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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO

SECTIONS 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 000-31635

Endwave Corporation

(Exact name of registrant as specified in its charter)

(408) 522-3100

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 par value

      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 þ          No o

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

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K.     o

      The aggregate market value of the common stock held by non-affiliates of the registrant as of June 30, 2004 was approximately $48.4 million. Shares of voting common stock held by directors, executive officers, and by each person who beneficially owns 10% or more of the outstanding common stock have been excluded as such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The aggregate market value has been computed based on a price of $7.95, which was the closing sale price June 30, 2004 as reported by the Nasdaq National Market.

      The number of shares outstanding of the registrant’s common stock as of March 18, 2005 was approximately 10,540,982.

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ENDWAVE CORPORATION

FORM 10-K

December 31, 2004

TABLE OF CONTENTS

FORWARD-LOOKING INFORMATION

      This report and the filings incorporated into this report by reference contain forward-looking statements within the meaning of Section 17A of the Securities Act and within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, that are subject to the “safe harbor” created by those sections. These forward-looking statements can generally be identified as such because the context of the statement will include words such as “anticipates,” “believes,” “continue,” “estimates,” “expects,” “intends,” “may,” “opportunity,” “plans,” “potential,” “predicts” or “will,” the negative of these words or words of similar import. Similarly, statements that describe our reserves and our future plans, strategies, intentions, expectations, objectives, goals or prospects are also forward-looking statements. Discussions containing these forward-looking statements may be found, among other places, in “Business,” “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as any amendments thereto reflected in subsequent filings with the Securities and Exchange Commission. These forward-looking statements are or will be, as applicable, based largely on our expectations and projections about future events and future trends affecting our business, and so are or will be, as applicable, subject to risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. The risks and uncertainties are attributable to, among other things: our ability to achieve and maintain profitability; our customer and market concentration; our ability to penetrate new markets; fluctuations in our operating results from quarter to quarter; our reliance on third-party manufacturers and semiconductor foundries; acquiring businesses and integrating them with our own; component, design or manufacturing defects in our products; and our dependence on key personnel. Because the risks and uncertainties referred to above, actual results or outcomes could differ materially from those expressed in any forward-looking statements made by us or on our behalf and you should not place undue reliance on any forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Except as required by law, we undertake no obligation to publicly revise our forward-looking statements to reflect events or circumstances that arise after the date of this report or the date of documents incorporated by reference in this report that include forward-looking statements.

PART I

Introduction

      We design, manufacture and market radio frequency, or RF, modules that enable the transmission, reception and processing of high frequency signals in telecommunication networks, defense electronics and homeland security systems. Our high-frequency RF module designs can accommodate a wide range of component performance and assembly process variations, resulting in ease of manufacture and high test yields. These attributes, coupled with our automated test systems, allow us to use cost-effective, offshore contract manufacturers to assemble and test the majority of our products. Our RF modules are typically used in high-frequency applications and include integrated transceivers, amplifiers, synthesizers, oscillators, up and down converters, frequency multipliers and microwave switch arrays.

      We were originally incorporated in California in 1991 and reincorporated in Delaware in 1995. In March 2000, we merged with TRW Milliwave Inc., a RF subsystem supplier that was a wholly-owned subsidiary of TRW Inc., now owned by Northrop Grumman Space & Mission Systems Corp. In connection with the merger, we changed our name from Endgate Corporation to Endwave Corporation. As a result of the merger, we became one of our industry’s largest commercial suppliers of microwave and millimeter wave RF

subsystems with a substantially increased customer base and design and manufacturing capacity. On October 17, 2000, we successfully completed the initial public offering of our common stock.

      Most of our RF modules are deployed in telecommunication networks, including current and next-generation cellular networks, carrier class trunking networks and point-to-point transmission networks. Our target customers for these applications are telecommunications network original equipment manufacturers and systems integrators, collectively referred to in this report as telecom OEMs. Telecom OEMs provide the wireless equipment used by service providers to deliver voice, data and video services to businesses and consumers. Telecom OEMs that purchased our products accounted for 86% of our total revenues during 2004 and included Nokia, Nera ASA, Stratex Networks, Inc., Powerwave Technologies, Inc. (formerly LGP Allgon), Siemens AG and Ceragon Networks Ltd.

      Our RF modules are also designed into various applications outside of the telecommunications network market, including defense electronics and homeland security systems. Our target customers in the defense electronics market include defense systems integrators and their subcontractors that design aerospace systems, defense systems, weapons and electronics platforms for domestic and foreign defense customers. Our target customers in the homeland security market include those customers that are taking advantage of the properties of high-frequency RF to create new capabilities designed to detect security threats. In this report, we refer to our target customers in the defense electronics and homeland security markets as defense and homeland security systems integrators. Revenues from this group of customers, including The Boeing Company, SafeView, Inc., Lockheed Martin Corporation, Suntron Corporation and Raytheon Company, accounted for 13% of our total revenues in 2004.

Industry Background and Markets

      High-Frequency RF Technology

      The applications of RF technology are broad, extending from terrestrial AM radio at the low end of the frequency spectrum, which is less than 1 MHz (megahertz, or million cycles per second), to atmospheric monitoring applications at the high end of the frequency spectrum, which is around 100 GHz (gigahertz, or billion cycles per second). Our products employ microwave and millimeterwave technology. Microwave technology refers to technology for the transmission of signals at high frequencies, from approximately 1 GHz to approximately 20 GHz. Millimeterwave technology refers to technology for the transmission of signals at very high frequencies, from approximately 20 GHz to as high as 100 GHz. The term microwave, however, is commonly understood in the industries we serve, and we use that term in this report, as meaning both microwave and millimeterwave.

      Our RF modules are typically designed to operate at frequencies between 5 GHz and 100 GHz, which we refer to in this report as high-frequency RF. Due to their physical attributes, high-frequency RF signals are well-suited for applications in telecommunication networks requiring high data throughput, defense systems demanding advanced radar and communication capabilities and homeland security systems requiring detection, measurement and imaging capabilities not available by conventional means.

      Telecommunication Networks

      Applications of High-Frequency RF Technologies in Telecommunication Networks. High-frequency transceiver modules are an integral part of microwave radios, which in turn play a key role in many telecommunication networks. Microwave radio links have a number of applications:

      Increased Demand for Microwave Radios in Telecommunication Networks. The demand for microwave radios and the transceiver modules used to build them is increasing. As service providers deploy more cellular base stations to serve their growing subscriber base and upgrade existing facilities, they will require more microwave radio links for cellular backhaul. We believe this projected increased demand is driven by several trends within the telecommunications industry:

      Defense Electronics

      High-frequency RF modules are an integral part of various defense electronics systems. Key applications in this market include:

      Electronic Warfare Systems. Most military aircraft are equipped with systems designed to detect if they have been targeted by an opposing force’s weapons system, and are often equipped with electronic countermeasures that jam the targeting radar. These systems employ a variety of high-frequency RF modules.

      Radar Systems. RF modules are used in traditional radar systems to detect large objects at significant distances. In addition, many new weapons systems employ complementary sophisticated radar systems designed to detect small vehicles and combat personnel. These new systems often use higher frequencies in order to provide greater resolution.

      Intelligent Battlefield Systems. The United States military has initiated an effort called the “intelligent battlefield” with the goal of providing the military with comprehensive, real-time information about the situation on the battlefield. Intelligent battlefield systems aggregate data from multiple radar and video sources that survey the battlefield and relay information nearly instantaneously to battlefield commanders. Such systems require high-bandwidth communication capabilities similar to those found in commercial telecommunication systems.

      High Capacity Communications. A modern, widely dispersed military force requires communication systems for voice, video and data wherever and whenever it is needed. Many military communication systems, whether terrestrial, airborne or satellite, employ wireless technology to meet these requirements. As the data rates in these systems increase, the systems must be able to operate at higher frequencies to take advantage of the bandwidth that is available in those frequencies.

      For these reasons, as well as the United States military’s concentration on upgrading existing electronic platforms rather than building new platforms, demand for high-frequency RF modules in the defense electronics market is growing.

      Homeland Security Systems

      The global escalation of terrorist and insurgency threats is resulting in increased governmental and private concern over providing adequate security measures. Many existing security systems and personnel screening techniques are inadequate to address these increasing concerns. The need for new, more capable systems has accelerated security system development. Because of their physical properties, high-frequency RF signals can be used in various detection and imaging systems applied to threats of violence. For example:

      Advanced Personnel Screening Portals. The human body reflects certain high-frequency RF signals. As a result, high-frequency RF signals can be used in advanced personnel screening portals that generate images showing weapons, including plastic explosives or ceramic knives, which are not detectable with conventional metal detection portals. These systems can operate very quickly, permitting a highly efficient and low-cost screening operation.

      Long Distance Personnel Detection. High-frequency RF signals can be used to detect the presence of humans at significant distances, much in the same way lower frequency radar systems can detect metal objects at a distance. This phenomenon can be employed as a radar fence to detect intrusion along lengthy security perimeters such as airport runways, military bases and international borders.

      We believe that the growth of these new security markets for RF modules may prove significant. The United States government’s spending on homeland security more than doubled from $17 billion in government fiscal year 2001 to over $40 billion in government fiscal year 2006.

Our Opportunity

      Historically, when telecom OEMs and defense electronics and homeland security systems integrators incorporated high-frequency RF modules into their products, they designed and manufactured them internally. However, faced with the need to generate greater cost efficiencies and technological innovations with fewer resources, we believe these OEMs and systems integrators are increasingly looking to merchant suppliers for these items.

      We have observed a trend of increasing use of merchant suppliers in the telecommunications network market. Of the top eleven microwave radio manufacturers that collectively represent 95% of the microwave radio unit volume worldwide, six exclusively use merchant suppliers for their transceiver modules, currently one is implementing a transition to the exclusive use of merchant supply and two source a portion of their requirements from merchant suppliers. Two of the microwave radio manufacturers made the decision to move to merchant suppliers exclusively within the last 18 months. We believe the same dynamic will also occur in the defense electronics and homeland security markets.

      We believe there are several key characteristics that telecom OEMs and defense and homeland security systems integrators value in a potential supply partner of high-frequency RF modules:

      We believe that few merchant suppliers comprehensively address all of these requirements. Many of the merchant suppliers that populate the industry are small and lack the requisite operational strength and technical capability. Many merchant suppliers use labor-intensive circuit manufacturing and test methods that limit their ability to produce high-frequency RF modules in high volume and at a low cost. Others have limited in-house RF design expertise and rely on third parties for their circuit designs. Fewer yet provide new technologies to the industry.

Our Strengths

      We are a provider of high-frequency RF modules to telecom OEMs and defense and homeland security systems integrators. We believe we possess several key strengths that enable us to provide our customers with superior products and services. These strengths include:

Our Strategy

      Our objective is to be the leading merchant supplier of high-frequency RF modules. Our strategies to achieve that objective focus on revenue growth, manufacturing efficiency and flexibility and technical breadth and strength:

      Accelerate Revenue Growth

      Increase our Telecommunications Network Business. We have long-standing customer relationships with many major telecom OEMs. We intend to use our customer base and track record, in conjunction with our low-cost manufacturing expertise, to increase our revenues. For a customer’s new designs, we intend to capture their business by designing and manufacturing new transceiver modules. However, if a customer is already producing a transceiver in-house, we intend to capture this additional business by taking over the production of their transceiver module designs and moving the production to our offshore contract manufacturing facilities where we can lower production costs by using our innovative supply chain management techniques. Subsequently, we plan to redesign our customers’ existing transceivers to lower costs further. In this market, we intend to generate additional revenues by offering both new product lines and frequencies. For example, in 2004, Nokia, Nera ASA and Siemens AG each expanded their relationship with us through purchasing new transceiver modules at different frequencies, Nera ASA chose to outsource all of its internal

transceiver manufacturing to us and Siemens AG chose to outsource a portion of its internal transceiver manufacturing to us.

      Expand into New Growth Markets. While our core market historically has been the telecommunications network market, we intend to leverage our high-frequency RF module expertise to expand in new growth markets, such as defense electronics and homeland security systems, to increase revenues and diversify our customer base. We are actively expanding our business in the defense electronics and homeland security markets with recent initiatives such as our acquisition of JCA and the formation of our Endwave Defense Systems division, our execution of a multi-year supply agreement with SafeView, Inc. and a teaming agreement with Signal Technology Corporation Microwave Systems, a subsidiary of Crane Co. In 2004, revenues from defense and homeland security systems integrators accounted for approximately 13% of our total revenues. We believe we are well positioned to take advantage of these markets as high-frequency RF modules become a more integral component of defense electronics and homeland security systems.

      Grow through Acquisitions. Since our initial public offering in October 2000, we have acquired and integrated five businesses or product lines. As a result of these transactions, we have increased our revenues and market share, broadened our product portfolio, diversified our customer base, gained expertise outside our core telecommunications network market and added key members to our staff. We believe the consolidation of high-frequency RF module suppliers will continue and will provide us additional opportunities for attractive acquisitions. It is our intent to continue to pursue strategic acquisitions that will further strengthen our competitive position and revenue growth as appropriate.

      Offer the Highest Level of Manufacturing Efficiency and Flexibility

      Continually Improve Manufacturing Efficiency. The manufacturability of our designs, our automated test processes and our continuing improvement efforts have enabled us to bring labor-saving manufacturing technologies to an industry that has historically used labor-intensive manufacturing techniques. We intend to continue to improve our lean manufacturing methods and further enhance our manufacturing expertise. This will be particularly important for our high mix product line, primarily manufactured in our Diamond Springs facility.

      Outsource to Low-Cost, Contract Manufacturers. In 2002, we began moving most of our high-volume manufacturing to HANA Microelectronics Co., Ltd., or HANA, in Thailand, a low-cost, offshore contract manufacturer. We consign raw materials to HANA, as well as provide the specialized assembly and test equipment needed to manufacture our products. HANA provides the direct labor to assemble and test our products. Our readily manufacturable designs, which can tolerate a wide range of component performance and assembly process variations, and our automated production test systems enabled this transition to offshore contract manufacturing. The portion of our product revenues attributable to products manufactured offshore increased from approximately 8% in 2002 to over 80% in 2004. This transition significantly improved our product margins and converted many of our fixed costs into variable costs. This conversion of our cost structure enables us to adjust costs flexibly in response to changing customer demand and the seasonality of our telecommunications network business. We intend to continue to use contract manufacturers to enable us to respond flexibly to changing customer demands and the seasonality of our business.

      Reduce Raw Materials and Component Costs. The costs of raw materials and components employed in high-frequency RF modules are a major part of the overall manufacturing cost. We have reduced the cost of these components by re-designing them, leveraging our purchasing power and selecting more cost-effective suppliers. As an outgrowth of our operational presence in Asia, we continue to identify low-cost, high-quality suppliers for several of the raw materials and components used in our products.

      Employ a Fabless Semiconductor Model. Semiconductors are both a critical technical element and a major cost component of our products. Since our inception, we have focused on producing high-frequency RF modules based on internally-designed semiconductors processed by third-party semiconductor fabrication facilities, or foundries. Our use of third-party foundries gives us the flexibility to use the process technology and materials best suited for each application, allows us to leverage our purchasing power and eliminates the need for us to invest in and maintain our own foundries. We intend to continue to use third-party

semiconductor foundries, particularly as we introduce new products incorporating more advanced semiconductor materials.

      Leverage Technical Breadth and Strength

      Broaden our Product Portfolio. We are enlarging the scope of our product offerings both in the frequency ranges in which our products are designed to operate and in the type of functionalities we support. This allows us to address a broader range of applications in our customers’ systems and further expands our market opportunities. For example, during the last year we have introduced a new microwave switch product for the homeland security market and a high performance synthesizer for the emerging gigabit ethernet bridging market.

      Develop New Circuit and Packaging Technologies. A key component of our value proposition is providing our customers with powerful and cost-effective technologies that offer them a major technical and economic advantage. We have developed and maintain a strong base of high-frequency RF technology supported by an experienced design team, a large library of circuit designs, extensive proprietary know-how and a large portfolio of patents. Our efforts to create new technology have led to 38 issued United States patents. We intend to continue to invest in research and development, maintain a team of talented engineers and scientists, and build on our manufacturing technologies. To that end, we recently introduced a proprietary circuit technology known as Multilithic Microsystems, or MLMS, and a proprietary circuit packaging technology called Epsilon, both of which reduce the cost of producing our products and improve technical performance.

Products and Technology

     Products

      Our RF modules are typically used in high-frequency applications and include integrated transceivers, amplifiers, synthesizers, oscillators, up and down converters, frequency multipliers and microwave switch arrays. Depending upon the requirements of our customers, we supply our products at the following levels of integration:

      The following diagram illustrates the varying levels of product integration available to our customers. The shaded area in the lower left portion of the diagram represents a single-function module used for intermediate frequency amplification. The shaded area on the right side of the diagram represents a multi-function RF module. The area enclosed by the box represents an integrated subsystem module.

      Circuit Technologies

      In high-frequency RF modules, the choice and implementation of the basic circuit technology determines the performance, cost and manufacturability of the product. Currently, the majority of our products employ one of two alternate technologies, either hybrid microwave integrated circuit, or HMIC, technology or monolithic microwave integrated circuit, or MMIC, technology. In each case, we apply our circuit design capabilities to develop custom circuits that are optimized for cost, performance and manufacturability. All of our products manufactured at HANA employ MMIC technology. We have advanced the design of our HMIC and MMIC circuits significantly and have benefited from those advancements in reduced costs and higher production yields. Multilithic Microsystem technology, or MLMS, is a proprietary next generation circuit technology, which we believe will significantly reduce costs and improve performance.

      The following table compares various characteristics and our assessment of the relative merits of these three distinct circuit technologies:

      In high-frequency RF modules, the circuit packaging technology also significantly impacts cost and performance. The majority of our current products employ planar packaging technology, especially our high-volume commercial products. To improve the performance and reduce the cost of packaging, we have developed our proprietary Epsilon packaging technology.

      The following table compares current RF packaging technology with our new Epsilon packaging technology and our assessment of the relative merits of these two distinct circuit packaging technologies:

Sales and Marketing

      We focus on the global telecommunications network, defense electronics and homeland security markets. We sell our products through our direct sales efforts, which are supported by a network of domestic and international independent representatives. For each of our major customers, we assign a technical account manager, who has responsibility for developing and expanding our relationship with that customer. Our direct sales efforts are augmented by traditional marketing activities, including advertising, participation in industry associations and presence at major trade shows.

      Our products are highly technical and the sales cycle can be long. Our sales efforts involve a collaborative and iterative process with our customers to determine their specific requirements either in order to design an appropriate solution or transfer efficiently the product to our offshore contract manufacturer. Depending on the product, the sales cycle can typically take anywhere from 2 to 12 months.

Customers

      We sell our products primarily to telecom OEMs and defense and homeland security systems integrators. During 2004, we shipped products to more than 100 different customers. Our top customers, which accounted for approximately 90% of our total revenues in 2004, and the markets they served, were:

      Revenues from all of our telecom OEM customers comprised 86% of our total revenues in 2004. While we intend to increase our revenues in the defense electronics and homeland security markets, we expect that the majority of our revenues will be attributable to a limited number of telecom OEMs for the foreseeable future.

Acquisitions

      As part of our growth strategy, we have made acquisitions designed to increase revenues and gain market share. We have completed the following acquisitions since our initial public offering:

Competition

      Among merchant suppliers in the telecommunications network market, we primarily compete with Eyal Microwave Industry, Filtronics plc, the Forem division of Andrew Corporation, Linkra Srl, Microelectronics

Technology Inc., REMEC, Inc., Teledyne Technologies Incorporated, Thales Group SA, and Xytrans Inc. In addition to these companies, there are telecom OEMs, such as Ericsson and NEC Corporation, that use their own captive resources for the design and manufacture of their own high-frequency RF transceiver modules, rather than use merchant suppliers like us. We believe that over one-half of the high-frequency RF transceiver modules manufactured today are being produced by these captive resources. To the extent that telecom OEMs presently, or may in the future, produce their own RF transceiver modules, we lose the opportunity to gain a customer and related sales. Conversely, if they should decide to outsource their requirements, this may significantly expand the market available to us. In the defense electronics and homeland security markets, we primarily compete with Aeroflex Incorporated, AML Communications Inc., Chelton, Ltd., CTT Inc., Herley Industries, Inc., KMIC Technology, Inc. and Teledyne Technologies Incorporated.

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

Research and Development

      Our research efforts focus on developing new proprietary circuit and packaging technologies, such as MLMS and Epsilon, and integrating our technology into new semiconductor materials, such as indium gallium phosphide. Our product development activities focus on designing products to meet specific customer and market needs and introducing these products to manufacturing. Our technical approach emphasizes the following capabilities:

      Custom Semiconductor Design Capabilities. Our ability to design custom semiconductors allows us to optimize and reduce the cost of designs beyond what is possible with standard, off-the-shelf semiconductors.

      Breadth of Expertise. We are experienced in a broad range of technical disciplines and possess the know-how to design products at multiple levels of integration.

      Computer Modeling Capabilities. Our extensive computer modeling capabilities allow us to create designs quickly and to minimize the number of iterations required to develop specification compliant, cost-effective designs.

      Extensive Library of Circuit Designs. Our extensive library of circuit, module and subsystem designs enables us to generate new designs and produce prototypes quickly to meet our customers’ time-to-market demands.

      Automated Testing Processes. High-frequency RF products require extensive testing after assembly to verify compliance with customer specifications. We use high speed, custom-designed, automated test sets that are capable of rapidly testing a complete RF module. This increases throughput in the manufacturing process and reduces the skill level required to conduct the tests. Concurrently with the development of these test methods, we develop data analysis and reporting tools to facilitate rapid communication of test data to our customers.

      Our research and development and related engineering expenses were $9.2 million, $4.5 million and $5.0 million, in 2002, 2003 and 2004, respectively. The increase in 2004 spending as compared to 2003 was primarily the result of research and development expenses incurred by JCA during the second half of 2004. The decrease in 2003 spending as compared to 2002 was primarily attributable to a significant reduction in the size of our engineering team in 2002 in order to match our investment in research and development with then current market needs.

Patents and Intellectual Property Rights

      Our success depends, 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. As of December 31, 2004, we had 38 United States patents issued, many with associated foreign filings and patents. Our issued patents include those relating to basic circuit and device designs, semiconductors, Multilithic Microsystem technology and system designs. Our issued United States patents expire between 2007 and 2020. We also license technology from other companies, including Northrop Grumman Corporation. There are no limitations on our rights to make, use or sell products we may develop in the future using the technology licensed to us by Northrop Grumman Corporation, provided that the products are for commercial customers and non-satellite applications.

      We maintain a vigorous technology development program that routinely generates potentially patentable intellectual property. Our decisions as to whether to seek formal patent protection and the countries in which to seek it are done on a patent by patent basis and are based on the economic value of the intellectual property, the anticipated strength of the resulting patent, the cost of pursuing the patent and an assessment of using a patent as a strategy to protect the intellectual property. With regard to our pending patent applications, it is possible that no patents may be issued as a result of these or any future applications or the allowed patent claims may be of reduced value and importance. Further, any existing or future patents may be challenged, invalidated or circumvented thus reducing or eliminating their commercial value.

      To protect our intellectual property, we 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. These measures may not be adequate in all cases to safeguard the proprietary technology underlying our products. 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 or limited outside of the United States, Europe and Japan.

Operations

      We currently have our products manufactured in two locations. Domestically, we operate a plant in Diamond Springs, California for those products that are being produced in low volumes. Our domestic manufacturing operations are primarily for defense electronics applications, which must be manufactured within the United States due to government export control regulations. The majority of our products are manufactured in Thailand by HANA Microelectronics Co., Ltd., or HANA, a contract manufacturer. Under our manufacturing contract, HANA supplies the physical plant, direct labor, basic assembly equipment and warehousing functions. We supplement those activities with our own full-time, in-country staff consisting of two employees and six independent contractors who provide production planning, process engineering, test engineering and quality assurance support. We own certain assets held in HANA’s factory, including specialized test and assembly equipment and various raw material and product inventories. Our arrangement with HANA allows us to reduce our labor and facility expenses while maintaining tight control of process and quality. To reduce our costs further, we have identified lower cost Asian sources for various raw materials, especially basic metal and circuit board components. Our manufacturing agreement with HANA currently expires in July 2005, but will renew automatically for a one-year period unless either party notifies the other of its desire to terminate the agreement at least 90 days prior to the expiration of the term. In addition, either party may terminate the agreement without cause upon 120 days prior written notice to the other party, and either party may terminate the agreement if the non-terminating party is in breach and does not cure the breach within 30 days after notice of the breach is given by the terminating party. While our relations with HANA are favorable and we do not anticipate an interruption in our arrangement with HANA, there can be no assurance that HANA will not seek to terminate its agreement with us.

      We design custom semiconductor devices. However, we do not own or operate a semiconductor foundry and rely on a limited number of third parties to produce these components. Our use of various third-party

semiconductor foundries gives us the flexibility to use the process technology that is best suited for each application and eliminates the need for us to invest in and maintain our own semiconductor facilities. Our primary semiconductor foundry is Velocium, a division of Northrop Grumman Space Mission & Systems Corp., which is the holder of approximately 33.0% of our common stock, and a wholly-owned subsidiary of Northrop Grumman Corporation. In this report, we refer to the Northrop Grumman Space & Mission Systems Corp. foundry by its tradename, Velocium. Velocium produced over 85% of our semiconductors in 2004. We also use other suppliers for some of our products. The loss of our relationship with or our access to any of the semiconductor foundries we currently use, particularly Velocium, and any resulting delay or reduction in the supply of semiconductor devices to us, would severely impact our ability to fulfill customer orders and could damage our relationships with our customers. Our current supply agreement with Velocium expires in December 2005. While we believe we are a significant customer of and do not anticipate an interruption in our relationship with Velocium, there can be no assurance that Velocium will renew its agreement with us. We estimate that it may take up to six months to shift product of a given semiconductor circuit design to a new foundry.

      All of the manufacturing facilities we use worldwide are registered under ISO 9001-2000, an international certification standard of quality for design, development and business practices. We maintain comprehensive quality systems at all of these facilities to ensure compliance with customer specifications, configuration control, documentation control and supplier quality conformance.

Backlog

      Our order backlog consists of a combination of conventional purchase orders and formal forecasts given to us under annual and multi-year frame agreements. Typically, the forecast portion of the backlog is the significantly larger amount. The forecasts we receive normally have a firm commitment portion of one to three months in duration that obligate the customer to accept at least some portion of the amount forecasted for that period, with the remainder of the forecast including no such obligation. These forecasts are subject to change on a regular basis and we have experienced significant forecast variations in both unit volumes and product mix. As a result, we believe that backlog is not a reliable indicator of future revenues.

      Our backlog at March 16, 2005 was approximately $29.8 million for shipments expected to occur through the end of calendar year 2005. By comparison, our backlog as of March 15, 2004 for shipments then expected to occur by December 31, 2004 was $20.6 million.

Governmental Regulation

      Government regulations directly affect our business in two principal ways. In our telecommunications network market, the frequencies at which wireless systems transmit and receive data are dictated by government licensing agencies in the location where they are deployed. Unexpected difficulties in obtaining licenses or changes in the operating frequencies allowed can halt or delay microwave radio deployments and therefore halt or delay the need for our products. Both national and international regulatory bodies have set stringent standards on the performance of microwave radios, especially spurious emissions and their potential to cause interference in other systems. Meeting these regulations is technologically challenging and changes in the regulations could require a re-design of our products to achieve compliance.

      In our defense electronics market, some of the products we supply to our foreign customers are controlled by United States 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 can be lengthy and approval is not assured. If we do not receive approval or the approval is delayed, it can halt or delay our shipments. Further, our products for defense electronics applications must be manufactured within the United States due to government export control regulations.

Employees

      As of December 31, 2004, we had 141 full-time employees, including 68 in manufacturing, 37 in product and process engineering, 17 in sales and marketing and 19 in general and administrative. Our employees are

not subject to any collective bargaining agreement with us and we believe that our relations with our employees are good.

Available Information

      Our principal executive offices are located at 776 Palomar Avenue, Sunnyvale, California 94085, and our main telephone number is (408) 522-3100. The public may read and copy any material we file with the Securities and Exchange Commission, or SEC, at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington D.C., 20549. The public may obtain information on the operations of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site, http://www.sec.gov, that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.

RISK FACTORS

      You should consider carefully the following risk factors as well as other information in this report and the documents incorporated by reference herein or therein, before investing any of our securities. If any of the following risks actually occur, our business, operating results and financial condition could be adversely affected. This could cause the market price of our common stock to decline, and you may lose all or part of your investment.

Risks Relating to Our Business

We have had a history of losses and may not be profitable in the future.

      We have had a history of losses. We had a net loss of $4.4 million in 2004. We also had net losses of $31.0 million and $7.9 million for the years ended December 31, 2002 and 2003, respectively. There is no guarantee that we will achieve or maintain profitability in the future.

We depend on a small number of key customers in the telecommunications industry for a large portion of our revenues. If we lose any of our major customers, particularly Nokia, or there is any material reduction in orders for our products from any of these customers, our business, financial condition and results of operations would be adversely affected.

      We depend, and expect to continue to depend, on a relatively small number of telecommunications network original equipment manufacturers and systems integrators, collectively referred to in this report as telecom OEMs, for a large portion of our revenues. The loss of any of our major customers, particularly Nokia, or any material reduction in orders from any of such customers would have a material adverse effect on our business, financial condition and results of operations. In 2002, 2003 and 2004, revenues from Nokia accounted for 71%, 59% and 55% of our total revenues, respectively. Revenues from Nera ASA accounted for 10% of our total revenues for 2004. Revenues from Stratex Networks, Inc. accounted for 13% of our total revenues for 2003. We had no other customers representing more than 10% of our total revenues for 2002, 2003 or 2004. None of our major customers is under any long-term commitment to purchase products from us, and there is no guarantee that any of them will continue to do business with us.

We depend on the telecommunications industry for most of our revenues. If this industry suffers another downturn or fails to grow as anticipated, our revenues could decrease and our profitability could suffer. In addition, consolidation in this industry could result in delays or cancellations of orders for our products, adversely impacting our results of operations.

      We depend, and expect to remain dependent, on the telecommunications industry for most of our revenues. Revenues from all of our telecom OEM customers comprised 86% of our total revenues in 2004.

      The telecommunications industry suffered a significant worldwide downturn beginning in 2000, and has only recently begun to grow again. In connection with this downturn, there were worldwide reductions in telecommunications network projects that resulted in the loss of some of our key customers and reduced revenues from our remaining customers. We also were forced to undertake significant cost reduction measures as a result. If similar downturns reoccur, or if the telecommunications industry fails to grow as we anticipate, our revenues may remain flat or decrease. Significantly lower revenues would likely force us to make provisions for excess inventory and abandoned or obsolete equipment and reduce our operating expenses. To reduce our operating expenses, we could be required to reduce the size of our workforce and consolidate facilities. We cannot guarantee that we would be able to reduce operating expenses to a level commensurate with the lower revenues resulting from such an industry downturn.

      The telecommunications industry has undergone significant consolidation in the past few years and we expect that consolidation to continue. The acquisition of one of our major customers in this market, or one of

the communications service providers supplied by one of our major customers, could result in delays or cancellations of orders of our products, which would have a material adverse effect on our results of operations.

Our future success depends in part on our ability to further penetrate into new markets, such as defense electronics and homeland security, and we may be unable to do so.

      Historically, all or a large majority of our revenues have been attributable to sales of our RF modules to telecom OEMs such as Nokia. Part of our growth strategy is to design and sell high-frequency RF modules for and to OEMs and systems integrators in new markets, particularly defense electronics and homeland security. To date, only a small percentage of our revenues has been attributable to sales of RF modules to defense systems integrators. We have only recently begun to design and sell products for the recently emerging homeland security market. The potential size of this market is unclear and we cannot predict how the market will evolve. If increased demand for high-frequency RF modules in the defense electronics and homeland security markets does not materialize, we fail to secure new design wins in these markets or we are unable to design readily manufacturable products for these new markets, our growth could be adversely impacted.

Our operating results have fluctuated significantly in the past and are likely to continue to do so in future periods.

      Our quarterly and annual operating results are difficult to predict and are likely to continue to fluctuate significantly from period to period. Our operating results may fluctuate for many reasons, including but not limited to:

Our operating results fluctuate significantly based on seasonal factors in the telecommunications network market.

      We typically recognize lower revenues in the first and third calendar quarters due to seasonality in the telecommunications network market. Revenues attributable to telecom OEMs typically contract in the first quarter due to delays in purchasing resulting from wireless carriers’ budgeting processes. The third quarter is generally slow in our telecommunications network market as many of our European telecom OEM customers shut down their factories for a portion of the summer months. The fourth quarter historically has been our strongest quarter as the wireless carriers expend their remaining capital budgets for the year. We expect these seasonal fluctuations to continue as they pertain to our telecommunications network business.

Because of the scarcity of some components and our dependence on single source 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:

      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. Recently, we suffered from a shortage of voltage-controlled oscillators and voltage regulators, which reduced our revenues in the fourth quarter of 2004 and is expected to impact revenues in the first quarter of 2005. 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 may be 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.

We rely heavily on a Thailand facility of HANA Microelectronics Co., Ltd., a third-party contract manufacturer, to produce our RF modules. If HANA is unable to produce these modules in sufficient quantities or with adequate quality, or it chooses to terminate our manufacturing arrangement, we will be forced to find an alternative manufacturer and may not be able to fulfill our production commitments to our customers, which could cause sales to be delayed or lost and could harm our reputation.

      We outsource the assembly and testing of most of our products to a Thailand facility of HANA Microelectronics Co., Ltd., or HANA, a third-party contract manufacturer. We plan to continue this arrangement as a key element of our operating strategy. If HANA does not provide us with high quality products and services in a timely manner, or terminates its relationship with us, we may be unable to obtain a satisfactory replacement to fulfill customer orders on a timely basis. In the event of an interruption of supply from HANA, sales of our products could be delayed or lost and our reputation could be harmed. Our manufacturing agreement with HANA currently expires in July 2005 but will renew automatically for a one-year period unless either party notifies the other of its desire to terminate the agreement at least 90 days prior to the expiration of the term. In addition, either party may terminate the agreement without cause upon 120 days prior written notice to the other party, and either party may terminate the agreement if the non-terminating party is in breach and does not cure the breach within 30 days after notice of the breach is given by the terminating party. There can be no guarantee that HANA will not seek to terminate its agreement with us.

We rely on Velocium and other third-party semiconductor foundries to manufacture the semiconductors contained in our products. The loss of our relationship with any of these foundries, particularly Velocium, without adequate notice would adversely impact our ability to fill customer orders and could damage our customer relationships.

      We design semiconductor devices. However, we do not own or operate a semiconductor fabrication facility, or foundry, and rely on a limited number of third parties to produce these components. Our primary semiconductor foundry is Velocium, a division of Northrop Grumman Space & Mission Systems Corp., which is the holder of approximately 33.0% of our common stock, and a wholly-owned subsidiary of Northrop Grumman Corporation. In this report, we refer to the Northrop Grumman Space & Mission Systems Corp. foundry by its tradename, Velocium. Velocium produced over 85% of our semiconductors in 2004. We also use other suppliers for some of our products. The loss of our relationship with or our access to any of the semiconductor foundries we currently use, particularly Velocium, and any resulting delay or reduction in the supply of semiconductor devices to us, would severely impact our ability to fulfill customer orders and could damage our relationships with our customers.

      Our current supply agreement with Velocium expires in December 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 is a limited number of semiconductor foundries that use the particular process technologies we select for our products and have sufficient capacity to meet our needs, using alternative or additional semiconductor foundries would require an extensive qualification process that could prevent or delay product shipments and revenues. We estimate that it may take up to six months to shift production of a given semiconductor circuit design to a new foundry.

We are subject to risks associated with acquisitions.

      One of our strategies is to grow through acquisitions. To that end, we have completed five acquisitions since our initial public offering and intend to pursue attractive acquisitions in our market as appropriate. The process of investigating, acquiring and integrating any business into our business and operations is risky and may create unforeseen operating difficulties and expenditures. The areas in which we may face difficulties include:

      Moreover, we may encounter other unforeseen problems with acquisitions that we may not be able to overcome. Future acquisitions may require us to issue shares of our stock or other securities that dilute our other stockholders, expend cash, incur debt, assume liabilities, including contingent or unknown liabilities, or create additional expenses related to write-offs or amortization of intangible assets with estimated useful lives, any of which could materially adversely affect our business, financial condition or results of operations.

Our products may contain component, manufacturing or design defects or may not meet our customers’ performance criteria, which could cause us to incur significant repair expenses, harm our customer relationships and industry reputation, and reduce our revenues and profitability.

      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 two 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, incurring significant expenses as a result. Further, our customers may discover latent defects in our products that were not apparent when the warranty period expired. These defects may cause us to incur significant repair or replacement expenses beyond the normal warranty period. In addition, any component, manufacturing or design defect could cause us to lose customers or revenues or damage our customer relationships and industry reputation.

      For example, some radios incorporating our transceivers that are manufactured and shipped by one of our customers have experienced degraded performance after installation in the field. The cause of the degradation was identified to be a faulty semiconductor component originally developed and supplied by TRW Inc. that was incorporated in the transceiver. TRW was later acquired by Northrop Grumman Corporation and renamed Northrop Grumman Space & Mission Systems Corp., and its foundry is referred to by its tradename, Velocium. Pursuant to a settlement agreement between TRW and us, we are responsible for the direct costs associated with the repair and replacement of the degraded transceivers produced under our supply agreement with the customer. Northrop Grumman Space & Mission Systems Corp., as successor to TRW, compensated our customer for the indirect costs associated with the repair and replacement of the degraded radios and transceivers. 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 each returned radio. During 2001, we reserved $4.6 million for warranty charges to cover the actual repair of the transceivers containing these faulty components, of which $1.1 million had been used through December 31, 2004.

      Under an agreement we entered into with Northrop Grumman Space & Mission Systems Corp. in March 2005, we agreed to pay $300,000 to Northrop Grumman Space & Mission Systems Corp. as final reimbursement for these indirect costs and to assume sole responsibility for any future product failures attributable to the semiconductor component. We are in the process of designing a replacement component, which will be fabricated by an alternate supplier that we believe will eliminate the degradation of performance in future production units. We expect to complete the design and qualification of this replacement component by mid-2005 at a cost of approximately $120,000.

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

      We believe that our future success depends upon our ability to attract, integrate and retain highly skilled managerial, research and development, manufacturing and sales and marketing personnel. Skilled personnel in our industry can be in short supply. To attract and retain qualified personnel, we may be required to grant large stock option or other stock-based incentive awards, which may harm our operating results or be dilutive to our other stockholders. We may also be required to pay significant base salaries and cash bonuses, which could harm our operating results.

      We are particularly dependent on the continued employment of our senior management team and other key personnel. If one or more members of our senior management team or other key personnel were unable or unwilling to continue in their present positions, these persons would be very difficult to replace, and our business could be seriously harmed. We do not maintain key person life insurance policies.

Competitive conditions may require us to reduce prices in the future and, as a result, we may need to reduce our costs in order to be profitable.

      We expect market conditions will cause us to reduce our prices in the future. In order to reduce our per-unit cost of product revenues, we must continue to design and re-design products to require lower cost materials, improve our manufacturing efficiencies and successfully move production to low-cost, offshore locations. The combined effects of these actions may be insufficient to achieve the cost reductions needed to be profitable.

The length of our sales cycle requires us to invest substantial financial and technical resources in a potential sale before we know whether the sale will occur. There is no guarantee that the sale will ever occur and if we are unsuccessful in designing a high-frequency RF module for a particular generation of a customer’s products, we may need to wait until the next generation of that product to sell our products to that particular customer.

      Our products are highly technical and the sales cycle can be long. Our sales efforts involve a collaborative and iterative process with our customers to determine their specific requirements either in order to design an appropriate solution or to transfer efficiently the product to our offshore contract manufacturer. Depending on the product, the sales cycle can take anywhere from 2 to 12 months, and we incur significant expenses as part of this process without any assurance of resulting revenues. 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 customer’s 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. There is no guarantee that our product will be selected for that new generation of its system. In the past, we have had difficulty meeting some of our major customers’ stated volume and cost requirements. The length of our product development and sales cycle makes us particularly vulnerable to the loss of a significant customer or a significant reduction in orders by a customer because we may be unable to quickly replace the lost or reduced sales.

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

      Existing and potential customers typically demand that we design products for them under difficult time constraints. In the current market environment, the need to respond quickly is particularly important. If we are unable to commit the necessary resources to complete a project for a potential customer within the requested timeframe, we may lose a potential sale. Our ability to design products within the time constraints demanded by a customer will depend on the number of product design professionals who are available to focus on that customer’s project and the availability of professionals with the requisite level of expertise is limited.

      Each of our telecommunications network products is designed for a specific range of frequencies. Because different national governments license different portions of the frequency spectrum for the telecommunications network market, and because communications service providers license specific frequencies as they become available, in order to remain competitive we must adapt our products rapidly to use a wide range of different frequencies. 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.

      In our other markets, our customers have specific requirements that can be at the forefront of technological development and therefore difficult and expensive to develop. If we are not able to devote sufficient resources to these products, or we experience development difficulties or delays, we could lose sales and damage our reputation with those customers.

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 been unable to manufacture 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. Manufacturing delays and interruptions can occur for many reasons, including, but not limited to:

      Manufacturing 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. 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.

      As part of our strategy, we may expand our domestic manufacturing capacity beyond the level required for our current sales in order to accommodate anticipated increases in our defense electronics business. As a result, our domestic manufacturing facilities may be underutilized from time to time. Conversely, if we do not maintain adequate manufacturing capacity to meet demand for our defense electronic products, we may lose opportunities for additional sales. Any failure to have sufficient manufacturing capacity to meet demand would harm our market share and operating results.

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

      Our sales are generally made on the basis of formal agreements and purchase orders, which may be later modified or canceled by the customer, rather than firm long-term purchase commitments. We have historically been required to place firm orders for products and manufacturing equipment with our suppliers up to six months prior to the anticipated delivery date and, on occasion, prior to receiving an order for the product, based on our forecasts of customer demands. Our sales process requires us to make multiple demand forecast assumptions, each of which may introduce error into our estimates, causing excess inventory to accumulate 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, 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. There is no guarantee that we will be able to adequately respond to unexpected increases in customer purchase orders in the future, in which case we may lose the revenues associated with those additional purchase orders and our customer relationships and reputation may suffer.

Some of our customer contracts require us to manufacture products designed by our customers. While we intend to convert these products to products of our own design, such transitions may be difficult to implement and delays or difficulties in doing so could harm our operating results.

      Some of our customer contracts are based on the transfer of product manufacturing from our customers’ factories to our own. Under these contracts, we may be required to manufacture the products in a manner

similar to the way our customers previously manufactured them until we are able to convert these products to products of our own design. The objective of converting a product to one of our own design is to improve manufacturability and lower costs. If we encounter difficulties or delays in transitioning a customer’s product to our manufacturing facilities, revenues attributable to that product could be delayed or lost. The cost of manufacturing a customer-designed product is typically much higher than the cost of manufacturing a product of our own design. In the short term, while we are manufacturing a customer-designed product, our profit margins will be adversely impacted. Similarly, difficulties and delays in transitioning a product to a product of our own design will result in reduced profitability over the long-term.

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

      Our success depends, 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. As of December 31, 2004, we had 38 United States patents issued, many with associated foreign filings and patents. Our issued patents include those relating to basic circuit and device designs, semiconductors, Multilithic Microsystem technology and system designs. Our issued United States patents expire between 2007 and 2020. We maintain a vigorous technology development program that routinely generates potentially patentable intellectual property. Our decision as to whether to seek formal patent protection is done on a patent by patent basis and is based on the economic value of the intellectual property, the anticipated strength of the resulting patent, the cost of pursuing the patent and an assessment of using a patent as a strategy to protect the intellectual property.

      To protect our intellectual property, we enter into confidentiality and assignment of rights to inventions agreements with our employees, and confidentiality and non-disclosure agreements with third parties, and generally control access to and distribution of our documentation and other proprietary information. These measures may not be adequate in all cases to safeguard the proprietary technology underlying our products. 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 or limited 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. We occasionally agree to incorporate a customer’s or supplier’s intellectual property into our designs, in which case we have obligations with respect to the non-use and non-disclosure of that intellectual property. We also license technology from other companies, including Northrop Grumman Corporation. There are no limitations on our rights to make, use or sell products we may develop in the future using the technology licensed to us by Northrop Grumman Corporation, 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 the intellectual property 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 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 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 other third parties 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 other third parties of a product which was later discovered to infringe upon another party’s proprietary rights. Irrespective of the validity or successful assertion of such claims we would likely incur significant costs and diversion of our

resources with respect to the defense of such 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.

      With regard to our pending patent applications, it is possible that no patents may be issued as a result of these or any future applications or the allowed patent claims may be of reduced value and importance. If they are issued, any patent claims allowed may not be sufficiently broad to protect our technology. Further, any existing or future patents may be challenged, invalidated or circumvented thus reducing or eliminating their commercial value. 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.

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

      In 2004, approximately 80% of our total revenues were derived from sales to customers outside the United States. In addition, some of our United States based customers may sell products that incorporate our RF modules into international markets. Adverse international economic conditions or developments could in the future negatively affect 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:

Starting in the third quarter of 2005, we are required to expense employee stock options, which could significantly increase our net loss or reduce our net income in future periods.

      In December 2004, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” or SFAS 123R, which requires the measurement of all share-based payments to employees, including grants of stock options, using a fair-value-based method and the recording of such expense in the consolidated statements of operations. The accounting provisions of SFAS 123R are effective for reporting periods beginning after June 15, 2005. Therefore, we will be required to record an expense for our stock-based compensation plans using a fair-value-based method beginning on July 1, 2005. This expense will exceed the expense we currently record for our stock-based compensation plans and correspondingly increase our net loss or reduce our net income in future periods.

We currently transact business only in United States 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 United States 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 existing 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 an adverse impact on the dollar value of our sales.

Risks Relating to Our Industry

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

      Some of the products we produce and supply to our foreign customers are controlled by United States 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 approvals and licenses is not certain. Delays or rejections in approving our applications or granting a license would subsequently delay or reduce our shipments for these products.

Our acquisition of JCA Technology and our own marketing and sales efforts have increased the volume of our products used by the United States government. Our revenues in this market largely depend upon the funding and implementation decisions of Congress and United States government agencies. These decisions could change abruptly and without notice, unexpectedly reducing our current or future revenues in this market.

      Our growth is partially dependent on growth in sales to defense electronics 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 our current revenues or future revenue forecasts. These funding and implementation decisions are difficult to predict and may change abruptly. If they change in a manner unfavorable to us, we could find that previously expected and forecasted revenues do not materialize.

Many of our customers operate in Euro-based economies. The current rise in the value of the Euro could make those customers’ products uncompetitive in world markets, thereby reducing their revenues and causing us to reduce our prices to maintain those customer relationships.

      Many of our customers operate in countries that have adopted the Euro as their standard currency. The recent rise in the value of the Euro could make products built in those countries uncompetitive 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 we would subsequently see reduced demand. Further, similar currency effects may require our customers to reduce their prices, bringing further pressure on us to reduce our prices. Such price reductions offered to our customers could harm our margins, operating results and financial condition.

Our failure to compete effectively could reduce our revenues and margins.

      Among merchant suppliers in the telecommunications network market, we primarily compete with Eyal Microwave Industry, Filtronics plc, the Forem division of Andrew Corporation, Linkra Srl, Microelectronics Technology Inc., REMEC, Inc., Teledyne Technologies Incorporated, Thales Group SA, and Xytrans Inc. In addition to these companies, there are telecom OEMs, such as Ericsson and NEC Corporation, that use their own captive resources for the design and manufacture of their high-frequency RF transceiver modules, rather than use merchant suppliers like us. We believe that over one-half of the high-frequency RF transceiver

modules manufactured today are being produced by these captive resources. To the extent that telecom OEMs presently, or may in the future, produce their own RF transceiver modules, we lose the opportunity to gain a customer and the potential related sales. In the defense electronics and homeland security markets, we primarily compete with Aeroflex Incorporated, AML Communications Inc., Chelton, Ltd., CTT Inc., Herley Industries, Inc., KMIC Technology, Inc. and Teledyne Technologies Incorporated.

      Many of our current and potential competitors are substantially larger than us and have greater financial, technical, manufacturing and marketing resources. In addition, we have only recently begun to design and sell products for homeland security applications as the market for homeland security is only now emerging. If we were unable to compete successfully, our future operations and financial results would be harmed.

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 Federal Communications Commission 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.

Risks Relating to Ownership of Our Stock

The market price of our common stock has historically fluctuated and is likely to fluctuate in the future.

      The price of our common stock has fluctuated widely since our initial public offering in October 2000. For example, in 2004, the lowest bid price for our common stock was $5.50 and the highest bid price for our common stock was $19.20. The market price of our common stock can fluctuate significantly for many reasons, including, but not limited to:

      It is likely that our operating results in one or more future quarters may be below the expectations of security analysts and investors. In that event, the trading price of our common stock would likely decline. In addition, the stock market has experienced extreme price and volume fluctuations. 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 that we may need to raise additional funds in the future, and this additional financing may not be available to us on 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 Corporation controls a large percentage of our common stock and is able to control the outcome of matters requiring stockholder approval.

      As of February 9, 2005, Northrop Grumman Corporation, through its wholly-owned subsidiary, Northrop Grumman Space Mission & Systems Corp., beneficially owned approximately 33.0% of our outstanding common stock. As a result, Northrop Grumman Corporation is able to effectively control all matters requiring approval of our stockholders, including the election of directors and approval of significant corporate transactions. As of that date, our directors and executive officers owned, or had the right to acquire within 60 days thereafter, approximately 9.6% of our outstanding common stock. As a result, they have a significant impact on matters requiring approval of our stockholders. 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.

If securities analysts do not publish research or reports about our business or if they downgrade our stock, the price of our common stock could decline.

      The trading market for our common stock will rely in part on the research and reports that industry and financial analysts publish about our business and industry. We do not control these analysts. Further, if one or more of the analysts who do cover us downgrade our stock, or if our performance is not in line with estimates published by such analysts, our stock price could decline rapidly. As a small public company, we have had and may continue to have difficulty attracting research coverage, and the analysts who publish information about our common stock may have had relatively little experience with our company, which could affect their ability to accurately forecast our results and make it more likely that we fail to meet their estimates. If one or more of these analysts cease coverage of our company, we could lose visibility in the market, which in turn could cause our stock price to decline.

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 at least 66²/3% 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. We have an Executive Officer Severance and Retention Plan and a Key Employee Severance and Retention Plan that provide for severance payments and the acceleration of vesting of a percentage of certain stock options granted to our executive officers and certain senior, non-executive employees under specified conditions. We also have a Transaction Incentive Plan for the benefit of our executive officers and certain senior, non-executive employees that provides for bonus payments to be made to them upon a change in control transaction. These plans 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.

      Our principal executive offices are located in Sunnyvale, California, where we lease approximately 16,000 square feet, which encompasses our corporate headquarters and research and development facilities. This lease expires in August 2006. We lease approximately 6,000 square feet in Andover, Massachusetts for our Northeast operations under a lease expiring in September 2005. We lease approximately 20,000 square feet in Diamond Springs, California for our manufacturing facilities under a lease that expires in April 2009. In Chiang Mai, Thailand, near the facilities of our contract manufacturer, HANA Microelectronics Co., Ltd., we lease a small office for manufacturing support under a lease expiring in March 2007. We believe that our existing facilities are adequate to meet our current and near term future needs.

Legal Proceedings

      Although we may have pending various legal actions arising in the ordinary course of business from time to time, such as worker’s compensation or collections disputes, we are not currently a party to any material legal proceedings.

      None.

PART II

      Our common stock is traded on the Nasdaq National Market under the symbol “ENWV.” The following table sets forth the high and low daily bid prices per share of our common stock, as reported by the Nasdaq National Market.

      The last reported sale price of our common stock on the Nasdaq National Market on March 18, 2005 was $21.13 per share. As of February 9, 2005, there were approximately 139 holders of record of our common stock.

      We have never declared a dividend or paid any cash dividends on our common stock. Because we currently intend to retain any future earnings to fund the development and growth of our business, we do not anticipate paying any cash dividends in the near future.

Item 6.     Selected Consolidated Financial Data

      The following selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the notes thereto included elsewhere in this report. The selected consolidated statements of operations data for the fiscal years ended December 31, 2002, 2003 and 2004 and the selected consolidated balance sheet data as of December 31, 2003 and 2004 are derived from the audited consolidated financial statements that are included elsewhere in this report. The selected consolidated statements of operations data for the fiscal years ended December 31, 2000 and 2001 and the selected consolidated balance sheet data as of December 31, 2000, 2001 and 2002 are derived from our audited consolidated financial statements not included in this report. The historical results are not necessarily indicative of the results of operations to be expected in any future periods. All per-share amounts for all periods presented have been restated to reflect the 1-for-4 reverse stock split that became effective after the close of business on June 28, 2002.

      The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this report, as well as the information set forth in the “Risk Factors” section of this report. In addition to historical consolidated financial information, this discussion contains forward-looking statements that involve known and unknown risks and uncertainties, including statements regarding our expectations, beliefs, intentions or strategies regarding the future. 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 discussed in the forward-looking statements. You 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

      We design, manufacture and market radio frequency, or RF, modules that enable the transmission, reception and processing of high frequency signals in telecommunication networks, defense electronics and homeland security systems. Our RF modules are typically used in high-frequency applications and include integrated transceivers, amplifiers, synthesizers, oscillators, up and down converters, frequency multipliers and microwave switch arrays.

      At the time we completed our initial public offering in October 2000, we were selling our products almost exclusively to telecommunications network original equipment manufacturers and systems integrators, collectively referred to in this report as telecom OEMs, that provide equipment used by service providers to deliver voice, data and video service to businesses and consumers. A rapid and severe downturn in the telecommunications industry began shortly after that time, which resulted in the loss of some of our key customers and reduced revenues from our remaining customers. In response to that industry downturn, we have executed on a plan to reduce costs, capitalize on the consolidation of companies producing products similar to our own by making strategic acquisitions and diversify into new markets such as defense electronics and homeland security applications.

      Dramatic Cost Reductions. We have dramatically reduced our costs and shifted many of our remaining costs from fixed to variable costs by consolidating our manufacturing operations, redesigning our products for cost reductions and improved manufacturability, streamlining our inventory management processes and reducing headcount. In 2001, we consolidated our three domestic manufacturing facilities into a single manufacturing facility in Diamond Springs, California, resulting in lower personnel and facilities costs. In 2002, we began implementing a plan to move most of our high-volume manufacturing to a lower-cost offshore contract manufacturer. Since that time, we increased the proportion of our revenues attributable to products manufactured offshore from approximately 8% in 2002 to over 80% in 2004. As a result, despite the fact that our product revenues increased from $22.1 million in 2002 to $32.3 million in 2004, our cost of product revenues decreased from $29.8 million in 2002 to $22.4 million in 2004.

      Our remaining domestic manufacturing operations are now used primarily for our defense electronics products, which are required to be produced in the United States, and telecommunications and homeland security products that are produced in low volumes or require a high degree of technical support during their initial production. We maintain the ability to manufacture products in high volumes in Diamond Springs, California as needed. To the extent sales of our defense electronics products increase, we intend to manufacture those products in our existing domestic manufacturing facility or to employ a qualified United States contract manufacturer.

      We lowered raw materials costs by redesigning the gallium arsenide monolithic microwave integrated circuits, or MMICs, contained in our high-volume products. Gallium arsenide chips are our most expensive

raw materials item, constituting approximately one-half of our raw materials costs. By redesigning these MMICs, we were able to reduce their size by approximately 40%, reduce the number of individual MMIC types required by approximately one-third, improve MMIC fabrication yield and improve module test yield. In addition, we lowered the cost of other raw materials and components through re-design and by sourcing the items from lower cost suppliers.

      In 2003, we began delivering products to Nokia, our largest customer, based on an inventory consignment model. Previously, we had delivered products to Nokia on a firm order basis under a long-term supply agreement. We intend to offer the consignment model, which has provided significant benefits to Nokia and to us, to all of our major customers. Under our consignment contract with Nokia, Nokia provides us with a weekly rolling forecast for the upcoming 52-week period and we provide products to a consignment stock location at Nokia’s facilities in Finland based on that forecast. Nokia pulls products from the consignment location as needed, enabling Nokia to react quickly to changing market needs and reduce its safety inventory. Using this consignment model, we are able to determine what products Nokia is pulling from the consignment location on a daily basis. This information has enabled us to anticipate better what Nokia’s future product needs will be, which in turn allows us to conserve cash by maintaining a reduced raw materials inventory to meet those product needs as well as facilitating better communications with our customer.

      We reduced headcount across all functions and levels in a series of reductions in force beginning in 2001, significantly reducing our ongoing salary and related personnel costs. At the end of 2000, we had 535 employees. As of December 31, 2004, we had 141 employees. As a result of these reductions in force, we incurred substantial costs for terminating and relocating employees. All of our severance charges for these reductions in force were fully expensed by the end of 2004.

      In connection with our headcount reductions, we were also able to relocate our corporate headquarters to smaller, more suitable facilities with lower monthly rent expense. We also sold the land and two buildings comprising our Diamond Springs, California manufacturing facilities and leased back one of the buildings from the new owner on market terms. In connection with these real estate transactions, in 2004 we incurred a net lease termination fee of $2.9 million and received cash of $4.6 million from the sale of our Diamond Springs property, net of closing costs and legal fees.

      Growth by Acquisition. In 2000, many larger companies had small divisions providing high-frequency RF modules to telecom OEMs. The telecommunications industry downturn led many of these larger companies to divest themselves of such businesses. Since our initial public offering in October 2000, we have acquired assets of four such businesses, including the Stellex Broadband business from M/A-COM, Inc. (a subsidiary of Tyco Corporation), the Fixed Wireless division of Signal Technology Corporation, a product line from the broadband business of Arcom Wireless, Inc. (a subsidiary of Dover Corporation) and certain assets of Verticom Inc. These acquisitions expanded our relationships with existing customers, added new customers, significantly increased our product portfolio, increased our revenues, enhanced our market position and allowed us to acquire additional highly-skilled RF engineering personnel. We believe that our experience in completing these acquisitions has also made us skilled at identifying, investigating and integrating acquisition candidates. We intend to continue pursuing acquisition candidates within the telecommunications network market and in other markets that we serve or are trying to enter.

      Customer Diversification. We have begun diversifying our customer base by selling into industries outside of telecommunication networks, such as defense electronics and homeland security systems. To that end, in July 2004, we acquired JCA Technology, Inc., or JCA, a long-standing provider of high-frequency RF amplifiers and other modules used in defense applications, including electronic warfare, radar and secure communications. This acquisition allowed us to strengthen our presence in the defense electronics market and create a platform for selling our products, including versions of our commercial products, to the defense electronics market.

      In addition, we have entered the homeland security market through development agreements with SafeView, Inc., a privately-held developer of a security portal screening system being evaluated for use in several locations where security is a high priority, such as government buildings and international borders.

Under our agreements with SafeView, we have developed a high-frequency RF transceiver and microwave switch arrays for use in the portal. We completed the design and manufacture of prototype units of these products for design qualification and system testing and have begun manufacturing early production units.

      Customer and Market Concentration. While we have succeeded in diversifying our customer base and markets to a limited extent, we depend, and expect to remain dependent in the near term, on a small number of telecom OEMs for sales of our products. In 2002, 2003 and 2004, revenues from Nokia accounted for 71%, 59% and 55% of our total revenues, respectively. Revenues from Stratex Networks, Inc. accounted for 13% of our total revenues in 2003. Revenues from Nera ASA accounted for 10% of our total revenues for 2004. Revenues from all of our telecom OEM customers comprised 86% of our total revenues in 2004. While we intend to increase our revenues in the defense electronics and homeland security markets, we expect that the majority of our revenues will be attributable to a limited number of telecom OEMs for the foreseeable future.

      Growth in Outsourcing. Our largest competition to date has been OEMs that use their own captive resources for the design and manufacture of their own high-frequency RF modules, rather than use merchant suppliers like us. However, faced with the need to generate greater cost efficiencies and technological innovations with fewer resources, we believe that many of these OEMs are increasingly choosing to outsource the design and manufacturing of these modules. We believe we are typically able to manufacture the high-frequency RF modules designed by a customer at a lower cost by using our offshore contract manufacturer, our manufacturing and automated test expertise, our volume semiconductor purchasing power and our ability to procure raw materials at a lower price offshore. We intend to assume the manufacturing of RF modules that the telecom OEMs and defense and homeland security system integrators now produce in their own factories in our lower cost manufacturing facilities. We intend to convert these RF modules to products of our own design to lower costs further. For example, in 2004, Nera ASA chose to outsource to us all of its transceiver manufacturing, and Siemens AG chose to outsource to us a portion of its transceiver manufacturing. This approach allows us to capture additional revenues without waiting for the next system design cycle and to deepen our relationships with key customers.

      Telecommunications Industry Consolidation. The telecommunications industry is consolidating at all levels in the supply chain. Although demand for high-frequency transceiver modules for telecommunications network applications has recently begun to increase, there are fewer providers and customers of high-frequency RF transceiver modules in this market than there were at the time of our initial public offering in October 2000. In order to reduce their own costs, the telecom OEMs that purchase our products wish to reduce the number of their suppliers in order to obtain the best pricing from retained suppliers based on increased volume. While the reduced number of high-frequency transceiver module providers has enabled us to gain new customers and increase product volumes sold to our customers, we have at times had to reduce prices in order to enter or maintain that business and expect continued pricing pressure from our limited number of customers in this market.

      Costs and Risks Associated with Acquisitions. We intend to continue to grow through acquisitions by taking advantage of consolidation of the suppliers of high-frequency RF modules and using our experience in identifying, investigating and integrating acquisition targets. The process of investigating, acquiring and integrating any business into our business and operations is risky and may create unforeseen operating difficulties and expenditures. In addition, future acquisitions could have a material adverse effect on our operating results by diluting our stockholders, causing us to incur additional debt and out-of-pocket expenses, and requiring us to write off the value of acquired assets.

      Costs and Risks Associated with Market Diversification. Part of our strategy is to expand into non-telecommunication markets, particularly defense electronics and homeland security. To date, only a small percentage of our revenues has been attributable to sales of our RF modules for defense electronics applications. We have only recently begun to design and sell products for homeland security applications as the market for homeland security is only now emerging. We cannot predict how the market will evolve. If

increased demand for high-frequency RF modules in defense electronics and homeland security markets does not materialize, we fail to secure new design wins in these markets or we are unable to design readily manufacturable products for these markets, our growth could be adversely impacted.

      Cost Efficiencies and Risks Associated with Limited Number of Semiconductor Foundries. We design semiconductor devices. However, we do not own or operate a semiconductor fabrication facility, or foundry, and rely on a limited number of third parties to produce these devices. Our primary semiconductor foundry is Velocium, a division of Northrop Grumman Space & Mission Systems Corp., which is a wholly-owned subsidiary of Northrop Grumman Corporation and is referred to in this report as Velocium. Velocium produced over 85% of our semiconductors in 2004. We have purposefully limited the number of foundries that we use in order to obtain the best pricing. The loss of our relationship with or our access to any of the foundries we currently use, particularly Velocium, and any resulting delay or reduction in the supply of semiconductor devices to us, would severely impact our ability to fulfill customer orders and could damage our relationships with our customers.

      Our current supply agreement with Velocium expires in December 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 is a limited number of third-party semiconductor foundries that use the particular process technologies we select for our products and have sufficient capacity to meet our needs, using alternative or additional foundries would require an extensive qualification process that could prevent or delay product shipments and revenues. We estimate that it may take up to six months to shift production of a given circuit design to a new foundry.

      Seasonality. We typically recognize lower revenues in the first and third calendar quarters due to seasonality in the telecommunications network market. Revenues attributable to telecom OEMs typically contract in the first quarter due to delays in purchasing resulting from wireless carriers’ capital budgeting processes. The third quarter is generally slow in our telecommunications network market as many of our European telecom OEM customers shut down their factories for a portion of the summer months. The fourth quarter historically has been our strongest quarter as the wireless carriers expend their remaining capital budgets for the year. We expect these seasonal fluctuations to continue as they pertain to our telecommunications network business.

Critical Accounting Policies

      Management’s discussion and analysis of its financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, allowance for doubtful accounts, inventories, asset impairments, income taxes, warranty obligations, restructuring charges, and commitments and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates or our estimates may be affected by different assumptions or conditions. Below, we discuss these policies further, as well as the estimates and judgments involved.

      Our primary customers are telecom OEMs and defense and homeland security systems integrators that incorporate our products into their systems. We recognize product revenues at the time title passes, which is

generally upon product shipment or when withdrawn from a consignment location, and persuasive evidence that 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 revenues. 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. Revenues attributable to development fees accounted for 1.9% of our total revenues in 2002, 5.1% of our total revenues in 2003 and 2.5% of our total revenues in 2004. The costs incurred under these development agreements are included in research and development expenses.

      We make ongoing assumptions relating to the collectibility of our accounts receivable in our calculation of the allowance for doubtful accounts. In determining the amount of the allowance, we make judgments about the creditworthiness of customers based on ongoing credit evaluations and assess current economic trends affecting our customers that might impact the level of credit losses in the future and result in different rates of bad debts than previously seen. We also consider our historical level of credit losses. Our reserves, which were $284,000 at December 31, 2003 and $243,000 at December 31, 2004, historically have been adequate to cover our actual credit losses. If actual credit losses were to be significantly greater than the reserves we have established, our selling, general and administrative expenses would increase.

      We generally offer a one-year to two-year warranty on all of our products. We record a liability based on estimates of the costs that may be incurred under our warranty obligations and charge to cost of product revenues the amount of such costs at the time revenues are recognized. Our warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Our estimates of anticipated rates of warranty claims and costs per claim are primarily based on historical information and future forecasts. We periodically assess the adequacy of our recorded warranty liabilities and adjust the amounts as necessary. If actual warranty claims are significantly higher than forecast, or if the actual costs incurred to provide the warranty is greater than the forecast, our gross margins could be adversely affected.

      Some radios incorporating our transceivers that are manufactured and shipped by one of our customers have experienced degraded performance after installation in the field. The cause of the degradation was identified to be a faulty semiconductor component originally developed and supplied by TRW Inc. that was incorporated in the transceiver. TRW was later acquired by Northrop Grumman Corporation and renamed Northrop Grumman Space & Mission Systems Corp., and its foundry is referred to in this report by its tradename, Velocium. Pursuant to a settlement agreement between TRW and us, we are responsible for the direct costs associated with the repair and replacement of the degraded transceivers produced under our supply agreement with the customer. Northrop Grumman Space & Mission Systems Corp., as successor to TRW, compensated our customer for the indirect costs associated with the repair and replacement of the degraded radios and transceivers. 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 each returned radio. During 2001, we reserved $4.6 million for warranty charges to cover the actual repair of the transceivers containing these faulty components, of which $1.1 million had been used through December 31, 2004. We believe that our remaining reserve is adequate to cover our remaining warranty obligations.

      Under an agreement we entered into with Northrop Grumman Space & Mission Systems Corp. in March 2005, we agreed to pay $300,000 to Northrop Grumman Space & Mission Systems Corp. as final reimbursement for these indirect costs and to assume sole responsibility for any future product failures attributable to the semiconductor component. We are in the process of designing a replacement component,

which will be fabricated by an alternate supplier that we believe will eliminate the degradation of performance in future production units. We expect to complete the design and qualification of this replacement component by mid-2005 at a cost of approximately $120,000.

      We evaluate our ending inventories for excess quantities and obsolescence at each balance sheet date. This evaluation includes review of materials usage, market conditions and product life cycles and an analysis of sales levels by product and projections of future demand and market conditions. We write off inventories that are considered excess or obsolete. We adjust remaining inventory balances to approximate the lower of our standard manufacturing cost or market value. If actual future demand or market conditions are less favorable than those projected by management, additional inventory write-downs may be required, and would be reflected in cost of product revenues in the period the revision is made. This would have a negative impact on our gross margins in that period. If in any period we are able to sell inventories that were not valued or that had been written off in a previous period, related revenues would be recorded without any offsetting charge to cost of product revenues, resulting in a net benefit to our gross margin in that period. To the extent these factors materially affect our gross margins, we would disclose them.

      We periodically review our property, plant and equipment and identifiable intangible assets for possible impairment whenever facts and circumstances indicate that the carrying amount may not be fully recoverable. Assumptions and estimates used in the evaluation of impairment may affect the carrying value of long-lived assets, which could result in impairment charges in future periods. Significant assumptions and estimates include the projected cash flows based upon estimated revenue and expense growth rates and the discount rate applied to expected cash flows. In addition, our depreciation and amortization policies reflect judgments on the estimated useful lives of assets.

      We record and account for our restructuring activities following formally approved plans that identify the actions and timeline over which the restructuring activities will occur. Restructuring charges include estimates pertaining to employee severance and fringe benefit costs, facility exit costs, inventory and excess equipment. We review remaining restructuring accruals on a quarterly basis and adjust these accruals when changes in facts and circumstances suggest actual amounts will differ from our estimates. Actual costs may be different than our original or revised estimates. These changes in estimates can result in increases or decreases to our results of operations in future periods and would be presented on the restructuring charges, net, line of our statement of operations.

      We currently have significant deferred tax assets, which are subject to periodic recoverability assessments. We record a valuation allowance to reduce our deferred tax assets to the amount that we believe to be more likely than not realizable. We have recorded a valuation allowance in an amount equal to the net deferred tax assets to reflect uncertainty regarding future realization of these assets based on past performance and the likelihood of realization of our deferred tax assets.

      In accordance with the provisions of Statement of Financial Accounting Standards No. 141, “Business Combinations,” the purchase price of an acquired company is allocated between the intangible assets and the net tangible assets of the acquired business with the residual of the purchase price recorded as goodwill. Our future operating performance will be impacted by the future amortization of these acquired intangible assets

and potential impairment charges related to goodwill if indicators of potential impairment exist. As a result of business acquisitions, the allocation of the purchase price to goodwill and intangible assets could have a significant impact on our future operating results. The allocation of the purchase price of the acquired companies to goodwill and intangible assets requires us to make significant estimates and assumptions, including estimates of future cash flows expected to be generated by the acquired assets and the appropriate discount rate for these cash flows. Should conditions be different from management’s current estimates, material write-downs of intangible assets or goodwill may be required, which would adversely affect our operating results.

      In accordance with the provisions of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” we assess goodwill and intangible assets with indefinite lives for impairment at least annually in the third quarter, or more frequently if events and changes in circumstances suggest that the carrying amount may not be recoverable. To the extent the carrying amount exceeds its fair value, an impairment charge to income is recorded. At December 31, 2004, the carrying value of goodwill was $1.5 million.

Results of Operations

      The following tables set forth selected consolidated statement of operations data for each of the periods indicated in absolute dollars and as a percentage of total revenues.

Results of Operations

      Revenues. Total revenues in 2004 were $33.2 million, a 2% decrease from $33.8 million in 2003. Total revenues were comprised of product revenues and development fees. Product revenues are attributable to sales of our RF modules. 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. We typically enter into a development contract only if we perceive it to generate a significant opportunity for substantial sales of our RF modules. We expect to enter into more development contracts in the future as we seek to further penetrate the defense electronics market, where development contracts are customary, but we do not expect development fees to represent a significant percentage of our total revenues for the foreseeable future.

      Product revenues were $32.3 million in 2004, a 1% increase from $32.1 million in 2003. Product revenues in 2004 remained consistent with the prior year despite pricing decreases of 10-15% for some of our larger customers based on committed price reductions arising from increased volumes and competitive market demands. These pricing decreases were offset by increased product volumes from some of our larger customers, sales of new products for existing customers, the addition of new customers and the addition of product revenues attributable to JCA, which we acquired in July 2004.

      Development fees were $832,000 in 2004, a decrease from $1.7 million in 2003. The decrease in development fees is attributable to fewer customers reimbursing us for the development of their customized products.

      Cost of product revenues. Cost of product revenues consists primarily of: costs of direct materials and labor used 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 manufacturer; expenses associated with excess or obsolete inventory; and costs associated with warranty returns offset by the benefit of usage of materials that were previously written off.

      Cost of product revenues was $22.4 million in 2004, a 10% decrease from $24.8 million in 2003. The decrease in cost of product revenues was primarily attributable to: the reversal of $1.3 million in excess warranty accrual; 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 use of redesigned products and semiconductors, resulting in reduced use of expensive semiconductor materials such as gallium arsenide; lower prices we negotiated with Velocium for semiconductor processing; and increased offshore manufacturing at a lower cost. The cost of product revenues was also reduced by the use of $292,000 of inventory that was previously written off. We intend to continue to focus on reducing the cost of product revenues as a percentage of total revenues through the introduction of new designs and technology and further improvements to our offshore manufacturing processes.

      Research and development expenses. Research and development expenses consist primarily of salaries and related expenses for research and development personnel, outside professional services, prototype materials, supplies and labor, depreciation for related equipment and allocated facilities costs. Research and development expenses in 2004 were $5.0 million, or 14.9% of total revenues, an 11% increase from $4.5 million, or 13.2% of total revenues, in 2003. The increase was primarily attributable to the research and development expenses incurred by added headcount from JCA, which we acquired in the third quarter of 2004, and project and consulting expenses for development programs, partially offset by decreases in depreciation and facilities costs resulting from the sale and leaseback of our Diamond Springs, California manufacturing facility and the relocation of our Sunnyvale, California headquarters. In 2005, we expect research and development expenses to increase in absolute dollar terms, but remain relatively flat as a percentage of total revenues, as we continue work on certain development programs, increase our defense electronics and homeland security related business and incur additional costs associated with a full year of JCA operations.

      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, promotional activities and allocated facilities costs. Selling, general and administrative expense in 2004 was $7.5 million, a 14% decrease from $8.8 million in 2003. The decrease was primarily attributable to a reduction in bad debt expense, lower depreciation expense due to the write-off of certain equipment in 2003 and reduced facilities expenses attributable to the relocation of our Sunnyvale headquarters, offset in part by increased headcount resulting from our acquisition of JCA in July 2004 and increased consulting and service fees attributable to our efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404. We anticipate selling, general and administrative expenses to increase by approximately $1.0 million in 2005 to support additional sales personnel and for advertising in connection with our defense electronics business, as is customary in the defense industry. We also expect that our selling, general and administrative expenses may increase as a result of our continued Section 404 compliance efforts. Such costs may exceed our estimates.

      In-process research and development. As part of our acquisition of JCA in July 2004, we acquired $320,000 of in-process research and development, or IPRD. The value of the IPRD was determined based on a valuation analysis from an independent appraiser. The amount of the purchase price for JCA allocated to IPRD was determined through established valuation techniques generally accepted in the technology industry. The $320,000 allocated to the acquired IPRD was immediately expensed in the period the acquisition was

completed because the projects associated with the IPRD had not yet reached technological feasibility and no future alternative uses existed for the technology. We had no IPRD in 2003.

      Amortization of intangible assets. As part of our acquisition of JCA, we acquired $4.2 million of identifiable intangible assets, including approximately $2.3 million of developed technology, approximately $1.1 million for the JCA tradename, approximately $780,000 for customer relationships and approximately $140,000 for customer backlog. These assets are subject to amortization and have estimated useful lives as follows: developed technology, five years; customer backlog, six months; customer relationships, five years. The trade name is not subject to amortization and will be evaluated for impairment at least annually commencing one year after the acquisition or more frequently if events and changes in circumstances suggest that the carrying amount may not be recoverable.

      The amortization associated with the developed technology is a charge to cost of product revenues. During 2004, $187,000 of amortization of developed technology was charged to cost of product revenues. In 2005, we expect to amortize $450,000 of developed technology. The amortization associated with the customer relationships and customer backlog is a charge to operating expenses. During 2004, $182,000 of amortization of customer relationships and customer backlog was charged to operating expenses. In 2005, we expect to amortize $179,000 of customer relationships and customer backlog. We had no such amortization expenses in 2003.

      Restructuring charges, net. Our restructuring charges have been charges to earnings associated with plans to restructure our business for cost reductions, and have included charges for lease terminations, severance benefits, inventory and equipment reductions. In 2004, we incurred aggregate restructuring charges, net of reversals of previous restructuring charges, of $2.9 million, and in 2003 we incurred aggregate net restructuring charges of $304,000.

      During 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. We also entered into a new lease for our corporate headquarters at a lower market rate. In addition, we reversed $4,000 associated with our restructuring plan for the third quarter of 2003, as we had overestimated the related charges at that time.

      During 2003, we recorded a restructuring charge of $490,000 under the third quarter 2003 restructuring plan, all of which was for severance payments. We eliminated 18 positions and made cash payments of $486,000 under the plan. In addition, during the fourth quarter of 2003, we revised estimates of the number of positions to be eliminated pursuant to the third quarter 2002 restructuring plan and reversed $186,000 of the severance accrual.

      Impairment of long-lived assets. During 2004, we recorded a charge of $389,000 to write off the remaining carrying value of equipment held-for-sale and to write off 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 sales tax was assessed in the third quarter of 2004 and was related to equipment that had been fully depreciated or impaired.

      During 2003, we evaluated the carrying value of the long-lived assets used in our manufacturing process. As we moved more of our production to our offshore contract manufacturer, 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.

      In 2003, we also 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. Our estimate of the fair value of the assets was based on sales prices of similar equipment.

      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 exercise price for option awards prior to our initial public offering, as well as expenses attributable to the acceleration of options. Deferred stock compensation is represented as a reduction of stockholders’ equity. In 2004, amortization of deferred stock compensation and other option-related expenses was $204,000, a decrease from $796,000 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 June 2004, we fully amortized all deferred stock compensation and, consequently, will not have any deferred stock compensation charges in 2005 arising from these option awards.

      Loss (recovery) on building sublease. During 2003, we recorded a charge of $662,000 associated with the sublease of our Sunnyvale, California headquarters 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 its expiration date, as a part of the lease termination described above.

      Interest income, expense and other, 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, partially offset by interest expense on a note payable and capital equipment leases. Interest income increased to $430,000 in 2004 from $257,000 in 2003. The increase in interest income was due to increasing interest rates and increasing levels of cash available for investment.

      Other income, net consists of contract termination fees and gains and losses on sale or abandonment of fixed assets. During 2004, we realized a net gain of $714,000, primarily from the sale of land, fixed assets and assets held-for-sale and sublease income. During 2003, we realized other income of $496,000 primarily due to $272,000 from the gain on sale of fixed assets and $182,000 from sublease income.

      Interest expense decreased to $19,000, as compared to $112,000 in 2003. The decrease in interest expense was primarily attributable to paying off the remaining balance on the note payable during the second quarter of 2004.

     Year ended December 31, 2003 compared to year ended December 31, 2002

      Revenues. Revenues in 2003 were $33.8 million, a 50% increase from $22.6 million in 2002, and were comprised of product revenues and development fees. Product revenues were $32.1 million in 2003, a 45% increase from $22.1 million in 2002. The increase reflects an increasing number of commercial telecommunications products sold to Nokia Networks, Siemens AG and Stratex Networks, Inc. Additionally, we acquired several product lines from competitors during the previous 18 months that generated revenues beyond our base business. As we integrated these product lines into our existing business and manufacturing operation, quantification of the increase is impractical. Development fees were $1.7 million in 2003, an increase from $423,000 in 2002. The increase in development fees was attributable to increased development of custom designed products for new and existing customers, as well as reimbursement for certain research related expenses.

      Cost of product revenues. Cost of product revenues was $24.8 million in 2003, a 17% decrease from $29.8 million in 2002. The improvement is attributable to restructuring actions in 2003 and 2002, cost reductions within the manufacturing process, including consolidation of our manufacturing sites, greater use of offshore manufacturing, introduction of lower cost products and elimination of excess overhead, equipment and capacity. The cost of product revenues was positively impacted by the use of previously reserved inventory amounting to approximately $1.0 million.

      Research and development expenses. Research and development expenses in 2003 were $4.5 million, a 52% decrease from $9.2 million in 2002. The decrease was primarily attributable to restructuring our engineering team to a more efficient and cost-effective size as well as a reduction in material and services costs, while still supporting development for new products and research associated with technology to be introduced in 2004.

      Selling, general and administrative expenses. Selling, general and administrative expense in 2003 was $8.8 million, a 5% decrease from $9.2 million in 2002. The decrease was primarily attributable to our restructuring actions in the third quarter of 2003 and overall expense control measures aimed at bringing operating expenses more in line with revenues, offset with an increase in bonus expense and professional service fees.

      Restructuring charges, net, and loss on sublease. During 2003, we recorded restructuring charges of $490,000 under a restructuring plan, the majority of which was for severance costs, partially offset by adjustments to previously recorded restructuring charges of $186,000 associated with such restructuring plan. We also recorded other charges of $662,000 associated with the sublease of our Sunnyvale, California headquarters building for the excess of our remaining lease obligations over the anticipated sublease income.

      During 2002, we recorded charges of $8.2 million in connection with our restructuring plans in March and September, which was comprised of $2.9 million for severance and fringe benefit costs, $310,000 in lease termination costs and $5.2 million for excess equipment, partially offset by adjustments of $142,000 for excess severance and fringe benefits costs and previously recorded restructuring charges of $490,000 for the settlement of lease obligations.

      Impairment of long-lived assets. During 2003, we evaluated the carrying value of the long-lived assets used in our manufacturing process. As we moved more of our production to our offshore contract manufacturer, 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.

      Also in 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. Our estimate of the fair value of the assets was based on sales prices of similar equipment.

      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. Deferred stock compensation is represented as a reduction of stockholders’ equity. In 2003, amortization of deferred stock compensation and other option-related expenses was $796,000, a decrease from $1.4 million in 2002. The decrease was primarily due to using an accelerated method to amortize deferred stock compensation that resulted in higher expense in earlier periods and credits of approximately $399,000 in 2003 from the forfeiture of options by terminated employees, as compared to $2.9 million in 2002. The decrease in credits was directly related to the decrease in forfeited options by terminated employees from 2002 to 2003.

      Interest income, expense and other, net. Net interest income and other, net consists primarily of interest income earned on our cash and cash equivalents and short-term investments and realized gains and losses on investments, offset by interest expense on capital equipment leases. Interest income decreased to $257,000 in 2003 from $1.4 million in 2002. The decrease in interest income was due to lower interest rates and lower levels of cash available for investment.

      Interest expense decreased to $112,000 as compared to $399,000 in 2002. The decrease in interest expense was primarily attributable to the early repayment of financing leases of manufacturing and engineering equipment.

      Other income, net consists of contract termination fees, gains and losses on sale or abandonment of fixed assets. During 2003, we realized other income of $496,000 primarily due to $272,000 from the gain on sale of fixed assets and $182,000 from sublease income. During 2002, we realized a gain in the amount of $1.1 million on contract terminations and $2.2 million resulting from a settled dispute with one of our customers for expenses incurred related to cancellations of product deliveries.

Liquidity and Capital Resources

      The following table sets forth selected consolidated statement of cash flows data for our three most recent fiscal years.

      During 2004, we used $5.0 million of cash in operating activities, as compared to generating $221,000 in 2003. The use of cash in operating activities in 2004 was attributable to a $2.4 million net loss, excluding depreciation and other non-cash items, and net changes in 2004 operating assets and liabilities that used an additional $2.6 million in cash. Our net loss for 2004, excluding depreciation and other non-cash items, was $2.4 million, as compared to a net loss for 2003, excluding depreciation and other non-cash items, of $1.4 million. The increased net loss in 2004 was primarily due to a $3.0 million settlement fee paid in consideration for the cancellation of an above-market lease on our previous Sunnyvale, California corporate headquarters. The use of $2.6 million in cash was primarily due to a $1.5 million increase to accounts receivable, a $1.5 million decrease in accrued warranty and a $390,000 net decrease in accounts payable and accrued compensation and other current and long-term liabilities, partially offset by a $610,000 decrease in inventory and a $160,000 decrease in other assets.

      During 2003, we generated $221,000 of cash from operating activities, as compared to using $19.9 million of cash in operating activities in 2002. The change in cash flow from operating activities from 2002 to 2003 was primarily due to a reduced operating loss net of non-cash items, decreased expenditures associated with accrued compensation and other current and long-term liabilities, accounts payable and accounts payable to affiliates in 2003. This was partially offset by an increase in accounts receivable and a lower decrease in inventory in 2003 compared to 2002.

      Cash provided by operating activities in 2003 was attributable to a $1.4 million net loss, excluding depreciation and other non-cash items, offset by net changes in 2003 operating assets and liabilities of $1.6 million resulting in $221,000 of cash provided by operating activities. Cash provided by net changes in operating assets and liabilities in 2003 resulted primarily from a $3.7 million decrease to inventory, a $1.1 million increase in accounts payable and a $134,000 decrease in other assets, partially offset by a $2.5 million increase in accounts receivable and a $773,000 decrease in accrued compensation and other current and long-term liabilities and accrued warranty.

      Investing activities provided cash of $4.2 million in 2004, as compared to $5.1 million in 2003. The $4.2 million provided by investing activities in 2004 was primarily due to $5.1 million generated by the sale of assets, including $4.6 million from the sale of land and buildings at our Diamond Springs, California location, $4.9 million provided by the net maturities of short-term investments and a $778,000 decrease in restricted cash resulting from our repayment in the same amount of a note payable in 2004, partially offset by the use of $6.1 million for the purchase of JCA and $460,000 of capital expenditures for additional leasehold improvements and computer hardware and software.

      Investing activities provided cash of $5.1 million in 2003, as compared to $10.8 million in 2002. In the years ended December 31, 2003 and 2002, we made capital expenditures of $8,000 and $614,000, respectively, primarily for purchases of computer and manufacturing equipment and leasehold improvements. In addition, in 2003, $4.8 million was provided by the net sale or maturity of short-term investments and a decrease in restricted cash, and we had net proceeds on sales of property and equipment of $382,000. In 2002, $3.4 million

was used in connection with the acquisition of the broadband assets of the Fixed Wireless division of Signal Technology Corporation and $14.4 million was provided by the net sale or maturity of short-term investments and an increase in restricted cash. Additionally, in 2002, we had net proceeds on sales of property and equipment of $384,000.

      Financing activities provided cash of $1.5 million in 2004, as compared to a use of $1.2 million in 2003. The $1.5 million provided by financing activities in 2004 was due to the $2.2 million of proceeds from the exercise of employee stock options and stock issuances under our employee stock purchase plan, partially offset by the $778,000 payment in satisfaction of a note payable for equipment purchases.

      Financing activities used $1.2 million in 2003, as compared to $3.0 million in 2002. Financing activities in 2003 included payments on capital lease obligations of $1.3 million and payments on a note payable of $496,000, partially offset by $493,000 in proceeds from the exercise of employee stock options and $93,000 in proceeds from shares purchased under our employee stock purchase plan. Financing activities in 2002 included payments under capital lease obligations of $4.3 million and the use of $79,000 for open market purchases of our common stock pursuant to a previously-announced stock repurchase program, partially offset by an increase in a note payable of $1.3 million and the receipt of $168,000 in proceeds from the exercise of employee stock options and shares purchased under our employee stock purchase plan.

      We believe that our existing cash and investment balances will be sufficient to meet our operating and capital requirements for the next 12 months and the foreseeable future thereafter. However, additional financing may be required to fund acquisitions. As a result, 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 discussed in the notes to the consolidated financial statements included in this report, 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. The following table summarizes our future cash obligations for operating leases, excluding interest:

Recent Accounting Pronouncements

      In December 2004, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” or SFAS 123R, which requires the measurement of all share-based payments to employees, including grants of stock options, using a fair-value-based method and the recording of such expense in the consolidated statements of operations. The accounting provisions of SFAS 123R are effective for reporting periods beginning after June 15, 2005. We are required to adopt SFAS 123R in the third quarter of fiscal 2005. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. See “Stock-Based Compensation” in the notes to the consolidated financial statements contained in this report for the pro forma net loss and net loss per share amounts, for fiscal 2002 through fiscal 2004, as if we had used a fair-value-based method similar to the methods required under SFAS 123R to measure compensation expense for employee stock incentive awards.

      We have not yet quantified the effects of the adoption of SFAS 123R, but we expect that the new standard will result in significant stock-based compensation expense. The pro forma effects on net loss and net loss per share if we had applied the fair value recognition provisions of the original SFAS 123 on stock compensation awards, rather than applying the intrinsic value measurement provisions of the current accounting standard, are contained in the notes to our consolidated financial statements included elsewhere in this report. Although these pro forma effects of applying the original SFAS 123 provisions may be indicative of the effects of adopting SFAS 123R, the provisions of these two statements differ in some important respects. The actual effects of adopting SFAS 123R will depend on numerous factors including, but not limited to: the valuation model chosen by us to value stock-based awards; the assumed award forfeiture rate; the accounting policies adopted concerning the method of recognizing the fair value of awards over the requisite service period; and the transition method, as described below, chosen for adopting SFAS 123R.

      SFAS 123R requires the use of the modified prospective application method. Under this method, SFAS 123R is applied to new awards and to awards modified, repurchased or cancelled after the effective date. Additionally, compensation cost for the portion of awards for which the requisite service has not been rendered, such as unvested options, that are outstanding as of the date of adoption will be recognized as the remaining requisite services are rendered. The compensation cost relating to unvested awards at the date of adoption will be based on the grant-date fair value of those awards as calculated for pro forma disclosures under the original SFAS 123. In addition, companies may use the modified retrospective application method. This method may be applied to all prior years for which the original SFAS 123 was effective or only to prior interim periods in the year of initial adoption. If the modified retrospective application method is applied, financial statements for prior periods will be adjusted to give effect to the fair-value-based method of accounting for awards on a consistent basis with the pro forma disclosures required for those periods under the original SFAS 123.

      In March 2004, the FASB issued Emerging Issues Task Force No. 03-1, or EITF 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” which provided new guidance for assessing impairment losses on investments. Additionally, EITF 03-1 includes new disclosure requirements for investments that are deemed to be temporarily impaired. In September 2004, the FASB delayed the accounting provisions of EITF 03-1; however, the disclosure requirements remain effective for annual periods ending after June 15, 2004. We will evaluate the impact of EITF 03-1 once final guidance is issued.

Qualitative and Quantitative Disclosures about Market Risk

      Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. In order to reduce this interest rate risk, we usually invest our cash in investments with short maturities. As of December 31, 2004, all of our investments in our portfolio were cash equivalents or short-term investments and consisted primarily of commercial paper and government securities. Due to the short duration of these investments, a change in interest rates would not have a material effect on our financial condition or results of operations. Declines in interest rates over time will, however, reduce interest income.

      We do not have any material equity investments. Therefore, we do not currently have any direct equity price risks.

      Currently, all sales to international customers are denominated in United States dollars and, accordingly we are not exposed to foreign currency rate risks in connection with these sales. However, a strengthening dollar could make our products less competitive in foreign markets and thereby lead to a decrease in revenues attributable to international customers.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Endwave Corporation

      We have audited the accompanying consolidated balance sheet of Endwave Corporation and its subsidiary (the “Company”) as of December 31, 2004, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended. Our audit also included the financial statement schedule listed in Item 15(a)(2). The consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audit.

      We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

      In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Endwave Corporation and its subsidiary as of December 31, 2004, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

Palo Alto, California

January 27, 2005, except as

 to Note 15, which is as of

 March 25, 2005

REPORT OF ERNST & YOUNG LLP, INDEPENDENT

REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

Endwave Corporation

      We have audited the accompanying balance sheet of Endwave Corporation as of December 31, 2003, and the related statements of operations, stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2003. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

      We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

      In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Endwave Corporation at December 31, 2003, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2003, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

Palo Alto, California

February 3, 2004

ENDWAVE CORPORATION

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these consolidated financial statements.

ENDWAVE CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

The accompanying notes are an integral part of these consolidated financial statements.

ENDWAVE CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

The accompanying notes are an integral part of these consolidated financial statements.

ENDWAVE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

The accompanying notes are an integral part of these consolidated financial statements.

ENDWAVE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.     The Company

      Endwave Corporation and its wholly-owned subsidiary, Endwave Defense Systems Incorporated (together referred to as “Endwave” or the “Company”), design, manufacture and market radio frequency (“RF”) modules that enable the transmission, reception and processing of high frequency signals in telecommunication networks, defense electronics and homeland security systems. The Company’s RF modules are typically used in high-frequency applications and include integrated transceivers, amplifiers, synthesizers, oscillators, up and down converters, frequency multipliers and microwave switch arrays.

      Most of the Company’s RF modules are deployed in telecommunication networks, including current and next generation cellular networks, carrier class trunking networks and point-to-point transmission networks. The Company’s target customers for these applications are telecommunications network original equipment manufacturers and systems integrators, collectively referred to in these consolidated financial statements as telecom OEMs. Telecom OEMs provide the wireless equipment used by communications service providers to deliver voice, data and video services to businesses and consumers. Telecom OEMs that purchased the Company’s products accounted for 86% of its total revenues during 2004 and included Nokia, Nera ASA, Stratex Networks, Inc., Powerwave Technologies, Inc. (formerly LGP Allgon), Siemens AG and Ceragon Networks Ltd.

      The Company’s RF modules are also designed into various applications outside the telecommunications network market, including defense electronics and homeland security systems. The Company’s target customers in the defense electronics market include defense systems integrators and their subcontractors that design aerospace systems, defense systems, weapons and electronics platforms for domestic and foreign defense customers. The Company’s target customers in the homeland security market include those customers that are taking advantage of the properties of high-frequency RF to create new capabilities designed to detect security threats. In these consolidated financial statements, these target customers in the defense electronics and homeland security markets are referred to as defense and homeland security systems integrators. Revenues from this group of customers, including The Boeing Company, SafeView, Inc., Lockheed Martin Corporation, Suntron Corporation and Raytheon Company, accounted for 13% of the Company’s total revenues in 2004.

2.     Summary of Significant Accounting Policies

Basis of Consolidation

      The accompanying consolidated financial statements of Endwave include the financial results of Endwave Defense Systems from the date of its purchase, July 21, 2004, and have been prepared in conformity with accounting principles generally accepted in the United States of America. All significant intercompany accounts and transactions have been eliminated.

Reclassification

      Certain prior year financial statement amounts have been reclassified to conform to the current year’s presentation. These reclassifications had no impact on previously reported total assets, stockholders’ equity or net losses.

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.

ENDWAVE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Revenue Recognition

      The Company’s primary customers are telecom OEMs and defense electronics and homeland security systems integrators that integrate the Company’s products into their systems. The Company recognizes product revenues at the time title passes, which is generally upon product shipment or when withdrawn from a consignment location and 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. After title passes, there are no customer acceptance requirements or other remaining obligations and customers do not have a right of return. 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 revenues. Up-front fees, if any, associated with development agreements are recognized over the estimated development and production period, but in no event prior to becoming payable by the customer. The costs incurred under these development agreements are expensed as incurred and included in research and development expenses.

Warranty

      The warranty periods for the Company’s products are between one and two years from date of shipment. The Company 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 and the Company’s cost of product revenues was reduced in the period by that amount. The amount is included in warranties settled or reversed during 2004 in the table below.

      Changes in the Company’s accrued warranty during the years ended December 31, 2004 and 2003 are as follows: