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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

(Mark One)

For the fiscal year ended December 31, 2002

OR

For the transition period from                       to                     

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 x    No ¨

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

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.    ¨

The aggregate market value of the common stock held by non-affiliates of the registrant as of June 30, 2002 was approximately $16.3 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 in that 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 $3.20, which was the closing sale price June 28, 2002 as reported by the Nasdaq National Market.

The number of shares outstanding of the registrant’s common stock as of March 14, 2003 was approximately 9,014,661.

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ENDWAVE CORPORATION

FORM 10-K

December 31, 2002

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Forward-Looking Statements

In addition to historical information, this Annual Report on Form 10-K contains forward-looking statements as defined by federal securities laws. Forward-looking statements involve known and unknown risks and uncertainties, which may cause our actual results in future periods to differ materially from what is currently anticipated. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in Item 1, “Business,” as well as Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” You should carefully review the risks described in this Annual Report on Form 10-K and in other documents we file with the Securities and Exchange Commission. When used in this report, the words “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate,” and similar expressions are generally intended to identify forward-looking statements. You should not place undue reliance on the forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. We undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this document.

PART I

We design, manufacture and market RF (radio frequency) subsystems that enable the transmission, reception and processing of high-speed electromagnetic signals in broadband wireless telecommunications systems and other adjacent market product designs requiring similar RF, microwave and millimeter wave technology.

Our products are used primarily in current and next generation “cellular backhaul,” carrier class trunking, point-to-point access, and point-to-multipoint access applications. Our target customers are microwave radio manufacturers and wireless systems integrators (collectively referred to as OEMs) that provide the broadband wireless equipment used by communications service providers to deliver voice, data and video services to business consumers. Original equipment manufacturers (OEMs) that use or have used our products include Allgon Microwave, Stratex Networks, Harris Corporation, Hughes Network Systems, Nera Networks, Nokia, Nortel Networks, P-Com, Siemens AG and Witcom Ltd. In addition to telecommunications applications, our products are used in various other applications and markets. Our target customers in these markets are defense contractors and sub-contractors that design aerospace, defense/weapons, and electronics platforms for various domestic and foreign defense customers. We also supply manufacturers of test and measurement equipment and of various other electronic products for commercial applications. Defense and commercial customers that use or have used our products include Anritsu, Boeing Corporation, Filtronic, Harris Corporation, L-3 Communications, Lockheed Martin, M/A-COM/Tyco, Raytheon, Rockwell International and TASC, a business unit of Northrop Grumman.

We were originally incorporated in California in 1991 and reincorporated in Delaware in 1995. In March 2000, we merged with TRW Milliwave Inc. (“TRW Milliwave”), a RF subsystem supplier that was a wholly-owned subsidiary of TRW Inc. (“TRW”). 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 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.

As part of our growth strategy, we have made selected acquisitions of related and competitive companies. In September 2002 we acquired the broadband assets of the Fixed Wireless division of Signal Technology Corporation. The acquisition included assets such as customer contracts, equipment, inventory, product designs and other intellectual property, and key personnel needed for the ongoing operation of the business unit. The acquisition added a broad product offering and capability to our product and technology portfolio. The acquisition both expanded relationships with existing customers such as Stratex Networks, Nera Networks and

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other major OEMs, and added several significant new customers to our customer list. In conjunction with the acquisition, we established a Northeast Operation based in Andover, MA to market and provide support to customers and prospective customers in the northeastern region of the United States and Europe. Approximately 12 employees are based in the Andover facility in functional areas including engineering and sales.

In February 2003, we acquired certain assets from the broadband business of Arcom Wireless, Inc., a subsidiary of Dover Corporation. This acquisition was structured as an asset purchase, and included transceiver designs and intellectual property required to manufacture and supply a 58 GHz integrated transceiver product to an existing Endwave customer. No employees from Arcom were retained in connection with this acquisition.

During the past 24 months, we have completed the following asset acquisitions:

We design our products to best satisfy our customers’ technical, inventory, logistical, and cost requirements by using our proprietary technologies, RF design, and manufacturing expertise. We offer a broad range of products at multiple levels of integration that are optimized for a customer’s specific product and performance needs. Our products include RF modules such as power amplifiers, low noise amplifiers, up and down converters, frequency multipliers, oscillators, synthesizers, integrated transceivers, and power amplifier switch combiners used in cellular base stations. Our proprietary circuit and manufacturing technologies enable us to design and manufacture RF subsystems that minimize the use of expensive gallium arsenide and reduce manual labor. We use third-party semiconductor fabrication facilities for the manufacturing of the gallium arsenide and other semiconductor devices, which we design. Designing our own semiconductor devices gives us the flexibility to use technologies best suited for specific applications and eliminates dependence on and limitations of standard, commercially available gallium arsenide devices. We believe our proprietary technologies and processes give us a significant competitive advantage in manufacturing our products in high volume with a path to low per-unit cost.

We also offer build-to-print (BTP) manufacturing services for customer-designed products such as multi-function modules, transceivers and outdoor units (ODUs). BTP services enable us to capture new manufacturing volume for existing customer programs that require no design efforts on the part of Endwave. Although BTP business does not fully utilize all of Endwave’s expertise, particularly RF design, it does allow us to serve the needs of larger customers that have exceeded their internal manufacturing capacities, want to move to an outsourced manufacturing model, or have the need to change suppliers due to product sourcing difficulties or other business reasons, including the departure of existing merchant suppliers. BTP manufacturing opportunities also allow Endwave to capture manufacturing volume and associated revenues without expending the substantial engineering investments typically associated with RF product design effort.

Telecommunications Industry Overview

The telecommunications industry has seen many significant changes and developments over the last few years. The rapid acceptance and broad use of the Internet has created the need for communications networks that are capable of handling large amounts of digital traffic. The widespread use of wireless communications and the desire for mobile, high speed Internet access by consumers and businesses has created needs for communication solutions that have not been met by traditional wire line systems. The continued growth in the use of cellular phones and other wireless communications devices, such as PC and Personal Digital Assistants (PDAs), has created a large market for broadband wireless infrastructure. Developing countries realize that a key requirement

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for their economic growth is the availability of modern communications systems to provide widely available and reliable phone and data services. Rather than installing the traditional wired networks, they often chose cellular networks as the best solution since they are the easiest and fastest to deploy and provide the mobility that so many desire. In such countries where wired infrastructure is unavailable or expensive, the interconnection of the various cell sites is accomplished by the use of microwave radio links. Developing nations such as China and India have created a significant demand for such microwave radio links. In Europe and other developed countries, as new networks are deployed or additional cell sites are installed to handle increased traffic density, these new cell sites are also often connected to the existing networks through the use of microwave radio links. This application, commonly referred to as “cellular backhaul”, has caused the installation of hundreds of thousands of radio links over the last decade. As users desire messaging services and internet access from their cellular phones and PDAs, network integrators and service providers are expected to move to new generations of cellular systems known as 2.5G and 3G (or 3rd generation) systems. Some people predict that these new systems will require as much as three times the number of base stations as first generation systems and that each base station will require higher capacity backhaul to the network. When these next generation systems are deployed, they will create a demand for a large number of new microwave radios. In addition, as spectrums become crowded and cost of bandwidth increases, network operators will require higher performance radios that provide higher capacities and greater spectral efficiency.

Today, businesses and consumers are fueling the need for additional bandwidth in the Internet infrastructure with the growing use of e-mail, audio, and video streaming, corporate data networks, corporate websites, e-commerce, electronic data exchange, customer support, supply chain management and telecommuting. To adequately satisfy these needs, service providers must be able to transport large quantities of data, at high speed to almost any location, often world-wide. Since not all locations are served by high-speed copper wire or fiber optic cable, there is a growing need for broadband wireless access.

Although over the long term we believe these fundamental forces are creating needs for greater capacity in the telecommunications infrastructure and for wireless access to that network, the last two years have been very challenging for the broadband wireless industry, including the service providers, system integrators, OEMs and their suppliers. During this period, new cell phone subscription rates continued to decrease, introduction of 2.5 and 3G networks were delayed, deployment of broadband wireless access systems failed to develop as expected and the situation was made worse by a major slowdown in the U.S. and world economies. Capital expenditures, which had been at unusually high levels for several years, plummeted. Several of the CLECs (Competitive Local Exchange Carrier), including Teligent, WinStar and ART, declared bankruptcy and have recently re-emerged but with limited plans for further network build outs. Although deployment by CLECs of microwave radio systems for high-speed access came to a virtual halt in North America, installation of cellular networks around the world using microwave radio links continued at a somewhat slower, but relatively healthy rate.

The annual production of point-to-point microwave radios in 2002 was approximately 200,000 units and approximately 85% of which were used for cellular backhaul applications. More than 80% of these were in the 10 to 40 GHz frequency range, where our design and manufacturing processes are focused. The production of these point-to-point microwave radios is concentrated in a relatively small number of OEMs. Of the approximately 200,000 radios produced last year, the top 10 manufacturers produced more than 90% of the total. The largest OEM producers include Alcatel, Stratex Networks, Ericsson, Harris, NEC, Nera, Nokia and Siemens. These OEMs are in turn supplied key components and sub-assemblies either by captive internal sources, or by merchant suppliers such as Endwave. Of these external merchant suppliers, Endwave has the significant market share. Several of our competitors are financially weak and several have exited the business in the past two years. Some industry observers believe that the component and sub-assembly supplier base will undergo consolidation, and Endwave in particular has a stated plan to take a leading role in this industry consolidation trend.

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The Challenge

Forecasts for future demand of our products and the products of our customers are uncertain. It is difficult to accurately predict how long the current economic conditions will continue in the United States and other parts of the world, or whether they will improve. Regulatory conditions affecting radio deployments around the world are changing. New spectrums are being allocated and new wireless applications are being created. These uncertain and changing conditions make it very hard for our customers to predict their specific future product requirements with certainty. However, we believe that in order to be successful in the future our customers will need:

Emerging Market Opportunities

New applications for wireless access technologies are developing at both ends of the spectrum. On the lower end of the frequency range at 2.4 GHz and 5.8 GHz, the 802.11 specifications commonly referred to as “Wi-Fi” are becoming a de facto standard for short range wireless computing. Business professionals, students, and mobile professionals are embracing the technology as the method of choice for connecting to the Internet and corporate networks in a mobile setting, and while moving about in office buildings and campuses. Wi-Fi enabled devices are expected to nearly double from 20 million shipments in 2002 to 35 million in 2003, and is expected to represent a $3.7 billion business in 2005. Although Endwave’s core competencies lie at frequency ranges above 10 GHz, we believe that the broad adoption of Wi-Fi technology will create demand for high capacity backhaul links from the WiFi access point back to the local switching office, and similar to the cellular backhaul market, will drive demand for Wi-Fi backhaul in licensed bands that are in Endwave’s frequency regime.

At the higher end of the spectrum, new interest at 70 GHz and 80 GHz is emerging in the form of request for the Federal Communications Commission (“FCC”) to allocate 5 GHz of spectrum in both bands for broadband access. A filing by Loea Communications requesting rulemaking at 70 GHz (71-76 GHz) and 80 GHz (81-86 GHz) has caused many industry leaders to watch this development closely. Cisco Systems, on behalf of Bridgewave, Ceragon Networks, Endwave Corporation, Loea Communications, and Stratex Networks has filed comments with the FCC for proposed rulemaking for these bands. It is expected that the FCC will rule on this matter in the next 6-12 months. If allocated as currently proposed, this spectrum would be well suited to deliver data rates of 1-10 Gbps over distances of approximately 2 kilometers. This distance and data rate capability make the technology well suited to serve the 75% of the 750,000 business buildings that are within 1 mile of the nearest fiber connection and cannot practically access the fiber. Although there is no certainty that spectrum will be allocated at these frequencies, or how it’s allocation may impact the business potential, we are one of a few companies that is capable of designing, developing, testing and manufacturing the RF front end for these high frequency wireless systems.

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Our Solution

As a provider of RF subsystems, we design and manufacture a broad portfolio of products, from RF modules to fully integrated transceivers and outdoor units and strive to provide our customers, original equipment manufacturers and wireless systems integrators, with the products, resources and services that they need to be successful in this changing environment. We provide:

Superior performance through technological leadership.    Technological leadership begins with the people, their capabilities and their experience. We have a large technical team with broad expertise in device physics, semiconductor device design, circuit design, component and/or subsystem design, test engineering and other critical disciplines. Our technical leadership enables us to optimize our products for critical performance factors that are important to our customers. We provide the technology to optimize such key parameters as spectral efficiency, which is the rate at which data can be transmitted in a given segment of the radio frequency spectrum. We have extensive experience in the design of RF devices based on gallium arsenide, the semiconductor material most widely used in broadband wireless access applications as well as other less commonly used RF semiconductor materials. This design expertise gives us the flexibility to optimize our product designs because we are not limited to standard, commercially available semiconductor devices. We use third-party semiconductor fabrication facilities to manufacture the gallium arsenide and other semiconductor devices we design. Our use of third-party semiconductor facilities 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 fabrication facilities.

Path to low cost through multiple circuit technologies.    With our proprietary circuit and process technologies, coupled with our world-class manufacturing processes, we are able to provide better solutions related to our customers’ volume and cost requirements. We employ three distinct circuit technologies as appropriate to meet the needs of our customers and their specific project, including traditional Hybrid Microwave Integrated Circuits (HMIC), Monolithic Microwave Integrated Circuits (MMIC), and Flip Chip Integrated Circuits (FCIC). HMICs, have many bond wires that must be individually tested and adjusted, or tuned, during the manufacturing process. Our MMIC circuits eliminate most of the bond wires used in HMICs, allowing us to produce them using automated assembly techniques. Our patented FCIC technology enables us to design and manufacture RF circuits with less gallium arsenide material than a typical MMIC circuit and significantly fewer wire bonds than HMICs. As a result, FCIC circuits lend themselves to high-volume, automated manufacturing processes for applications characterized by very high unit volumes. These circuit advantages, coupled with our award winning “lean manufacturing” process have allowed us to significantly reduce costs.

Short product design cycle.    We have developed an extensive library of RF circuit and device designs that allow us to rapidly and economically combine standard circuits and devices into custom assemblies to quickly satisfy the various performance and frequency requirements of our customers. We have the expertise and facilities to take advantage of traditional circuit manufacturing technologies to rapidly prototype and test a new design. After prototyping in traditional HMIC technology, we can update the design to utilize MMIC, or our proprietary FCIC technology for lower cost and high volume manufacturing. We believe that this ability to migrate from prototype to volume production in a short period of time is an important competitive advantage.

Broad product portfolio.    We offer a range of products at multiple levels of integration, from single function RF modules to integrated transceivers, to address most any customer need. This allows our customers to select the products that best complement their internal capabilities and manufacturing requirements. Our product design capability supports a broad range of frequencies, from 1 GHz to 100 GHz, and addresses multiple market applications. This enables our customers to rapidly design products for new frequencies or applications.

Scalable manufacturing with high volume production capability.    We believe we are one of the largest suppliers of RF subsystems focused on broadband wireless solutions. Our traditional manufacturing approach allows our customers to develop new products in relatively small quantities during the early stages of development. As their design becomes proven and is moved into production, these products can either be

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maintained with traditional assembly approaches, moved into an automated process where volumes justify this transition, or moved to our offshore manufacturing facility. Our advanced assembly and testing capabilities and multiple production lines allow us to rapidly achieve high volume production to meet our customers’ increasing volume demands. We have a long-term gallium arsenide device supply agreement with Velocium, a former wholly-owned subsidiary of TRW which is now an operating unit of Northrop Grumman Space and Mission Systems Corp., which further enhances our manufacturing capabilities and ensures an adequate supply of gallium arsenide devices.

Logistical flexibility.    We provide our customers with a high degree of logistical flexibility through the use of multi-year frame agreements with logistical plans that are tailored to their individual needs. These frame agreements usually cover a variety of products and frequencies, with varying degrees of flexibility on quantities and delivery rates. This allows our customers to rapidly adjust to the changing demands of their market.

High quality.    Our customers, whether focused in telecommunications, defense or other adjacent markets, expend considerable financial and human resource to develop and introduce new products. Understandably, they have high demands for quality and reliability once they’ve completed their development and are preparing to take their product to market. Many customers find it necessary to design their systems so they will operate 99.99% or even 99.999% of the time. Our careful design, advanced manufacturing and ISO 9001 certified facilities are intended to provide the high reliability required for today’s commercial systems.

Our Strategy

Our objective is to be the leading global supplier of RF subsystems for broadband wireless applications. We intend to become the RF subsystem supplier of choice for broadband wireless systems built by the leading companies in telecommunications and other markets. The major elements of our strategy include:

Maintain and expand our strong position in our core market.    The majority of our revenue is derived from production of low and medium data rate radios, in the 10 to 40 GHz frequency range, for use in cellular backhaul systems. Today this represents the largest and one of the most stable portions of the market. We intend to maintain and expand our penetration in these areas, both in terms of current and new customers, customer programs, and frequency ranges.

Extend our technological leadership.    We will continue to invest in “next generation” research and development, maintain our team of the most talented engineers and scientists, and build on our manufacturing technologies.

Provide our customers with increased logistical flexibility.    In this uncertain market, it is difficult for our customers to predict exact products, frequencies and quantities. By developing broader band circuits and by using multi-product, multi-year supply agreements, flexible logistics plans and short manufacturing cycles, we enable our customers to quickly respond to market demands.

Target new frequencies and emerging applications.    We currently offer a wide range of products that support the principal frequency bands currently used for broadband wireless backhaul and access, and defense applications. We intend to offer products for higher data rate radios, new frequency bands and emerging market applications as opportunities arise.

Provide best-in-class manufacturing capability.    Our circuit design, manufacturing and testing processes and continuous improvement programs have helped to bring manufacturing innovations to an industry that has historically utilized labor-intensive manufacturing techniques. We will continue to improve our lean manufacturing methods that have produced significant cost reductions and significantly higher outputs with fewer employed assets.

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Reduce costs through offshore manufacturing.    We have responded to customer and market requirements for lower cost solutions with the establishment of a partnership with a world-class manufacturing facility in Southeast Asia. Within that facility we utilize both a standard contract manufacturing line managed by our partner and an Endwave managed manufacturing line. This partnership and the product manufacturing is managed by our full-time, in-country management team with extensive experience in process engineering and manufacturing management. We draw on the local economy to obtain lower cost of materials, labor, and facilities than is available in the United States.

Maintain rapid design and prototyping capability.    We intend to maintain our ability to rapidly design and prototype new products that meet our customers’ needs. We believe we can achieve this with our multiple design and manufacturing techniques.

Leverage strategic relationship with Velocium.    Our supply agreement with Velocium, a former wholly-owned subsidiary of TRW which is now an operating unit of Northrop Grumman, provides us with a long-term supply of gallium arsenide devices at preferred cost. We believe that our supply of these devices from Velocium is a competitive advantage because the supply of gallium arsenide devices may become constrained in the future as the broadband wireless access market grows. In addition, we have access to Velocium’s research and design expertise in the areas of RF and digital circuit design technologies as well as advanced semiconductor materials. We believe this access represents a significant competitive advantage.

Balance production capacity to market demand.    The demand for RF products is volatile. As the demand varies, we will adjust our manufacturing capacity to meet market demand. We have flexible facilities and equipment so adjusting to changes in market demands is largely a matter of adjusting work force levels accordingly.

Secure new design wins to expand and diversify our customer base.    We intend to use our technology, skilled design teams, short design cycles and manufacturing capability to secure new designs wins with new and existing customers, with special attention to those top 10 microwave radio suppliers who represent over 90% of the total demand.

Use our unique strengths to further penetrate adjacent markets.    We have unique technology, experience, and capabilities in the design of high volume microwave modules and subsystems in the 10 to 100 GHz frequency range. These are attributes that are useful in other adjacent markets such as instrumentation, scientific, automotive radar, security, fiber optics and military systems. We will continue to pursue additional opportunities in these adjacent markets where our technologies are advantageous.

Pursue additional acquisitions where appropriate.    In order to achieve our goal of being the leading global supplier of RF subsystems, we intend to continue to pursue additional acquisition opportunities that are strategically advantageous and financially accretive.

Products

Our products include amplifiers, multipliers, frequency converters, oscillators, frequency synthesizers, integrated transceivers and outdoor units (ODUs) that enable the transmission and reception of data signals in communication applications such as cellular backhaul, broadband wireless access, and network trunking; as well as other adjacent markets requiring these technologies and products. In addition to those products designed and developed by Endwave, we also provide “build-to-print” manufacturing services for products that have been designed by our customers. While the majority of our existing customers are wireless systems integrators and original equipment manufacturers serving the broadband wireless market, a portion of our revenues are derived from customers who use our products to satisfy needs for military, instrumentation, scientific and other adjacent markets.

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Transceivers are our core product offering, representing approximately 85% of our net revenues for 2002. Transceivers are a critical subsystem found in microwave and millimeter wave radios. These subsystems function as the heart of the wireless system by combining transmit and receive functions in a single package, which gets built into the overall radio system. Endwave specializes in high frequency transceivers in the range of 10 GHz to 60 GHz, for point-to-point and point-to-multipoint communications applications.

Customers

We sell our products primarily to global wireless systems integrators and original equipment manufacturers. During 2002 we shipped products to more that 90 different customers. The ten customers that attributed the greatest proportion of our revenues in the year ended December 31, 2002, were:

A relatively limited number of customers have historically accounted for a substantial portion of our sales. For the years ended December 31, 2002 and 2001, sales to our largest customer, Nokia, accounted for 71% and 67% of our total revenue, respectively. For the year ended December 31, 2000, sales to Nokia, Nortel and Hughes Network Systems accounted for 32%, 25% and 21% of total revenue, respectively. There were no other customers that accounted for more than 10% of our revenues.

The rapid and severe downturn for the United States economy and the telecommunications industry, beginning in late 2000, has affected growth in demand for our customers’ products. In addition to the deteriorating domestic economic environment, the worldwide telecommunications market is also experiencing reduced demand. This decreased demand has led to reduced order forecasts from some of our customers. In February 2002, we announced lower than expected revenue outlook for 2002, primarily due to reduced demand and inventory reduction at a major customer. There can be no certainty as to the degree of the severity or duration of this economic downturn or the demand in the telecommunications industry. We also cannot predict the extent and timing, if any, of the impact of the economic downturn in the United States and the worldwide downturn for the telecommunications industry on economies in Asia, Europe and other countries and geographic regions. We also cannot predict whether any significant customer in prior periods will continue to be a significant customer in future periods. We expect that a high percentage of our product sales will continue to be to a rather limited number of customers in the foreseeable future.

Sales

Product sales were $22.1 million, $33.5 million, and $39.8 million for 2002, 2001, and 2000 respectively. Shipments to international customers accounted for 76.6%, 72.6% and 23.4% of total product sales in 2002, 2001 and 2000, respectively. Additionally, many of our customers sell their products, which incorporate components and subsystems sold by us, outside the United States.

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Competition

Competition in the market for RF subsystems for broadband wireless access systems is intense. In the markets for RF modules, transceivers and outdoor units, we primarily compete with, among others, the following merchant suppliers:

In addition to those companies listed above with whom we may compete directly, there are wireless systems integrators, for example, Ericsson, who design and manufacture their own RF subsystems for use in their own broadband radio products. To the extent wireless systems integrators presently, or may in the future, produce their own RF subsystems, we lose the opportunity to gain a customer and the related sales opportunities. Conversely, if they should decide to outsource their requirements, this may significantly expand the market available to Endwave.

We are committed to providing superior product performance, logistical flexibility and manufacturing excellence, as we believe these factors are critical to our customers’ decision to purchase our products. We believe that the cost structure of our products is competitive in each of our target markets. Many factors contribute to the final pricing of our products, including the costs for customer-specific designs, the scale of production, and the logistical arrangements.

We believe we are well positioned to compete effectively in our chosen markets. However, some of our current and potential competitors are substantially larger than us and have greater financial, technical, manufacturing and marketing resources. If we were unable to compete successfully, our future operations and financial results would be harmed.

Backlog

Our order backlog consists of a combination of standard purchase orders, annual purchase agreements and multi-year frame agreements. The large majority of our orders are multi-year frame agreements with major commercial OEMs. These frame agreements usually include an estimate of the expected annual quantities during the contract and include a logistics plan that provides for a monthly rolling forecast of usage from the customer. These forecasts, however, are primarily for material and capacity planning purposes and are subject to significant changes from month to month and quarter to quarter. The logistics plans generally allow the customers a high degree of flexibility in changing, rescheduling or canceling forecasted requirements. Because these customers are only required to take delivery of the “firm” portion of the forecasts, which is usually a month, more or less, they have the ability to significantly change forecasted delivery dates and quantities. For these reasons we believe that backlog is not a reliable indicator of future revenue.

Backlog includes all purchase orders and contracts for products with expected delivery dates through December 31, 2003. Our backlog at March 21, 2003 was approximately $19.2 million as compared to a backlog of $24.4 million as of March 15, 2002. The decrease in backlog is attributable to the more conservative forecasts from our customers for requirements through the rest of 2003. There can be no assurance that the current backlog

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will necessarily lead to actual sales in any future period. Of our current backlog, approximately 60.5% is attributable to orders received from Nokia. If we were to lose this customer or if orders by Nokia or other customers were to decrease or be delayed, our operating results and financial condition would be harmed.

Governmental Regulations

Our products are incorporated into wireless communications systems that are subject to various United States regulations and similar laws and regulations adopted by regulatory authorities in other countries. Regulatory changes, including changes in allocation of available frequency spectrum, could significantly impact our operations by restricting development efforts by our customers, making obsolete current products or increasing the opportunity for additional competition. Changes in, or failure to comply with, applicable domestic and international regulations could have an adverse effect on our business, operating results and financial condition. In addition, the increasing demand for wireless communication has exerted pressure on regulatory bodies worldwide to adopt new standards for these products and services, generally following extensive investigation of and deliberation over competing technologies. The delays inherent in this governmental approval process have caused in the past, and may cause in the future, the cancellation, postponement or rescheduling of installation of communications systems by our customers, which in turn may negatively affect the sale of our products to those customers.

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. Nevertheless, these measures may not be adequate to safeguard the proprietary technology underlying our products. As of December 31, 2002, we had 36 United States patents issued and 26 foreign patents issued. Our issued patents include those relating to basic circuit and device designs, semiconductors, our proprietary “flip-chip” circuit technology and various circuit and system designs. In addition, we jointly hold seven patents with AT&T pertaining to sectorized communications systems and jointly hold one patent with Superconducting Supertechnologies, Inc. relating to satellite communications. Our issued patents expire between 2013 and 2018. Of all our patents, we consider two patents relating to our flip-chip circuit technology and a patent relating to our YIG oscillator technology to be the most valuable. With regard to our pending patent applications, no patents may be issued as a result of these or any future applications. If they are issued, any patent claims allowed may not be sufficiently broad to protect our technology. In addition, any existing or future patents may be challenged, invalidated or circumvented, and any right granted hereunder may not provide meaningful protection to us. The failure of any patents to provide protection to our technology might make it easier for our competitors to offer similar products and use similar manufacturing techniques.

We generally enter into confidentiality and assignment of rights to inventions agreements with our employees, and confidentiality and non-disclosure agreements with our strategic partners, and generally control access to and distribution of our documentation and other proprietary information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use our products or technology without authorization, develop similar technology independently or design around our patents. In addition, effective patent, copyright, trademark and trade secret protection may be unavailable 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 cases we have obligations with respect to the non-use and non-disclosure of that intellectual property. We also license technology from Velocium, a former wholly-owned subsidiary of TRW which is now an operating unit of Northrop Grumman Space and Mission Systems. There are no limitations on our rights to make, use or sell products we may develop in the future utilizing the technology licensed to us by Velocium, provided that the products are for commercial customers and non-satellite applications.

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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.

The wireless access industry is characterized by vigorous protection and pursuit of intellectual property rights. We have received, and may receive in the future, notices of claims of infringement of other parties’ proprietary rights. In addition, the invalidity of our patents may be asserted or prosecuted against us. Furthermore, in a patent or trade secret action, we could be required to withdraw the product or products as to which infringement was claimed from the market or redesign products offered for sale or under development. We have also at times agreed to indemnification obligations in favor of our customers and strategic partners that could be triggered upon an allegation or finding of our infringement of other parties’ proprietary rights. These indemnification obligations would be triggered for reasons including our sale or supply to a customer or strategic partner of a product which was later discovered to infringe upon another party’s proprietary rights. Irrespective of the validity or successful assertion of 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.

Research and Development

The goals of our research and development efforts are to reduce the cost and increase the functionality and performance of our products, while adapting them to the specifications required of our customers and of new markets for our products. In addition, substantial efforts have been devoted to the development of efficient manufacturing methods necessary for competitive pricing and improved gross margins of our products, while maintaining high quality standards required by our customers. Other development efforts include expansion of existing product families and initiatives to combine products from our various complementary product lines to create additional functionality.

We believe that our future success will depend on our ability to continue to enhance and cost reduce our existing products, and to develop and introduce new products to maintain our technological leadership and meet a wider range of customer needs. However, as a business we recognize the need to balance research and development spending with running a profitable business and have reduced our research effort accordingly. Our research and development and related engineering expenses were approximately $9.2 million, $14.2 million, and $9.7 million in each of 2002, 2001, and 2000 respectively. The decrease in 2002 spending was primarily the result of staff reductions associated with matching our research and development spending to the current needs of the industry.

Employees

As of December 31, 2002, we had 137 full-time employees, including 80 in manufacturing, 22 in product and process engineering, 15 in sales and marketing and 20 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 990 Almanor Avenue, Sunnyvale, California 94085, and our main telephone number is (408) 522-3100. Investors can obtain access to this annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and all amendments to these reports, free of charge, on our website at http://www.endwave.com as soon as reasonably practicable after such filings are

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electronically filed with the SEC. The public may read and copy any material we file with the 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

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

We expect to continue incurring operating losses and may not be profitable in the future.

We have not achieved profitability to date and may not achieve or sustain profitability in the future. Our failure to achieve profitability within the time frame that investors expect may cause the market price of our common stock to decline in the future. We had net losses of $31.0 million, $156.7 million and $59.5 million for the years ended December 31, 2002, 2001 and 2000, respectively. While we restructured during 2001, revenues declined further which resulted in an additional restructuring in 2002. There is no guarantee that these restructuring actions will enable the Company to achieve profitability in the future.

As a result of the merger with TRW Milliwave in March 2000, we may be limited in our ability to utilize any of our net operating loss carryforwards generated prior to the merger to offset any future taxable income we may have.

Until the last quarter of 2002, our cost of product revenues has exceeded our product revenues due in part to the historically low volumes of products we have sold and our investments in manufacturing capacity. We may be unable to maintain positive gross margins on product revenues or increase revenues sufficiently to achieve overall profitability.

The development of our technologies and products has required significant expenditures to hire and retain our research and development staff. In addition, many of our major customers typically require high levels of product customization that generally requires the commitment of significant research and development resources. We intend to continue to invest significantly in all areas, including research and development, to execute our business strategy. As a result of these and other factors, we expect to continue to incur significant quarterly losses for at least the next several quarters. If our revenues fail to grow at anticipated rates or if our expenses increase faster than we anticipate, our losses may increase and we may not become profitable.

Because we have a limited operating history, you may have difficulty evaluating our business and future prospects.

We have only limited financial data that you can use to evaluate our future prospects in the broadband wireless access market. Furthermore, because our merger with TRW Milliwave occurred in March 2000, we have a limited operating history as a combined company.

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

We depend, and expect to remain dependent, on a small number of wireless systems integrators for sales of our products. If our customers reduce orders for our products, we could lose revenues and suffer damage to our reputation in the industry. In February 2002, we announced lower than expected revenue outlook for 2002,

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primarily due to reduced demand and inventory reduction at a major customer. For the year ended December 31, 2002, sales to Nokia, Stratex Networks, Siemens and accounted for 80.2% of total revenues. For the year ended December 31, 2001, sales to Nokia accounted for 67% of total revenue. For the year ended December 31, 2000, Nokia, Nortel and Hughes Network Systems accounted for 78% of total revenue.

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

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

As a combined company, including results on a pro forma combined basis prior to March 31, 2000, our cost of product revenues has exceeded our revenues and, accordingly, we have reported negative gross margins since inception until the fourth quarter of 2002. If we are not able to continue to reduce our per-unit cost of product revenues to a sufficient degree, we will not become profitable. We expect market conditions, particularly declining prices for competing broadband access solutions, will force us to reduce our prices in the future. In order to reduce these costs, we must migrate our products to designs that require lower cost materials, improve our manufacturing efficiencies and successfully move production to low cost, off shore locations. The combined effects of these actions may not be sufficient to achieve the cost reductions needed to maintain positive gross margins and to achieve profitability.

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

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

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

Our products are highly technical and accordingly our sales efforts involve a collaborative and iterative process with our customers to determine their specific requirements and design an appropriate solution. Depending on the product, the typical product development and sales cycle can take anywhere from three to twelve months, and we incur significant expenses as part of this process without any assurance of resulting revenues. During the product development phase, our engineers typically work with the customer to define the product and design a prototype product for the customer to evaluate. We generate revenues only if our product is selected for incorporation into a customer’s system and that system is accepted in the marketplace. If our product is not selected, or the customers development program is discontinued, we generally will not have an opportunity to sell our product to that customer until that customer develops a new generation of its system. For example, in 1998, we began the development of complete outdoor units for use in point-to-multipoint applications. Through 2000 we expended significant development funds on these products. While the ODUs were incorporated into the customers system, there was little market demand for the end product at its price and performance level. 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 may be limited.

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

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

At times in the past, we have not produced products in the volume requested by our customers. In the future, we may not be able to manufacture products and deliver them to our customers at the times, and in the volumes they require. If we fail to manufacture and deliver products in a timely fashion, our reputation may be harmed,

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we may jeopardize existing orders and lose potential future sales and we may be forced to pay penalties to our customers. Manufacturing delays and interruptions can occur for many reasons, including, but not limited to:

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

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

As part of our operating strategy, we partially or wholly outsource the assembly and test of some of our subassemblies and finished products to off shore partners located in Southeast Asia. We plan to continue this arrangement as a key element of our operating strategy. If these vendors do not provide us with high quality products and services in a timely manner, or if one or more of these vendors terminates its relationship with us, we may be unable to obtain satisfactory replacements to fulfill customer orders on a timely basis. Factors that could result in an interruption of supply from our off shore partners include, but may not be limited to:

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

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

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

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

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

Our reliance on these third-party suppliers involves several additional risks, including reduced control over manufacturing costs, delivery times, reliability and quality of the products incorporating these devices. The fabrication of semiconductor devices is a complex and precise process. There are many factors that can cause a substantial percentage of wafers to be rejected or numerous devices on a wafer to be nonfunctional including, but not limited to:

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

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

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

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

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

The rapid and severe downturn for the United States economy and the telecommunications industry, beginning in late 2000, has affected growth in demand for our customers’ products. In addition to the deteriorating domestic economic environment, the worldwide telecommunications market is experiencing reduced demand. This decreased demand has led to fluctuating order forecasts from some of our customers, particularly those in the point-to-multipoint market. There can be no certainty as to the degree of the severity or duration of this economic downturn or the demand in the telecommunications industry. We also cannot predict the extent and timing, of the impact of the economic downturn in the United States and the worldwide downturn for the telecommunications industry on economies in Asia, Europe and other countries and geographic regions.

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

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

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

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

We have experienced manufacturing quality problems with our products in the past and may have similar problems in the future. As a result of these problems, we have replaced components in some products, or replaced the product, in accordance with our product warranties.

Our product warranties typically last one to three years. As a result of component, manufacturing or design defects, we may be required to repair or replace a substantial number of products under our product warranties. Further, our customers may discover latent defects in our products that were not apparent when the warranty period expired. These defects may cause repair or replacement expenses beyond the normal warranty, the loss of customers or damage to our reputation.

During 2001, we provided $4.3 million for warranty charges to cover repairing transceivers, sold to our largest customer, that have been identified to have a potentially faulty electronic component supplied by one our vendors. While we believe the cause of the component’s out of specification performance has been identified and corrected, we cannot guarantee that there will not be future specification performance problems with components supplied by vendors or that we will not take further warranty charges in future periods.

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

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

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

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the field as well as removing and replacing the transceiver module in the radio. Subsequently we have reached an agreement with the component supplier to share a portion of these repair and replacement costs. During 2001, we provided $4.3 million for warranty charges to cover the actual repair of the transceivers containing faulty components. While we believe that this reserve is adequate to cover our actual repair costs, it may not be adequate to fully cover all liability for our share of the “indirect costs” for which our supplier may be responsible.

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

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

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

We also license technology from Velocium, a former wholly-owned subsidiary which is now an operating unit of Northrop Grumman Space & Mission Systems. There are no limitations on our rights to make, use or sell products we may develop in the future utilizing the technology licensed to us by Velocium, provided that the products are for commercial customers and non-satellite applications.

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

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

As part of our business strategy, we may invest in or acquire other businesses, technologies or assets, or enter into strategic relationships with third parties. For future acquisitions, we may issue additional stock, incur debt, assume liabilities, incur amortization expenses related to goodwill and other intangible assets or incur large and immediate write-offs. With the exception of the integration of operations experienced following our merger with TRW Milliwave, our acquisition of certain assets of M/A-COM from Tyco Electronics, our acquisition of the broadband assets of the Fixed Wireless division of Signal Technology Corporation and our acquisition of

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certain assets of Arcom, we have limited experience in integrating acquired businesses with our existing business. Our operation of any acquired businesses would involve numerous risks, including, but not limited to:

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

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

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

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

For the years ended December 31, 2002, 2001, and on a pro forma basis giving effect to our merger with TRW Milliwave for the year ended December 31, 2000, 76.6%, 71.3% and 21.6%, respectively, of our revenues were derived from sales invoiced and shipped to customers outside the United States. In addition, some of our United States based customers may sell products, which incorporate our products, into international markets. Adverse international economic conditions or developments could in the future negatively affect our revenues and sales by our customers into these regions, which would impact our revenues. In addition to the uncertainty as to our ability to maintain and expand our international presence, there are certain risks inherent in foreign operations, including, but not limited to:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Many of our current and potential competitors are substantially larger than us and have greater financial, technical, manufacturing and marketing resources. If we were unable to compete successfully, our future operations and financial results would be harmed. For more information with reference to competition, please see the section entitled Competition, above.

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

In order to succeed, we must improve current products and develop and introduce new products that are competitive in terms of price, performance and quality and that adequately address the changing requirements of wireless systems integrators, their customers and subscribers and emerging industry standards. To accomplish this, we make substantial investments in the research and development of new products for and improvements to existing products. If these investments do not result in competitive products that generate large volume orders, we may be unable to generate sufficient revenues to achieve profitability. Our research and development expenses were $9.2 million and $14.2 million for the years ended December 31, 2002 and 2001 respectively. On a pro forma basis giving effect to our merger with TRW Milliwave, our research and development expenses were $12.6 million in the year ended December 31, 2000. We intend to continue to incur substantial research and development and product development expenses. It is possible that these investments will not generate product revenues sufficient to offset the original investment expense.

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

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

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

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

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

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

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

In addition, the stock market has recently experienced extreme price and volume fluctuations, particularly after the September 11, 2001 terrorist attacks, including significant volatility in the market price of our common stock in particular. These market fluctuations can be unrelated to the operating performance of particular companies and the market prices for securities of technology companies have been especially volatile. Future sales of substantial amounts of our common stock, or the perception that such sales could occur, could adversely affect prevailing market prices for our common stock. Additionally, future stock price volatility for our common stock could provoke the initiation of securities litigation, which may divert substantial management resources and have an adverse effect on our business, operating results and financial condition. Our existing insurance coverage may not sufficiently cover all costs and claims that could arise out of any such securities litigation. We anticipate that prices for our common stock will continue to be volatile.

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Our common stock has traded below one dollar and may be subject to de-listing from the Nasdaq National Market.

The NASDAQ has a $1.00 per share minimum closing bid price requirement, pursuant to which our common stock could be de-listed from the NASDAQ National Market if its closing bid price is below $1.00 for 30 consecutive trading days and does not subsequently trade above $1.00 for 10 consecutive trading days. There can be no assurance that our closing bid price will be above the Nasdaq requirements for the necessary time periods mandated by the NASDAQ National Market.

If we are unable to meet the NASDAQ requirements to maintain listing on the NASDAQ National Market our common stock could trade on the NASDAQ SmallCap Market, the OTC Bulletin Board or in the “pink sheets” maintained by the National Quotation Bureau, Inc. Such alternatives are generally considered to be less efficient markets, and our stock price, as well as the liquidity of our common stock, will be adversely impacted as a result.

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

If we do not have sufficient capital to fund our operations, we may be forced to discontinue product development, reduce our sales and marketing efforts and forego attractive business opportunities, and we may lose the ability to respond to competitive pressures. It is possible we may need to raise additional funds in the future, and this additional financing may not be available to us 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 and our officers and directors control a large percentage of our common stock and together are able to control the outcome of matters requiring stockholder approval.

As of March 15, 2003, directors and holders of five percent or more of our outstanding common stock beneficially owned approximately 52.1% of our common stock. Of this percentage, Northrop Grumman alone beneficially owns approximately 38.5% of our common stock. As a result, our executive officers, directors and five percent stockholders as a group are able to effectively control all matters requiring approval of our stockholders, including the election of directors and approval of significant corporate transactions. Northrop Grumman alone is able to significantly influence matters on which the stockholders vote. This concentration of ownership may also delay, deter or prevent a change in control and may make some transactions more difficult or impossible to complete without the support of these stockholders, even if the transaction is favorable to our stockholders. In addition, because of their ownership of our common stock, these stockholders are in a position to significantly affect our corporate actions in a manner that could conflict with the interests of our public stockholders.

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

We are subject to certain Delaware anti-takeover laws by virtue of our status as a Delaware corporation. These laws prevent us from engaging in a merger or sale of more than 10% of our assets with any stockholder, including all affiliates and associates of any stockholder, who owns 15% or more of our outstanding voting stock, for three years following the date that the stockholder acquired 15% or more of our voting stock unless the board of directors approved the business combination or the transaction which resulted in the stockholder becoming an interested stockholder, or upon consummation of the transaction which resulted in the stockholder becoming an

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interested stockholder, the interested stockholder owned at least 85% of our voting stock of the corporation, or the business combination is approved by our board of directors and authorized by least 66-2/3% of our outstanding voting stock not owned by the interested stockholder. A corporation may opt out of the Delaware anti-takeover laws in its charter documents, however we have not chosen to do so. Additionally, our certificate of incorporation and bylaws include a number of provisions that may deter or impede hostile takeovers or changes of control of management, including a staggered board of directors, the elimination of the ability of our stockholders to act by written consent, discretionary authority given to our board of directors as to the issuance of preferred stock, and indemnification rights for our directors and executive officers. In addition, we have an Officer Retention Plan that provides for the acceleration of vesting of a percentage of the stock options granted to our officers under certain conditions. Under this plan, an unvested portion of each officer’s stock options will become vested and, in addition, severance benefits will be paid to the officer, if we undergo a change in control transaction or the officer is terminated without cause. This plan may make us a less attractive acquisition target or may reduce the amount a potential acquiror may otherwise be willing to pay for our company.

Our principal executive offices are located in Sunnyvale, California, where we lease approximately 33,000 square feet, which encompasses our headquarters and research and development facilities, under a lease expiring June 2006. Approximately 13,000 square feet of this facility is subleased to an unrelated entity, under an agreement that will expire February 2004. In March 2002, we terminated a lease for approximately 9,000 square feet, in Sunnyvale, California. We lease approximately 6,000 square feet in Andover, Massachusetts for our Northeast operations under a lease expiring September 2005. We also lease approximately 5,000 square feet in Torrance, California for business development purposes, under a lease expiring in March 2006. We own two buildings comprising approximately 46,000 square feet on eight acres of land in Diamond Springs, California, which we use primarily for manufacturing purposes. We believe that our existing facilities are adequate to meet our current and near term future needs.

Although we may have pending various legal actions arising in the ordinary course of business from time to time, we are not currently a party to any material legal proceedings.

None.

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PART II

On October 20, 2000, we completed the initial public offering of our common stock. Our common stock is traded on the NASDAQ National Market under the symbol “ENWV.” The following table sets forth, for the periods indicated, the high and low sales prices per share of our common stock as reported by the NASDAQ National Market since our initial public offering of common stock.

All per-share amounts from all periods have been restated to reflect the 1 for 4 reverse stock split approved by our Board of Directors on June 26, 2002.

As of March 14, 2003, there were approximately 205 holders of record of our common stock.

During the fourth quarter of 2000, we completed our initial public offering of a total of 1,725,000 shares of common stock, resulting in net proceeds of approximately $87.8 million. Net proceeds remaining will continue to be used for general corporate purposes. We may in the future use proceeds to acquire or invest in additional complementary businesses or products or to obtain the right to use complementary technologies. As of December 31, 2002, net proceeds remaining continue to be invested in short term, interest bearing investment grade securities and cash and cash equivalents pending our usage for the above mentioned purposes.

We have never declared a dividend or paid any cash dividends on our common stock. Since 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. For information regarding securities authorized for issuance under equity compensation plans, see Item 12.

The following selected financial data (presented in thousands, except per share amounts), as of December 31, 2002 and 2001 and with respect to the years ended December 31, 2002, 2001 and 2000 are derived from our financial statements included elsewhere in this Form 10-K; selected financial data as of December 31, 2000, 1999 and 1998 and with respect to the years ended December 31, 1999 and 1998 is derived from our financial statements not included in this form 10-K. This data should be read in conjunction with the financial statements and notes thereto, as applicable, and with Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

On March 31, 2000, we merged with TRW Milliwave. We were the surviving corporation in the merger and TRW Milliwave ceased to exist as a separate legal entity. However, because we issued more than half of our

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outstanding capital stock to TRW in exchange for all outstanding shares in TRW Milliwave, TRW Milliwave is treated as the acquiring company for accounting purposes. As a result, our financial statements prior to the date of the merger are those of TRW Milliwave.

Net loss per share is computed below in accordance with Statement of Financial Accounting Standards (SFAS) Statement No. 128, “Earnings per Share” (“SFAS 128”) and SEC Staff Accounting Bulletin No. 98 (“SAB 98”). Pursuant to SFAS 128 and SAB 98, basic net loss per share is computed by dividing the net loss applicable to common stockholders for the period by the weighted average numbers of shares of common stock outstanding during the period.

In March 2000, in connection with the merger, TRW received convertible preferred stock in exchange for all outstanding shares of the common stock of TRW Milliwave. Giving effect to the merger retroactive to March 2000, no shares of common stock are outstanding. Accordingly, net loss per share data has not been presented for periods prior to March 2000. The net loss applicable to common stockholders subsequent to the merger represents the net loss incurred after March 2000, including the charge for purchased in-process research and development. The net loss for the year ended December 31, 2000 was $59.5 million, less the net loss for the three months ended March 31, 2000 of $2.0 million resulting in a net loss applicable to common stockholders subsequent to the merger in March 2000 of $57.5 million. The shares used in computing net loss per share are the weighted average shares outstanding since the merger. Since we incurred losses for all periods presented, the convertible preferred stock would be anti-dilutive and accordingly, diluted net loss per share is the same as basic net loss per share.

All per-share amounts from all periods presented have been restated to reflect the 1 for 4 reverse stock split approved by our Board of Directors on June 26, 2002.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in this Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties, including statements regarding our expectations, beliefs, intentions or strategies regarding the future. The following discussion should be read together with our financial statements and notes to those financial statements included elsewhere in this Annual Report on Form 10-K. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any

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such forward-looking statements. Our actual results could differ materially from those described in our forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements. In the past, our operating results have fluctuated and are likely to continue to fluctuate in the future.

All per-share amounts for all periods have been adjusted to reflect the 1 for 4 reverse stock split approved by our Board of Directors on June 26, 2002.

Overview

Our revenues consist of product revenues and, to a much lesser extent, development fees. Product revenues are generated through sales of our custom and standard RF subsystem products to wireless systems integrators and original equipment manufacturers and are recognized when title passes, which is upon product shipment or when withdrawn from a consignment location. We sell our products through our direct sales force and through our network of independent sales representatives. Development fees are generated 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. Any up-front development fees paid under a development contract are recognized ratably over the expected term of the contract or when specific milestones are achieved, except that in no event are revenues recognized prior to becoming billable under the terms of the contract. These agreements, which we enter into with key customers from time to time, are for specific projects and are non-recurring.

We depend, and expect to remain dependent, on a small number of wireless systems integrators for sales of our products. If our customers reduce orders for our products, we could lose revenues and suffer damage to our reputation in the industry. For the years ended December 31, 2002, 2001 and 2000, total sales to Nokia accounted for 71%, 67% and 33% of total revenue, respectively.

The rapid and severe downturn for the United States economy and the telecommunications industry, beginning in late 2000, has affected growth in demand for our customers’ products. In addition to the deteriorating domestic economic environment, the worldwide telecommunications market is experiencing continued reduced demand. This decreased demand has led to fluctuating order forecasts from some of our customers. There can be no certainty as to the degree of the severity or duration of this economic downturn or the demand in the telecommunications industry. We also cannot predict the extent and timing of the impact of the economic downturn in the United States and the worldwide downturn for the telecommunications industry on economies in Asia, Europe and other countries and geographic regions. As recent as the first quarter of 2003, order demand from our largest customer continues to fluctuate as they are experiencing the impact of the downturn in the telecommunications market.

On March 31, 2000, we merged with TRW Milliwave, a former wholly owned subsidiary of TRW. We were the surviving corporation in the merger and TRW Milliwave ceased to exist as a separate legal entity. However, because we issued more than half of our outstanding shares of capital stock to TRW in exchange for all outstanding shares of TRW Milliwave, TRW Milliwave was treated as the acquiring company for accounting purposes. However, when we refer to our business or other corporate activities prior to March 31, 2000, the date of the merger, we are generally referring to our business and corporate activities prior to our merger with TRW Milliwave unless otherwise specified. When we refer to our results on a pro forma basis, we have combined the historical statements of operations for TRW Milliwave and Endgate as discussed in Note 16 to the Financial Statements.

Our merger with TRW Milliwave was accomplished through a tax-free reorganization under the Internal Revenue Code. As such, the respective tax bases in assets and liabilities carried over to the combined company with no step-up in basis. Therefore, the amortization and impairment charge related to intangible assets resulting from the merger, including goodwill, is not deductible for tax purposes. Since inception, we have incurred net losses and therefore generated significant net operating loss carryforwards. Historically, these carryforwards were not reflected on our balance sheet as an asset because they were fully reserved due to uncertainty about our

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

On April 24, 2001, we completed the acquisition of certain assets from Tyco Electronics related to their M/A-COM subsidiary’s broadband wireless business. We have used the acquired net assets to expand our customer base and product offerings. The acquisition was accounted for using the purchase method of accounting. The total consideration paid by the Company in the acquisition was $4.0 million in cash and the issuance of 229,106 shares of our common stock valued at $2.0 million, liabilities assumed of approximately $2.7 million and acquisition expenses of approximately $700,000.

On September 24, 2002, we acquired the broadband assets of the Fixed Wireless division of Signal Technology Corporation for cash of $3.6 million, inclusive of acquisition costs. The assets acquired were inventory, equipment, product designs and related intellectual property, and customer contracts. In addition, we hired 13 former employees of Signal Technology Corporation to support the ongoing business with existing customers.

We review long-lived assets, including intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset exceeds its fair value. In the first quarter of 2001, we determined that impairment indicators were present and therefore evaluated the carrying value of the goodwill and other intangible assets. The evaluation was based on a cash flow forecast for five years ending March 31, 2006, and discounted at the rate of 14%, which represented our weighted average cost of capital. As a result of the evaluation, we concluded that unamortized goodwill and other intangible assets of $90.4 million were impaired and accordingly, this amount was charged to operations in the first quarter of 2001.

We adopted SFAS No. 142, “Goodwill and Other Intangible Assets,” (“SFAS No. 142”) on January 1, 2002. The following pro forma information reflects the impact on net loss and net loss per share assuming the adoption of SFAS No. 142 had occurred on January 1, 2001 (in thousands):

In December 2001, we divested our antenna product division, and effectively ceased all operations relating to antenna development and manufacturing. The net loss on this transaction was insignificant. As part of the sale,

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Endwave will receive royalties for the next ten years on any future sales of Endwave-developed intellectual property. The revenues associated with the antenna products for the year ended December 31, 2001 were approximately $1.1 million. To date, there have been no antenna royalties received.

In January 2002, we announced a plan to repurchase up to an aggregate of 750,000 shares of our stock. The repurchases will be made from time to time on the open market at prevailing market prices or in negotiated transactions off the market. During 2002, we repurchased 39,150 shares for approximately $79,000.

In March 2002, we executed a renewal to our master supply agreement with Velocium, a former wholly-owned subsidiary of TRW which is now an operating unit of Northrop Grumman Space and Missions Systems Corp. through December 31, 2005. This renewal expands our access to Velocium’s custom wafer processing services, to state-of-the-art gallium arsenide technologies, products operating at lower frequency bands for wireless infrastructure applications, indium phosphide products for advanced applications and guaranteed pricing and purchase commitments.

During the first quarter of 2002, we commenced the implementation of an on-site inventory management program with Nokia. This program provides storage of Endwave finished goods at Nokia’s factory and allows Nokia to draw against this inventory based on their manufacturing needs. Revenue is recognized as Nokia draws the inventory from this stocking location.

In June 2002, we announced that we had entered into a contract with Lockheed Martin Missiles and Fire Control Company to design the RF receiver unit for the Comanche Radar system used in the Boeing RAH-66 Comanche Helicopter. The contract with Lockheed Martin, a primary sub-contractor to The Boeing Company for the Comanche Radar program, calls for us to design the radar RF receiver unit, and to manufacture and deliver prototype and evaluation units that will be used in qualification trials within the complete radar system.

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

Restructuring Plans

On January 29, 2001, our Board of Directors approved a restructuring plan related to our transition of all manufacturing activities from our Sunnyvale, California facility to our Diamond Springs, California manufacturing facility. Some of the factors that led to the decision to restructure include a decline in the telecommunications market, our decision to exit the point-to-multipoint market and long-term excess capacity. The consolidation of manufacturing operations to our Diamond Springs, California facility was substantially completed in the second quarter of 2001.

In the first quarter of 2001, we recorded restructuring costs of $3.7 million in conjunction with the restructuring plan. These costs related primarily to severance and benefits of $0.4 million and non-cash costs of $3.3 million for impairment of fixed assets. In addition, the Company recognized a $9.4 million charge for excess and obsolete inventory related primarily to inventory for the point to multipoint market that the Company decided to exit. The inventory charge was recorded as a cost of product revenues in our statement of operations.

An additional restructuring charge of $1.5 million primarily related to retention bonuses and benefits and $1.6 million for excess leased facilities in Sunnyvale, California was recognized in the last three quarters of

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2001. Also in the fourth quarter, we reached an agreement to settle its claims in relation to the inventory it had acquired to fulfill sales orders with one of our point to multipoint customers that was charged off in the first quarter. This settlement resulted in a $2.6 million benefit that was recorded as a reduction to cost of product revenues in the Company’s statement of operations.

Following is a summary of activity in the restructuring reserve (amounts in thousands):

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

During the first quarter of 2002, we recorded a restructuring charge of $3.5 million (“the First Quarter 2002 Plan”), the components of which were $1.1 million for severance payments, $310,000 for lease cancellations, and a non cash charge of $2.1 million for excess equipment, offset by a $142,000 adjustment for excess severance benefits. During the twelve months ended December 31, 2002, we eliminated 107 positions and made cash payments of $1.0 million under the First Quarter 2002 Plan. Of the 107 positions that were eliminated, 67 were in operations, 33 were in engineering and 7 were in sales, general and administration. We anticipate paying the majority of the severance benefits of $5,000 in the first quarter of 2003. Below is a table summarizing activity relating to the First Quarter 2002 Plan (in thousands):

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

We expect our 2002 restructuring programs to reduce annual cash usage by approximately $12.0 million, as a result of reductions in force and lease cancellations.

Critical Accounting Policies, Judgments and Estimates

General

Management’s discussion and analysis of its financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these 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 on-going basis, we evaluate our estimates, including those related to product returns, bad debts, excess and obsolete inventories, investment carrying value, intangible assets, income taxes, warranty obligations, excess component order cancellation costs, restructuring, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies contain the more significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition

The Company’s customers are primarily wireless systems integrators and equipment manufacturers who integrate the Company’s products into their products. The Company recognizes product revenue at the time title passes, which is upon product shipment or when withdrawn from a consignment location. Revenues related to product sales are recognized in accordance with SEC Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements,” when: (1) persuasive evidence that an arrangement exists, (2) delivery has occurred or services have been rendered, (3) the seller’s price to the buyer is fixed or determinable, and (4) collectibility is reasonably assured. There are no typically significant acceptance requirements or post-shipment obligations on the part of Endwave. The Company recognizes development fees ratably over the estimated term of the development period or when specific milestones are achieved. Up-front fees, if any, associated with development

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agreements are recognized over the estimated development and production period. In no event are revenues recognized prior to becoming payable by the customer. The costs incurred under these agreements are included in research and development expenses.

Allowance for Doubtful Accounts

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We provide an allowance for specific customer accounts where collection is doubtful and also provide a general allowance for other accounts based on historical collection and write-off experience. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

Warranty Reserve

We provide for the estimated cost of product warranty at the time revenue is recognized. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers, our 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 our estimates, and revisions to the estimated warranty liability would be required.

We have experienced manufacturing quality problems with our products in the past and may have similar problems in the future. As a result of these problems, we have replaced components in some products, or replaced the product, in accordance with our product warranties.

Our product warranties typically last one to three years. As a result of component, manufacturing or design defects, we may be required to repair or replace a substantial number of products under our product warranties. Further, our customers may discover latent defects in our products that were not apparent when the warranty period expired. These defects may cause repair or replacement expenses beyond the normal warranty, the loss of customers or damage to our reputation.

During 2001, some radios incorporating our transceivers and manufactured and shipped by one of our customers are experiencing degraded performance after installation in the field. The cause of the degradation has been identified to be a faulty electronic component supplied by one of our vendors. We believe the cause of the component’s out of specification performance has been identified and corrected. Although the transceiver products were delivered under a contract between Endwave and the customer, the component supplier has agreed to compensate our customer for the “indirect costs” associated with the repair and replacement of the degraded radios and modules. These “indirect costs” include the costs associated with removing and replacing the radios in the field as well as removing and replacing the transceiver module in the radio. Subsequently we have reached an agreement with the component supplier to share a portion of these repair and replacement costs. During 2001, we provided $4.3 million for warranty charges to cover the actual repair of the transceivers containing faulty components. While we believe that this reserve is adequate to cover our actual repair costs, it may not be adequate to fully cover all liability for our share of the “indirect costs” for which our component supplier may ultimately be responsible to our customers.

Inventory Valuation

We report our inventory at the lower of cost or market. In establishing the appropriate provisions for inventory, management must make estimates about the future customer demand for our products, taking into account both general economic conditions and growth prospects within our customers’ ultimate marketplace and the market acceptance of our current and pending products. These judgments must be made in the context of our customers’ shifting technology and product needs. A misinterpretation or misunderstanding of these conditions

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or uncertainty in the future outlook of our industry or the economy, or other failure to estimate correctly, could result in inventory losses in excess of the provisions determined to be appropriate as of the balance sheet date.

Investment in Securities

We consider all highly liquid investments with a maturity of 90 days or less when purchased to be cash equivalents. All other investments which have maturities between 90 days and a year are classified as short-term investments and are carried at market. Our cash equivalents and investments are comprised principally of money market funds, commercial paper and corporate bonds. Investments in commercial paper/corporate bonds are in companies with excellent ratings and are considered high quality at the time of the initial investment. In the event the financial condition of the companies issuing these securities deteriorates, the value of these assets would need to be evaluated and may result in charges to reflect impairment of market value.

Long-Lived Assets

We periodically review our property, plant and equipment 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.

Restructuring Charges

During 2002 and 2001, we recorded significant charges in connection with our restructuring programs. These reserves include estimates pertaining to employee separation costs, the settlement of contractual obligations and the estimated net proceeds for property and equipment to be disposed of resulting from our actions.

During 2002, we recorded additional, significant charges with our restructuring plans in March and September. These reserves include estimates pertaining to employee separation costs, the settlement of contractual obligations and the estimated net proceeds for property and equipment to be disposed of resulting from our actions. These plans will be substantially completed as of December 31, 2003.

Stock Based Compensation

As permitted by the provisions of SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure,” and SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), we apply Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations in accounting for our stock option plans and stock purchase plan. Note 11 of the Notes to the Financial Statements describes the plans we operate, and Note 2 of the Notes to the Financial Statements contains a summary of the pro forma effects reported to new loss and net loss per share if we elected to recognize compensation cost based on the fair value of the options granted at the grant date, as prescribed by SFAS 123.

Deferred Taxes

We currently have significant deferred tax assets, which are subject to periodic recoverability assessments. Realization of our deferred tax assets is principally dependent upon our achievement of projected future taxable income. Because we have not generated profits since inception, we have established a valuation allowance for the full amount of the deferred tax asset. If our profitability changes, we will reassess the value of these assets and make adjustments as required.

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Results of Operations

Year ended December 31, 2002 compared to year ended December 31, 2001

Revenues

Revenues in 2002 were $22.6 million, a 34% decrease from 2001, and were comprised of product revenues and development fees. Assuming the overall market condition does not improve, we expect no material increase in revenues in 2003.

Product revenues were $22.1 million in 2002, a 34% decrease from $33.5 million in 2001. The decrease reflects a slow-down in the global economy, and further tightening of financial markets in the telecommunication industry, which has reduced our customers’ demand for our products. More specifically, we experienced a decrease in the number of transceiver products sold to Nokia and Allgon Microwave partially offset by increased shipments to Stratex Networks and Lockheed Martin.

We generate development fees by developing product prototypes and custom products pursuant to development agreements that provide for payment of a portion of our research and development or other expenses. Development fees were $423,000 in 2002, a 32% decrease from $619,000 in 2001. The decrease in development fees is attributable to less development of custom designed products. We are engaging with customers for development of new product prototypes and seek to generate future development fees, particularly with defense and government related contracts; however, we do not foresee significant development fees in the near term.

Cost and Expenses

Cost of product revenues.    Cost of product revenues consists primarily of the costs of direct materials and labor utilized to assemble and test our products; equipment depreciation; costs associated with procurement, production control, quality assurance, and manufacturing engineering; costs associated with maintaining our manufacturing facilities; transition costs to support our offshore manufacturing strategy and, costs associated with warranty returns. Cost of product revenues was $29.8 million in 2002, a 48% decrease from $57.2 million in 2001. The improvement is attributable to restructuring actions over the past 24 months, cost controls within the manufacturing process, including consolidation of our manufacturing sites, introduction of lower cost products and elimination of excess overhead and capacity and lower product shipments during 2002. We expect further improvements in cost of product revenues as a result of our 2002 cost reduction activities.

In addition, we recorded charges in 2001 for excess and obsolete inventory of $6.8 million associated with the decline in demand of customers in the point-to-multipoint market, and a special warranty charge of $4.3 million to cover the recall and repair of transceivers sold to our largest customer, that have been identified to have a potentially faulty electronic component supplied by one of our vendors. At the present time, we expect our reserves for this special warranty charge to be adequate and do not foresee any additional reserve requirements.

Research and development expenses.    Research and development expenses in 2002 were $9.2 million, a 35% decrease from $14.2 million in 2001. The decrease was primarily attributable to restructuring our engineering team in line with business opportunities as well as reduced development cost for new products. In 2003, we expect a further decline in research and development costs as a result of our 2002 cost reduction activities, unless we unexpectedly have an increase in new customer-specific development projects for which we could receive some subsidy in the form of development fees.

Selling, general and administrative expenses.    Selling, general and administrative expenses consist primarily of salaries and related expenses for executive, sales, marketing, finance, accounting, information technology, facilities and human resources personnel, professional fees, and promotional activities. Selling, general and administrative expense in 2002 was $9.2 million, a 21% decrease from $11.6 million in 2001. The

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decrease was primarily attributable to our restructuring actions, consolidation of facilities and continued focus on expenses. In 2003, we expect a further decline in selling, general and administrative expenses as a result of our 2002 cost reduction activities.

Restructuring charge.    We have implemented restructuring plans in 2001 and 2002.

On January 29, 2001, our Board of Directors approved a restructuring plan related to our transition of manufacturing activities from our Sunnyvale, California facility to our Diamond Springs, California manufacturing facility. Some of the factors that led to the decision to restructure the Company included a decline in the telecommunications market, our decision to exit the point-to-multipoint market and long-term excess capacity. The consolidation of manufacturing operations to the company’s Diamond Springs, California facility was substantially completed in 2001. The restructuring costs of $6.8 million for the year ended December 31, 2001 included $1.9 million for severance and benefits, $1.6 million for the write down of excess leased facilities in Sunnyvale, California and $3.3 million related to excess equipment. At December 31, 2002, we had no remaining obligations due to the return of $650,000 deposit and settlement of lease obligations of $490,000.

During 2002, we recorded significant charges in connection with our restructuring plans in March and September. These plans were implemented as a result of further decline in the telecommunications industry. The charges recorded in connection with these restructuring plans totaled $8.3 million, which was comprised of $2.9 million in severance, $310,000 in lease cancellations and $5.2 million in non-cash charges for excess equipment offset by $142,000 of excess severance costs. The plans will be substantially completed as of December 2003.

Amortization of deferred stock compensation.    Deferred stock compensation charges consist primarily of charges related to the difference between deemed fair market values for financial reporting purposes on the date of employee option grants and the option price for option awards prior to our initial public offering. Deferred stock compensation is represented as a reduction of stockholders equity. Amortization of deferred stock compensation in 2002 was $1.4 million, a decrease from $6.5 million in 2001. We use the graded method of amortization of deferred stock compensation, which results in higher amortization in earlier periods. Remaining deferred compensation of $1.3 million will be amortized in 2003 by approximately $1.0 million with the balance of $300,000 in 2004.

Interest income, expense and other, net.    Net interest income and other, net consists primarily of interest income earned on our cash and cash equivalents and short-term investments and unrealized gains and losses on investments, offset by interest expense on capital equipment leases. Interest income decreased to $1.4 million in 2002 from $3.3 million in 2001. The decrease in interest income was due to lower interest rates and lower levels of cash available for investment.

Interest expense decreased to $399,000 in 2002 from $729,000 in 2001. The decrease in interest expense was primarily attributable to decreased financing leases of manufacturing and engineering equipment.

Other income, net consists of contract termination fees and gains and losses on sale or abandonment of fixed assets. During 2002, we realized a gain in the amount of $1.1 million on contract terminations, $2.2 million resulting from a settled dispute with one of our customers for expenses incurred related to cancellations of product deliveries and $67,000 of impairment loss on investments available for sale.

Results of Operations

Year ended December 31, 2001 compared to year ended December 31, 2000

Revenues

Product revenues were $33.5 million in 2001, a 16% decrease from $39.8 million in 2000. The decrease is primarily attributable to a decrease in the number of transceiver and antenna products sold to Nortel, Hughes Network Systems and Rockwell International offset by increased revenues with Nokia, and reflects a slow-down

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in the global economy, further tightening of financial markets in the telecommunication industry, which has reduced our customers’ ability to secure financing and purchase products, and the exiting of the point-to-multipoint market. Two of our major customers, Nortel and Hughes Network Systems, exited the point-to-multipoint market during the first half of 2001.

Development fees were generated by developing product prototypes and custom products pursuant to development agreements that provide for payment of a portion of our research and development or other expenses. Development fees were $0.6 million in 2001, a 57% decrease from $1.4 million in 2000. The decrease in development fees is attributable to less development of custom designed products, particularly for Hughes Network Systems.

Cost and Expenses

Cost of product revenues.    Cost of product revenues consists primarily of the costs of direct materials and labor utilized to assemble and test our products; costs associated with procurement, production control, quality assurance, and manufacturing engineering; costs associated with maintaining our manufacturing facilities; and, costs associated with warranty returns. Cost of product revenues was $57.2 million in 2001, a 9% increase from $52.5 million in 2000. The increase in cost is attributable to charges taken for excess and obsolete inventory of $6.8 million associated with the decline in demand of customers in the point-to-multipoint market, and a special warranty charge of $4.3 million to cover the recall and repair of transceivers sold to our largest customer, that have been identified to have a potentially faulty electronic component supplied by one of our vendors. These increases were partially offset by lower quantities of units sold.

Research and development expenses.    Research and development expenses in 2001 were $14.2 million, an increase of 46% from $9.7 million in 2000. The increase was primarily attributable to our combined operations following our merger in March 2000 with TRW Milliwave, the addition of engineering personnel hired in connection with our acquisition of assets from M/A-COM’s broadband wireless business in the second quarter of 2001, and an increase in product development activities, both for designing custom products for new customers and designing cost-reduced products for existing customers.

Selling, general and administrative expenses.    Selling, general and administrative expenses consist primarily of salaries and related expenses for executive, sales, marketing, finance, accounting, information technology, facilities and human resources personnel, professional fees, and promotional activities. Selling, general and administrative expense in 2001 was $11.6 million, a 45% increase from $8.0 million in 2000. The increase was primarily attributable to our combined operations following our March 2000 merger, the hiring of additional administrative, sales and marketing personnel to support an expected overall increased business activities, and increased public-company related professional services.

Impairment of long-lived assets.    We review long-lived assets, including intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset exceeds its fair value. In the first quarter of 2001, we determined we would be unable to successfully negotiate a new contract with Nortel and were informed by Hughes that orders for the following few quarters would be effectively eliminated. Hughes indicated that orders may be resumed late in 2001, however, we did not expect this would happen as it believed Hughes had excess quantities already on hand and the market for their product was weakening. Sales to Hughes and Nortel represented approximately 43% of 2000 sales. Also in the first quarter, we decided to consolidate manufacturing in the Diamond Springs, California facility. This plan resulted in a majority of prior Endgate employees being terminated. In addition, during the first quarter, we came to believe that the downturn in the industry would be significantly longer than originally expected as a result of earnings warnings of both customers and peers. We considered these events to be indicators of potential impairment and we evaluated the carrying value of our long-lived assets. Our forecast of future cash flows indicated that our long-lived assets were impaired. We estimated the fair value of long-lived assets by discounting the cash flow forecast using a discount rate of 14%, which represented our weighted average cost of

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capital. As a result of the evaluation, we concluded that unamortized goodwill and other intangible assets of $90.4 million were fully impaired, and accordingly, we charged this amount to operations in the first quarter of 2001.

Restructuring charge.    On January 29, 2001, our Board of Directors approved a restructuring plan related to our transition of manufacturing activities from our Sunnyvale, California facility to our Diamond Springs facility. Some of the factors that led to the decision to restructure included a decline in the telecommunications market, our decision to exit the point-to-multipoint market and long-term excess capacity. We took non-recurring charges, comprised primarily of severance benefits, a charge taken for obsolete equipment associated with the point-to-multipoint market and for the write down of excess leased facilities in Sunnyvale, CA. We substantially completed the consolidation of manufacturing operations to our Diamond Springs facility in 2001. The total workforce reductions associated with this restructuring across all business functions was 170 employees by the end of year December 31, 2001. The restructuring costs of $6.8 million for the year ended December 31, 2001 included $1.9 million for severance and benefits, $1.6 million for the write down of excess leased facilities in Sunnyvale, California and $3.3 million related to excess equipment. At December 31, 2001, we had approximately $1.1 million accrued for the remaining unpaid leases obligations. We recorded no restructuring charge in 2000.

In-process research and development expense.    In connection with our merger in March 2000 with TRW Milliwave, we allocated $11.7 million of the purchase price to in-process research and development. The amount allocated to in-process research and development was expensed upon acquisition because technological feasibility had not been established and no future alternative uses existed.

Amortization of intangible assets.    Amortization of intangibles assets decreased to $6.9 million in 2001 from $14.8 million in 2000. We recorded our merger in March 2000 with TRW Milliwave using the purchase method of accounting. In connection with the merger, we recorded goodwill of $80.2 million and other intangible assets of $23.6 million. We were amortizing goodwill and other intangible assets acquired on a straight-line basis over five to six years. As a result of the charges taken in the first quarter of 2001 for impairment of long-lived assets, the carrying value of these assets was written off and no further amortization was recognized.

In April 2001, we acquired M/A-COM’s broadband wireless business. The acquisition was accounted for as a purchase transaction. We paid total consideration in the acquisition of $4.0 million in cash and the issuance of 229,106 shares of our common stock, valued at $2.0 million, liabilities assumed of approximately $2.7 million and acquisition expenses of approximately $0.7 million.

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. Deferred stock compensation is represented as a reduction of stockholders equity. Amortization of deferred stock compensation in 2001 was $6.5 million, an increase from $6.2 million in 2000. We use the graded method of amortization of deferred stock compensation, which results in higher amortization in earlier periods.

Interest income, expense and other net.     Net interest income consists primarily of interest income earned on our cash and cash equivalents and short-term investments and interest expense on capital equipment leases. Interest income increased to $3.3 million in 2001 from $2.2 million in 2000. The increase in interest income was due to the investment of proceeds from the sale of shares of our common stock in the fourth quarter of 2000 pursuant to our initial public offering. These proceeds were invested in short-term interest bearing securities.

Interest expense increased to $729,000 in 2001 from $492,000 in 2000. The increase in interest expense was primarily attributable to increased financing leases of manufacturing and engineering equipment.

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Liquidity and Capital Resources

Selected Financial Liquidity Data

Our principal source of liquidity as of December 31, 2002, consisted of approximately $30.6 million in cash, cash equivalents and short-term investments. During 2002, we used $20.0 million of cash in operating activities, as compared to $34.1 million in 2001. The decrease in the use of cash for the year ended December 31, 2002 compared to the same period in 2001 was primarily due to a reduced operating loss, decreased expenditures associated with inventory purchases and changes in non-cash items such as deferred stock compensation, restructuring charges and depreciation. This was partially offset by an increase in accounts receivable and a decrease in accounts payable, accrued compensation and other liabilities. During 2001, we used $34.1 million of cash in operating activities, as compared to $27.2 million in 2000. The increase in the use of cash for the year ended December 31, 2001 compared to the same period in 2000 was primarily due to an increased operating loss, increased expenditures associated with inventory purchases and changes in non-cash items such as deferred stock compensation, restructuring charges and depreciation.

Investing activities provided $10.8 million in 2002, as compared to using $16.4 million in 2001 and $39.5 million in 2000. In the years ended December 31, 2002, 2001, and 2000, we made capital expenditures of $614,000, $2.9 million, and $13.0 million, respectively. Capital expenditures in all three years consisted primarily of purchases of computer and manufacturing equipment and leasehold improvements. In addition, 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 sale of short-term investments. Additionally, in 2002 we had net proceeds on sales of property and equipment of $384,000. In 2001, $4.7 million was used in connection with the acquisition of certain assets of M/A-COM’s broadband wireless business, $9.3 million was used for the purchase of short-term investments and we had net proceeds on sales of property and equipment of $559,000. In 2000, $26.6 million was used for the purchase of short-term investments.

Financing activities in 2002 used $3.0 million of cash as compared to using $2.2 million of cash in 2001, and providing $140.4 million in cash in 2000. Financing activities in 2002 included payments under capital lease obligations of $4.3 million and $79,000 for the purchase of treasury shares, offset by an increase in notes payable of $1.3 million and $168,000 in proceeds from the exercise of employee stock options and shares purchased under the employee stock purchase plan. Financing activities in 2001 included payments under capital lease obligations of $2.9 million, offset by $662,000 in proceeds from the exercise of employee stock options and shares purchased under the employee stock purchase plan. The net cash provided by financing activities in 2000 was due primarily to our receipt of $87.9 million in net proceeds from our initial public offering, net cash acquired of $20.9 million and $20.0 million in proceeds from our issuance of preferred stock, both of which were in conjunction with our merger March 2000 merger with TRW Milliwave, our sale of common stock for proceeds of $6.0 million, net advances of funds by TRW of $6.0 million, $1.1 million in proceeds from the exercise of warrants to purchase our stock and the exercise of employee stock options, and payments under capital lease obligations of $1.4 million.

We believe that our existing cash and investment balances and anticipated cash flows from operations will be sufficient to meet our operating and capital requirements for at least the next 12 months. However, revenues could decline below our expectations resulting in insufficient cash flow from operations. As a result, we could be

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required, or could elect, to raise additional funds during that period and we may need to raise additional capital in the future. Additional capital may not be available at all, or may only be available on terms unfavorable to us. With the exception of operating and capital leases discussed in Note 12 to our financial statements, we have not entered into any off-balance sheet financing arrangements, we have not established any variable interest entities, we do not have any unconditional purchase obligations, nor do we have non-cancelable commitments for capital expenditures. We have not guaranteed the debt or obligations of other entities or entered into options on non-financial assets.

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

The following table summarizes our future cash payments, excluding interest, in thousands:

Related Party Transactions

Velocium, a former wholly-owned subsidiary of TRW which is now an operating unit of Northrop Grumman Space & Mission Systems, is a major supplier of gallium arsenide to us, which is a key component to our products. We have a long-term supply agreement with Velocium/Northrop Grumman which specifies volume and price commitments. Under this supply agreement we have paid TRW, Inc., Velocium’s former parent company, $7.2 million, $11.6 million and $11.7 million in 2002, 2001 and 2000, respectively.

In December 2001, we entered into an agreement with TRW to repair RF subsystems previously supplied by TRW to Nokia. This agreement terminates on completion of the repair of all units requiring repair. In the year ended December 31, 2002 and 2001, we recognized revenues of approximately $837,122 and $52,000 attributable to this agreement, respectively.

Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (SFAS) No. 141, “Business Combinations” (“SFAS 141”) and SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. SFAS No. 141 also includes guidance on the initial recognition and measurement of goodwill and other intangible assets arising from business combinations completed after June 30, 2001. SFAS No. 142 prohibits the amortization of goodwill and intangible assets with indefinite useful lives. SFAS No. 142 requires that these assets be reviewed for impairment at least annually.

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Intangible assets with finite lives will continue to be amortized over their estimated useful lives. Additionally, SFAS No. 142 requires that goodwill included in the carrying value of equity method investments no longer be amortized.

The Company adopted SFAS No. 142 on January 1, 2002. See previous discussion regarding the impact on net loss and net loss per share assuming the adoption of SFAS No. 142 had occurred on January 1, 2001.

In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”), that is applicable to financial statements issued for fiscal years beginning after December 15, 2001. This standard provides a single accounting model for long-lived assets to be disposed of and significantly changes the criteria that would have to be met to classify an asset as held-for-sale. Classification as held-for-sale is an important distinction since such assets are not depreciated and are stated at the lower of fair value and carrying amount. This Standard also requires expected future operating losses from discontinued operations to be recorded in the period(s) in which the losses are incurred, rather than as of the measurement date as presently required.

The Company adopted SFAS No. 144 on January 1, 2002. There was no material impact on the Company’s financial position or results of operations as a result of this adoption.

In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” Among other provisions, SFAS No. 145 rescinds SFAS No. 4, “Reporting Gains and Losses from Extinguishment of Debt.” Accordingly, gains or losses from extinguishment of debt shall not be reported as extraordinary items unless the extinguishment qualifies as an extraordinary item under the criteria of Accounting Principles Board (“APB”) Opinion No. 30, “Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions.” Gains or losses from extinguishment of debt that do not meet the criteria of APB No. 30 should be reclassified to income from continuing operations in all prior periods presented. There was no material impact on the Company’s financial position or results of operations as a result of this adoption.

Statement 145 amends paragraph 14(a) of FASB Statement No. 13, Accounting for Leases (Statement 13) and, as a technical correction, replaced paragraph 38 of Statement 13. As Amended, paragraph 14(a) of Statement 13 requires capital lease modifications that give rise to a new arrangement classified as an operating lease to be accounted for under the sale-leaseback provisions of FASB Statement No. 98, Accounting for Leases: Sale-Leaseback Transactions Involving Real Estate; Sales-Type Leases of Real Estate; Definition of the Lease Term; Initial Direct Costs of Direct Financing Leases (Statement 98) or paragraphs 2 through 3 of FASB Statement No. 28, Accounting for Sales with Leasebacks (Statement 28), as applicable. Statement 145’s amendment and technical correction to Statement 13 is effective for all transactions occurring after May 15, 2002, with early application encouraged. Early application of Statement 145 may be as of the beginning of the fiscal year or interim period in which the Statement was issued. There was no material impact on the Company’s financial position or results of operations as a result of this adoption.

In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”). SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred as opposed to EITF Issue No. 94-3 that required a liability for an exit cost to be recognized at the date of an entity’s commitment to an exit plan. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The principal difference between Statement 146 and Issue 94-3 relates to Statement 146’s requirements for recognition of a liability for a cost associated with an exit or disposal activity. The Company does not expect the adoption of SFAS 146 to have a material impact on its financial position or results of operations.

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In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation, Transition and Disclosure” (SFAS 148). SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also requires that disclosures of the pro forma effect of using the fair value method of accounting for stock-based employee compensation be displayed more prominently and in a tabular format. Additionally, SFAS No. 148 requires disclosure of the pro forma effect in interim financial statements. The interim disclosure requirements are effective for the first quarter of the Company’s fiscal year 2003. The Company does not expect SFAS No. 148 to have a material effect on its results of operations or financial condition.

In November 2002, the FASB issued FASB Interpretation No. 45, “FIN 45”, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”. FIN 45 requires that a liability be recorded in the guarantor’s balance sheet upon issuance of a guarantee. In addition, FIN 45 requires disclosures about the guarantees that an entity has issued, including a roll forward of the entity’s product warranty liabilities. The disclosure provisions of FIN 45 are effective for financial statements for the year ended December 31, 2002. The Company does not provide any guarantees but does provide warranty for its products. The Company does not expect the adoption of the recognition and measurement provisions of FIN 45 to have a material impact on its financial position or results of operations.

In January 2003, the FASB issued FASB Interpretation No. 46 “FIN 46”, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.” FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003. The Company does not believe it has any investments in variable interest entities and therefore, does not anticipate any impact upon the adoption of this interpretation.

Disclosure about Market Risk

The following discusses our exposure to market risk related to changes in interest rates, equity prices and foreign currency exchange rates.

As of December 31, 2002, we had cash and cash equivalents of $9.2 million. This amount consists substantially of highly liquid investments with an original maturity at the date of purchase of less than 90 days. In addition, we have short-term investments of $21.4 million, which consist primarily of highly liquid investment grade commercial paper and government securities. All of these amounts are exposed to interest rate risk and will decrease in value if market interest rates should increase. A hypothetical increase in market interest rates by 10 percent from December 31, 2002 would cause the fair value of these instruments to decline by an insignificant amount. 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.

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Index to Financial Statements

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REPORT OF INDEPENDENT AUDITORS

The Board of Directors and Stockholders

Endwave Corporation

We have audited the accompanying balance sheets of Endwave Corporation as of December 31, 2002 and 2001, and the related statements of operations, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2002. 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 auditing standards generally accepted in the 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, 2002 and 2001, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States. 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.

As discussed in Note 2 to the financial statements, effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.”

/s/    ERNST & YOUNG LLP