Endwave 10Q 2008 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2008


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

For the transition period from to

000-31635
(Commission file number)

ENDWAVE CORPORATION

(Exact name of registrant as specified in its charter)


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

130 Baytech Drive
San Jose, CA		95134
(Address of principal executive offices)		(Zip code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filero		Accelerated filerþ		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller Reporting Companyo

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ.

The number of shares of the registrant’s common stock outstanding as of October 24, 2008 was 9,216,760 shares. The number of shares of the registrant’s preferred stock outstanding as of October 24, 2008 was 300,000 shares.

ENDWAVE CORPORATION

INDEX


		Page
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements	3

	Condensed Consolidated Balance Sheets as of September 30, 2008 (unaudited) and December 31, 2007	3

	Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2008 and 2007	4

	Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2008 and 2007	5

	Notes to Condensed Consolidated Financial Statements (unaudited)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17

Item 3.	Qualitative and Quantitative Disclosure about Market Risk	24

Item 4.	Controls and Procedures	24

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	25

Item 1A.	Risk Factors	25

Item 4.	Submission of Matters to a Vote of Security Holders	36

Item 6.	Exhibits	37

SIGNATURES		39

EXHIBITS		40
EX-31.1
EX-31.2
EX-32.1

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ENDWAVE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)


	September 30,			December 31,
	2008			2007
	(unaudited)			(1)
ASSETS
Current assets:
Cash and cash equivalents	$	29,085		$	38,992
Short-term investments		14,976			5,464
Accounts receivable, net		10,277			9,362
Inventories		15,670			12,434
Other current assets		1,413			1,168

Total current assets		71,421	��		67,420
Long-term investments		—			4,501
Property and equipment, net		3,751			2,999
Other assets, net		239			212
Restricted cash		625			25
Goodwill and intangible assets, net		6,489			7,432

	$	82,525		$	82,589

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	4,264		$	3,422
Accrued warranty		2,672			2,712
Accrued compensation		3,134			2,240
Other current liabilities		762			2,251

Total current liabilities		10,832			10,625
Other long-term liabilities		24			116

Total liabilities		10,856			10,741

Commitments and contingencies (Note 7)
Stockholders’ equity:
Convertible preferred stock, $0.001 par value; 5,000,000 shares authorized; 300,000 shares issued and outstanding at September 30, 2008 and December 31, 2007, respectively		—			—
Common stock, $0.001 par value; 50,000,000 shares authorized; 9,216,760 and 9,174,622 shares issued and outstanding at September 30, 2008 and December 31, 2007, respectively		9			9
Additional paid-in capital		348,478			345,038
Treasury stock, at cost, 39,150 shares at December 31, 2007		—			(79	)
Accumulated other comprehensive loss		(9	)		(6	)
Accumulated deficit		(276,809	)		(273,114	)

Total stockholders’ equity		71,669			71,848

	$	82,525		$	82,589


(1)		Derived from the Company’s audited consolidated financial statements as of December 31, 2007.

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

ENDWAVE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share amounts)

(unaudited)


	Three months ended						Nine months ended
	September 30,						September 30,
	2008			2007			2008			2007
Revenues:
Product revenues	$	16,937		$	13,608		$	47,810		$	41,339
Development fees		42			186			630			745

Total revenues		16,979			13,794			48,440			42,084


Costs and expenses:
Cost of product revenues*		11,798			9,940			33,529			30,768
Cost of product revenues, amortization of intangible assets		149			149			447			399
Research and development*		2,943			2,792			8,715			7,906
Selling, general and administrative*		3,200			3,230			9,927			9,709
Amortization of intangible assets		179			180			537			352


Total costs and expenses		18,269			16,291			53,155			49,134


Loss from operations		(1,290	)		(2,497	)		(4,715	)		(7,050	)
Interest and other income, net		291			842			1,042			2,708

Loss before provision for income taxes		(999	)		(1,655	)		(3,673	)		(4,342	)
Provision for income taxes		—			—			22			—

Net loss	$	(999	)	$	(1,655	)	$	(3,695	)	$	(4,342	)


Basic and diluted net loss per share	$	(0.11	)	$	(0.14	)	$	(0.40	)	$	(0.37	)

Shares used in computing basic and diluted net loss per share		9,216,760			11,618,746			9,182,041			11,590,059


*		Includes the following amounts related to stock-based compensation:


Cost of product revenues	$	188	$	200	$	554	$	495
Research and development		225		230		694		612
Selling, general and administrative		592		681		1,842		1,994

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

ENDWAVE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)


	Nine months ended
	September 30,
	2008			2007
Operating activities:
Net loss	$	(3,695	)	$	(4,342	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation		871			730
Amortization of intangible assets		984			751
Stock compensation expense		3,090			3,101
Amortization of investments, net		(25	)		(3	)
Gain on sale of investments		(45	)		4
Loss on sale of fixed assets		3			—
Changes in operating assets and liabilities:
Accounts receivable, net		(915	)		(660	)
Inventories		(3,243	)		5,209
Other assets, net		(272	)		(170	)
Accounts payable		842			(380	)
Accrued warranty		(40	)		(111	)
Accrued compensation, other current liabilities and other long-term liabilities		316			(590	)

Net cash provided by (used in) operating activities		(2,129	)		3,539

Investing activities:
Purchase of ALC Microwave, Inc., net of cash acquired		(1,027	)		(5,779	)
Change in restricted cash		(600	)		236
Proceeds on sale of property		1			11
Purchases of property and equipment		(1,627	)		(748	)
Proceeds on sales and maturities of investments		11,102			51,895
Purchases of investments		(16,058	)		(50,474	)

Net cash used in investing activities		(8,209	)		(4,859	)

Financing activities:
Payments on capital leases		(17	)		(8	)
Proceeds from common stock issuance		434			368
Proceeds from exercises of stock options, net of issuance costs		2			138

Net cash provided by financing activities		419			498


Effects of foreign exchange rate changes on cash and cash equivalents		12			(10	)

Net decrease in cash and cash equivalents		(9,907	)		(832	)
Cash and cash equivalents at beginning of period		38,992			26,176

Cash and cash equivalents at end of period	$	29,085		$	25,344

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

ENDWAVE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Business and Basis of Presentation

Endwave Corporation and its wholly-owned subsidiary, Endwave Defense Systems Incorporated (together referred to as “Endwave” or the “Company”), design, manufacture and market radio frequency (“RF”) modules that enable the transmission, reception and processing of high-frequency signals in telecommunication networks and non-telecommunication networks such as defense electronics, homeland security and other systems. The Company’s RF modules are typically used in high-frequency applications and include:

	•		integrated transceivers — combinations of electronic devices that combine both the transmit and receive functions necessary for a bi-directional radio link;

	•		amplifiers — electronic devices used to increase the amplitude and power of an electronic signal;

	•		synthesizers — electronic devices that can be used to generate several different radio frequency signals from a single source;

	•		oscillators — electronic devices that generate radio frequency signals at a fixed frequency;

	•		up and down converters — electronic devices that shift the center frequency of a radio signal without altering the signal’s data modulation;

	•		frequency multipliers — electronic devices that increase the frequency of a radio signal in integer multiples; and

	•		microwave switch arrays — electronic devices that can switch the routing of a radio signal.

The accompanying unaudited condensed consolidated financial statements of Endwave have been prepared in conformity with accounting principles generally accepted in the United States of America and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not contain all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. The year-end condensed consolidated balance sheet data was derived from the Company’s audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. In the opinion of management, the information contained herein reflects all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation of the results of the interim periods presented. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2008 or any future periods. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2007.

2. Restricted Cash

At September 30, 2008, the Company had a restricted cash balance of $625,000, which included two certificates of deposit held by a financial institution as collateral for two letters of credit in connection with the Company’s building leases. During the second quarter of 2008, the Company executed an agreement to lease approximately 31,000 square feet in Folsom, California. The lease term will be for sixty months. In connection with this lease, the Company established a $600,000 certificate of deposit as collateral for a letter of credit. The letter of credit terms permit an annual 25% reduction of the certificate of deposit at the end of each year of the lease.

In addition, the Company had a $25,000 certificate of deposit that secures a letter of credit in connection with the Company’s building lease in Andover, Massachusetts. The $25,000 certificate of deposit will be maintained by the Company for the term of the lease.

3. Investments

The following fair value amounts have been determined using available market information.


	September 30, 2008
			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value
	(In thousands)
Cash equivalents:
Money market funds	$	9,396	$	—	$	—		$	9,396
Commercial paper		10,583		—		—			10,583
United States government agency		8,981		—		—			8,981

Total	$	28,960	$	—	$	—		$	28,960


Investments:
United States government agency	$	7,985	$	9	$	(3	)	$	7,991
Corporate securities		7,000		1		(16	)		6,985

Total	$	14,985	$	10	$	(19	)	$	14,976


	December 31, 2007
			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value
	(In thousands)
Cash equivalents:
Commercial paper	$	7,195	$	—	$	—		$	7,195

Investments:
United States government agency	$	1,496	$	4	$	—		$	1,500
Corporate securities		8,463		8		(6	)		8,465

Total	$	9,959	$	12	$	(6	)	$	9,965

At September 30, 2008, the Company had $15.0 million of short-term investments with maturities of less than one year and no long-term investments.

At September 30, 2008, the Company had investments of $7.6 million with an unrealized loss of $19,000. At September 30, 2008, no investments had been in a loss position for a period greater than one year. The investments mature through 2009 and the Company believes that it has the ability to hold these investments until the maturity date. There were no realized gains for the three month period ended September 30, 2008. Realized gains were $45,000 for the nine month period ended September 30, 2008. Realized gains and losses were insignificant for the three and nine month periods ended September 30, 2007.

The Company reviews its investment portfolio to identify and evaluate investments that have indications of possible impairment. Factors considered in determining whether a loss is temporary include the length of time and extent to which fair value has been less than the cost basis, credit quality and the Company’s ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. If the Company believes the carrying value of an investment is in excess of its fair value, and this difference is other-than-temporary, it is the Company’s policy to write down the investment to reduce its carrying value to fair value.

Fair Value Measurement

On January 1, 2008, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS No. 157”) which defines fair value, establishes a framework for using fair value to measure assets and liabilities, and expands disclosures about fair value measurements. SFAS No. 157 applies whenever other statements require or permit assets or liabilities to be measured at fair value. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, except for nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis, for which application has been deferred for one year.

The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis in accordance with SFAS No. 157 as of September 30, 2008 (in thousands):


			Quoted Prices in
			Active Markets of		Significant Other
	Balance as of		Identical Assets		Observable Inputs
	September 30, 2008		(Level 1)		(Level 2)
Assets:
Cash equivalents:
Money market funds	$	9,396	$	9,396	$	—
Commercial paper		10,583		—		10,583
United States government agency		8,981		—		8,981
Short-term investments:
United States government agency		7,991		—		7,991
Corporate securities		6,985		—		6,985

Total	$	43,936	$	9,396	$	34,540


Liabilities:	$	—	$	—	$	—

The Company’s financial assets and liabilities are valued using market prices on both active markets (Level 1) and less active markets (Level 2). Level 1 instrument valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level 2 instrument valuations are obtained from readily-available pricing sources for comparable instruments. As of September 30, 2008, the Company did not have any assets or liabilities without observable market values that would require a high level of judgment to determine fair value (Level 3).

4. Inventories

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


	September 30,		December 31,
	2008		2007
Raw materials	$	9,698	$	9,630
Work in process		2,230		1,365
Finished goods		3,742		1,439

	$	15,670	$	12,434

5. Goodwill and Intangible Assets

Goodwill

At September 30, 2008 and December 31, 2007, the Company had goodwill of $3.0 million, $1.6 million associated with its purchase of JCA Technology, Inc. (“JCA”) in July of 2004 and $1.4 million associated with its purchase of ALC Microwave, Inc. (“ALC”) in April of 2007. The Company conducted its 2008 annual goodwill impairment analysis of the JCA and ALC related goodwill in the third quarter of 2008 and no goodwill impairment was indicated.

Intangible Assets

In April 2007, as part of the ALC acquisition, the Company acquired $2.9 million of identifiable intangible assets, including $900,000 for customer relationships, $880,000 for developed technology, $560,000 for customer backlog, $370,000 for the non-compete agreement and $230,000 for the tradename. These assets are subject to amortization and have approximate estimated useful lives as follows: customer relationships — six years, developed technology — six years, customer backlog — two years, non-compete agreement — four years, and tradename — six years.

In July 2004, as part of the JCA acquisition, the Company acquired $4.2 million of identifiable intangible assets, including $2.3 million for developed technology, $1.1 million for the tradename, $780,000 for customer relationships and $140,000 for customer backlog. The JCA intangible assets are subject to amortization and have approximate estimated useful lives as follows: developed technology — five years, customer backlog — six months and customer relationships — five years.

The components of intangible assets as of September 30, 2008 were as follows (in thousands):


	Gross Carrying		Accumulated			Net Carrying
	Amount		Amortization			Amount
Developed technology	$	3,130	$	(2,083	)	$	1,047
Tradename		1,290		(54	)		1,236
Customer relationships		1,680		(863	)		817
Customer backlog		700		(537	)		163
Non-compete agreement		370		(131	)		239

Total intangible assets	$	7,170	$	(3,668	)	$	3,502

The components of intangible assets as of December 31, 2007 were as follows (in thousands):


	Gross Carrying		Accumulated			Net Carrying
	Amount		Amortization			Amount
Developed technology	$	3,130	$	(1,636	)	$	1,494
Tradename		1,290		(27	)		1,263
Customer relationships		1,680		(633	)		1,047
Customer backlog		700		(327	)		373
Non-compete agreement		370		(61	)		309

Total intangible assets	$	7,170	$	(2,684	)	$	4,486

The amortization of developed technology is a charge to cost of product revenues and was $149,000 and $149,000 for the three months ended September 30, 2008 and 2007, respectively, and was $447,000 and $399,000 for the nine months ended September 30, 2008 and 2007, respectively. Amortization of all other intangible assets is a charge to operating expenses and was $179,000 and $180,000 for the three months ended September 30, 2008 and 2007, respectively, and was $537,000 and $352,000 for the nine months ended September 30, 2008 and 2007, respectively.

The JCA tradename has a gross carrying value of $1.1 million and is not subject to amortization and is evaluated for impairment at least annually or more frequently if events and changes in circumstances suggest that the carrying amount may not be recoverable. The Company conducted its 2008 annual impairment analysis of the tradename in the third quarter of 2008 and no impairment was indicated. The ALC tradename is amortized as it has an estimated economic life.

The future amortization of the identifiable intangible assets is as follows (in thousands):


Years Ending December 31,
2008 (October 1 through December 31)	$	328
2009		874
2010		428
2011		366
2012		335
Thereafter		111

Total	$	2,442

6. Warranty

The warranty periods for the Company’s products are between twelve and thirty months from date of shipment. The Company provides for estimated warranty expense at the time of shipment. While the Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of component suppliers, its warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from the estimates, revisions to the estimated warranty accrual and related costs may be required.

Changes in the Company’s product warranty liability during the nine months ended September 30, 2008 and 2007 are as follows (in thousands):


	Nine months ended September 30,
	2008			2007
Balance at January 1	$	2,712		$	2,928
Warranties accrued		543			660
Warranties settled or reversed		(583	)		(613	)

Balance at September 30	$	2,672		$	2,975

7. Commitments and Contingencies

On Friday, October 31, 2008, the Company filed a complaint with the Canadian Superior Court in Montreal, Quebec alleging that Advantech Advanced Microwave Technologies Inc. (“Advantech”) the parent company of Allgon Microwave Corporation AB, had breached its contractual obligations with Endwave and owes the Company $994,500 in a note receivable, purchased inventory and accepted purchase orders. The Company cannot predict the outcome of these proceedings. An adverse decision in these proceedings could harm the Company’s consolidated financial position and results of operations. Other than the complaint against Advantech, the Company is not currently a party to any material litigation.

The Company’s future annual minimum lease payments under non-cancelable operating leases are as follows (in thousands):


Years Ending December 31
2008 (October 1 through December 31)	$	234
2009		1,091
2010		992
2011		875
2012		628
Thereafter		593

Total	$	4,413

8. Stockholder’s Equity

Stock Option Exchange

On January 4, 2008, the Company filed a Tender Offer Statement on Schedule TO (the “Exchange Offer”) with the Securities and Exchange Commission. The Exchange Offer related to an offer by the Company to certain optionholders to exchange some or all of their outstanding stock option grants under the Company’s 2007 Equity Incentive Plan with an exercise price per share greater than or equal to $21.47 for new option grants. The Exchange Offer was made to employees and directors of the Company who, as of the date the Exchange Offer commenced, were actively employed by or otherwise providing services to the Company and held eligible option grants. The Exchange Offer expired on February 6, 2008. A total of 331,950 stock options were eligible to participate in the Exchange Offer and a total of 327,921 options were exchanged. The exercise price of the new option grants was $6.59, the closing price of Endwave’s common stock on February 7, 2008.

The exchange of original options for new options was treated as a modification of the original options in accordance with SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123 (R)”). As such, the Company will continue to incur compensation cost for the incremental difference between the fair value of the new options and the fair value of the original options immediately before modification, reflecting the current facts and circumstances on the modification date, over the expected term of the new options.

Stock Based Compensation

The Company adopted the provisions of SFAS No. 123 (R) which establishes accounting for stock-based awards exchanged for employee services. Accordingly, stock-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as expense over the requisite service period. All of the Company’s stock compensation is accounted for as an equity instrument.

The effect of recording stock-based compensation for the three months ended September 30, 2008 and 2007 was as follows (in thousands, except per share data):


	Three Months Ended September 30,
	2008			2007
Stock-based compensation expense by type of award:
Employee stock options	$	859		$	987
Employee stock purchase plan		133			124
Amounts capitalized into inventory during the three month period		(6	)		(17	)
Amounts previously capitalized into inventory and expensed		19			17

Total stock-based compensation		1,005			1,111
Tax effect on stock-based compensation		—			—

Total stock-based compensation expense	$	1,005		$	1,111

Impact on net loss per share — basic and diluted	$	(0.11	)	$	(0.10	)

The effect of recording stock-based compensation for the nine months ended September 30, 2008 and 2007 was as follows (in thousands, except per share data):


	Nine Months Ended September 30,
	2008			2007
Stock-based compensation expense by type of award:
Employee stock options	$	2,657		$	2,825
Employee stock purchase plan		426			304
Amounts capitalized into inventory during the nine month period		(47	)		(45	)
Amounts previously capitalized into inventory and expensed		54			17

Total stock-based compensation		3,090			3,101
Tax effect on stock-based compensation		—			—

Total stock-based compensation expense	$	3,090		$	3,101

Impact on net loss per share — basic and diluted	$	(0.34	)	$	(0.27	)

During the three months ended September 30, 2008 and 2007, the Company granted options to purchase 27,200 and 15,100 shares of common stock, respectively, with an estimated total grant-date fair value of $87,000 and $74,000 respectively. Of these amounts, the Company estimated that the stock-based compensation expense of the awards not expected to vest was $25,000 and $21,000, respectively.

During the nine months ended September 30, 2008, the Company granted options to purchase 987,221 shares of common stock, including 327,921 options granted as part of the Exchange Offer noted above. The 327,921 options granted as part of the Exchange Offer had an estimated total grant-date fair value of $607,000 or $1.85 per option. The remaining 659,300 options had an estimated total grant-date fair value of $2.2 million or $3.28 per option. The total estimated grant-date fair value of all 987,221 options granted was $2.8 million. Of this amount, the Company estimated that the stock-based compensation expense of the awards not expected to vest was a total of $790,000.

During the nine months ended September 30, 2007, the Company granted options to purchase 763,350 shares of common stock with an estimated total grant-date fair value of $4.9 million. Of this amount, the Company estimated that the stock-based compensation expense of the awards not expected to vest was $1.4 million.

As of September 30, 2008, the unrecorded stock-based compensation balance related to all stock options was $2.2 million, net of estimated forfeitures, and will be recognized over an estimated weighted-average service period of 1.4 years. As of September 30, 2008, the unrecorded stock-based compensation balance related to the employee stock purchase plan was $407,000, net of estimated forfeitures, and will be recognized over an estimate weighted-average service period of 0.6 years.

Valuation Assumptions

The Company estimates the fair value of stock options using a Black-Scholes option valuation model, consistent with the provisions of SFAS No. 123 (R) and Securities and Exchange Commission Staff Accounting Bulletin No. 107. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option valuation model and the graded-vesting method with the following weighted-average assumptions:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
Risk-free interest rate		2.65%-3.39	%		4.53%-4.60	%		1.93%-3.39	%		4.53%-4.80	%
Expected life of options	3.5 years			3.4 years			3.5 years			3.6 years
Expected dividends		0.0	%		0.0	%		0.0	%		0.0	%
Volatility		70	%		70	%		70	%		70	%

The fair value of purchase rights under the employee stock purchase plan is determined using the Black-Scholes option valuation model with the following weighted-average assumptions:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
Risk-free interest rate		2.05% - 4.74	%		4.67% - 5.07	%		2.05% - 4.74	%		4.67% - 5.07	%
Expected life of options	1.2 years			1.1 years			1.2 years			1.2 years
Expected dividends		0.0	%		0.0	%		0.0	%		0.0	%
Volatility		51	%		51	%		51	%		51	%

The dividend yield of zero is based on the fact that the Company has never paid cash dividends and has no present intention to pay cash dividends. Expected volatility is based on the combination of historical volatility of the Company’s common stock and the expected future volatility over the period commensurate with the expected life of the options and other factors. The risk-free interest rates are taken from the Daily Federal Yield Curve Rates as of the grant dates as published by the Federal Reserve and represent the yields on actively traded Treasury securities for terms equal to the expected term of the options. The expected term calculation is based on the Company’s observed historical option exercise behavior and post-vesting cancellations of options by employees.

During the three months ended September 30, 2008, zero options were exercised. The total intrinsic value of options exercised during the three months ended September 30, 2008 and 2007 was zero and $23,000, respectively. The total intrinsic value of options exercised during the nine months ended September 30, 2008 and 2007 was $6,000 and $146,000, respectively.

Equity Incentive Program

The Company’s equity incentive program is a broad-based, long-term retention program designed to align stockholder and employee interests. Under the Company’s equity incentive program, stock options generally have a vesting period of four years, are exercisable for a period not to exceed ten years from the date of issuance and are generally granted at prices not less than the fair market value of the Company’s common stock at the grant date.

The following table summarizes activity under the equity incentive plans for the indicated periods:


						Weighted-
				Weighted-		Average		Aggregate
				Average		Remaining		Intrinsic
	Number of			Exercise		Contractual		Value
	Shares			Price		Term (Years)		(In thousands)
Outstanding at December 31, 2007		2,465,436			13.19
Options granted		987,221			6.57
Options exercised		(1,075	)		1.92
Options cancelled		(473,214	)		23.85

Outstanding at September 30, 2008		2,978,368		$	9.30		7.88	$	582

Options vested and exercisable and expected to be exercisable at September 30, 2008		2,673,818		$	9.40		7.76	$	582
Options vested and exercisable at September 30, 2008		1,423,306		$	9.79		6.87	$	582

At September 30, 2008, the Company had 1,915,350 options available for grant under its equity incentive plans.

The options outstanding and options vested and exercisable at September 30, 2008 were in the following exercise price ranges:


							Options Vested and Exercisable
Options Outstanding at September 30, 2008							At September 30, 2008
					Weighted-Average
			Weighted-Average		Remaining				Weighted-Average
Range of Exercise Price	Shares		Exercise Price		Contractual Life		Shares		Exercise Price
$0.76 - $6.37		255,207	$	3.29		6.12		188,722	$	2.22
$6.59 - $6.59		896,171	$	6.59		9.37		112,240	$	6.59
$6.60 - $9.75		199,160	$	9.07		7.47		119,178	$	9.09
$9.77 - $9.77		328,822	$	9.77		7.36		203,600	$	9.77
$9.90 - $10.22		441,328	$	10.11		6.59		343,090	$	10.17
$10.23 - $12.90		227,155	$	11.97		7.17		157,419	$	11.94
$13.23 - $13.23		512,750	$	13.23		8.38		193,144	$	13.23
$15.14 - $19.30		113,622	$	16.65		6.59		101,760	$	16.61
$20.32 - $20.32		124	$	20.32		1.49		124	$	20.32
$21.47 - $21.47		4,029	$	21.47		6.36		4,029	$	21.47

		2,978,368	$	9.30		7.88		1,423,306	$	9.79

Employee Stock Purchase Plan

In October 2000, the Company established the Endwave Corporation Employee Stock Purchase Plan. All employees who work a minimum of 20 hours per week and are customarily employed by the Company (or an affiliate thereof) for at least five months per calendar year are eligible to participate. Under this plan, employees may purchase shares of common stock through payroll deductions of up to 15% of their earnings with a limit of 3,000 shares per offering period under the plan. The price paid for the Company’s common stock purchased under the plan is equal to 85% of the lower of the fair market value of the Company’s common stock on the date of commencement of participation by an employee in an offering under the plan or the date of purchase. During the nine months ended September 30, 2008, there were 80,213 shares issued under the purchase plan at a weighted average price of $5.41 per share. During the nine months ended September 30, 2007, there were 42,345 shares issued under the purchase plan at a weighted average price of $8.70 per share. At September 30, 2008, there were 349,127 shares available for purchase under the purchase plan. There were no shares issued under the Plan during the three months ended September 30, 2008 and 2007.

9. Net Loss Per Share

Basic net loss per share is computed by dividing net loss by the weighted-average number of common shares outstanding for the period. Diluted net loss per share is computed by dividing the net loss for the period by the weighted-average number of shares of common stock and potential common stock equivalents outstanding during the period, if dilutive. Potential common stock equivalents include convertible preferred stock, warrants to purchase convertible preferred stock, options to purchase common stock, and shares to be purchased in connection with the Company’s employee stock purchase plan.

As of September 30, 2008, 300,000 preferred shares were outstanding, which are convertible into 3,000,000 shares of common stock. Additionally, as of September 30, 2008, the Company had an outstanding warrant that granted the holder the right to purchase 90,000 shares of preferred stock, which are convertible into 900,000 shares of common stock.

As the Company incurred net losses for all periods presented, shares associated with common stock issuable upon the conversion of the preferred shares or the exercise of the outstanding warrant were not included in the calculation of diluted net loss per share, as the effect would be anti-dilutive. Also, potential dilutive common shares of 2,978,368 as of September 30, 2008 and 2,452,413 as of September 30, 2007 from the assumed exercise of stock options were not included in the net loss per share calculations as their inclusion would have been anti-dilutive. As a result, diluted net loss per share is the same as basic net loss per share for all periods presented.

During the first quarter of 2008, the Company retired 39,150 shares of common stock, reducing the number of outstanding shares of common stock. This did not have a significant impact on the weighted-average number of common shares calculated for use in the net loss per share calculations.

10. Comprehensive Income (Loss)

Comprehensive income (loss) generally represents all changes in stockholders’ equity except those resulting from investments or contributions by stockholders. The Company’s unrealized gains and losses on its available-for-sale securities and gains and losses resulting from foreign currency translation adjustments represent the only components of comprehensive loss excluded from the reported net loss.

The components of comprehensive income (loss) were as follows (in thousands):


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2008			2007			2008			2007
Net loss	$	(999	)	$	(1,655	)	$	(3,695	)	$	(4,342	)
Foreign currency translation adjustments		—			(10	)		12			(10	)
Change in unrealized gain (loss) on investments		(10	)		39			(15	)		24

Total comprehensive loss	$	(1,009	)	$	(1,626	)	$	(3,698	)	$	(4,328	)

11. Segment Disclosures

The Company operates in a single business segment. Although the Company sells to customers in various geographic regions throughout the world, the end customers may be located elsewhere. The Company’s total revenues by billing location for the periods ended September 30 were as follows (in thousands):


	Three Months Ended September 30,
	2008				2007
United States	$	4,487	26.4	%	$	2,492	18.1	%
Finland		9,434	55.6	%		8,560	62.1	%
Italy		22	0.1	%		497	3.6	%
Norway		18	0.1	%		543	3.9	%
Slovakia		843	5.0	%		401	2.9	%
Singapore		1,560	9.2	%		300	2.2	%
Rest of the world		615	3.6	%		1,001	7.2	%

Total	$	16,979	100.0	%	$	13,794	100.0	%


	Nine Months Ended September 30,
	2008				2007
United States	$	11,713	24.2	%	$	7,338	17.5	%
Finland		27,652	57.1	%		21,083	50.1	%
Italy		844	1.7	%		3,637	8.6	%
Norway		88	0.2	%		3,551	8.4	%
Slovakia		2,499	5.2	%		3,374	8.0	%
Singapore		2,952	6.1	%		340	0.8	%
Rest of the world		2,692	5.5	%		2,761	6.6	%

Total	$	48,440	100	%	$	42,084	100	%

For the three months ended September 30, 2008, Nokia Siemens Networks accounted for 56% of the Company’s total revenues. For the three months ended September 30, 2007, Nokia Siemens Networks accounted for 66% of the Company’s total revenues.

For the nine months ended September 30, 2008, Nokia Siemens Networks accounted for 59% of the Company’s total revenues. For the nine months ended September 30, 2007, Nokia Siemens Networks (including Nokia and Siemens AG revenues for 2007 prior to their merger) and Nera accounted for 59% and 17%, respectively, of the Company’s total revenues.

For the periods presented, no other customer accounted for more than 10% of the Company’s total revenues.

12. Recent Accounting Pronouncements

In February 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position No. FAS 157-2, “Effective Date of FASB Statement No. 157” (“FSP 157-2”) to partially defer SFAS No. 157. FSP 157-2 defers the effective date of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), to fiscal years, and interim periods within those fiscal years, beginning after November 15, 2008. The Company is currently evaluating the impact of FSP 157-2 on its consolidated financial position and results of operations.

In October 2008, the FASB issued FASB Staff Position No. FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active” (“FSP 157-3”). FSP 157-3 clarifies the application of SFAS No. 157 in a market that is not active and it is effective upon the issuance date. The Company is currently evaluating the impact of FSP 157-3 on its consolidated financial position and results of operations.

13. Subsequent Events

On Friday, October 31, 2008, the Company filed a complaint with the Canadian Superior Court in Montreal, Quebec alleging that Advantech the parent company of Allgon Microwave Corporation AB, had breached its contractual obligations with Endwave and owes the Company $994,500 in a note receivable, purchased inventory and accepted purchase orders. The Company cannot predict the outcome of these proceedings.

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

The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements, related notes and “Risk Factors” section included elsewhere in this report on Form 10-Q, as well as the information contained under “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2007. In addition to historical consolidated financial information, this discussion contains forward-looking statements that involve known and unknown risks and uncertainties, including statements regarding our expectations, beliefs, intentions or strategies regarding the future. All forward-looking statements included in this report are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Our actual results could differ materially from those discussed in the forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements. In the past, our operating results have fluctuated and are likely to continue to fluctuate in the future.

The terms “we,” “us,” “our” and words of similar import below refer to Endwave Corporation and its wholly-owned subsidiary, Endwave Defense Systems Incorporated.

Overview

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

Over the past several months, with the onset of the global credit crisis, credit has become severely restricted. We believe this restriction in credit could materially impact our customers and vendors, and ultimately us.

The installation and enhancement of telecommunication networks integrating our products, often rely on the availability of credit. With the current restriction in credit markets, capital may not be available for the build-out of these networks. Without appropriate capital, our customers may have difficulty funding their on-going operations and may reduce their orders for our products. This could significantly impact our operations and financial results through a reduction in our revenues, an increase in our bad debt expense, and increased write-offs of excess inventory. Additionally, our vendors may rely on credit markets to finance their operations. With the current restriction in credit markets, capital may not be available to our vendors or may only be available at unfavorable terms. Without appropriate capital, our vendors may have difficulty funding their on-going operations and may not be able to fulfill orders for their products. This could significantly impact our operations and financial results.

Results of Operations

Three and nine months ended September 30, 2008 and 2007

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


	Three months ended						Nine months ended
	September 30,						September 30,
	2008			2007			2008			2007
Total revenues		100.0	%		100.0	%		100.0	%		100.0	%

Cost of product revenues		69.5			72.1			69.2			73.1
Cost of product revenues, amortization of intangible assets		0.9			1.1			0.9			0.9
Research and development		17.3			20.2			18.0			18.8
Selling, general and administrative		18.8			23.4			20.5			23.1
Amortization of intangible assets		1.1			1.3			1.1			0.8

Total costs and expenses		107.6			118.1			109.7			116.8

Loss from operations		(7.6	)		(18.1	)		(9.7	)		(16.8	)
Interest and other income, net		1.7			6.1			2.2			6.4

Loss before provision for income taxes		(5.9	)		(12.0	)		(7.6	)		(10.3	)
Provision for income taxes		—			—			—			—

Net loss		(5.9	)%		(12.0	)%		(7.6	)%		(10.3	)%

Total revenues


	Three months ended September 30,							Nine months ended September 30,
	2008		2007		% Change			2008		2007		% Change
	(In thousands)							(In thousands)
Total revenues	$	16,979	$	13,794		23.1	%	$	48,440	$	42,084		15.1	%
Product revenues	$	16,937	$	13,608		24.5	%	$	47,810	$	41,339		15.7	%
Development fees	$	42	$	186		(77.4	%)	$	630	$	745		(15.4	%)

Total revenues consist of product revenues and development fees. Product revenues are attributable to sales of our RF products. Development fees are attributable to the development of product prototypes and custom products pursuant to development agreements that provide for payment of a portion of our research and development or other expenses. We expect to enter into more development contracts in the future as we seek to further penetrate the defense electronics market, where development contracts are customary, but we do not expect development fees to represent a significant percentage of our total revenues for the foreseeable future.

During the three months ended September 30, 2008, total revenues increased by 23% compared to the same period in 2007. This increase was primarily the result of an increase in revenues from our non-telecommunication customers. We experienced a $2.9 million increase in revenues from our non-telecommunication customers and an increase of $283,000 in revenues from our telecommunication customers.

During the nine months ended September 30, 2008, total revenues increased by 15% compared to the same period in 2007. This increase was the result of an increase in revenues from our non-telecommunication customers. We experienced a $6.7 million increase in revenues from our non-telecommunication customers which was partially offset by a $294,000 decrease in revenues from our telecommunication customers.

Cost of product revenues


	Three months ended September 30,									Nine months ended September 30,
	2008			2007			% Change			2008			2007			% Change
	(In thousands)									(In thousands)
Cost of product revenues	$	11,798		$	9,940			18.7	%	$	33,529		$	30,768			9.0	%
Percentage of total revenues		69.5	%		72.1	%					69.2	%		73.1	%

Cost of product revenues consists primarily of: costs of direct materials and labor utilized to assemble and test our products; equipment depreciation; costs associated with procurement, production control, quality assurance and manufacturing engineering; costs associated with maintaining our manufacturing facilities; fees paid to our offshore manufacturing vendor; reserves for potential excess or obsolete material; costs related to stock-based compensation; and accrued costs associated with potential warranty returns offset by the benefit of usage of materials that were previously written off.

During the third quarter of 2008, the cost of product revenues as a percentage of revenues decreased compared to the same period in 2007. This decrease was primarily attributable to the increased absorption of our overhead costs resulting from increased production and to a change in product mix favoring certain higher margin products. The cost of product revenues in both periods was favorably impacted by the utilization of inventory that was previously written off, amounting to $49,000 during the third quarter 2008 and $62,000 during the third quarter 2007.

During the first nine months of 2008, the cost of product revenues as a percentage of revenues decreased compared to the same period in 2007. This decrease was primarily attributable to the increased absorption of our overhead costs resulting from increased production and to a change in product mix favoring certain higher margin products. Additionally, the cost of product revenue during the first nine months of 2007 was negatively impacted by the write down of certain raw material inventory and increased inventory reserves associated with the end of life of one of our customer programs. The cost of product revenues in both periods was favorably impacted by the utilization of inventory that was previously written off, amounting to $157,000 during the first nine months of 2008 and $477,000 during the first nine months of 2007.

We continue to focus on reducing the cost of product revenues as a percentage of total revenues through the introduction of new designs and technology and further improvements to our manufacturing processes. In addition, our product costs are impacted by the mix and volume of products sold and will continue to fluctuate as a result.

Research and development expenses


	Three months ended September 30,									Nine months ended September 30,
	2008			2007			% Change			2008			2007			% Change
	(In thousands)									(In thousands)
Research and development expenses	$	2,943		$	2,792			5.4	%	$	8,715		$	7,906			10.2	%
Percentage of total revenues		17.3	%		20.2	%					18.0	%		18.8	%

Research and development expenses consist primarily of salaries and related expenses for research and development personnel, outside professional services, prototype materials, supplies and labor, depreciation for related equipment, allocated facilities costs and expenses related to stock-based compensation.

During the third quarter of 2008, research and development expenses increased in absolute dollars compared to the same period in 2007. The increase in research and development costs was primarily attributable to an increase of $126,000 in personnel-related expenses.

During the first nine months of 2008, research and development expenses increased in absolute dollars compared to the same period in 2007. The increase in research and development expenses in absolute dollars was primarily attributable to an increase of $855,000 in personnel-related expenses and an increase of $82,000 for stock based compensation which were partially offset by a decrease of $212,000 in project-related expenses.

During the remainder of 2008, we expect research and development expenses to be flat relative to the third quarter of 2008 in absolute dollar terms.

Selling, general and administrative expenses


	Three months ended September 30,									Nine months ended September 30,
	2008			2007			% Change			2008			2007			% Change
	(In thousands)									(In thousands)
Selling, general and administrative expenses	$	3,200		$	3,230			(0.9	%)	$	9,927		$	9,709			2.2	%
Percentage of total revenues		18.8	%		23.4	%					20.5	%		23.1	%

Selling, general and administrative expenses consist primarily of salaries and related expenses for executive, sales, marketing, finance, accounting, legal, information technology and human resources personnel, professional fees, facilities costs, expenses related to stock-based compensation and promotional activities.

During the third quarter of 2008, selling, general and administrative expenses decreased as percentage of revenues due to our increase in revenues compared to the same period in 2007. During the third quarter of 2008, selling, general and administrative expense remained consistent in absolute dollars compared to the same period in 2007.

During the first nine months of 2008, selling, general and administrative expenses increased in absolute dollars compared to the same period in 2007. The increase in absolute dollars was primarily attributable to an increase of $643,000 in personnel-related expenses which was partially offset by a decrease of $235,000 in professional services and a decrease of $152,000 for stock based compensation.

During the remainder of 2008, we anticipate selling, general and administrative expenses will be flat relative to the third quarter of 2008 in absolute dollar terms.

Amortization of intangible assets


	Three months ended September 30,							Nine months ended September 30,
	2008		2007		% Change			2008		2007		% Change
	(In thousands)							(In thousands)
Cost of product revenues, amortization of intangible assets	$	149	$	149		0.0	%	$	447	$	399		12.0	%
Amortization of intangible assets	$	179	$	180		(0.6	%)	$	537	$	352		52.6	%

As part of our acquisition of ALC Microwave, Inc., or ALC, in April 2007, we acquired $2.9 million of identifiable intangible assets, including $900,000 for customer relationships, $880,000 for developed technology, $560,000 for customer backlog, $370,000 for the non-compete agreement and $230,000 for the tradename. These assets are subject to amortization and have approximate estimated useful lives as follows: customer relationships — six years, developed technology — six years, customer backlog — two years, non-compete agreement — four years, and tradename — six years.

As part of our acquisition of JCA Technology, Inc., or JCA, in July 2004, we acquired $4.2 million of identifiable intangible assets, including $2.3 million for developed technology, $1.1 million for the tradename, $780,000 for customer relationships and $140,000 for customer backlog. These assets are subject to amortization and have approximate estimated useful lives as follows: developed technology — five years, customer backlog — six months and customer relationships — five years. The tradename intangible asset is not subject to amortization and will be evaluated for impairment at least annually or more frequently if events and changes in circumstances suggest that the carrying amount may not be recoverable.

The amortization associated with developed technology is a charge to cost of product revenues. The amortization associated with developed technology was $149,000 and $149,000 for three months ended September 30, 2008 and 2007, respectively.

During the first nine months of 2008, the amortization associated with developed technology was $447,000 compared to $399,000 during the first nine months of 2007.

The amortization associated with the customer backlog, customer relationships, non-compete and tradename is a charge to operating expenses. During the third quarter of 2008, the $179,000 of amortization was comprised of the following: $77,000 for customer relationships, $70,000 for customer backlog, $23,000 for the non-compete agreement and $9,000 for the tradename. During the third quarter of 2007, the $180,000 of amortization was comprised of the following: $77,000 for customer relationships, $70,000 for customer backlog, $23,000 for the non-compete agreement and $10,000 for the tradename.

During the first nine months of 2008, total amortization of $537,000 was comprised of the following: $230,000 for customer relationships, $210,000 for customer backlog, $70,000 for the non-compete agreement and $27,000 for the tradename. During the first nine months of 2007, total amortization of $352,000 was comprised of the following: $180,000 for customer relationships, $117,000 for customer backlog, $38,000 for the non-compete agreement and $17,000 for the tradename. This increase was attributable to the amortization related to the ALC intangibles.

Interest and other income, net


	Three months ended September 30,							Nine months ended September 30,
	2008		2007		% Change			2008		2007		% Change
	(In thousands)							(In thousands)
Interest and other income, net	$	291	$	842		(65.4	%)	$	1,042	$	2,708		(61.5	%)

Interest and other income, net consists primarily of interest income earned on our cash, cash equivalents and investments, the amortization of the deferred gain from the sale of our Diamond Springs, California location and gains and losses related to foreign currency transactions.

The decrease in interest and other income, net during both the three and nine months ended September 30, 2008 was primarily the result of decreased interest earned on our investments. We had a lower cash and investment balance due to our stock repurchase in the fourth quarter of 2007 and our acquisition of ALC during the second quarter of 2007. Additionally, interest rates have decreased significantly from the prior year, especially on the highest rated investment vehicles, leading to lower interest income. During the third quarter of 2008, we earned $268,000 of interest income, and recognized $38,000 of other income from the amortization of the deferred gain from the sale of our Diamond Springs, California location which were partially offset by banking charges and losses on foreign currency transactions. During the third quarter of 2007, we earned $843,000 of interest income and recognized $38,000 of other income primarily from the amortization of the deferred gain from the sale of our Diamond Springs, California location which were partially offset by banking charges and losses on foreign currency transactions.

During the first nine months of 2008, we earned $974,000 of interest income, recognized a gain of $45,000 from the sales of securities and recognized $115,000 of other income from the amortization of the deferred gain from the sale of our Diamond Springs, California location which were partially offset by banking charges and losses on foreign currency transactions. During the first nine months of 2007, we earned $2.7 million of interest income and recognized $115,000 of other income primarily from the amortization of the deferred gain from the sale of our Diamond Springs, California location which were partially offset by banking charges and losses on foreign currency transactions.

Our functional currency is the U.S. dollar. Transactions in foreign currencies other than the functional currency are remeasured into the functional currency at the time of the transaction. Foreign currency transaction losses consist of the remeasurement losses that arise from exchange rate fluctuations related to our operations in Thailand. For the three and nine months ended September 30, 2008, we recorded a foreign currency loss of $3,000 and $43,000, respectively. For the three months and nine months ended September 30, 2007, we recorded a foreign currency transaction loss of $22,000.

Liquidity and Capital Resources

At September 30, 2008, we had $29.1 million of cash and cash equivalents, $15.0 million in short-term investments, working capital of $60.6 million and no debt outstanding. The following table sets forth selected condensed consolidated statement of cash flows data:


	Nine months ended
	September 30,
	2008			2007
	(in thousands)
Net cash provided by (used in) operating activities	$	(2,129	)	$	3,539
Net cash used in investing activities		(8,209	)		(4,859	)
Net cash provided by financing activities		419			498
Cash, cash equivalents, restricted cash, short- term and long-term investments at end of period	$	44,686		$	65,386

During the first nine months of 2008, operating activities used $2.1 million of cash as compared to providing $3.5 million of cash during the first nine months 2007. During the first nine months of 2008, our net loss, adjusted for depreciation and other non-cash items, contributed $1.2 million of cash as compared to $241,000 in first nine months of 2007. During the first nine months of 2008, the offsetting use of $3.3 million of cash was primarily due to a $3.2 million increase in inventory, a $915,000 increase in accounts receivable and a $272,000 increase in other assets which were partially offset by a $842,000 increase in accounts payable and a $316,000 increase in accrued compensation, other current and long-term liabilities. During the first nine months of 2007, the remaining $3.3 million of cash provided by operating activities was primarily due to a $5.2 million decrease in inventory which was partially offset by a $660,000 increase in accounts receivable, a $380,000 decrease in accounts payable, a $170,000 increase in other assets, a $111,000 decrease in accrued warranty and a $590,000 decrease in accrued compensation and other current and long-term liabilities.

During the first nine months of 2008, investing activities used $8.2 million of cash as compared to using $4.9 million of cash during the first nine months of 2007. The use of cash during the first nine months of 2008 was due to the purchase of $1.6 million of property and equipment, the $1.0 million final payment for the purchase of ALC, a $600,000 increase to restricted cash and a net $5.0 million increase in investments. The use of cash during the first nine months of 2007 was due to $5.8 million used for the purchase of ALC and $748,000 used for the purchase of property and equipment partially offset by a net $1.4 million decrease in investments and a $236,000 decrease in restricted cash.

During the first nine months of 2008, financing activities provided $419,000 of cash as compared to providing $498,000 of cash during the first nine months of 2007. During the first nine months of 2008, we received $434,000 of cash from the proceeds of stock issuance which was partially offset by capital lease payments. During the first nine months of 2007, we received $368,000 of cash from the proceeds of stock issuance and $138,000 from the exercise of stock options.

At September 30, 2008, we had a net unrealized loss of $9,000 related to $15.0 million of investments in 18 debt securities. The investments all mature during 2008 and 2009 and we believe that we have the ability to hold these investments until the maturity date. Realized gains were $45,000 for the first nine months of 2008. There were no such gains during the first nine months of 2007. During the first nine months of 2008 and 2007, we recorded a foreign currency transaction loss of $43,000 and $22,000, respectively.

In order to maintain and enhance our competitive position, we must be able to satisfy our customers’ short lead-times and rapidly-changing needs. As a result of these challenges, we may increase our raw materials and finished goods inventory so that we will be better-positioned to meet our customers’ demand. We currently have inventory consigned to a customer location and may increase this inventory in the future. Generally, if the consigned inventory is not withdrawn by our customer within a certain period of time we have the ability to invoice the customer for the consigned inventory. These increases in raw materials and finished goods may increase our working capital needs in the future.

We believe that our existing cash and investment balances will be sufficient to meet our operating and capital requirements for at least the next 12 months. With the exception of operating leases discussed in the notes to the consolidated financial statements included in this report, we have not entered into any off-balance sheet financing arrangements and we have not established or invested in any variable interest entities. We have not guaranteed the debt or obligations of other entities or entered into options on non-financial assets. The following table summarizes our future cash obligations for operating leases and capital leases, excluding interest:


	Payments Due by Period
			Less Than 1						More Than 5
	Total		Year		1-3 Years		3-5 Years		Years
	(In thousands)
Contractual Obligations:
Capital lease obligations, including interest	$	49	$	23	$	26	$	—	$	—
Operating lease obligations		4,413		1,074		1,965		1,266		108

Total	$	4,462	$	1,097	$	1,991	$	1,266	$	108

Recent Accounting Pronouncements

In February 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position No. FAS 157-2, “Effective Date of FASB Statement No. 157” (“FSP 157-2”), to partially defer FASB Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”). FSP 157-2 defers the effective date of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), to fiscal years, and interim periods within those fiscal years, beginning after November 15, 2008. We are currently evaluating the impact of FSP 157-2 on our consolidated financial position and results of operations.

In October 2008, the FASB issued FASB Staff Position No. FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active” (“FSP 157-3”). FSP 157-3 clarifies the application of SFAS No. 157 in a market that is not active and it is effective upon the issuance date. We are currently evaluating the impact of FSP 157-3 on our consolidated financial position and results of operations.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes in our reported market risks since our report on market risks in our Annual Report on Form 10-K for the year ended December 31, 2007 under the heading corresponding to that set forth above. Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. In order to reduce this interest rate risk, we usually invest our cash primarily in investments with short maturities. As of September 30, 2008, our investments in our portfolio were classified as cash equivalents and short-term investments. The cash equivalents and short-term investments consisted primarily of United States government agency notes, United States government money market funds, commercial paper and corporate notes. Since our investments consist of cash equivalents and short-term 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.

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, if the dollar were to strengthen relative to other currencies that could make our products less competitive in foreign markets and thereby lead to a decrease in revenues attributable to international customers. We currently pay a number of expenses related to our Thai personnel and office in Thai Bhat. During the first nine months of 2008, the total payments made in Thai Bhat were $655,000 and we recorded a related foreign currency transaction loss of $43,000.

Item 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures.

Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) were effective as of the end of the period covered by this report.

Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives and our chief executive officer and our chief financial officer have concluded that these controls and procedures are effective at the “reasonable assurance” level. We believe that a control system no matter how well designed and operated cannot provide absolute assurance that the objectives of the control system are met and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

(b) Changes in internal controls over financial reporting.

There were no changes in our internal controls over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

On Friday, October 31, 2008, we filed a complaint with the Canadian Superior Court in Montreal, Quebec alleging that Advantech Advanced Microwave Technologies Inc. (“Advantech”) the parent company of Allgon Microwave Corporation AB, had breached its contractual obligations with Endwave and owes us $994,500 in a note receivable, purchased inventory and accepted purchase orders. We cannot predict the outcome of these proceedings. An adverse decision in these proceedings could harm our consolidated financial position and results of operations. Other than the complaint against Advantech, we are not currently a party to any material litigation.

Item 1A. Risk Factors

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


**Indicates risk factor has been updated since our Annual Report on Form 10-K for the year ended December 31, 2007.

Risks Relating to Our Business

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

We have had a history of losses. We had a net loss of $3.7 million for the first nine months of 2008. We also had net losses of $5.4 million and $1.3 million for the years ended December 31, 2007 and 2006, respectively. There is no guarantee that we will achieve or maintain profitability in the future.

The current turmoil in the global credit markets could adversely impact our operations and financial results.**

Over the past several months, with the onset of the global credit crisis, credit has become severely restricted. This restriction in credit could materially impact our operations and financial results. Our customers, particularly our telecommunication customers, often rely on credit markets to finance the build-out of their networks. With the current restriction in credit markets, capital may not be available to our customers or may only be available at unfavorable terms. Without appropriate capital, our customers may have difficulty funding their on-going operations and may reduce their orders for our products. This could significantly impact our operations and financial results. Additionally, our vendors may rely on credit markets to finance their operations. With the current restriction in credit markets, capital may not be available to our vendors or may only be available at unfavorable terms. Without appropriate capital, our vendors may have difficulty funding their on-going operations and may not be able to fulfill requirements for their products. This could significantly impact our operations and financial results through a reduction in our revenues.

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

We depend, and expect to continue to depend, on a relatively small number of telecom customers for a large portion of our revenues. The loss of any of our major customers, particularly Nokia Siemens Networks, or any material reduction in orders from any such customers, would have a material adverse effect on our business, financial condition and results of operations. Revenues from Nokia Siemens Networks (including Nokia and Siemens AG revenues for 2007 prior to their merger) accounted for 59% and 60% our total revenues in the first nine months of 2008 and in fiscal 2007.

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

We depend, and expect to remain dependent, on the telecommunications industry for most of our revenues. Revenues from all of our telecom OEM customers comprised 69% of our total revenues during the first nine months of 2008 and 79% of our total revenues in 2007.

The telecommunications industry suffered a significant worldwide downturn beginning in 2000. In connection with this downturn, there were worldwide reductions in telecommunication network projects that resulted in the loss of some of our key customers and reduced revenues from our remaining customers. We also were forced to undertake significant cost reduction measures as a result. The telecommunications industry has since begun to grow again, but at a more measured rate than in the 1990s. However, the current global credit crisis may result in another downturn in the telecommunications industry. Our revenues are dependent, in part, on growth of wireless telephony particularly in developing countries, increasing data-intensive cellular traffic, deployment of third-generation, or 3G, networks and the introduction of other high capacity data-only telecommunication networks. If a downturn occurs again, or if the telecommunications industry fails to grow as we anticipate, our revenues may remain flat or decrease. Significantly lower revenues would likely force us to make provisions for excess inventory and abandoned or obsolete equipment and reduce our operating expenses. To reduce our operating expenses, we could be required to reduce the size of our workforce and consolidate facilities. We cannot guarantee that we would be able to reduce operating expenses to a level commensurate with the lower revenues resulting from such an industry downturn.

The telecommunications industry has undergone significant consolidation in the past few years and we expect that consolidation to continue. The acquisition of one of our major customers in this market, or one of the communications service providers supplied by one of our major customers, could result in delays or cancellations of orders of our products and, accordingly, delays or reductions in our anticipated revenues and reduced profitability or increased net losses. In particular, during April 2007, Nokia and Siemens merged their telecommunication network businesses.

Implementing our acquisition strategy could result in dilution to our stockholders and operating difficulties leading to a decline in revenues and operating profit.**

One of our strategies is to grow through acquisitions. To that end, we have completed six acquisitions since our initial public offering in October 2000. We intend to continue to pursue acquisitions in our markets that we believe will be beneficial to our business. The process of investigating, acquiring and integrating any business into our business and operations is risky and may create unforeseen operating difficulties and expenditures. The areas in which we may face difficulties include:

	•		diversion of our management from the operation of our core business;

	•		assimilating the acquired operations and personnel;

	•		integrating information technology and reporting systems;

	•		retention of key personnel;

	•		retention of acquired customers; and

	•		implementation of controls, procedures and policies in the acquired business.

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

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

Historically, a large majority of our revenues have been attributable to sales of our RF modules to telecom OEMs such as Nokia Siemens Networks. Part of our growth strategy is to design and sell high-frequency RF modules for and to OEMs and systems integrators in new non-telecommunication markets, particularly defense electronics, homeland security and other systems. To date, only a modest percentage of our revenues have been attributable to sales of RF modules to these alternate markets. We are designing and selling products for the emerging homeland security market. The potential size of this market is unclear and we cannot predict how the market will evolve. If increased demand for high-frequency RF modules in non-telecommunication markets does not materialize, or if we fail to secure new design wins in these markets or if we are unable to design readily manufacturable products for these new markets, our growth and revenues could be adversely impacted, thereby decreasing our profitability or increasing our net losses.

Our operating results may be adversely affected by substantial quarterly and annual fluctuations and market downturns.

Our revenues, earnings and other operating results have fluctuated in the past and our revenues, earnings and other operating results may fluctuate in the future. These fluctuations are due to a number of factors, many of which are beyond our control. These factors include, among others, overall growth in our target markets, the ability of our customers to obtain adequate capital, U.S. export law changes, changes in customer order patterns, customer consolidation, availability of components from our suppliers, the gain or loss of a significant customer, changes in our product mix and market acceptance of our products and our customers’ products. These factors are difficult to forecast, and these, as well as other factors, could materially and adversely affect our quarterly or annual operating results.

Because of the shortages of some components and our dependence on single source suppliers and custom components, we may be unable to obtain an adequate supply of components of sufficient quality in a timely fashion, or we may be required to pay higher prices or to purchase components of lesser quality.

Many of our products are customized and must be qualified with our customers. This means that we cannot change components in our products easily without the risks and delays associated with requalification. Accordingly, while a number of the components we use in our products are made by multiple suppliers, we may effectively have single source suppliers for some of these components.

In addition, we currently purchase a number of components, some from single source suppliers, including, but not limited to:

	•		semiconductor devices;

	•		application-specific monolithic microwave integrated circuits;

	•		voltage-controlled oscillators;

	•		voltage regulators;

	•		unusual or low usage components;

	•		surface mount components compliant with the EU’s Restriction of Hazardous Substances, or RoHS, Directive;

	•		high-frequency circuit boards;

	•		custom connectors; and

	•		yttrium iron garnet components.

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. In the past, we suffered from shortages of and quality issues with various components. These shortages and quality issues adversely impacted our product revenues and could reappear in the future. 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 and their components are qualified with our customers on a timely basis, identifying them and entering into arrangements with them may be difficult and time consuming, and they may not meet our quality standards. We may not be able to obtain sufficient quantities of required components on the same or substantially the same terms.

Our cash requirements will be impacted by our need to increase inventories.**

As part of our expansion in the telecommunications market and our increased emphasis on the non-telecommunication markets, we have significantly increased the number of our products during recent fiscal years. The products we manufacture require hundreds or thousands of components obtained from a wide variety of suppliers and we have faced component shortages and quality issues from our suppliers from time to time. In addition, in order to maintain and enhance our competitive position, we must be able to satisfy our customers’ short lead-times and rapidly-changing needs. As a result of these challenges, we have significant raw materials inventory and finished products in our key customers’ consignment stocks so that they will be better-positioned to meet their own customers’ demand. Increased inventory of raw materials and finished goods may consume additional capital in the future.

We are exposed to fluctuations in the market values of our investment portfolio.**

Although we have not experienced any material losses on our cash, cash equivalents and short-term and long-term investments, future declines in their market values could have a material adverse effect on our financial condition and operating results. Although our portfolio has no direct investments in auction rate or sub-prime mortgage securities, our overall investment portfolio is currently and may in the future be concentrated in cash equivalents including money market funds. If any of the issuers of the securities we hold default on their obligations, or their credit ratings are negatively affected by liquidity, credit deterioration or losses, financial results, or other factors, the value of our cash equivalents and short-term and long-term investments could decline and result in a material impairment.

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

We outsource the assembly and testing of most of our telecommunication related products to a Thailand facility of HANA Microelectronics Co., Ltd., or HANA, a contract manufacturer. We plan to continue this arrangement as a key element of our operating strategy. If HANA does not provide us with high quality products and services in a timely manner, terminates its relationship with us, or is unable to produce our products due to financial difficulties or political instability we may be unable to obtain a satisfactory replacement to fulfill customer orders on a timely basis. In the event of an interruption of supply from HANA, sales of our products could be delayed or lost and our reputation could be harmed. Our latest manufacturing agreement with HANA expires in October 2009, but will renew automatically for successive one-year periods unless either party notifies the other of its desire to terminate the agreement at least one year prior to the expiration of the term. In addition, either party may terminate the agreement without cause upon 365 days prior written notice to the other party, and either party may terminate the agreement if the non-terminating party is in material breach and does not cure the breach within 30 days after notice of the breach is given by the terminating party. There can be no guarantee that HANA will not seek to terminate its agreement with us.

We rely on the semiconductor foundry operations of Northrop Grumman Space Technology, Inc. (formerly known as Velocium) and other third-party semiconductor foundries to manufacture the semiconductors contained in our products. The loss of our relationship with any of these foundries, particularly Northrop Grumman Space Technology, Inc., without adequate notice would adversely impact our ability to fill customer orders and could damage our customer relationships.

We design semiconductor devices. However, we do not own or operate a semiconductor fabrication facility, or foundry, and rely on a limited number of third parties to produce these components. Our largest semiconductor foundry supplier is the semiconductor foundry operations of Northrop Grumman Space Technology, Inc. If Northrop Grumman Space Technology, Inc. is unable to deliver semiconductors to us in a timely fashion, the resulting delay could severely impact our ability to fulfill customer orders and could damage our relationships with our customers. In addition, the loss of our relationship with or our access to any of the semiconductor foundries we currently use, particularly Northrop Grumman Space Technology, Inc., and any resulting delay or reduction in the supply of semiconductor devices to us, would severely impact our ability to fulfill customer orders and could damage our relationships with our customers.

We may not be successful in forming alternative supply arrangements that provide us with a sufficient supply of gallium arsenide devices. Gallium arsenide devices are used in a substantial portion of the products we manufacture. Because there are a limited number of semiconductor foundries that use the particular process technologies we select for our products and that have sufficient capacity to meet our needs, using alternative or additional semiconductor foundries would require an extensive qualification process that could prevent or delay product shipments and revenues. We estimate that it may take up to six months to shift production of a given semiconductor circuit design to a new foundry.

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

We have experienced manufacturing quality problems with our products in the past and may have similar problems in the future. As a result of these problems, we have replaced components in some products, or replaced the product, in accordance with our product warranties. Our product warranties typically last twelve to thirty months. As a result of component, manufacturing or design defects, we may be required to repair or replace a substantial number of products under our product warranties, incurring significant expenses as a result. Further, our customers may discover latent defects in our products that were not apparent when the warranty period expired. These defects may cause us to incur significant repair or replacement expenses beyond the normal warranty period. In addition, any component, manufacturing or design defect could cause us to lose customers or revenues or damage our customer relationships and industry reputation.

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

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

Due to our relatively small number of employees and the limited number of individuals with the skill set needed to work in our industry, 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 ability to conduct our business successfully could be seriously harmed. We do not maintain key person life insurance policies.

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

Over the past year, we have reduced many of our prices of telecom products by 10% to 15% in order to remain competitive and we expect market conditions will cause us to reduce our prices in the future. In order to reduce our per-unit cost of product revenues, we must continue to design and re-design products to require lower cost materials, improve our manufacturing efficiencies and successfully move production to lower-cost, offshore locations. The combined effects of these actions may be insufficient to achieve the cost reductions needed to maintain or increase our gross margins or achieve profitability.

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

Our products are highly technical and the sales cycle can be long. Our sales efforts involve a collaborative and iterative process with our customers to determine their specific requirements either in order to design an appropriate solution or to transfer the product efficiently to our offshore contract manufacturer. Depending on the product and market, the sales cycle can take anywhere from 2 to 24 months, and we incur significant expenses as part of this process without any assurance of resulting revenues. We generate revenues only if our product is selected for incorporation into a customer’s system and that system is accepted in the marketplace. If our product is not selected, or the customer’s development program is discontinued, we generally will not have an opportunity to sell our product to that customer until that customer develops a new generation of its system. There is no guarantee that our product will be selected for that new generation system. In the past, we have had difficulty meeting some of our major customers’ stated volume and cost requirements. The length of our product development and sales cycle makes us particularly vulnerable to the loss of a significant customer or a significant reduction in orders by a customer because we may be unable to quickly replace the lost or reduced sales.

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

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

project and the availability of professionals with the requisite level of expertise is limited. We have, in the past, expended significant resources on research and design efforts on potential customer products, that did not result in additional revenue.

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

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

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

We may not be able to manufacture products and deliver them to our customers at the times and in the volumes they require. Manufacturing delays and interruptions can occur for many reasons, including, but not limited to:

	•		the failure of a supplier to deliver needed components on a timely basis or with acceptable quality;

	•		lack of sufficient capacity;

	•		poor manufacturing yields;

	•		equipment failures;

	•		manufacturing personnel shortages;

	•		labor disputes;

	•		transportation disruptions;

	•		changes in import/export regulations;

	•		infrastructure failures at the facilities of our offshore contract manufacturer;

	•		natural disasters;

	•		acts of terrorism; and

	•		political instability.

Manufacturing our products is complex. The yield, or percentage of products manufactured that conform to required specifications, can decrease for many reasons, including materials containing impurities, equipment not functioning in accordance with requirements or human error. If our yield is lower than we expect, we may not be able to deliver products on time. For example, in the past, we have on occasion experienced poor yields on certain products that have prevented us from delivering products on time and have resulted in lost sales. If we fail to manufacture and deliver products in a timely fashion, our reputation may be harmed, we may jeopardize existing orders and lose potential future sales, and we may be forced to pay penalties to our customers.

As part of our strategy, we may expand our domestic manufacturing capacity beyond the level required for our current sales in order to accommodate anticipated increases in our non-telecommunication business. As a result, our domestic manufacturing facilities may be underutilized from time to time. Conversely, if we do not maintain adequate manufacturing capacity to meet demand for our non-telecommunication products, we may lose opportunities for additional sales. Any failure to have sufficient manufacturing capacity to meet demand could cause us to lose revenues, thereby reducing our profitability, or increasing our net losses, and could harm our reputation with customers.

Although we do have long-term commitments from many of our customers, they are not for fixed quantities of product. As a result, we must estimate customer demand, and errors in our estimates could have negative effects on our cash, inventory levels, revenues and results of operations.**

We have been required historically 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. If we overestimate customer demand, we may allocate resources to manufacturing products that we may not be able to sell when we expect, if at all. As a result, we would have additional usage of cash, excess inventory and overhead expense, which would harm our financial results. On occasion, we have experienced adverse financial results due to excess inventory and excess manufacturing capacity. Conversely, if we underestimate customer demand or if insufficient manufacturing capacity were available, we would lose revenue opportunities, market share and damage our customer relationships. On occasion, we have been unable to adequately respond to unexpected increases in customer purchase orders and were unable to benefit from this increased demand. There is no guarantee that we will be able to adequately respond to unexpected increases in customer purchase orders in the future, in which case we may lose the revenues associated with those additional purchase orders and our customer relationships and reputation may suffer.

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

Our success depends, in part, on our ability to protect our intellectual property. We rely primarily on a combination of patent, copyright, trademark and trade secret laws to protect our proprietary technologies and processes. As of September 30, 2008, we had 43 United States patents issued, many with associated foreign filings and patents. Our issued patents include those relating to basic circuit and device designs, semiconductors, our multilithic microsystems technology and system designs. Our issued United States patents expire between 2008 and 2027. We maintain a vigorous technology development program that routinely generates potentially patentable intellectual property. Our decision as to whether to seek formal patent protection is done on a case by case basis and is based on the economic value of the intellectual property, the anticipated strength of the resulting patent, the cost of pursuing the patent and an assessment of using a patent as a strategy to protect the intellectual property.

To protect our intellectual property, we regularly enter into written confidentiality and assignment of rights to inventions agreements with our employees, and confidentiality and non-disclosure agreements with third parties, and generally control access to and distribution of our documentation and other proprietary information. These measures may not be adequate in all cases to safeguard the proprietary technology underlying our products. It may be possible for a third party to copy or otherwise obtain and use our products or technology without authorization, develop similar technology independently or attempt to 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. Moreover we occasionally agree to incorporate a customer’s or supplier’s intellectual property into our designs, in which case we have obligations with respect to the non-use and non-disclosure of that intellectual property. We also license technology from other companies, including Northrop Grumman Corporation. There are no limitations on our rights to make, use or sell products we may develop in the future using the chip technology licensed to us by Northrop Grumman Corporation. Steps taken by us to prevent misappropriation or infringement of our intellectual property or the intellectual property of our customers may not be successful. Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets or to

determine the validity and scope of proprietary rights of others, including our customers. Litigation of this type could result in substantial costs and diversion of our resources.

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

With regard to our pending patent applications, it is possible that no patents may be issued as a result of these or any future applications or the allowed patent claims may be of reduced value and importance. If they are issued, any patent claims allowed may not be sufficiently broad to protect our technology. Further, any existing or future patents may be challenged, invalidated or circumvented thus reducing or eliminating their commercial value. The failure of any patents to provide protection to our technology might make it easier for our competitors to offer similar products and use similar manufacturing techniques.

Risks Relating to Our Industry

Our revenues in the defense electronics and homeland security markets largely depend upon the funding and implementation decisions of Congress and government agencies. These decisions could change abruptly and without notice, unexpectedly reducing our revenues from these markets.

Our growth is partially dependent on growth in sales to defense electronics and homeland security prime contractors. Changes in levels of government contract funding and in implementation of government contracts may cause prime contractors to reduce funding to subcontractors. These funding and implementation decisions are difficult to predict and may change abruptly. As a result, our quarterly revenues from prime contractors may fluctuate significantly from quarter to quarter.

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

Among merchant suppliers in the wireless telecommunication market who provide integrated transceivers to radio OEMs, we primarily compete with Compel Electronics Inc., Filtronic plc, Microelectronics Technology Inc., and Teledyne Technologies Incorporated. In some cases, system integrators and radio OEMs choose to outsource the full Outdoor Unit, or ODU, to companies such as Remec Broadband Wireless, Inc., instead of just the Tx/Rx portion of the full ODU. As this higher-level of integration product line is not currently offered by Endwave, outsourcing that takes place at the full ODU level can reduce the available market of Tx/Rx based subsystems to Endwave. Additionally, there are telecom OEMs, such as Ericsson and NEC Corporation, that use their own captive resources for the design and manufacture of their high-frequency RF transceiver modules, rather than using merchant suppliers like us. We believe that over one-half of the high-frequency RF transceiver modules manufactured today are being produced by these captive resources. To the extent that telecom OEMs presently, or may in the future, produce their own RF transceiver modules, we lose the opportunity to gain a customer and the potential related sales. Further, if a telecom OEM were to sell its captive operation to a competitor, we would lose the opportunity to acquire those potential sales. In non-telecommunication markets, we compete both with internal captive groups within many of the large defense OEMs, along with other companies such as Aeroflex Incorporated, Akon Inc., AML Communications Inc., Chelton, Ltd., Ciao Wireless, CTT Inc., Herley Industries, Inc., KMIC Technology, Inc., M/A-Com, Miteq, Inc. and Teledyne Technologies Incorporated, and Terabeam HXI.

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

Our failure to comply with any applicable environmental regulations could result in a range of consequences, including fines, suspension of production, excess inventory, sales limitations and criminal and civil liabilities.

Due to environmental concerns, the need for lead-free solutions in electronic components and systems is receiving increasing attention within the electronics industry as companies are moving towards becoming compliant with the Restriction of Hazardous Substances Directive, or RoHS Directive. The RoHS Directive is European Union legislation that restricts the use of a number of substances, including lead, after July 2006. We believe that our products impacted by these regulations are compliant with the RoHS Directive and that materials will continue to be available to meet these new regulations. However, it is possible that unanticipated supply shortages or delays or excess non-compliant inventory may occur as a result of these new regulations. Failure to comply with any applicable environmental regulations could result in a range of consequences, including loss of sales, fines, suspension of production, excess inventory and criminal and civil liabilities.

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. Further, the Federal Communications Commission and foreign regulatory agencies have adopted regulations that impose stringent RF emissions standards on the communications industry. In response to the new environmental regulations on health and safety in Europe and China, we are required to design and build a lead-free product. Changes to these regulations may require that we alter the performance of our products.

Risks Relating to Ownership of Our Stock

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

The price of our common stock has fluctuated widely since our initial public offering in October 2000. In the first nine months of 2008, the lowest daily closing sales price for our common stock was $4.92 and the highest daily closing sales price for our common stock was $7.62. In 2007, the lowest daily closing sales price for our common stock was $5.92 and the highest daily closing sales price for our common stock was $13.59. The market price of our common stock can fluctuate significantly for many reasons, including, but not limited to:

	•		our financial performance or the performance of our competitors;

	•		the purchase or sale of common stock, short-selling or transactions by large stockholders;

	•		technological innovations or other trends or changes in telecommunication and non-telecommunication networks;

	•		successes or failures at significant product evaluations or site demonstrations;

	•		the introduction of new products by us or our competitors;

	•		acquisitions, strategic alliances or joint ventures involving us or our competitors;

	•		decisions by major participants in the communications industry not to purchase products from us or to pursue alternative technologies;

	•		decisions by investors to de-emphasize investment categories, groups or strategies that include our company or industry;

	•		market conditions in the industry, the financial markets and the economy as a whole;

	•		existence of preferred stock with rights differing from those of common stock; and

	•		the low trading volume of our common stock.

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

We have a few shareholders that each own a large percentage of our outstanding capital stock and, as a result of their significant ownership, are able to significantly affect the outcome of matters requiring stockholder approval.**

Oak Technology Partners XI, Limited Partnership, or Oak, owns 300,000 shares of our Series B preferred stock that are convertible into 3,000,000 shares of our common stock and a warrant to purchase 90,000 shares of our Series B preferred stock that upon issuance will be convertible into 900,000 shares of our common stock. Assuming the exercise in full of the warrant issued to Oak and the conversion of Oak’s preferred shares into common stock, as of September 30, 2008, Oak beneficially owned 29.7% of our capital stock. In addition, two other shareholders each beneficially owned more than 10% of our capital stock on September 30, 2008.

Because most matters requiring approval of our stockholders require the approval of the holders of a majority of the shares of our outstanding capital stock present in person or by proxy at the annual meeting, the significant ownership interest of these shareholders allows them to affect significantly the election of our directors and the outcome of corporate actions requiring stockholder approval. 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 their support, even if the transaction is favorable to our stockholders as a whole.

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 our board of directors approved the business combination or the transaction which resulted in the stockholder becoming an interested stockholder, or upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of our voting stock of the corporation, or the business combination is approved by our board of directors and authorized by at least 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. 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. Additionally, we have adopted a Stockholder Rights Plan, providing for the distribution of one preferred share purchase right for each outstanding share of common stock that may lead to the delay or prevention of a change in control that is not approved by our board of directors. We have an Executive Officer Severance and Retention Plan and a Key Employee Severance and Retention Plan that provide for severance payments and the acceleration of vesting of a percentage of certain stock options granted to our executive officers and certain senior, non-executive employees under specified conditions. These plans may make us a less attractive acquisition target or may reduce the amount a potential acquirer may otherwise be willing to pay for our company.

Item 4. Submission of Matters to a Vote of Security Holders

We held our Annual Meeting of Stockholders on July 22, 2008. The results of the voting were as follows:

	1.		To elect one director, John M. McGrath, Jr., to hold office until the 2011 Annual Meeting of Stockholders.

			FOR: 10,226,413 WITHHOLD: 152,345

	2.		To elect one director, Wade Meyercord, to hold office until the 2011 Annual Meeting of Stockholders.

			FOR: 9,976,328 WITHHOLD: 402,430

	3.		To ratify the selection by the Audit Committee of the Board of Directors of Burr, Pilger & Mayer LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2008.

			FOR: 10,368,289 AGAINST: 8,137 ABSTAIN: 2,332

Item 6. Exhibits.


Number		Description
2.1(1)		Stock Purchase Agreement among the Registrant and the stockholders and option holders of ALC Microwave, Inc. dated April 19, 2007.

3.1(2)		Amended and Restated Certificate of Incorporation effective October 20, 2000.

3.2(3)		Certificate of Amendment of Amended and Restated Certificate of Incorporation effective June 28, 2002.

3.3(4)		Amended and Restated Bylaws effective July 22, 2008.

3.4(5)		Certificate of Designation for Series A Junior Participating Preferred Stock.

3.5(6)		Certificate of Designation for Series B Preferred Stock.

3.7(7)		Certificate of Amendment of Amended and Restated Certificate of Incorporation effective July 26, 2007.

4.1(2)		Form of specimen Common Stock Certificate.

4.2(4)		Rights Agreement dated as of December 1, 2005 between the Registrant and Computershare Trust Company, Inc.

4.3(4)		Form of Rights Certificate

4.4(5)		Preferred Stock and Warrant Purchase Agreement by and between Oak Investment Partners XI, Limited Partnership and the Registrant dated April 24, 2006.

4.5(5)		Warrant issued to Oak Investment Partners XI, Limited Partnership.

4.6(8)		Amendment No. 1 to Rights Agreement, dated as of December 21, 2007, between the Registrant and ComputerShare Trust Company, Inc.

10.1(2)		Form of Indemnity Agreement entered into by the Registrant with each of its directors and officers.

10.2(2)*		1992 Stock Option Plan.

10.3(2)*		Form of Incentive Stock Option under 1992 Stock Option Plan.

10.4(2)*		Form of Nonstatutory Stock Option under 1992 Stock Option Plan.

10.5(9)*		2007 Equity Incentive Plan.

10.6(10)*		Form of Stock Option Agreement under 2007 Equity Incentive Plan.

10.7(10)*		Form of Stock Option Agreement for Non-Employee Directors under the 2007 Equity Incentive Plan.

10.8(2)*		2000 Employee Stock Purchase Plan.

10.9(2)*		Form of 2000 Employee Stock Purchase Plan Offering.

10.10(11)*		2000 Non-Employee Directors’ Stock Option Plan, as amended.

10.11(2)*		Form of Nonstatutory Stock Option Agreement under the 2000 Non-Employee Director Plan.

10.12(12)*		Description of Compensation Payable to Non-Employee Directors.

10.13(12)*		2008 Base Salaries for Named Executive Officers.

10.14(12)*		2008 Executive Incentive Compensation Plan.

10.15(17)*		Executive Officer Severance and Retention Plan.

10.16(2)		License Agreement by and between TRW Inc. and TRW Milliwave Inc. dated February 28, 2000.

10.17(13)†		Purchase Agreement between Nokia and the Registrant dated January 1, 2006.

10.18(13)†		Frame Purchase Agreement by and between the Registrant and Siemens Mobile Communications Spa dated January 16, 2006.

10.19(14)†		Lease Agreement by and between Legacy Partners I San Jose, LLC and the Registrant dated May 24, 2006.

10.20(18)†		Amended and Restated Supply Agreement by and between Northrop Grumman Space and Mission Systems Corp. and the Registrant dated May 12, 2008.

10.21(15)†		Services Agreement by and between Hana Microelectronics Co., Ltd. and the Registrant dated October 15, 2006.

10.22(16)		Amended and Restated Settlement Agreement by and between the Registrant and Arthur Steinberg, as receiver for Wood River Capital Management, L.L.C., Wood River Associates, L.L.C., Wood River Partners, L.P. and Wood River Partners Offshore, Ltd., dated December 20, 2007.

10.23(8)		Stock Purchase Agreement, dated December 21, 2007, entered into between the Registrant, Wood River Partners, L.P., Wood River Partners Offshore, Ltd. and, for the limited purpose set forth therein, Arthur J. Steinberg, solely in his capacity as Receiver for Wood River Capital Management, L.L.C., Wood River Associates, L.L.C., Wood River Partners, L.P. and Wood River Partners Offshore, Ltd. and not in his individual capacity.

10.24(18)		Lease Agreement by and between 8812, a California limited partnership, and the Registrant dated May 20, 2008.

31.1		Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


(1)		Previously filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on April 24, 2007 and incorporated herein by reference.

(2)		Previously filed as an exhibit to the Registrant’s Registration Statement on Form S-1 (Registration No. 333-41302) and incorporated herein by reference.

(3)		Previously filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2004 and incorporated herein by reference.

(4)		Previously filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on July 28, 2008 and incorporated herein by reference.

(5)		Previously filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on December 5, 2005 and incorporated herein by reference.

(6)		Previously filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on April 26, 2006 and incorporated herein by reference.

(7)		Previously filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007 and incorporated herein by reference.

(8)		Previously filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on December 21, 2007 and incorporated herein by reference.

(9)		Previously filed as an appendix to the Registrant’s Definitive Proxy Statement on Schedule 14A filed on June 13, 2007 and incorporated herein by reference.

(10)		Previously filed as an exhibit to the Registrant’s Registration Statement on Form S-8 (Registration No.333-144851) and incorporated herein by reference.

(11)		Previously filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005 and incorporated herein by reference.

(12)		Previously filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on February 1, 2008 and incorporated herein by reference.

(13)		Previously filed as an exhibit to the Registrant’s Registration Statement on Form S-3 (Registration No.333-144054) and incorporated herein by reference.

(14)		Previously filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006 and incorporated herein by reference.

(15)		Previously filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006 and incorporated herein by reference.

(16)		Previously filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on December 20, 2007 and incorporated herein by reference.

(17)		Previously filed as an exhibit to the Registrant’s Annual Report on Form 10-K filed for the fiscal year ended December 31, 2007 and incorporated herein by reference.

(18)		Previously filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2008 and incorporated herein by reference.


*		Indicates a management contract or compensatory plan or arrangement.

†		Confidential treatment has been requested for a portion of this exhibit.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, Endwave Corporation has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	ENDWAVE CORPORATION

Date: November 7, 2008

		By:	/s/ Edward A. Keible, Jr.

		Edward A. Keible, Jr.
		President and Chief Executive Officer (Duly Authorized Officer and Principal Executive Officer)

		By:	/s/ Brett W. Wallace

		Brett W. Wallace
		Executive Vice President and Chief Financial Officer(Duly Authorized Officer and Principal Financial and Accounting Officer)

Index to Exhibits


Number		Description
31.1		Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. freshman Good

Endwave Inactive 10-Q2008 Q3 Quarterly report

Content analysis