ENWV Endwave Corp. (MM)

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

(Mark One)

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

For the fiscal year ended December 31, 2007

or

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

For the transition period from              to           

Commission file number: 000-31635

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class		Name of Each Exchange on Which Registered
Common Stock, $0.001 par value per share		The NASDAQ Global Market

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

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  o      No  þ

     Indicate by check mark if the registrant is not required to file pursuant to Section 13 or 15(d) of the Exchange Act.  Yes  o      No  þ

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

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

     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):

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o      No  þ

     The aggregate market value of the common stock held by non-affiliates of the registrant as of June 29, 2007 was approximately $119 million. Shares of voting common stock held by directors and executive officers have been excluded as such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The aggregate market value has been computed based on a price of $11.39, which was the closing sale price on June 29, 2007 as reported by The NASDAQ Global Market.

     The number of shares outstanding of the registrant’s common stock as of February 8, 2008 was 9,135,472. The number of shares outstanding of the registrant’s preferred stock as of such date was 300,000. Such shares are convertible at the holder’s option into 3,000,000 shares of our common stock.

 

 

ENDWAVE CORPORATION
FORM 10-K
Year Ended December 31, 2007
TABLE OF CONTENTS

				Page No.
PART I
Item 1.		Business			3
Item 1A.		Risk Factors			16
Item 1B.		Unresolved Staff Comments			26
Item 2.		Properties			26
Item 3.		Legal Proceedings			26
Item 4.		Submission of Matter to Vote of Security Holders			26
PART II
Item 5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			27
Item 6.		Selected Consolidated Financial Data			28
Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			29
Item 7A.		Quantitative and Qualitative Disclosures About Market Risk			42
Item 8.		Financial Statements and Supplementary Data			43
Item 9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			71
Item 9A.		Controls and Procedures			71
Item 9B.		Other Information			73
PART III
Item 10.		Directors, Executive Officers and Corporate Governance			73
Item 11.		Executive Compensation			78
Item 12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			89
Item 13.		Certain Relationships and Related Transactions and Director Independence			91
Item 14.		Principal Accountant Fees and Services			93
PART IV
Item 15.		Exhibits and Financial Statement Schedules			93
SIGNATURES					98
EXHIBIT 10.15
EXHIBIT 21.1
EXHIBIT 23.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1

FORWARD-LOOKING INFORMATION

     This report contains forward-looking statements within the meaning of Section 17A of the Securities Act of 1933, or the Securities Act, and within the meaning of Section 21E of the Securities Exchange Act of 1934, or the Exchange Act, that are subject to the “safe harbor” created by those sections. These forward-looking statements can generally be identified as such because the statement will include words such as “anticipate,” “believe,” “continue,” “estimate,” “expect,” “intend,” “may,” “opportunity,” “plan,” “potential,” “predict” or “will,” the negative of these words or words of similar import. Similarly, statements that describe our future plans, strategies, intentions, expectations, objectives, goals or prospects are also forward-looking statements. Discussions containing these forward-looking statements may be found, among other places, in the sections of this report entitled “Business,” “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These forward-looking statements are based largely on our expectations and projections about future events and future trends affecting our business, and so are subject to risks and uncertainties that could cause actual results to differ materially from those anticipated in the forward-looking statements. The risks and uncertainties are attributable to, among other things: our ability to achieve and maintain profitability; our customer and market concentration; our ability to penetrate new markets; fluctuations in our operating results from quarter to quarter; our reliance on third-party manufacturers and semiconductor foundries; acquiring businesses and integrating them with our own; component, design or manufacturing defects in our products; and our dependence on key personnel. Because of the risks and uncertainties referred to above and other risks and uncertainties, including the risks described in the section of this report entitled “Risk Factors,” actual results or outcomes could differ materially from those expressed in any forward-looking statements and you should not place undue reliance on any forward-looking statements. New risks emerge from time to time, and it is not possible for us to predict which risks will arise. In addition, we cannot assess the impact of each risk on our business or the extent to which any risk, or combination of risks, may cause actual results to differ materially from those contained in any forward-looking statements. Except as required by law, we undertake no obligation to publicly revise our forward-looking statements to reflect events or circumstances that arise after the date of this report or the date of documents incorporated by reference in this report that include forward-looking statements.

     Our high-frequency RF module designs can accommodate a wide range of component performance and assembly process variations, resulting in ease of manufacture and high test yields. These attributes, coupled with our automated test systems, allow us to use cost-effective, offshore contract manufacturers to assemble and test the majority of our commercial products. Our RF modules are used typically in high-frequency applications and include various types of products such as integrated transceivers, amplifiers, synthesizers, oscillators, up and down converters, frequency multipliers and microwave switch arrays.

     We were originally incorporated in California in 1991 and reincorporated in Delaware in 1995. In March 2000, we merged with TRW Milliwave Inc., a RF subsystem supplier that was a wholly-owned subsidiary of TRW Inc. In connection with the merger, we changed our name from Endgate Corporation to Endwave Corporation. On October 17, 2000, we successfully completed the initial public offering of our common stock.

Industry Background and Markets

High-Frequency RF Technology

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

     Our RF modules are typically designed to operate at frequencies between 1 GHz and 100 GHz, which we refer to in this report as high-frequency RF. Due to their physical attributes, high-frequency RF signals are well-suited for applications in telecommunication networks requiring high data throughput, defense systems demanding advanced radar and communication capabilities and homeland security systems requiring detection, measurement and imaging capabilities not available by conventional means. Within each of these market segments, we address multiple applications as described below.

Telecommunication Networks

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

      Cellular Backhaul.   The communication link between the cellular base station site and a mobile telephone switching office, or MTSO, is referred to as cellular backhaul. This is currently the most common use of microwave radios. In most parts of the world, cellular backhaul is typically accomplished through the use of microwave radios either because of their ease of deployment and low overall cost relative to available wireline options or because adequate wireline facilities are not available. In the United States and Canada, cellular backhaul has been typically accomplished through the use of high-speed telephone lines because low-cost wireline facilities are readily available.

      Carrier Class Trunking.   Communications carriers require high capacity links between major voice and data switching centers, referred to as trunk circuits, to deploy their networks. While fiber optic cables are the most common type of trunk circuit facility, microwave radios are often used for portions of these circuits when the intervening terrain, such as mountains or bodies of water, is difficult to traverse or as redundant backup links for the fiber optic network.

      Private Voice and Data Networks.   When private users, such as companies and universities, deploy stand-alone campus area or metropolitan area voice and data networks, they often encounter situations where it is not possible to access a direct physical path between their facilities due to distance or intervening structures and roads. If third-party wireline facilities are not available or cost-effective, a microwave radio link is often used to provide the network connection. In addition, companies often implement microwave facilities as redundant backup links for their wireline facilities.

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

      Growth of Wireless Telephony in Developing Nations.   Developing nations, such as Brazil, Russia, India and China, have experienced a dramatic increase in wireless cellular telephony over the past few years. We expect that this growth will result in increased demand for microwave backhaul radios because these countries lack well-established wireline infrastructures.

      Increase in Data-Intensive Cellular Traffic.   Data-intensive “2.5G” applications, such as sending email, transmitting digital images from camera-equipped cellular telephones and downloading music and ring tones, are gaining popularity. The increased use of these data-intensive applications is dramatically increasing the volume of backhaul traffic as compared to voice-only services, necessitating additional high-speed backhaul capacity. In locations where microwave radios currently fulfill the backhaul requirements, this increased demand will necessitate equipment upgrades or replacements. Where cellular backhaul is currently provided by wireline solutions, such as in the United States and Canada, we believe these higher capacity requirements can make microwave radio backhaul solutions more cost-effective than wireline solutions because the incremental cost of added wireline capacity will, in some deployments, exceed the amortization cost of wireless solutions. In addition, adequate wireline solutions may not be available in some locations.

      Deployment of Third-Generation Networks.   Telecom OEMs and service providers are deploying cellular systems known as third generation, or “3G,” networks. We believe the deployment of these 3G networks will require a proportionately larger number of microwave radios. These networks support many data-intensive services, such as internet access via cellular phone or personal digital assistant, which require an even greater backhaul capacity than the current 2.5G applications noted above. We believe 3G networks will have a compounding effect on cellular backhaul needs because more base stations and more backhaul capacity per base station must be deployed in order to provide the required bandwidth and still maintain quality of service. As the density of base stations increases, we expect there will be a shift to higher frequency backhaul to support more efficient re-use of the available wireless spectrum.

      Introduction of Other High Capacity Data-Only Telecommunication Networks.   We believe the introduction of fixed wireless access data networks will also increase demand for microwave radios. Various approaches are being considered for the widespread implementation of fixed wireless access networks, including the IEEE 802.16 WiMAX standard, LTE (Long Term Evolution) technology or UMB (Ultra Mobile Broadband) technology. WiMAX is supported by a large industry consortium, which includes market leaders such as Alcatel-Lucent, Cisco Systems, Ericsson, Intel Corporation, Microsoft Corporation, Motorola, Nera ASA, Nokia Siemens Networks, and ZTE Corporation. LTE and UMB are competing technologies respectively supported primarily by mobile operators and Qualcomm, Inc. Regardless of the underlying technology such fixed wireless access networks will, like cellular telephone networks, face the technological and cost issues associated with connecting individual access points to the wireline network infrastructure. We believe this need for backhaul represents an opportunity for microwave radios, particularly because the anticipated high bandwidth requirements of fixed wireless access networks are served more cost-effectively by microwave radios than by wireline alternatives.

Defense Electronics

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

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

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

radar is airborne vision equipment that allows pilots to see through low-lying haze and dust much in the same way night vision goggles permit one to see in the dark.

      Signal Intelligence Systems. Information about an opposing force can be gathered by monitoring their electronic communications. Systems to gather such information utilize a variety of RF and microwave modules to monitor and interpret information over a broad spectrum of potential frequencies that a hostile force might use.

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

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

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

Homeland Security Systems

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

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

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

     We believe that the growth of these new security markets for RF modules may prove significant.

Our Opportunity

     Historically, when telecom OEMs and defense electronics and homeland security systems integrators incorporated high-frequency RF modules into their products, they designed and manufactured them internally. However, faced with the need to generate greater cost efficiencies and technological innovations with fewer resources, we believe these telecom OEMs and systems integrators are increasingly looking to merchant suppliers for these items. We believe there are several key characteristics that telecom OEMs and defense and homeland security systems integrators value in a potential supply partner of high-frequency RF modules:

      Low Cost.   Telecom OEMs and defense and homeland security systems integrators are under increasing pricing pressure from their customers so they expect effective and persistent cost-reduction programs from their merchant suppliers. These cost-reduction programs require merchant suppliers to mount a comprehensive effort at multiple levels, including integration of

multiple functions, efficient manufacturing, effective supply chain management, streamlined life cycle support and use of low-cost sub-contractors.

      Technical Depth.   Telecom OEMs and systems integrators seek merchant suppliers of RF modules that have significant experience in and understanding of the overall system design. This depth and breadth of understanding is crucial to determining appropriate overall system level tradeoffs and in providing advice to the telecom OEM or system integrator, thereby enabling the OEM or system integrator to design and deploy its systems more cost-effectively.

      Flexible Production.   Volatility of demand is common in the market for RF modules, especially in the telecommunication network market. Therefore, these OEMs and systems integrators need merchant suppliers that can accommodate fluctuations in the demand, whether in mix and/or quantity, in the normal course of business and can flexibly scale their manufacturing to match the fluctuating demands of the OEM or systems integrator.

      Innovative Technology.   New technology is the key to providing enhanced performance and continued cost reduction. These OEMs and systems integrators value this capability and therefore prefer partners that create new technologies offering additional functionality, higher reliability, lower cost and better performance.

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

Our Strengths

     We believe we possess several key strengths that enable us to provide our customers with superior products and services. These strengths include:

      Cost-Effective Volume Manufacturing.   Our high unit volumes enable us to achieve lower manufacturing costs than many of our competitors as we increase our materials purchasing power, amortize our overhead expenses over a larger number of units and gain labor efficiencies. We believe the combination of our proprietary semiconductor components and technology, our ability to design highly-manufacturable products and our automated testing capability differentiate us from the labor-intensive methods often used in our industry. We contract with third-party, offshore manufacturers for added cost savings.

      Depth and Breadth of Technical Expertise.   We have extensive experience in the design and manufacture of high-frequency RF modules for a broad range of products. Our body of intellectual property and a highly-skilled technical team are critical when dealing with the higher frequencies required by emerging applications. Our technical team has broad expertise in device physics, semiconductor device and circuit design, system engineering, test engineering and other critical disciplines. In addition, our large library of proprietary circuit designs enables us to introduce new products rapidly and cost-effectively. We believe the depth and breadth of our technical expertise differentiates us from many of our competitors, enabling us to optimize our products for critical performance factors and to assist our customers in developing an optimal overall design.

      Scalable and Flexible Manufacturing.   Our use of third-party contract manufacturing and innovative supply chain management techniques enables us to adjust rapidly, efficiently and flexibly to our customers’ varying quantity and product mix requirements, which are often created by unexpected needs and seasonal variations in demand.

      Next-Generation Technology.   We have invested in the development of next-generation circuit and packaging technologies that allow us to provide our customers with high-performance and low-cost solutions. Many of our competitors do not have the capability to produce proprietary integrated circuit and device designs and therefore are limited to using standard, commercially-available semiconductor devices. We are able to develop new semiconductor devices on a custom basis to optimize the overall product or subsystem design. We have augmented our circuit design capabilities with advancements in circuit packaging that

allow further enhancement of the design. This gives us greater flexibility to optimize our product designs for our customers and their specific applications.

Our Strategy

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

Revenue Growth

      Increase our Telecommunication Network Business.   We have long-standing customer relationships with many major telecom OEMs. We intend to use our customer base and track record, in conjunction with our technical capabilities and low-cost manufacturing expertise, to increase our revenues. For a customer’s new designs, we intend to capture their business by designing and manufacturing new transceiver modules. However, if a customer is already producing a transceiver in-house, we intend to capture this additional business by taking over the production of their transceiver module designs and moving the production to our offshore contract manufacturing facilities where we can lower production costs by using our innovative supply chain management techniques. When economically justified, we also plan to redesign our customers’ existing transceivers to further lower costs. While some of these existing customer designs may have lower profit margins, we believe that capturing this added volume helps to absorb fixed manufacturing costs and will improve our position in the future. In this market, we also intend to generate additional revenues by expanding the types of products and the range of frequencies we offer.

      Expand into New Growth Markets.   While our core market historically has been the telecommunication network market, we intend to leverage our high-frequency RF module expertise to expand in new growth markets, such as defense electronics and homeland security systems, to increase revenues and diversify our customer base. In 2007, revenues from defense and homeland security systems integrators accounted for 21% of our total revenues. We believe we are well positioned to take advantage of these markets as high-frequency RF modules become a more integral component of defense electronics and homeland security systems.

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

Offer the Highest Level of Manufacturing Efficiency and Flexibility

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

      Outsource to Low-Cost, Contract Manufacturers.   In 2002, we began moving most of our high-volume commercial manufacturing to Hana Microelectronics Co., Ltd., or HANA, in Thailand, a low-cost, offshore contract manufacturer. We consign raw materials to HANA, as well as provide the specialized assembly and test equipment needed to manufacture our products. HANA provides the direct labor to assemble and test our products. Our readily manufacturable designs, which can tolerate a wide range of component performance and assembly process variations, and our automated production test systems enabled this successful transition to offshore contract manufacturing. The portion of our product revenues attributable to products manufactured offshore increased from approximately 8% in 2002 to approximately 82% in 2007. This transition has significantly improved our product margins and provides us greater flexibility to adjust costs in response to changing customer demand. We intend to continue to use contract manufacturers to enable us to respond with greater flexibility to changing customer demands and the seasonality of our business.

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

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

Leverage Technical Breadth and Strength

      Broaden our Product Portfolio.   We are enlarging the scope of our product offerings by expanding the frequency ranges in which our products are designed to operate and by extending the type of applications we support. This allows us to address a broader range of applications in our customers’ systems and we believe this further expands our market opportunities.

      Develop New Circuit and Packaging Technologies.   A key component of our value proposition is providing our customers with powerful and cost-effective technologies that offer them a major technical and economic advantage. We have developed and maintain a strong base of high-frequency RF technology supported by an experienced design team, a large library of circuit designs, extensive proprietary know-how and a large portfolio of patents. We currently have 42 issued United States patents and several associated foreign patents. We intend to continue to invest in research and development, maintain a team of talented engineers and scientists, and build on our manufacturing technologies.

Products and Technology

Products

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

      Single-Function Modules.   Single-function modules are simple, standardized products that perform a single function, such as amplification, frequency multiplication or signal mixing. We employ these modules in the design of prototype or low production volume systems that do not warrant the development of a custom, fully-integrated module.

      Multi-Function Modules.   Multi-function modules are customized, complex products that combine a number of individual functional elements into a single package. These modules are typically more cost-effective for higher-volume applications and provide greater reliability and performance than systems assembled by the customer using single-function RF modules.

      Integrated Subsystem Modules.   Integrated subsystem modules combine several functional RF blocks, such as amplifiers, switches or oscillators, with various types of control and support circuitry, such as a microprocessor or a power supply, to form a stand-alone subsystem. These complex subsystem modules, such as those we supply to Nokia Siemens Networks, combine RF capability with sophisticated analog and digital system interface capabilities.

Circuit Technologies

     In high-frequency RF modules, the choice and implementation of the basic circuit technology determine the performance, cost and manufacturability of the product. Currently, most of our products employ one of two alternate technologies, either hybrid microwave integrated circuit, or HMIC, technology or monolithic microwave integrated circuit, or MMIC, technology. In each case, we apply our

circuit design capabilities to develop custom circuits that are optimized for cost, performance and manufacturability. All of our products manufactured at HANA employ MMIC technology. We have advanced the design of our HMIC and MMIC circuits significantly and have benefited from those advancements in reduced costs and higher production yields. Multilithic Microsystem technology, or MLMS, is a proprietary next generation circuit technology, that we believe will significantly reduce cost and allow improved performance. MLMS technology is in the early stages of commercial production.

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

Circuit Packaging Technologies

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

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

Sales and Marketing

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

     Our products are highly technical and the sales cycle can be long. Our sales efforts involve a collaborative and iterative process with our customers to determine their specific requirements either in order to design an appropriate solution or transfer efficiently the product to our offshore contract manufacturer. Depending on the product and market, the sales cycle can typically take anywhere from 2 to 24 months.

Customers

     We sell our products primarily to telecom OEMs and defense and homeland security systems integrators. Revenues from all of our telecom OEM customers comprised approximately 79% of our total revenues in 2007. While we intend to increase our revenues in the defense electronics and homeland security markets, we expect that the majority of our revenues will be attributable to a limited number of telecom OEMs for the foreseeable future. The telecommunications industry has undergone significant consolidation in the past few years and we expect that consolidation trend 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. On April 1, 2007, two of our key customers, Nokia and Siemens AG, merged to become Nokia Siemens Networks. In 2007, revenues from Nokia Siemens Networks (including Nokia and Siemens AG revenues for 2007 prior to their merger) and Nera accounted for 60% and 14% of our total revenues, respectively.

customer and related sales. Conversely, if they should decide to outsource their requirements, this may significantly expand the market available to us.

     In the defense electronics and homeland security markets, we primarily compete with Aeroflex Incorporated, AML Communications Inc., Chelton, Ltd., Ciao Wireless, CTT Inc., Herley Industries, Inc., KMIC Technology, Inc., M/A-Com Inc., Miteq Inc. and Teledyne Technologies Incorporated.

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

	•		Product pricing and the ability to offer low-cost solutions;
	•		Technical leadership and product performance;
	•		Strong customer relationships;
	•		Product breadth;
	•		Time-to-market in the design and manufacturing of products; and
	•		Logistical flexibility, manufacturing capability and scalable capacity.

Research and Development

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

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

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

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

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

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

     Our increased investment in research and development and related engineering projects has resulted in expenses of $6.5 million, $8.9 million and $10.7 million in 2005, 2006 and 2007, respectively. The increase in 2007 spending as compared to 2006 was primarily attributable to an increase of $717,000 of personnel-related expenses, an increase of $437,000 related to the acquisition of the ALC engineering group, an increase of $343,000 in project-related expenses and an increase of $305,000 for SFAS No. 123 (R) stock-based compensation expense. The increase in 2006 spending as compared to 2005 was due to a combination of a $1.1 million increase in project-related expenses and an increase of $1.1 million in personnel-related expenses and stock-based compensation. Our

investments in technology support both our telecommunication network and defense electronics and homeland security related businesses.

Patents and Intellectual Property Rights

     Our success depends, in part, on our ability to protect our intellectual property. We rely primarily on a combination of patent, copyright, trademark and trade secret laws to protect our proprietary technologies and processes. As of December 31, 2007, we had 42 United States patents issued, many with associated foreign filings and patents. Our issued patents include those relating to basic circuit and device designs, semiconductors, MLMS technology and system designs. Our issued United States patents expire between 2008 and 2027. We do not anticipate the impact of the expiration of patents over the near term to have a significant impact on our research and development or operations. We also license technology from other companies, including Northrop Grumman Corporation. There are no limitations on our rights to make, use or sell products we may develop in the future using the technology licensed to us by Northrop Grumman Corporation.

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

     To protect our intellectual property, we enter into confidentiality and assignment of rights to inventions agreements with our employees, and confidentiality and non-disclosure agreements with our strategic partners, and generally control access to and distribution of our documentation and other proprietary information. These measures may not be adequate in all cases to safeguard the proprietary technology underlying our products. It may be possible for a third party to copy or otherwise obtain and use our products or technology without authorization, develop similar technology independently or 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.

Operations

     We currently have our products manufactured in three locations. Domestically, we operate two plants in the Sacramento, California area for those products that are being produced in low volumes or for defense electronics applications. Products made for defense electronics applications generally must be manufactured within the United States due to government regulations. Most of our products are manufactured in Thailand by a contract manufacturer. Under our manufacturing contract, Hana Microelectronics Ltd. or HANA supplies the physical plant, direct labor, basic assembly equipment and warehousing functions. We supplement those activities with our own full-time, in-country staff consisting of 16 people who provide production planning, process engineering, test engineering, product support, design engineering and quality assurance support. We own certain assets held securely in HANA’s factory, including specialized test and assembly equipment and various raw material and product inventories. Our arrangement with HANA allows us to reduce our labor and facility expenses while maintaining tight control of process and quality. To reduce our costs further, we have identified lower cost Asian sources for various raw materials, especially basic metal and circuit board components. Our manufacturing agreement with HANA currently expires in October 2008, 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 design custom semiconductor devices. However, we do not own or operate a semiconductor foundry and rely on a limited number of third parties to produce these components. Our use of various third-party semiconductor foundries gives us the flexibility to use the process technology that is best suited for each application and eliminates the need for us to invest in and maintain our own semiconductor facilities. Our primary semiconductor foundry is a business unit of Northrop Grumman Space and Technology Corp. or

NGST a wholly-owned subsidiary of Northrop Grumman Corporation. NGST produced approximately 40%, in terms of dollar volume of our semiconductors in 2007. We also use other suppliers for some of our products. The loss of our relationship with or our access to any of the semiconductor foundries we currently use, particularly NGST and any resulting delay or reduction in the supply of semiconductor devices to us, would severely impact our ability to fulfill customer orders and could damage our relationships with our customers. Our current supply agreement with NGST expires in September 2008 and we are currently negotiating an extension of the agreement. Should the services of a given foundry become unavailable to us, we estimate that it may take up to six months to shift production to a new foundry.

     All of the manufacturing facilities we use worldwide are registered under ISO 9001-2000, an international certification standard of quality for design, development and business practices. Additionally, we are certified under AS-9100 in support of our defense and homeland security activities. We maintain comprehensive quality systems at all of these facilities to ensure compliance with customer specifications, configuration control, documentation control and supplier quality conformance.

     We maintain raw materials and work-in-process inventory at both our Sacramento area plants and in Thailand at HANA’s plant. We also maintain finished goods inventory on consignment at or near the manufacturing plants of certain key telecommunication customers. In order to maintain and enhance our competitive position, we must be able to satisfy our customers’ short lead-times and rapidly-changing needs. Meeting this requirement necessitates that we maintain significant raw material and finished goods inventories. Maintaining these inventories is costly and requires significant working capital and may increase our capital needs in the future.

Backlog

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

     Our backlog at February 8, 2008 for shipments expected to occur through December 31, 2008 was approximately $51.3 million. By comparison, our backlog as of February 16, 2007 for shipments then expected to occur through December 31, 2007 was $52.0 million.

Governmental Regulation

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

     In our defense electronics market, some of the products we supply to our foreign customers are controlled by United States government export regulations promulgated by the Departments of State, Commerce and Defense. Prior to shipment of these products, we must apply for various approvals and licenses. This application process can be lengthy and approval is not assured. If we do not receive approval or the approval is delayed, it can halt or delay our shipments. Further, our products for defense electronics applications generally must be manufactured within the United States due to government regulations respecting foreign material content and socio-economic rules passed down to federal subcontractors by law.

Seasonality

     We believe that the telecommunications network market we serve can have an underlying seasonal pattern characterized by lower activity levels in the first and third calendar quarters, normal activity in the second calendar quarter and a surge of activity in the

fourth calendar quarter. Reduced activity in the first quarter is due to delays in purchasing resulting from wireless carriers’ budgeting processes while reduced activity in the third quarter occurs as many of the European telecom OEMs shut down their factories for a portion of the summer months. Activity can expand in the fourth quarter as the wireless carriers expend their remaining capital budgets for the year. The underlying telecommunications market trends notwithstanding, we have not experienced these seasonal patterns in our 2006 or 2007 revenues. Similarly, while the US government budgeting process can result in seasonal variations in activity, we have not seen a corresponding pattern in our revenues from our defense electronics customers. We cannot be certain what seasonal market factors, if any, will impact our revenues in the future or the extent of such potential fluctuations.

Employees

     As of December 31, 2007, we had 214 full-time employees, including 121 in manufacturing, 53 in product and process engineering, 16 in sales and marketing and 24 in general and administrative. Our employees are not subject to any collective bargaining agreement with us and we believe that our relations with our employees are good.

Available Information

     Our principal executive offices are located at 130 Baytech Drive, San Jose, CA 95134 and our main telephone number is (408) 522-3100. Our Internet address is www.endwave.com . We make available free of charge through our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission, or SEC.

     The public may read and copy any material we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington D.C., 20549. The public may obtain information on the operations of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site, http://www.sec.gov , that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC.

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.

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 $5.4 million in 2007. We also had net losses of $1.3 million and $874,000 for the years ended December 31, 2006 and 2005, respectively. There is no guarantee that we will achieve or maintain profitability in the future.

We depend on a small number of key customers in the telecommunications industry for a large portion of our revenues. If we lose any of our major customers, particularly Nera or 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 Nera or 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. In 2007, Nokia Siemens Networks (including Nokia and Siemens AG revenues for 2007 prior to their merger) accounted for 60% of our total revenues. In 2006 and 2005, revenues from Nokia accounted for 42% and 47% of our total revenues, respectively. Revenues from Siemens accounted for 23% and 16% of our total revenues for 2006 and 2005, respectively, and revenues from Nera accounted for

14%, 14% and 10% of our total revenues for 2007, 2006 and 2005, respectively. We had no other customers individually representing more than 10% of our total revenues for 2007, 2006 and 2005.

     During April 2007, Nokia and Siemens merged their telecommunication network businesses and created Nokia Siemens Networks. The ongoing impact, if any, of this merger on our continuing relationship with the combined company is uncertain. During 2007, we experienced a decrease in revenues from the former Siemens product lines of Nokia Siemens Networks as they decreased purchases of legacy products that historically have been outsourced to us.

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

     We depend, and expect to remain dependent, on the telecommunications industry for most of our revenues. Revenues from all of our telecom OEM customers comprised 79% of our total revenues in 2007 and 84% of our total revenues in 2006.

     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 begun to grow again, but at a more measured rate than in the 1990s. 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 similar downturns reoccur, or if the telecommunications industry fails to grow as we anticipate, our revenues may remain flat or decrease. Significantly lower revenues would likely force us to make provisions for excess inventory and abandoned or obsolete equipment and reduce our operating expenses. To reduce our operating expenses, we could be required to reduce the size of our workforce and consolidate facilities. We cannot guarantee that we would be able to reduce operating expenses to a level commensurate with the lower revenues resulting from such an industry downturn.

     The telecommunications industry has undergone significant consolidation in the past few years and we expect that consolidation to continue. The acquisition of one of our major customers in this market, or one of the communications service providers supplied by one of our major customers, could result in delays or cancellations of orders of our products 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. The ongoing impact, if any, of this merger on our ongoing relationship with the combined company is uncertain.

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, including the acquisition of ALC Microwave, Inc. in April 2007. 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 markets, such as defense electronics and homeland security, 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 markets, particularly defense electronics and homeland security. 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 the defense electronics and homeland security 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 defense electronics and homeland security 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 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 these issuers 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. Additionally, our investment portfolio is presently and may in the future be concentrated with a single institutional investment firm. If this firm were to experience financial difficulties, the value of our cash equivalents 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 2008, 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 defense electronics business. As a result, our domestic manufacturing facilities may be underutilized from time to time. Conversely, if we do not maintain adequate manufacturing capacity to meet demand for our defense electronic products, we may lose opportunities for additional sales. Any failure to have sufficient manufacturing capacity to meet demand could cause us to lose revenues, thereby reducing our profitability, or increasing our net losses, and could harm our reputation with customers.

Though 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 December 31, 2007, we had 42 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 enter into confidentiality and assignment of rights to inventions agreements with our employees, and confidentiality and non-disclosure agreements with third parties, and generally control access to and distribution of our documentation and other proprietary information. These measures may not be adequate in all cases to safeguard the proprietary technology underlying our products. It may be possible for a third party to copy or otherwise obtain and use our products or technology without authorization, develop similar technology independently or 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 telecommunication network market, we primarily compete with Compel Electronics Inc., Filtronic plc, Microelectronics Technology Inc., Remec Broadband Wireless, Inc. and Teledyne Technologies Incorporated. In addition to these companies, there are telecom OEMs, such as Ericsson and NEC Corporation, that use their own captive resources for the design and manufacture of their high-frequency RF transceiver modules, rather than using merchant suppliers like us. Additionally, during 2007, we experienced a decrease in revenues from the former Siemens product lines of Nokia Siemens Networks as they increased the use of their captive resources for the manufacture of their modules. 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 the defense electronics and homeland security markets, we compete both with internal captive groups within many of the large defense OEMs, along with other companies such as Aeroflex Incorporated, AML Communications Inc., Chelton, Ltd., Ciao Wireless, CTT Inc., Herley Industries, Inc., KMIC Technology, Inc., M/A-Com, Miteq, Inc. and Teledyne Technologies Incorporated.

     Many of our current and potential competitors are substantially larger than us and have greater financial, technical, manufacturing and marketing resources. In addition, we have 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 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 the telecommunication network, defense electronics or homeland security markets;
	•		successes or failures at significant product evaluations or site demonstrations;
	•		the introduction of new products by us or our competitors;
	•		acquisitions, strategic alliances or joint ventures involving us or our competitors;
	•		decisions by major participants in the communications industry not to purchase products from us or to pursue alternative technologies;
	•		decisions by investors to de-emphasize investment categories, groups or strategies that include our company or industry;
	•		market conditions in the industry, the financial markets and the economy as a whole; and
	•		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 February 8, 2008, Oak beneficially owned 29.9% of our capital stock. In addition, two other shareholders each beneficially owned more than 10% of our capital stock on February 8, 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 1B.   Unresolved Staff Comments

     Not applicable.

PART II

Performance Measurement Comparison

     The graph below shows the cumulative total stockholder return of an investment of $100 (and the reinvestment of any dividends thereafter) on December 31, 2002 in (i) our common stock, (ii) the NASDAQ Stock Market Index (U.S. Companies) and (ii) the NASDAQ Telecommunications Index. Our stock price performance shown in the graph below is not indicative of future stock price performance.

Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

      The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this report, as well as the information set forth in the “Risk Factors” section of this report. In addition to historical consolidated financial information, this discussion contains forward-looking statements that involve known and unknown risks and uncertainties, including statements regarding our expectations, beliefs, intentions or strategies regarding the future. All forward-looking statements included in this report are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Our actual results could differ materially from those discussed in the forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements. In the past, our operating results have fluctuated and are likely to continue to fluctuate in the future.

Overview

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

Markets and Growth Strategy

      Telecommunications market.   Most of our RF modules are deployed in telecommunication networks. Our target customers for these applications are telecommunication network original equipment manufacturers and systems integrators, collectively referred to in this report as telecom OEMs. Telecom OEMs provide the wireless equipment used by service providers to deliver voice, data and video services to businesses and consumers.

     Telecom OEMs that purchased our products accounted for 79% of our total revenues during 2007. From 2006 to 2007, we experienced a decrease of 15% in our telecommunications-related revenues. The decline in revenues in 2007 was due primarily to decreased demand from our telecommunications customers and lower average sales prices of our modules. During April 2007, two of our largest customers, Nokia and Siemens, merged their telecommunications network businesses and created Nokia Siemens Networks. During 2007, we experienced a decrease in revenues from the former Siemens product lines of Nokia Siemens Networks as they decreased purchases of legacy products that historically have been outsourced to us. The ongoing impact, if any, of this merger on our continuing relationship with the combined company is uncertain.

      Defense electronics and homeland security system markets.   Our RF devices and modules are also designed into various applications outside of the telecommunication network market, including defense electronics and homeland security systems. Our target customers in the defense electronics market include defense systems integrators and their subcontractors that design aerospace systems, defense systems, weapons and electronics platforms for domestic and foreign defense customers. Our target customers in the homeland security market include those customers that are utilizing the properties of high-frequency RF to create new capabilities designed to detect security threats.

     From 2006 to 2007, we experienced growth of 22% in our defense and homeland security-related revenues. Such revenues, accounted for approximately 21% of our total revenues in 2007. We continue to seek growth through enhancing our position as a leading merchant supplier of RF modules, continuing our expansion into the defense electronics and homeland security markets and pursuing strategic acquisitions. In support of this growth strategy, on April 19, 2007, we announced the acquisition of all of the outstanding capital stock of privately-held ALC Microwave, Inc., or ALC, a provider of logarithmic amplifier subsystems to defense markets, for approximately $6.8 million in cash.

     We also believe the demand for high-frequency RF modules within various defense electronics and homeland security systems is increasing. We are seeing increased demand in defense electronics systems as high frequency RF modules are being used in

sophisticated radar systems, electronic warfare systems, intelligent battlefield systems and high-capacity communication systems. Due to the need for greater resolution, more comprehensive real-time information and better communication on the battlefield, the United States military’s demand for high-frequency RF modules in the defense electronics market is growing. Similarly, the global escalation of terrorist and insurgency threats is resulting in increased governmental and private concern over providing adequate security measures. Many new, more capable systems are utilizing high-frequency RF signals for various detection and imaging systems applied to threats of violence.

      Growth through acquisitions.   We continue to seek growth through strategic acquisitions. Since our initial public offering in October 2000, we have acquired and integrated six businesses or product lines. As a result of these transactions, we have increased our revenues and market share, broadened our product portfolio, diversified our customer base, gained expertise outside our core telecommunication network market and added key members to our staff.

Seasonality

     We believe that the telecommunications market we serve can have an underlying seasonal pattern characterized by lower activity levels in the first and third calendar quarters, normal activity in the second calendar quarter and a surge of activity in the fourth calendar quarter. Reduced activity in the first quarter is due to delays in purchasing resulting from wireless carriers’ budgeting processes while reduced activity in the third quarter occurs as many of the European telecom OEMs shut down their factories for a portion of the summer months. Activity can expand in the fourth quarter as the wireless carriers expend their remaining capital budgets for the year. The underlying telecommunications market trends notwithstanding, we have not experienced these seasonal patterns in our 2006 or 2007 revenue. Similarly, while the US government budgeting process can result in seasonal variations in activity, we have not seen a corresponding pattern in our revenues from our defense electronics customers. We cannot be certain what seasonal market factors, if any, will impact our revenues in the future or the extent of such potential fluctuations.

Critical Accounting Policies and Estimates

General

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

Revenue Recognition

     Our primary customers are telecom OEMs and defense and homeland security systems integrators that incorporate our products into their systems. We recognize product revenues at the time title passes, which is generally upon product shipment or when withdrawn from a consignment location, coupled with persuasive evidence that an arrangement exists, delivery has occurred or services have been rendered, our price to the buyer is fixed or determinable and collectibility is reasonably assured. Revenues under development contracts are generally recorded on a percentage of completion basis, using project hours as the basis to measure progress toward completing the contract and recognizing revenues. Alternatively, where a development contract specifies defined progress gates or milestones tied to payments, revenue is recognized on a pro rata basis matching the milestone(s). Revenues attributable to development fees accounted for 3.3% of our total revenues in 2005, 2.0% of our total revenues in 2006 and 1.5% of our total revenues in 2007. The costs incurred under these development agreements are included in research and development expenses.

Allowance for Doubtful Accounts

     We make ongoing assumptions relating to the collectibility of our accounts receivable in our calculation of the allowance for doubtful accounts. In determining the amount of the allowance, we make judgments about the creditworthiness of customers based on ongoing credit evaluations and assess current economic trends affecting our customers that might impact the level of credit losses in the future and result in different rates of bad debts than previously seen. We also consider our historical level of credit losses. Our reserves, which were $131,000 at December 31, 2006 and $67,000 at December 31, 2007, historically have been adequate to cover our actual credit losses. If actual credit losses were to be significantly greater than the reserves we have established, our selling, general and administrative expenses would increase.

Warranty Reserves

     We generally offer a twelve to thirty month warranty on all of our products. We record a liability based on estimates of the costs that may be incurred under our warranty obligations and charge to cost of product revenues the amount of such costs at the time revenues are recognized. Our warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Our estimates of anticipated rates of warranty claims and costs per claim are primarily based on historical information and future forecasts. At December 31, 2006 and 2007 our warranty reserves were $2.9 million and $2.7 million, respectively. We periodically assess the adequacy of our recorded warranty liabilities and adjust the amounts as necessary. If actual warranty claims are significantly higher than forecast, or if the actual costs incurred to provide the warranty is greater than the forecast, our gross margins could be adversely affected.

Inventory Valuation

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

Stock-Based Compensation

     Effective January 1, 2006, we adopted the provisions of Statement of Financial Accounting Standards, or SFAS, No. 123 (revised 2004) “Share-Based Payment”, or SFAS No. 123(R). SFAS No. 123(R) 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 our stock compensation is accounted for as an equity instrument. We previously applied Accounting Principles Board, or APB, Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations and provided the required pro forma disclosures of SFAS No. 123, “Accounting for Stock-Based Compensation,” or SFAS No. 123.

     Upon adoption of SFAS No. 123(R), we elected the alternative transition method for calculating the tax effects of stock-based compensation pursuant to SFAS No. 123(R). The alternative transition method provides a simplified method to establish the beginning balance of the additional paid-in capital pool, or APIC Pool, related to the tax effects of employee stock-based compensation, and to determine the subsequent impact on the APIC Pool and consolidated statements of cash flows of the tax effects of employee stock-based compensation awards that are outstanding upon adoption of SFAS No. 123(R).

     Consistent with prior years, we use the “with and without” approach as described in Emerging Issues Task Force Topic No. D-32 in determining the order in which our tax attributes are utilized. The “with and without” approach results in the recognition of the windfall stock option tax benefits after all other tax attributes of ours have been considered in the annual tax accrual computation. SFAS No. 123(R) prohibits the recognition of a deferred tax asset for an excess tax benefit that has not yet been realized. As a result,

we will only recognize a benefit from stock-based compensation in paid-in capital if an incremental tax benefit is realized after all other tax attributes currently available to us have been utilized. In addition, we have elected to account for the indirect benefits of stock-based compensation on items such as the alternative minimum tax, the research tax credit or the domestic manufacturing deduction through the consolidated statements of operations rather than through paid-in capital.

     We estimate the fair value of stock options and shares under our stock purchase plan using the Black-Scholes valuation model, consistent with the provisions of SFAS No. 123(R), Securities and Exchange Commission Staff Accounting Bulletin No. 107 and our prior period pro forma disclosures of net loss, including stock-based compensation (determined under a fair value method as prescribed by SFAS No. 123). The fair value of each option grant and the shares under our stock purchase plan are estimated on the date of grant using the Black-Scholes valuation model and the graded-vesting method with assumptions concerning expected dividend yield, stock price volatility, risk free interest rate and expected life of the award.

Deferred Taxes

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

Long-Lived Assets

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

Business Combinations

     In accordance with the provisions of SFAS No. 141, “Business Combinations,” the purchase price of an acquired company is allocated between the intangible assets and the net tangible assets of the acquired business with the residual of the purchase price recorded as goodwill. The valuation of our intangible assets is based on an income approach methodology that values the intangible assets based on the future cash flows that could potentially be generated by the asset over its estimated remaining life discounted to its present value utilizing an appropriate weighted average cost of capital.

     At December 31, 2007, the carrying value of goodwill was $3.0 million and the carrying value of identifiable intangible assets was $4.5 million. In accordance with the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” we assess goodwill and intangible assets with indefinite lives for impairment at least annually, or more frequently if events and changes in circumstances suggest that the carrying amount may not be recoverable. To the extent the carrying amount exceeds its fair value, an impairment charge to income is recorded. This assessment is based upon a discounted cash flow analysis and analysis of our market capitalization. The estimate of cash flow is based upon, among other things, certain assumptions about expected future operating performance and an appropriate discount rate determined by our management. Our estimates of discounted cash flows may differ from actual cash flows due to, among other things, economic conditions, changes to our business model or changes in operating performance. Significant differences between these estimates and actual cash flows could materially affect our future financial results. We completed our annual goodwill impairment test as of September 30, 2007 and determined that no adjustment to the carrying value of goodwill was required. We have determined that no events have occurred from that date through December 31, 2007 that would require an updated analysis. Our future operating performance will be impacted by the future amortization of these acquired intangible assets and potential impairment charges related to goodwill if indicators of potential impairment exist. As a result of business acquisitions, the allocation of the purchase price to goodwill and intangible assets could have a significant impact on our future operating results.

Results of Operations

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

     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.

     Product revenues decreased 9% from 2006 to 2007 as a result of decreased demand primarily from our telecommunications customers. We experienced an $8.0 million decrease in revenues from our telecommunications customers which was offset in part by a $2.2 million increase in revenues from our defense and homeland security customers. The decrease in telecommunication revenue was primarily attributable to decreased revenues from the former Siemens product lines of Nokia Siemens Networks as they reduced purchases of legacy products that historically have been outsourced to us. During 2007, revenues from our telecom OEM customers comprised 79% of our total revenues, compared with 84% in 2006. During 2007, revenues from our defense and homeland security and other customers were 21% of our total revenues, compared with 16% in 2006.

     The decrease in development fees from 2006 to 2007 was attributable to decreased development of custom-designed products for new and existing customers for both our telecommunications customers and our defense and homeland security customers.

     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 2007, the cost of product revenues as a percentage of revenues increased due primarily to the decreased absorption of our overhead costs resulting from decreased total revenues and the write down of certain inventory 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 approximately $572,000 during 2007 as compared to $678,000 in 2006.

     We intend to focus on reducing the cost of product revenues as a percentage of total revenues through the introduction of new designs and technology and further improvements to our offshore manufacturing processes. 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 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 2007, research and development costs increased both as a percentage of total revenues and in absolute dollars compared to 2006. The increase in research and development costs was primarily attributable to an increase of $717,000 of personnel-related expenses, an increase of $437,000 related to the acquisition of the ALC engineering group, an increase of $343,000 in project-related expenses and an increase of $305,000 for SFAS No. 123 (R) stock-based compensation expense.

     During 2008, we expect research and development expenses to increase in absolute dollar terms as we continue our investment in development programs in both the telecommunication and defense electronics and homeland security related businesses.

     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 2007, selling, general and administrative expenses decreased in absolute dollars compared to 2006 primarily due to a $389,000 decrease in sales commissions and a $106,000 decrease in personnel-related expenses partially offset by a $271,000 increase for SFAS No. 123(R) stock-based compensation expense.

     During 2008, we anticipate selling, general and administrative expenses will increase moderately in absolute dollar terms as we increase the size of our sales and marketing team related to the defense electronics and homeland security related business.

Transaction costs

		Year Ended
		December 31,
		2007				2006				% Change
		(In thousands)
Transaction costs		$	—			$	200				(100	)%

     During 2006, as part of our growth strategy, we pursued acquiring another company and capitalized the associated transaction costs in other current assets on our consolidated balance sheet. By the end of 2006, we decided not to pursue the acquisition and expensed the amount accordingly.

     As part of our acquisition of 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. 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 $548,000 and $449,000 for 2007 and 2006, respectively. The increase in cost of product revenues, amortization of intangible assets was due to $98,000 of amortization for the ALC developed technology.

     The amortization associated with customer backlog, customer relationships, non-compete and tradename is a charge to operating expenses. During 2007, the $531,000 of amortization was comprised of the following: $256,000 for customer relationships, $187,000 for customer backlog, $61,000 for the non-compete agreement and $27,000 for the tradename. During 2006, the $156,000 of amortization was due to the amortization of customer relationships of JCA. This increase in amortization was attributable to the amortization of the ALC intangibles.

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

     The increase in interest and other income, net during 2007 was primarily the result of increased interest earned on a higher cash and investment balance due to the proceeds received from the sale of preferred stock and warrants to Oak Investment Partners XI, Limited Partnership (“Oak”) during the second quarter of 2006. During 2007, we earned $3.5 million of interest income and recognized $154,000 of other income from the amortization of the deferred gain from our sale of the Diamond Springs, California location which were partially offset by banking charges and losses on foreign currency transactions. During 2006, we earned $2.6 million of interest income and recognized $154,000 of other income primarily from the amortization of the deferred gain from our sale of the Diamond Springs, California location partially offset by banking charges and a $77,000 loss on the sale of fixed assets related to the move of our corporate headquarters.

     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 gains and losses that arise from exchange rate fluctuations related to our operations in Thailand. During 2007, we recorded a foreign currency transaction loss of $17,000. There were no such losses in 2006.

Year ended December 31, 2006 compared to year ended December 31, 2005

Total revenues

     Product revenues increased 29% from 2005 to 2006 as a result of increased demand primarily from our telecommunication network customers. During 2006 revenues from our telecom OEM customers comprised 84% of our total revenues, compared with 80% in 2005. Revenues from our defense electronics and homeland security and other customers were 16% of our total revenues, compared with 20% in 2005. Telecommunication network related revenues increased 34% from 2005 as a result of increased demand experienced by our customers and by capturing a greater share of some customers’ overall transceiver business. During 2006, we increased revenues attributable to our three largest telecommunication customers, as we benefited from the increased demand they experienced and from increasing our penetration within these companies. Our defense electronics and homeland security and other revenues increased 4% from 2005 as we continued establishing our presence in this market.

     The decrease in development fees from 2005 to 2006 was attributable to decreased development of custom-designed products for new and existing customers for both our telecommunications customers and our defense and homeland security customers during the year.

     During 2006, two of our largest customers, Nokia and Siemens announced plans to merge their telecommunications network businesses. During the fourth quarter of 2006, we experienced a decrease in revenues from Nokia as they decreased their inventory of our product in anticipation of the closing of the merger.

     During 2006, the cost of product revenues as a percentage of revenues increased due primarily to a change in product mix, $435,000 of stock-based compensation from the adoption of SFAS No. 123(R) and an increase in inventory reserves of $302,000 associated with the end of life of one of our customer programs. These effects were partially offset by the increased absorption of our overhead costs resulting from increased production. The cost of product revenues in both periods was favorably impacted by the utilization of inventory that was previously written off, amounting to approximately $678,000 during 2006 as compared to $695,000 during 2005.

     During 2006, research and development costs increased in absolute dollars and as a percentage of total revenues compared to 2005, as we increased our investment in development projects in both our telecommunication network and defense electronics and homeland security related businesses. The increase was primarily due to an increase of $1.1 million in project-related expenses, an increase of $576,000 in personnel-related expenses and $540,000 of stock-based compensation expense from the adoption of SFAS No. 123(R).

     During 2006, selling, general and administrative expenses increased in absolute dollars and as a percentage of total revenues compared to 2005, primarily due to $2.3 million of stock-based compensation expense from the adoption of SFAS No. 123(R), an increase of $333,000 in sales commissions, and an increase of $215,000 in personnel-related expenses.

Transaction costs

		Year Ended
		December 31,
		2006				2005				% Change
		(In thousands)
Transaction costs		$	200			$	851				(76.5	)%

     During 2005, as part of a planned public offering of common stock pursuant to a registration statement filed with the Securities and Exchange Commission, we accumulated transaction costs in other current assets on our consolidated balance sheet. During 2005, we suspended the secondary offering and expensed the amount accordingly. The registration statement was withdrawn in the first quarter of 2006.

     During 2006, as part of our growth strategy, we pursued acquiring another company and capitalized the associated transaction costs in other current assets on our consolidated balance sheet. By the end of 2006, we decided not to pursue the acquisition and expensed the amount accordingly.

     As part of our acquisition of JCA Technology, Inc. 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 generally subject to amortization and have approximate original estimated weighted average

useful lives as follows: developed technology – 5 years, customer backlog – 6 months and customer relationships – 5 years. The tradename intangible asset is not subject to amortization and will be evaluated for impairment at least annually or more frequently if events and changes in circumstances suggest that the carrying amount may not be recoverable.

     The amortization associated with the developed technology is a charge to cost of product revenues and was $449,000 and $452,000 for 2006 and 2005, respectively. The amortization associated with customer relationships is a charge to operating expenses and was $156,000 for 2006 and 2005. The amortization of customer backlog is a charge to operating expenses and was $23,000 during 2005 and was fully amortized during the first quarter of 2005.

Restructuring charges, net

		Year Ended
		December 31,
		2006				2005				% Change
		(In thousands)
Restructuring charges, net		$	—			$	(46	)			(100.0	%)

     During 2005, we incurred a net benefit to restructuring expense related to the reversal of $46,000 of charges from the restructuring plan in connection with the acquisition of JCA Technology, Inc. The original estimates of the charges related to the restructuring plan were higher than the final payouts resulting in the $46,000 benefit in 2005. There were no similar charges or reversals in 2006.

     The increase in interest and other income, net during 2006 was primarily the result of increased interest earned on a higher cash and investment balance due to the proceeds received from the sale of preferred stock and warrants to Oak during the second quarter of 2006. During 2006, we earned $2.6 million of interest income and recognized $154,000 of other income from the amortization of the deferred gain from our sale of the Diamond Springs, California location which were partially offset by banking charges and a $77,000 loss on the sale of fixed assets related to the move of our corporate headquarters. During 2005, we earned $648,000 of interest income and recognized $128,000 of other income primarily from the amortization of the deferred gain from our sale of the Diamond Springs, California location partially offset by banking charges.

Liquidity and Capital Resources

     At December 31, 2007, we had $39.0 million of cash and cash equivalents, $10.0 million in short-term and long-term investments, working capital of $56.8 million and no long-term or short-term debt outstanding. The following table sets forth selected consolidated statements of cash flows data for our three most recent fiscal years.

     During 2007, $3.9 million of cash was generated by operating activities as compared to $2.8 million in 2006. Our net loss adjusted for depreciation and other non-cash items, was income of $767,000 in 2007 as compared to income of $3.6 million in 2006. The remaining provision of $3.2 million in cash in 2007 was primarily due to a $5.8 million decrease in inventories partially offset by a $1.1 million decrease in accrued compensation, restructuring and other current and long-term accrued liabilities, a $939,000 decrease in accounts payable, a $374,000 decrease in accrued warranty and a $355,000 decrease in other assets.

     During 2006, $2.8 million of cash was generated by operating activities as compared to using $7.0 million in 2005. Our net loss adjusted for depreciation and other non-cash items, was income of $3.6 million in 2006 as compared to income of $1.2 million in 2005. The remaining use of $800,000 in cash in 2006 was primarily due to a $3.7 million increase in inventories and a $329,000 decrease in accrued warranty partially offset by a $1.8 million decrease in accounts receivable and a $1.3 million increase in accounts payable.

     During 2007, investing activities provided cash of $24.9 million compared to using $29.3 million of cash in 2006. The provision of cash by investing activities in 2007 was primarily due to the net proceeds of short-term investments of $89.2 million which was partially offset by purchases of investments of $57.8 million, the use of $5.8 million to purchase ALC and purchases of equipment of $1.1 million.

     During 2006, investing activities used cash of $29.3 million compared to $5.8 million of cash provided in 2005. The $29.3 million used by investing activities in 2006 was primarily due to the net purchase of short-term investments of $27.5 million and purchases of equipment of $1.7 million.

     During 2007, financing activities used cash of $16.0 million, as compared to providing cash of $44.3 million in 2006. The use of cash by financing activities during 2007 was primarily due to the use of $16.8 million of cash to repurchase 2,502,247 shares of our common stock which was partially offset by $766,000 from the sale of common stock under our stock purchase plan and $130,000 from the exercise of stock options.

     During 2006, financing activities provided cash of $44.3 million, as compared to $4.9 million in 2005. During the second quarter of 2006, we generated $43.1 million in net proceeds from the sale of 300,000 shares of Series B preferred stock and a warrant to purchase 90,000 shares of Series B preferred stock to Oak. In addition to the proceeds received from Oak, during 2006 we received $751,000 from the sale of common stock under our stock purchase plan and $429,000 from the exercise of stock options.

     At December 31, 2007, we had a net unrealized gain of $6,000 related to $10.0 million of investments in seven debt securities. The increase in the value of these investments is primarily related to changes in interest rates. The investments all mature during 2008 or 2009 and we believe that we have the ability to hold these investments until the maturity date. Realized gains and losses were insignificant for the years ended December 31, 2007, 2006, and 2005. During 2007, we recorded a foreign currency translation loss of $12,000. There were no such losses in 2006.

     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 inventory and add more finished products to our key customers’ consignment stocks so that they will be better-positioned to meet their customers’ demand. These increases in raw materials and finished goods may significantly 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, capital leases and purchase obligations, excluding interest at December 31, 2007:

     We have purchase obligations to certain suppliers. In some cases the products we purchase are unique and have provisions against cancellation of the order. At December 31, 2007, we had approximately $5.5 million of purchase obligations, which are due within the following 12 months.

Other Long-Term Liabilities

     At December 31, 2007 we had $77,000 of other long-term liabilities related to the deferred gain from a sale-leaseback transaction. We will recognize the remaining total deferred gain of $231,000 on a straight-line basis over the term of the lease, which expires in 2009. The following table summarizes the future recognition of the deferred gain:

Recent Accounting Pronouncements

     In September 2006, the Financial Accounting Standards Board, or FASB, issued SFAS No. 157, “Fair Value Measurements,” or SFAS No. 157. SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements; rather, it applies under other accounting pronouncements that require or permit fair value measurements. The provisions of SFAS No. 157 are to be applied prospectively as of the beginning of the fiscal year in which it is initially applied, with any transition adjustment recognized as a cumulative-effect adjustment to the opening balance of retained earnings. The provisions of SFAS No. 157 are effective for fiscal years beginning after November 15, 2007; therefore, we anticipate adopting this standard as of January 1, 2008. We are currently evaluating the impact of SFAS No. 157 on our consolidated financial position and results of operations.

     In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-Including an Amendment of FASB Statement No. 115,” or SFAS No. 159, which permits entities to elect to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. This election is irrevocable. SFAS No. 159 will be effective for us beginning on January 1, 2008. We are currently evaluating the impact of SFAS No. 159 on our consolidated financial position and results of operations.

     In December 2007 the FASB issued SFAS No. 141 (revised 2007), “Business Combinations,” or SFAS No. 141R. SFAS No. 141R establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. SFAS No. 141R also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statement to evaluate the nature and financial effects of the business combination. SFAS No. 141R is effective for financial statements issued for fiscal years beginning after December 15, 2008. We are currently evaluating the impact of SFAS No. 141R on our consolidated financial position and results of operations.

     In December 2007 the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51,” or SFAS No. 160. SFAS No. 160 changes the accounting and reporting for minority interests. Minority interests will be recharacterized as noncontrolling interests and will be reported as a component of equity separate from the parent’s equity, and purchases or sales of equity interests that do not result in a change in control will be accounted for as equity transactions. In addition, net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement and upon a loss of control, the interest sold, as well as any interest retained, will be recorded at fair value with any gain or loss recognized in earnings. SFAS No. 160 is effective for financial statements issued for fiscal years beginning after December 15, 2008. We are currently evaluating the potential impact that the adoption of SFAS No. 160 will have on our future consolidated financial statements.

     The Emerging Issues Task Force issued EITF 07-3, “Accounting for Nonrefundable Advanced Payments for Goods and Services Received for Use in Future Research and Development Activities,” or EITF 07-3, to clarify diversity in practice on the presentation of advanced payments for goods or services used in future research and development activities. The Task Force concluded that nonrefundable advance payments for good or services that will be used or rendered for future research and development activities should be deferred and capitalized. Such amounts should be recognized as an expense as the related good are delivered or the related services are performed. EITF 07-3 is effective for financial statements issued for fiscal years beginning after December 15, 2007, and interim periods within those fiscal years. We are currently evaluating the potential impact that the adoption of EITF 07-3 will have on our future consolidated financial statements

Item 7A.   Quantitative and Qualitative Disclosures about Market Risk

Quantitative and Qualitative Disclosures about Market Risk

     Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. In order to reduce this interest rate risk, we usually invest our cash primarily in investments with short maturities. As of December 31, 2007, our investments in our portfolio were classified as cash equivalents, short-term investments and long-term investments. The cash equivalents and short-term investments consisted primarily of commercial paper, corporate bond and notes and government securities. The long-term investments consisted of corporate notes and bonds. Since 90% of 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 2007, the total payments made in Thai Bhat were $751,000 and we recorded a related foreign currency transaction loss of $17,000.

Item 8.   Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

		Page
		Number
Report of Independent Registered Public Accounting Firm			44
Consolidated Balance Sheets			45
Consolidated Statements of Operations			46
Consolidated Statements of Stockholders’ Equity			47
Consolidated Statements of Cash Flows			48
Notes to Consolidated Financial Statements			49

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Endwave Corporation

     We have audited the accompanying consolidated balance sheets of Endwave Corporation and its subsidiaries (the “Company”) as of December 31, 2007 and 2006, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2007. Our audits also included the financial statement schedule listed in Item 15(a)(2). These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

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

     In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Endwave Corporation and its subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

     As discussed in Note 2 and Note 12 to the consolidated financial statements, on January 1, 2007 the Company changed its method of accounting for uncertain tax positions as a result of adopting Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109” and as discussed in Note 2 and Note 8 to the consolidated financial statements, on January 1, 2006 the Company changed its method of accounting for stock-based compensation as a result of adopting Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” applying the modified prospective method.

     We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 10, 2008 expressed an unqualified opinion thereon.

/s/  Burr, Pilger & Mayer LLP

San Jose, California
March 10, 2008

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

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