- Quarterly Report (10-Q)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended June 30, 2009


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

For the transition period from to

000-31635

(Commission file number)

ENDWAVE CORPORATION

(Exact name of registrant as specified in its charter)


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

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

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No 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):


Large accelerated filer o	Accelerated filer o	Non-accelerated filer þ	Smaller reporting company o
		(Do not check if a smaller reporting company)

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 number of shares of the registrant’s Common Stock outstanding as of July 24, 2009 was 9,593,648 shares. The number of shares of the registrant’s Preferred Stock outstanding as of July 24, 2009 was 300,000 shares.

ENDWAVE CORPORATION

INDEX


	Page
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements		3

Condensed Consolidated Balance Sheets as of June 30, 2009 (unaudited) and December 31, 2008		3

Unaudited Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2009 and 2008		4

Unaudited Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2009 and 2008		5

Notes to Condensed Consolidated Financial Statements (unaudited)		6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		16

Item 3. Quantitative and Qualitative Disclosure about Market Risk		23

Item 4. Controls and Procedures		23

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		24

Item 1A. Risk Factors		24

Item 6. Exhibits		34

SIGNATURES		36

EXHIBITS		37
EX-2.2
EX-2.3
EX-10.14
EX-31.1
EX-31.2
EX-32.1

PART I. FINANCIAL INFORMATION


Item 1.		Financial Statements

ENDWAVE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)


	June 30,			December 31,
	2009			2008
	(unaudited)			(1)
ASSETS
Current assets:
Cash and cash equivalents	$	49,191		$	33,998
Short-term investments		19,476			11,350
Accounts receivable, net		4,374			4,762
Inventories		4,984			14,454
Other current assets		927			738

Total current assets		78,952			65,302
Property and equipment, net		1,976			4,220
Other assets, net		171			218
Restricted cash		—			600

	$	81,099		$	70,340

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	1,184		$	2,263
Accrued warranty		1,262			2,439
Accrued compensation		768			2,811
Other current liabilities		982			713

Total current liabilities		4,196			8,226
Other long-term liabilities		99			73

Total liabilities		4,295			8,299

Commitments and contingencies (Note 8)
Stockholders’ equity:
Convertible preferred stock, $0.001 par value; 5,000,000 shares authorized; 300,000 shares issued and outstanding at June 30, 2009 and December 31, 2008, respectively		—			—
Common stock, $0.001 par value; 50,000,000 shares authorized; 9,588,748 and 9,345,442 shares issued and outstanding at June 30, 2009 and December 31, 2008, respectively		10			9
Additional paid-in capital		351,678			349,855
Accumulated other comprehensive income		1			42
Accumulated deficit		(274,885	)		(287,865	)

Total stockholders’ equity		76,804			62,041

	$	81,099		$	70,340


(1)		Derived from the Company’s audited consolidated financial statements as of December 31, 2008.

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

ENDWAVE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share amounts)
(unaudited)


	Three months ended						Six months ended
	June 30,						June 30,
	2009			2008			2009			2008
Revenues:
Product revenues	$	5,580		$	12,093		$	12,822		$	22,493
Development fees		—			—			—			60

Total revenues		5,580			12,093			12,822			22,553


Costs and expenses:
Cost of product revenues*		4,237			7,976			9,056			15,095
Research and development*		1,306			1,680			3,011			2,841
Selling, general and administrative*		1,935			2,757			4,293			5,536
Restructuring		166			—			1,233			—


Total costs and expenses		7,644			12,413			17,593			23,472


Loss from continuing operations		(2,064	)		(320	)		(4,771	)		(919	)
Interest and other income, net		94			294			200			733

Loss from continuing operations before provision (benefit) for income taxes		(1,970	)		(26	)		(4,571	)		(186	)
Provision (benefit) for income taxes		(13	)		22			(21	)		22

Loss from continuing operations		(1,957	)		(48	)		(4,550	)		(208	)
Income (loss) from discontinued operations, net of tax* (Note 10)		18,597			(712	)		17,530			(2,488	)

Net income (loss)	$	16,640		$	(760	)	$	12,980		$	(2,696	)


Basic and diluted net loss per share from continuing operations	$	(0.21	)	$	(0.01	)	$	(0.48	)	$	(0.02	)
Basic and diluted net income (loss) per share from discontinued operations	$	1.97		$	(0.07	)	$	1.86		$	(0.27	)
Basic and diluted net income (loss) per share	$	1.76		$	(0.08	)	$	1.38		$	(0.29	)

Shares used in computing basic and diluted net loss per share		9,460,395			9,187,183			9,403,482			9,164,682

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

Cost of product revenues	$	29		$	100		$	110		$	186
Research and development		60			165			188			319
Selling, general and administrative		318			564			716			1,096
Income (loss) from discontinued operations, net of tax		155			251			355			484

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

ENDWAVE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)


	Six months ended
	June 30,
	2009			2008
Operating activities:
Net income (loss)	$	12,980		$	(2,696	)
Income (loss) from discontinued operations		17,530			(2,488	)

Loss from continuing operations, net of tax		(4,550	)		(208	)
Adjustments to reconcile net loss to net cash provided by (used in) continuing operating activities:
Depreciation		380			266
Stock compensation expense		1,014			1,601
Amortization of investments, net		24			2
Gain on sale of investments		—			(45	)
Changes in operating assets and liabilities:
Accounts receivable, net		(1,827	)		(167	)
Inventories		4,602			(979	)
Other assets		(898	)		154
Accounts payable		123			346
Accrued warranty		(531	)		(57	)
Accrued compensation, other current liabilities and other long-term liabilities		(527	)		(277	)

Net cash provided (used in) provided by continuing operating activities		(2,190	)		636

Investing activities:
Proceeds from sale of discontinued operations		28,000			—
Purchase of ALC Microwave, Inc., net of cash acquired		—			(1,027	)
Change in restricted cash		600			(600	)
Purchases of property and equipment		(178	)		(675	)
Proceeds on sales and maturities of investments		14,315			7,157
Purchases of investments		(22,506	)		(7,845	)

Net cash provided by (used in) continuing investing activities		20,231			(2,990	)

Financing activities:
Payments on capital leases		(9	)		(12	)
Proceeds from common stock issuance		242			434
Proceeds from exercises of stock options, net of issuance costs		226			2

Net cash provided by financing activities		459			424


Effects of foreign exchange rate changes on cash and cash equivalents		—			12

Cash flows from discontinued operations:
Operating activities		(2,513	)		(3,423	)
Investing activities		(794	)		(299	)
Financing activities		—			—

Net cash used in discontinued operations		(3,307	)		(3,722	)


Net change in cash and cash equivalents		15,193			(5,640	)
Cash and cash equivalents at beginning of period		33,998			38,992

Cash and cash equivalents at end of period	$	49,191		$	33,352

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

ENDWAVE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1. Business and Basis of Presentation

Endwave Corporation (“Endwave” or the “Company”), designs, manufactures and markets radio frequency (“RF”) modules that enable the transmission, reception and processing of high-frequency signals in mobile communication networks.

The accompanying unaudited condensed consolidated financial statements of Endwave have been prepared in conformity with accounting principles generally accepted in the United States of America and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not contain all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. The year-end condensed consolidated balance sheet data was derived from the Company’s audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. In the opinion of management, the information contained herein reflects all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation of the results of the interim periods presented. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2009 or any future periods. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2008.

On April 30, 2009, the Company sold its defense and security business to Microsemi Corporation (“Microsemi”). The Company’s financial statements have been presented to reflect the defense and security business as a discontinued operation for all periods presented. See additional discussion at Note 10, Discontinued Operations.

2. Restricted Cash

At December 31, 2008, the Company had a restricted cash balance of $600,000, which represents a certificate of deposit held by a financial institution as collateral for a letter of credit in connection with the Company’s building lease in Folsom, California.

During the second quarter of 2009, the restricted cash was released as Microsemi assumed the Company’s building lease in Folsom, California as a result of the sale of the Company’s defense and security business to Microsemi on April 30, 2009. See additional discussion at Note 10, Discontinued Operations.

3. Investments

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


	June 30, 2009
			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value
			(In thousands)
Investments:
United States government agency	$	18,856	$	2	$	(2	)	$	18,856
Corporate securities		619		1		—			620

Total	$	19,475	$	3	$	(2	)	$	19,476


	December 31, 2008
			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value
			(In thousands)
Investments:
Commercial paper	$	1,791	$	2	$	(3	)	$	1,790
United States government agency		6,690		35		—			6,725
Corporate securities		2,827		10		(2	)		2,835

Total	$	11,308	$	47	$	(5	)	$	11,350

At June 30, 2009, the Company had $19.5 million of short-term investments with maturities of less than one year and no long term investments.

At June 30, 2009, the Company had unrealized gains of $3,000 related to $7.3 million of investments in debt securities and unrealized losses of $2,000 related to $12.2 million of investments in debt securities. The securities were in an unrealized loss position for a period of less than one year. The investments mature through 2010 and the Company believes that it has the ability to hold these investments until the maturity date. Realized gains and losses were insignificant for the quarters ended June 30, 2009 and 2008.

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

Fair Value Measurements

The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2009 (in thousands):


			Quoted Prices in		Significant Other
			Active Markets of		Observable
	Balance as of		Identical Assets		Inputs
	June 30, 2009		(Level 1)		(Level 2)
Assets:
Cash equivalents:
Money market funds	$	45,897	$	45,897	$	—
Short-term investments:
United States government agencies		18,856		—		18,856
Corporate security		620		—		620

Total	$	65,373	$	45,897	$	19,476


Liabilities:	$	—	$	—	$	—

The Company’s financial assets and liabilities are valued using market prices on both active markets (Level 1) and less active markets (Level 2). Level 1 instrument valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level 2 instrument valuations are obtained from readily-available pricing sources for comparable instruments. As of June 30, 2009, the Company did not have any assets or liabilities without observable market values that would require a high level of judgment to determine fair value (Level 3).

The amounts reported as cash and cash equivalents, accounts receivable, note receivable, accounts payable and accrued liabilities approximate fair value due to their short-term maturities. The fair value for the Company’s investments in marketable debt securities is estimated based on quoted market prices. Based upon borrowing rates currently available to the Company for capital leases with similar terms, the carrying value of its capital lease obligations approximates fair value.

4. Inventories

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


	June 30,		December 31,
	2009		2008
Raw materials	$	4,385	$	8,452
Work in process		490		1,574
Finished goods		109		4,428

	$	4,984	$	14,454

5. Note Receivable

During the third quarter of 2008, the Company set up a note receivable with one of its customers, Allgon Microwave Corporation AB (“Allgon”) who failed to meet the terms of its accounts receivable. The note was in the amount of $545,000, with payments of $25,000 due on a weekly basis. The note was to be paid in full by the end of the first quarter of 2009.

During the third and fourth quarters of 2008, Allgon made the first five payments under the note. However, during the fourth quarter of 2008, Allgon went in default on the note and filed for bankruptcy protection under Swedish composition rules. At the time of default, the note receivable balance was $420,000. Based on Allgon’s bankruptcy filing and current estimates of payments to Allgon’s creditors, the Company has reserved 75% or $315,000 of the remaining balance of the note receivable. At June 30, 2009 and December 31, 2008, the net amount of $105,000 is included in other current assets on the consolidated balance sheet.

Subsequent to Allgon’s default on the note receivable, the Company filed a complaint alleging that Allgon’s parent company, Advantech Advanced Microwave Technologies Inc. of Montreal, Canada (“Advantech”), had breached its contractual obligations with the Company and owes the Company $994,500 including the note receivable, purchased inventory and authorized and accepted purchase orders resulting in shippable finished goods. See additional discussion at Note 8, Commitments and Contingencies. There have been no changes to the note receivable since December 31, 2008.

6. Warranty

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

Changes in the Company’s product warranty liability during the six months ended June 30, 2009 and 2008 are as follows (in thousands):


	Six months ended June 30,
	2009			2008
Balance at January 1	$	2,439		$	2,712
Warranties accrued		600			376
Warranties settled or reversed		(1,049	)		(285	)
Warranties transferred due to sale of the business		(728	)		—

Balance at June 30	$	1,262		$	2,803

7. Restructuring

During the first quarter of 2009, the Company undertook certain restructuring activities to reduce expenses (“First Quarter 2009 Restructuring Plan”). The Company terminated the employment of 33 employees in order to reduce the Company’s cost structure. These terminations affected all areas of the Company’s operations. The components of the restructuring charge included severance, benefits, payroll taxes and other costs associated with the termination of the employees. The charge for these restructuring activities was $1.2 million and is expected to be substantially completed by the end of the first quarter of 2010.

During the second quarter of 2009, the Company undertook certain restructuring activities to reduce expenses (“Second Quarter 2009 Restructuring Plan”). The components of the restructuring charge included severance, benefits, payroll taxes and other costs associated with the termination of the employees. The charge for these restructuring activities was $258,000 and is expected to be substantially completed by the end of the first quarter of 2010.


	Restructuring
	(in thousands)

First Quarter 2009 Restructuring Plan charge	$	1,249
Second Quarter 2009 Restructuring Plan charge		258
Cash payments		(1,125	)
First Quarter 2009 Restructuring Plan adjustment		(55	)

Accrual at June 30, 2009	$	327

The accrued restructuring charges are included in other current liabilities on the condensed consolidated balance sheet.

During the second quarter of 2009, the Company recorded $166,000 of restructuring expense which included the following: a $258,000 restructuring charge for the Second Quarter 2009 Restructuring Plan partially offset by a $55,000 adjustment to the First Quarter 2009 Restructuring Plan and $37,000 of restructuring expense recorded in discontinued operations.

8. Commitments and Contingencies

On October 31, 2008, the Company filed a complaint with the Canadian Superior Court in Montreal, Quebec alleging that Advantech, the parent company of Allgon had breached its contractual obligations with Endwave and owes the Company $994,500 in a note receivable, purchased inventory and authorized finished goods purchase orders. The Company cannot predict the outcome of these proceedings. An adverse decision in these proceedings could harm the Company’s consolidated financial position and results of operations.

In a related action, the Company filed a creditor’s claim for $994,500 against Allgon in the composition of creditors’ proceedings now pending in a Stockholm, Sweden bankruptcy court. Although a recovery under Swedish bankruptcy law is not assured, if it occurs any recovery will be a set-off in the Montreal action against Allgon’s parent, Advantech. Other than the described complaint against Advantech and the related claim against Allgon, the Company is not currently a party to any material litigation.

9. Stockholder’s Equity

Stock-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as expense over the requisite service period. All of the Company’s stock compensation is accounted for as an equity instrument.

The effect of recording stock-based compensation for the three months ended June 30, 2009 and 2008 was as follows (in thousands, except per share data):


	Three months ended June 30,
	2009			2008
Stock-based compensation expense by type of award:
Employee stock options	$	501		$	907
Employee stock purchase plan		61			171
Amounts capitalized into inventory during the three month period		(6	)		(19	)
Amounts previously capitalized into inventory and expensed		6			21

Total stock-based compensation		562			1,080
Tax effect on stock-based compensation		—			—

Total stock-based compensation expense	$	562		$	1,080

Impact on net income (loss) per share — basic and diluted	$	(0.06	)	$	(0.12	)

The effect of recording stock-based compensation for the six months ended June 30, 2009 and 2008 was as follows (in thousands, except per share data):


	Six months ended June 30,
	2009			2008
Stock-based compensation expense by type of award:
Employee stock options	$	1,151		$	1,798
Employee stock purchase plan		205			293
Amounts capitalized into inventory during the six month period		(12	)		(41	)
Amounts previously capitalized into inventory and expensed		25			35

Total stock-based compensation		1,369			2,085
Tax effect on stock-based compensation		—			—

Total stock-based compensation expense	$	1,369		$	2,085

Impact on net income (loss) per share — basic and diluted	$	(0.15	)	$	(0.23	)

During the three months ended June 30, 2009 and 2008, the Company granted options to purchase 50,300 and 56,800 shares of common stock, respectively, with an estimated total grant-date fair value of $60,000 and $147,000, respectively. Of these amounts, the Company estimated that the stock-based compensation expense of the awards not expected to vest was $5,000 and $17,000, respectively.

During the six months ended June 30, 2009, the Company granted options to purchase 520,000 shares of common stock with an estimated total grant date fair value of $538,000 or $1.04 per option. Of this amount, the Company estimated the stock based compensation expense of the awards not expected to vest was a total of $146,000.

During the six months ended June 30, 2008, the Company granted options to purchase 960,021 shares of common stock, including 327,921 options granted as part of an option exchange program. The 327,921 options granted as part of the exchange program had an estimated total grant-date fair value of $607,000 or $1.85 per option. The remaining 632,100 options had an estimated total grant-date fair value of $2.1 million or $3.28 per option. The total estimated grant-date fair value of all 960,021 options granted was $2.7 million. Of this amount, the Company estimated that the stock-based compensation expense of the awards not expected to vest was a total of $765,000.

During the three months ended June 30, 2009, the Company fully accelerated the vesting of 165,600 options in connection with the closing of the Microsemi transaction and certain restructuring activities. The Company recorded additional stock-based compensation expense of $66,000 relating to the incremental value of the fully vested modified awards.

As of June 30, 2009, the unrecorded stock-based compensation balance related to all stock options was $1.2 million, net of estimated forfeitures, and will be recognized over an estimated weighted-average service period of 1.3 years. As of June 30, 2009, the unrecorded stock-based compensation balance related to the employee stock purchase plan was $340,000, net of estimated forfeitures, and will be recognized over an estimate weighted-average service period of 0.6 years.

Valuation Assumptions

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


	Three months ended						Six months ended
	June 30,						June 30,
	2009			2008			2009			2008
Risk-free interest rate		1.46% - 2.05	%		2.38% - 2.80	%		1.44% - 2.05	%		2.32% - 2.80	%
Expected life of options		3.0 years			2.2 years			4.5 years			3.5 years
Expected dividends		0.0	%		0.0	%		0.0	%		0.0	%
Volatility		70	%		70	%		70	%		70	%

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


	Three months ended						Six months ended
	June 30,						June 30,
	2009			2008			2009			2008
Risk-free interest rate		0.35% - 0.93	%		2.05% - 4.74	%		0.35% - 0.93	%		2.05% - 4.74	%
Expected life of options		1.2 years			1.2 years			1.2 years			1.2 years
Expected dividends		0.0	%		0.0	%		0.0	%		0.0	%
Volatility		51	%		51	%		51	%		51	%

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

The total intrinsic value of options exercised during the three months ended June 30, 2009 and 2008 was $107,000 and $5,000, respectively. The total intrinsic value of options exercised during the six months ended June 30, 2009 and 2008 was $109,000 and $6,000, respectively.

Equity Incentive Program

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

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


					Weighted-
			Weighted-		Average		Aggregate
			Average		Remaining		Intrinsic
	Number of		Exercise		Contractual		Value
	Shares		Price		Term (Years)		(In thousands)
Outstanding at December 31, 2008		3,008,917	$	9.23
Options granted		520,000		1.88
Options exercised		(140,231)		1.61
Options cancelled		(955,291)		9.22

Outstanding at June 30, 2009		2,433,395	$	8.10		6.25	$	329

Options vested and exercisable and expected to be exercisable at June 30, 2009		2,266,088	$	8.31		6.06	$	282
Options vested and exercisable at June 30, 2009		1,504,416	$	9.35		4.73	$	125

At June 30, 2009, the Company had 3,056,119 options available for grant under its equity incentive plans.

The options outstanding and options vested and exercisable at June 30, 2009 were in the following exercise price ranges:


							Options Vested and Exercisable
Options Outstanding at June 30, 2009							At June 30, 2009
					Weighted-Average
			Weighted-Average		Remaining				Weighted-Average
Range of Exercise Price	Shares		Exercise Price		Contractual Life		Shares		Exercise Price
$ 0.76 - $ 1.21		14,863	$	1.14		2.94		14,863	$	1.14
$ 1.81 - $ 1.81		403,500	$	1.81		7.22		103,400	$	1.81
$ 1.93 - $ 6.37		184,245	$	3.61		6.46		135,784	$	3.95
$ 6.59 - $ 6.59		579,877	$	6.59		7.91		213,892	$	6.59
$ 6.60 - $ 9.75		65,432	$	8.71		5.17		52,282	$	8.70
$ 9.77 - $ 9.77		259,673	$	9.77		5.55		218,594	$	9.77
$ 9.90 - $ 10.22		305,515	$	10.13		4.41		288,433	$	10.15
$ 10.23 - $ 12.90		196,658	$	11.90		3.92		182,502	$	11.91
$ 13.23 - $ 13.23		342,779	$	13.23		6.56		214,589	$	13.23
$ 15.14 - $ 21.47		80,853	$	17.37		4.15		80,077	$	17.39

		2,433,395	$	8.10		6.25		1,504,416	$	9.35

Employee Stock Purchase Plan

In October 2000, the Company established the Endwave Corporation Employee Stock Purchase Plan. All employees who work a minimum of 20 hours per week and are customarily employed by the Company (or an affiliate thereof) for at least five months per calendar year are eligible to participate. Under this plan, employees may purchase shares of common stock through payroll deductions of up to 15% of their earnings with a limit of 3,000 shares per offering period under the plan. The price paid for the Company’s common stock purchased under the plan is equal to 85% of the lower of the fair market value of the Company’s common stock on the date of commencement of participation by an employee in an offering under the plan or the date of purchase. The compensation cost in connection with the purchase plan for the three months ended June 30, 2009 and 2008 was $61,000 and $171,000. The compensation cost in connection with the purchase plan for the six months ended June 30, 2009 and 2008 was $205,000 and $293,000. During the second quarter of 2009, there were 103,075 shares issued under the purchase plan at a weighted average price of $2.35 per share. During the second quarter of 2008, there were 80,213 shares issued under the purchase plan at a weighted average price of $5.41 per share. At June 30, 2009, there were 257,294 shares available for purchase under the purchase plan.

10. Discontinued Operations

On April 30, 2009, the Company entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Microsemi, pursuant to which Microsemi purchased the Company’s defense and security business (the “Business”), including all of the outstanding capital stock of Endwave Defense Systems, Incorporated (“EDSI”). As consideration, Microsemi assumed certain liabilities associated exclusively with the Business, including the Company’s building lease in Folsom, California, and paid $28 million in cash. The Purchase Agreement contains standard representations and warranties as to the Business that survives for two years following the closing. In connection with the transaction, the Company entered into an indemnification agreement pursuant to which the Company agreed to indemnify Microsemi for environmental, product liability and intellectual property infringement claims related to the Company’s operation of the Business prior to the closing date, as well as for any other excluded liability, and Microsemi agreed to indemnify the Company for any claims related to the operation of the Business following the closing date and for any other assumed liability, subject in some cases to a customary deductible and limitation on maximum damages.

Concurrently with the closing of the acquisition, the Company entered into a transition services agreement and an employee transition services agreement with Microsemi pursuant to which the Company agreed to provide to Microsemi for a limited period of time certain transitional services, including human resources, information technology and product supply services.

The Company classified the results of the Business as a discontinued operation in the Company’s condensed consolidated statements of operations for all periods presented. During the second quarter of 2009, the Company recognized income from discontinued operations of $18.6 million net of tax expense of $41,000 related to the sale of the Business.

The results of operations for the Business classified as discontinued operations are as follows (in thousands):


	Three months ended						Six months ended
	June 30,						June 30,
	2009			2008			2009			2008
Revenue of discontinued operations	$	516		$	5,186		$	5,313		$	8,907
Loss from discontinued operations		(961	)		(712	)		(2,028	)		(2,488	)
Gain on sale of discontinued operation, net of tax		19,558			—			19,558			—

Net income (loss) from discontinued operations, net of tax	$	18,597		$	(712	)	$	17,530		$	(2,488	)

11. Net Income (Loss) Per Share

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

As of June 30, 2009 and 2008, 300,000 preferred shares were outstanding, which were convertible into 3,000,000 shares of common stock. Additionally, as of June 30, 2008, the Company had an outstanding warrant that granted the holder the right to purchase 90,000 shares of preferred stock, which are convertible into 900,000 shares of common stock. The warrant expired on April 24, 2009.

As the Company incurred net losses from continuing operations for all periods presented, shares associated with common stock issuable upon the conversion of the preferred shares or the exercise of the outstanding warrant were not included in the calculation of diluted net loss per share, as the effect would be anti-dilutive. Potential dilutive common shares of 2,433,395 as of June 30, 2009 and 2,958,073 as of June 30, 2008 from the assumed exercise of stock options were not included in the net income (loss) per share calculations as their inclusion would have been anti-dilutive. As a result, diluted net loss per share is the same as basic net loss per share for all periods presented.

12. Comprehensive Income (Loss)

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

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


	Three months ended						Six months ended
	June 30,						June 30,
	2009			2008			2009			2008
Net income (loss)	$	16,640		$	(760	)	$	12,980		$	(2,696	)
Foreign currency translation adjustments		—			19			—			12
Change in unrealized gain (loss) on investments		(16	)		(52	)		(41	)		(5	)

Total comprehensive income (loss)	$	16,624		$	(793	)	$	12,939		$	(2,689	)

13. Segment Disclosures

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


	Three months ended June 30,
	2009				2008
United States	$	6	0.1	%	$	262	2.2	%
Finland		3,351	60.0	%		10,614	87.8	%
Germany		976	17.5	%		—	—
Slovakia		906	16.3	%		328	2.7	%
Rest of the world		341	6.1	%		889	7.3	%

Total	$	5,580	100.0	%	$	12,093	100.0	%


	Six months ended June 30,
	2009				2008
United States	$	44	0.3	%	$	426	1.9	%
Finland		9,891	77.1	%		18,218	80.8	%
Germany		976	7.6	%		—	—
Slovakia		1,097	8.6	%		1,656	7.3	%
Rest of the world		814	6.4	%		2,253	10.0	%

Total	$	12,822	100	%	$	22,553	100	%

For the three months ended June 30, 2009, Nokia Siemens Networks and its manufacturing partner, SRI Radio Systems, and Nera accounted for 78% and 16%, respectively, of the Company’s total revenues. For the three months ended June 30, 2008, Nokia Siemens Networks accounted for 89% of the Company’s total revenues.

For the six months ended June 30, 2009 and 2008, Nokia Siemens Networks and its manufacturing partner, SRI Radio Systems, accounted for 85% and 84%, respectively, of the Company’s total revenues.

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

14. Recent Accounting Pronouncements

In April 2009, the Financial Accounting Standards Board (“FASB”) issued Staff Position (“FSP”) No. FAS 157-4, “Determining Fair Value When the Volume or Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP 157-4”). FSP 157-4 provides additional guidance for estimating fair value in accordance with SFAS No. 157 when the volume and level of activity for the asset or liability have significantly decreased and requires interim and annual disclosures of the inputs and valuation technique(s) used to measure fair value. FSP 157-4 is effective for interim and annual reporting periods ending after June 15, 2009 and is to be applied prospectively. The adoption of FSP 157-4 did not have a material impact on the Company’s condensed consolidated financial statements.

In April 2009, the FASB issued FSP No. 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP 107-1 and APB 28-1”). FSP 107-1 and APB 28-1 require disclosures about fair value of financial instruments in financial statements for interim and annual reporting periods of publicly traded companies. FSP 107-1 and APB 28-1 are effective for interim and annual reporting periods ending after June 15, 2009. The adoption of FSP 107-1 and APB 28-1 did not have a material impact on the Company’s condensed consolidated financial statements.

In April 2009, the FASB issued FSP No. FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies (“FSP 141(R)-1”). FSP 141(R)-1 amends and clarifies SFAS No. 141 (revised 2007), “Business Combinations” to address application issues raised by preparers, auditors, and members of the legal profession on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. FSP 141(R)-1 is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The impact, if any, will depend on the nature and terms of business combinations the Company consummates after the effective date.

In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP FAS 115-2 and FAS 124-2”). FSP FAS 115-2 and FAS 124-2 amend the other-than-temporary impairment guidance in U.S. GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. FSP FAS 115-2 and FAS 124-2 do not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. FSP FAS 115-2 and FAS 124-2 are effective for interim and annual reporting periods ending after June 15, 2009. The adoption of FSP FAS 115-2 and FAS 124-2 did not have a material impact on the Company’s condensed consolidated financial statements.

In June 2009, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles” (“SFAS No, 168”) which replaces SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” as the source of authoritative accounting principles recognized by FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. SFAS No. 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. Since the underlying GAAP guidance for nongovernmental entities will not change as a result of the issuance of SFAS No. 168, the Company does not expect the adoption of the SFAS No. 168 to have a material impact on its financial condition or results of operations. References to codification guidance will be updated in the Quarterly Report on Form 10-Q for the quarter ending September 30, 2009.

15. Subsequent Events

On August 11, 2009 the Company filed a Tender Offer Statement on Schedule TO with the Securities and Exchange Commission. The tender offer related to an offer by the Company to certain optionholders to exchange some or all of their outstanding stock option grants to purchase shares of the Company’s common stock granted under the Company’s 2007 Equity Incentive Plan with an exercise price per share greater than or equal to $5.00 for new option grants at an exchange ratio of 3 old options for 1 new option. The exchange offer was made to employees and directors of the Company who, as of the date the exchange offer commenced, were actively employed and held eligible option grants. The exchange offer is scheduled to expire on September 9, 2009.

The Company has performed an evaluation of subsequent events through August 14, 2009, which is the date the financial statements were issued.


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

The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements, related notes and “Risk Factors” section included elsewhere in this report on Form 10-Q, as well as the information contained under “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2008. In addition to historical consolidated financial information, this discussion contains forward-looking statements that involve known and unknown risks and uncertainties, including statements regarding our expectations, beliefs, intentions or strategies regarding the future. All forward-looking statements included in this report are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Our actual results could differ materially from those discussed in the forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements. In the past, our operating results have fluctuated and are likely to continue to fluctuate in the future.

The terms “we,” “us,” “our” and words of similar import below refer to Endwave Corporation.

Overview

On April 30, 2009, we entered into an Asset Purchase Agreement with Microsemi Corporation (“Microsemi”) pursuant to which Microsemi purchased our defense and security business, including all of the outstanding capital stock of Endwave Defense Systems Incorporated. As consideration, Microsemi assumed certain liabilities associated exclusively with the defense and security business and paid $28 million in cash. Additionally, as part of the sale, approximately 130 employees associated with the defense and security business transferred to Microsemi. As a result of the divestiture, we will now focus our resources on our communication module and RF semiconductor businesses. The sale of the defense and security business will have a meaningful impact on our operations and financial results in future periods.

The funding of the installation and enhancement of mobile communication networks integrating our products, often rely on the availability of credit. Over the past several months, global economic conditions have continued to be weak and credit has continued to be severely restricted. This continued restriction in credit has materially impacted our customers and vendors and has had a negative effect on our business. We expect the restriction in credit will continue to impact our customers and vendors for the foreseeable future. Without appropriate capital, our customers may have difficulty funding their on-going operations and may reduce their orders for our products. This could significantly impact our operations and financial results.

Results of Operations

Three and six months ended June 30, 2009 and 2008

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


	Three months ended						Six months ended
	June 30,						June 30,
	2009			2008			2009			2008
Total revenues		100.0	%		100.0	%		100.0	%		100.0	%

Cost of product revenues		75.9			65.9			70.6			66.9
Research and development		23.4			13.9			23.5			12.6
Selling, general and administrative		34.7			22.8			33.5			24.6
Restructuring		3.0			—			9.6			—

Total costs and expenses		137.0			102.6			137.2			104.1

Loss from continuing operations		(37.0	)		(2.6	)		(37.2	)		(4.1	)
Interest and other income, net		1.7			2.4			1.6			3.3

Loss from continuing operations before provision (benefit) for income taxes		(35.3	)		(0.2	)		(35.6	)		(0.8	)
Provision (benefit) for income taxes		(0.2	)		0.2			(0.1	)		0.1

Loss from continuing operations		(35.1	)		(0.4	)		(35.5	)		(0.9	)
Income (loss) from discontinued operations, net of tax		333.3			(5.9	)		136.7			(11.0	)

Net income (loss)		298.2	%		(6.3	)%		101.2	%		(11.9	)%

Total revenues


	Three months ended June 30,						Six months ended June 30,
	2009		2008		% Change		2009		2008		% Change
	(In thousands)						(In thousands)
Total revenues	$	5,580	$	12,093		(53.9)%	$	12,822	$	22,553		(43.1)%
Product revenues	$	5,580	$	12,093		(53.9)%	$	12,822	$	22,493		(43.0)%
Development fees	$	—	$	—		—	$	—	$	60		(100.0)%

Total revenues consist of product revenues and development fees. Product revenues are attributable to sales of our mobile communication 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 do not expect development fees to represent a significant percentage of our total revenues for the foreseeable future.

During the three months ended June 30, 2009, total revenues decreased by $6.5 million, or 54%, compared to the same period in 2008. During the six months ended June 30, 2009, total revenues decreased by $9.7 million, or 43%, compared to the same period in 2008. The demand for our products has declined relative to prior periods as the mobile communication industry has been impacted by the current global economic downturn and credit crisis.

During the remainder of 2009, we expect revenues to be lower relative to 2008 in absolute dollar terms because global economic conditions continue to remain weak and uncertain.

Cost of product revenues


	Three months ended June 30,									Six months ended June 30,
	2009			2008			% Change			2009			2008				% Change
	(In thousands)									(In thousands)
Cost of product revenues	$	4,237		$	7,976			(46.9	)%	$	9,056			$	15,095			(40.0	)%
Percentage of total revenues		75.9	%		65.9	%					70.6	%			66.9	%

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

During the second quarter of 2009, the cost of product revenues as a percentage of revenues increased compared to the same period in 2008, primarily due to the decreased absorption of our overhead costs resulting from decreased 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 $46,000 during the second quarter of 2009 and $15,000 during the second quarter of 2008.

During the first half of 2009, the cost of product revenues as a percentage of revenues increased compared to the same period in 2008, primarily due to the decreased absorption of our overhead costs resulting from decreased 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 $65,000 during the first half of 2009 and $34,000 during the first half of 2008.

We continue to focus on reducing the cost of product revenues as a percentage of total revenues through the introduction of new designs and technology and further improvements to our 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


	Three months ended June 30,								Six months ended June 30,
	2009			2008			% Change		2009			2008			% Change
	(In thousands)									(In thousands)
Research and development expenses	$	1,306		$	1,680		(22.3)	%	$	3,011		$	2,841		6.0	%
Percentage of total revenues		23.4	%		13.9	%				23.5	%		12.6	%

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

During the second quarter of 2009, research and development costs decreased in absolute dollars compared to the second quarter of 2008. During the second quarter of 2009, a decrease of $297,000 in personnel related expenses and a decrease of $105,000 for stock-based compensation expenses were partially offset by a $62,000 increase in project related expenses.

During the first half of 2009, research and development costs increased in absolute dollars compared to the first half of 2008. During the first half of 2009, an increase of $578,000 for project related expenses was partially offset by a decrease of $242,000 in personnel related expenses and a decrease of $131,000 for stock-based compensation expenses.

During the remainder of 2009, we expect research and development expenses to be flat on a quarterly basis relative to research and development expenses incurred during the second quarter of 2009.

Selling, general and administrative expenses


	Three months ended June 30,								Six months ended June 30,
	2009			2008			% Change		2009			2008			% Change
	(In thousands)									(In thousands)
Selling, general and administrative expenses	$	1,935		$	2,757		(29.8)	%	$	4,293		$	5,536		(22.5)	%
Percentage of total revenues		34.7	%		22.8	%				33.5	%		24.6	%

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

During the second quarter of 2009, selling, general and administrative expenses decreased in absolute dollars compared to the second quarter of 2008 primarily due to a $437,000 decrease in personnel-related expenses, a $246,000 decrease in stock-based compensation expenses, and a $57,000 decrease in professional fees.

During the first half of 2009, selling, general and administrative expenses decreased in absolute dollars compared to the first half of 2008 primarily due to a $533,000 decrease in personnel-related expenses, a $381,000 decrease in stock-based compensation expenses, a $124,000 decrease in professional fees and a $75,000 decrease in travel and entertainment.

During the remainder of 2009, we expect selling, general and administrative expenses to moderately decrease on a quarterly basis relative to selling, general and administrative expenses incurred during the second quarter of 2009.

Restructuring


	Three months ended June 30,						Six months ended June 30,
	2009		2008		% Change		2009		2008		% Change
	(In thousands)						(In thousands)
Restructuring expenses	$	166	$	—		—	$	1,233	$	—		—

During the first quarter of 2009, we undertook certain restructuring activities to reduce expenses (“First Quarter 2009 Restructuring Plan”). We terminated the employment of 33 employees in order to reduce our cost structure. These terminations affected all areas of our operations. The components of the restructuring charge include severance, benefits, payroll taxes and other costs associated with the termination of the employees. The charge for these restructuring activities was $1.2 million and the restructuring activities are expected to be substantially completed by the end of the first quarter of 2010.

During the second quarter of 2009, we undertook certain restructuring activities to reduce expenses (“Second Quarter 2009 Restructuring Plan”). We terminated the employment of several employees in order to reduce our cost structure. The components of the restructuring charge included severance, benefits, payroll taxes and other costs associated with the termination of the employees. The charge for these restructuring activities was $258,000 and is expected to be substantially completed by the end of the first quarter of 2010.

During the second quarter of 2009, we recorded $166,000 of restructuring expenses. A restructuring charge of $258,000 for the Second Quarter 2009 Restructuring Plan was partially offset by a $55,000 adjustment to the First Quarter 2009 Restructuring Plan and $37,000 of restructuring expense recorded in discontinued operations.

Interest and other income, net


	Three months ended June 30,							Six months ended June 30,
	2009		2008		% Change			2009		2008		% Change
	(In thousands)							(In thousands)
Interest and other income, net	$	94	$	294		(68.0	%)	$	200	$	733		(72.7	%)

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

The decrease in interest and other income, net during both the three and six months ended June 30, 2009 was primarily the result of decreased interest earned on our investments. Interest rates have decreased significantly from the prior year, especially on the highest rated investment vehicles, leading to lower interest income.

During the second quarter of 2009, we earned $68,000 of interest income and recognized $38,000 of other income from the amortization of the deferred gain from the sale of our Diamond Springs, California location which were partially offset by banking charges and losses on foreign currency transactions. During the second quarter of 2008, we earned $254,000 of interest income, recognized a gain of $37,000 from the sale of securities and recognized $38,000 of other income from the amortization of the deferred gain from the sale of our Diamond Springs, California location, which were partially offset by banking charges and losses on foreign currency transactions.

During the first half of 2009, we earned $154,000 of interest income and recognized $76,000 of other income from the amortization of the deferred gain from the sale of our Diamond Springs, California location which were partially offset by banking charges and losses on foreign currency transactions. During the first half of 2008, we earned $707,000 of interest income, recognized a gain of $45,000 from the sales of securities and recognized $77,000 of other income from the amortization of the deferred gain from the sale of our Diamond Springs, California location, which were partially offset by banking charges and losses on foreign currency transactions.

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 the second quarter of 2009, we recorded a foreign currency transaction gain of $2,000 and during the second quarter of 2008 we recorded a foreign currency transaction loss of $19,000. During the first half of 2009 and 2008, we recorded foreign currency transaction losses of $3,000 and $41,000, respectively.

Provision (benefit) for income taxes


	Three months ended June 30,								Six months ended June 30,
	2009			2008		% Change			2009			2008		% Change
	(In thousands)								(In thousands)
Provision (benefit) for income taxes	$	(13	)	$	22		159.1	%	$	(21	)	$	22		195.5	%

During the second quarter of 2009, we recorded an income tax benefit of $13,000 due to a benefit from refundable research and development tax credits in the United States. During the six months ended June 30, 2009, we recorded an income tax benefit of $21,000 due to a benefit from refundable research and development tax credits in the United States.

Discontinued operations, net of tax


	Three months ended June 30,								Six months ended June 30,
	2009		2008			% Change			2009		2008			% Change
	(In thousands)								(In thousands)
Income (loss) from discontinued operations, net of tax	$	18,597	$	(712	)		2,711.9	%	$	17,530	$	(2,488	)		804.6	%

On April 30, 2009, we entered into an Asset Purchase Agreement with Microsemi pursuant to which Microsemi purchased our defense and security business (“the Business”), including all of the outstanding capital stock of Endwave Defense Systems Incorporated. As consideration, Microsemi assumed certain liabilities associated exclusively with the defense and security business and paid $28 million in cash.

We classified the results of the Business as a discontinued operation in our condensed consolidated statements of operations for all periods presented. During the second quarter of 2009, we recognized income from discontinued operations of $18.6 million net of tax expense of $41,000 related to the sale of the Business.

Liquidity and Capital Resources

At June 30, 2009, we had $49.1 million of cash and cash equivalents, $19.5 million in short-term investments, working capital of $74.8 million and no debt outstanding. The following table sets forth selected condensed consolidated statement of cash flows data:


	Six months ended
	June 30,
	2009			2008
	(in thousands)
Net cash provided by (used in) operating activities	$	(2,190	)	$	636
Net cash provided by (used in) investing activities		20,231			(2,990	)
Net cash provided by financing activities		459			424
Cash, cash equivalents, restricted cash, short- term and long-term investments at end of period	$	68,667		$	44,668

During the first half of 2009, operating activities used $2.2 million of cash as compared to the first half 2008 which provided $636,000 of cash. During the first half of 2009, our net loss, adjusted for depreciation and other non-cash items, used $3.1 million of cash as compared to the first half of 2008 which provided $1.6 million of cash. During the first half of 2009, the remaining provision of $942,000 of cash was primarily due to a $4.6 million decrease in inventory and a $123,000 increase in accounts payable which were partially offset by a $1.8 million increase in accounts receivable, an $898,000 increase in other assets, a $531,000 decrease in accrued warranty and a $527,000 decrease in accrued compensation and other current and other long-term liabilities. During the first half of 2008, the remaining use of $980,000 of cash was primarily due to a $979,000 increase in inventory, a $277,000 decrease in accrued compensation, other current liabilities and other long-term liabilities and a $167,000 increase in accounts receivable, which were partially offset by a $346,000 increase in accounts payable and a $154,000 decrease in other assets.

During the first half of 2009, investing activities provided $20.2 million of cash as compared to the first half of 2008 which used $3.0 million of cash. The source of cash during the first half of 2009 was due to the $28.0 million proceeds from sale of our defense and security business and a $600,000 decrease to restricted cash, which were partially offset by a net increase in investments of $8.2 million and the purchase of $178,000 of property and equipment. The use of cash during the first half of 2008 was due to the $1.0 million final payment for the purchase of ALC, a net increase in investments of $688,000, the purchase of $675,000 of property and equipment and a $600,000 increase to restricted cash.

During the first half of 2009, financing activities provided $459,000 of cash as compared to the first half of 2008, which provided $424,000 of cash. During the first half of 2009, we received $242,000 of cash from the proceeds of stock issuance and $226,000 from the exercise of stock options, which were partially offset by capital lease payments. During the first half of 2008, we received $434,000 of cash from the proceeds of stock issuance, which was partially offset by capital lease payments.

At June 30, 2009, we had a net unrealized gain of $1,000 related to $19.5 million of investments in 10 debt securities. The investments all mature during 2009 or 2010 and we believe that we have the ability to hold these investments until the maturity date. Realized gains were $37,000 for the quarter ended June 30, 2008 and $45,000 for the first half of 2008. There were no such gains during the second quarter of 2009 or the first half of 2009. During the first half of 2009 and 2008, we recorded foreign currency transaction losses of $3,000 and $41,000, respectively.

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

We believe that our existing cash and investment balances will be sufficient to meet our operating and capital requirements for at least the next 12 months. With the exception of operating leases discussed in the notes to the consolidated financial statements included in this report, we have not entered into any off-balance sheet financing arrangements and we have not established or invested in any variable interest entities. We have not guaranteed the debt or obligations of other entities or entered into options on non-financial assets. The following table summarizes our future cash obligations for operating leases and capital lease, excluding interest, as of June 30, 2009:


	Payments Due by Period
	Total		Less Than 1 Year		1–3 Years		3-5 Years		More Than 5 Years
					(In thousands)
Contractual Obligations:
Capital lease obligations, including interest	$	21	$	12	$	9		—	$	—
Operating lease obligations		1,315		542		643		130		—

Total	$	1,336	$	554	$	652	$	130	$	—

Recent Accounting Pronouncements

In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2 “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP FAS 115-2 and FAS 124-2”). FSP FAS 115-2 and FAS 124-2 amend the other-than-temporary impairment guidance in U.S. GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. FSP FAS 115-2 and FAS 124-2 do not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. FSP FAS 115-2 and FAS 124-2 are effective for interim and annual reporting periods ending after June 15, 2009. The adoption of FSP FAS 115-2 and FAS 124-2 did not have a material impact on our condensed consolidated financial statements.

In June 2009, the FASB issued State of Financial Accounting Standards (“SFAS”) SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles” (SFAS No. 168”) which replaces SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” as the source of authoritative accounting principles recognized by FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. SFAS No. 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. Since the underlying GAAP guidance for nongovernmental entities will not change as a result of the issuance of SFAS No. 168, the adoption of the SFAS is not expected to have an impact on our financial condition or results of operations. References to codification guidance will be updated in the Quarterly Report on Form 10-Q for the quarter ending September 30, 2009.


Item 3.		Quantitative and Qualitative Disclosures about Market Risk

There have been no material changes in our reported market risks since our report on market risks in our Annual Report on Form 10-K for the year ended December 31, 2008 under the heading corresponding to that set forth above. Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. In order to reduce this interest rate risk, we usually invest our cash primarily in investments with short maturities. As of June 30, 2009, our investments in our portfolio were classified as cash equivalents and short-term investments. The cash equivalents and short-term investments consisted primarily of United States treasury notes, United States government agency notes, United States government money market funds, and a corporate bond. Since our investments consist of cash equivalents and short-term investments, a change in interest rates would not have a material effect on our financial condition or results of operations. Declines in interest rates over time will, however, reduce interest income.

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

We currently pay a number of expenses related to our Thai personnel and office in Thai Bhat. During the first half of 2009, the total payments made in Thai Bhat were $395,000 and we recorded a related foreign currency transaction loss of $3,000. During the first half of 2008, the total payments made in Thai Bhat were $465,000 and we recorded a related foreign currency transaction loss of $41,000.


Item 4.		Controls and Procedures

(a) Evaluation of disclosure controls and procedures.

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

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

(b) Changes in internal controls over financial reporting.

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

PART II. OTHER INFORMATION


Item 1.		Legal Proceedings

On October 31, 2008, we filed a complaint with the Canadian Superior Court in Montreal, Quebec alleging that Advantech Advanced Microwave Technologies Inc. (“Advantech”) the parent company of Allgon Microwave Corporation AB (“Allgon”), had breached its contractual obligations with Endwave and owes us $994,500 in a note receivable, purchased inventory and authorized and accepted purchase orders resulting in shippable finished goods. We cannot predict the outcome of these proceedings. An adverse decision in these proceedings could harm our consolidated financial position and results of operations. Although we may have pending various legal actions arising in the ordinary course of business from time to time, other than the complaint against Advantech, we are not currently a party to any material litigation.

In a related action, we have filed a creditor’s claim for $994,500 against Allgon in the composition of creditors’ proceedings now pending in a Stockholm, Sweden bankruptcy court. Although a recovery under Swedish bankruptcy law is not assured, if it occurs any recovery will be a set-off in the Montreal action against Allgon’s parent, Advantech.


Item 1A.		Risk Factors

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

** Indicates risk factor has been updated since our Annual Report on Form 10-K for the year ended December 31, 2008.

Risks Relating to Our Business

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

We had a net loss from continuing operations of $2.0 million for the second quarter of 2009. We also had net losses from continuing operations of $5.3 million and $2.9 million for the years ended December 31, 2008 and 2007, respectively. There is no guarantee that we will achieve or maintain profitability in the future.

Subsequent to the divesture of our defense and security business, we depend on the mobile communication industry for substantially all of our revenues. As this industry is negatively impacted by the global economic downturn, 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.**

The current global economic downturn and credit crisis has impacted the mobile communication industry. We anticipate decreased revenues from our mobile communication related customers in 2009, and therefore we undertook certain restructuring activities to reduce expenses. If the current downturn in the mobile communication industry persists, our revenues will continue to suffer and we may be forced to take further action, including but not limited to, making provisions for excess inventory, accounts receivable and abandoned or obsolete equipment and reducing our operating expenses through additional restructuring activities. We cannot guarantee that we would be able to reduce operating expenses to a level commensurate with the lower revenues resulting from such a prolonged industry downturn.

The mobile communication industry has undergone significant consolidation in the past few years. For example, during April 2007, Nokia and Siemens merged their mobile communication network businesses. 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.

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

Over the past several months, global economic conditions continue to remain weak and uncertain. For example, credit continues to be severely restricted. This restriction in credit has materially impacted our operations and financial results and we expect it to continue to do so. Our customers often rely on credit markets to finance the build-out of their networks and systems. With the current restriction in credit markets, capital may not be available to our customers or may only be available at unfavorable terms. Without appropriate capital, our customers may have difficulty funding their on-going operations and may reduce their orders for our products. This could significantly impact our operations and financial results. Additionally, our vendors may rely on credit markets to finance their operations. With the current restriction in credit markets, capital may not be available to our vendors or may only be available at unfavorable terms. Without appropriate capital, our vendors may have difficulty funding their on-going operations and may not be able to fulfill requirements for their products. This could significantly impact our operations and financial results through a reduction in our revenues.

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

We depend, and expect to continue to depend, on a relatively small number of mobile communication customers for a significant part of our revenues. The loss of any of our major customers, particularly Nokia Siemens Networks and its manufacturing partner, SRI Radio Systems, 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 the first half of 2009 and in fiscal 2008, revenues from Nokia Siemens Networks and its manufacturing partner, SRI Radio Systems, accounted for 85% and 83% of our total revenues, respectively. We had no other customers individually representing more than 10% of our total revenues for these periods.

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, global economic conditions, 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.

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

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

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

	•		assimilating the acquired operations and personnel;

	•		integrating information technology and reporting systems;

	•		retention of key personnel;

	•		retention of acquired customers; and

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

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

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

We utilize both industry standard semiconductor components and our own custom-designed 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 our custom-designed components. If any of our semiconductor suppliers 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 for the fabrication of custom designed components 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.

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; and

	•		custom connectors.

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.

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 investments, future declines in their market values could have a material adverse effect on our financial condition and operating results. Although our portfolio has no direct investments in auction rate or sub-prime mortgage securities, our overall investment portfolio is currently and may in the future be concentrated in cash equivalents including money market funds. If any of the issuers of the securities we hold default on their obligations, or their credit ratings are negatively affected by liquidity, credit deterioration or losses, financial results, or other factors, the value of our cash equivalents and short-term and long-term investments could decline and result in a material impairment.

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 communication 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.

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 communication related products to a Thailand facility of HANA Microelectronics Co., Ltd., or HANA, a contract manufacturer. We plan to continue this arrangement as a key element of our operating strategy. If HANA does not provide us with high quality products and services in a timely manner, terminates its relationship with us, or is unable to produce our products due to financial difficulties or political instability we may be unable to obtain a satisfactory replacement to fulfill customer orders on a timely basis. In the event of an interruption of supply from HANA, sales of our products could be delayed or lost and our reputation could be harmed. Our latest manufacturing agreement with HANA expires in October 2009, but will

renew automatically for successive one-year periods unless either party notifies the other of its desire to terminate the agreement at least one year prior to the expiration of the term. No such notification has been sent to or received from HANA. 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.

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.

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 communication products is designed for a specific range of frequencies. Because different national governments license different portions of the frequency spectrum for the mobile communication 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.

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

We have been required historically to place firm orders for products and manufacturing equipment with our suppliers up to six months prior to the anticipated delivery date and, on occasion, prior to receiving an order for the product, based on our forecasts of customer demands. Our sales process requires us to make multiple demand forecast assumptions, each of which may introduce error into our estimates. If we overestimate customer demand, we may allocate resources to manufacturing products that we may not be able to sell when we expect, if at all. As a result, we would have additional usage of cash, excess inventory and overhead expense, which would harm our financial results. On occasion, we have experienced adverse financial results due to excess inventory and excess manufacturing capacity. Conversely, if we underestimate customer demand or if insufficient manufacturing capacity were available, we would lose revenue opportunities, market share and damage our customer relationships. On occasion, we have been unable to adequately respond to unexpected increases in customer purchase orders and were unable to benefit from this increased demand. There is no guarantee that we will be able to adequately respond to unexpected increases in customer purchase orders in the future, in which case we may lose the revenues associated with those additional purchase orders and our customer relationships and reputation may suffer.

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

Our success depends, in part, on our ability to protect our intellectual property. We rely primarily on a combination of patent, copyright, trademark and trade secret laws to protect our proprietary technologies and processes. As of June 30, 2009, we had 41 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 2009 and 2027. We maintain a vigorous technology development program that routinely generates potentially patentable intellectual property. Our decision as to whether to seek formal patent protection is done on a case by case basis and is based on the economic value of the intellectual property, the anticipated strength of the resulting patent, the cost of pursuing the patent and an assessment of using a patent as a strategy to protect the intellectual property.

To protect our intellectual property, we regularly enter into written confidentiality and assignment of rights to inventions agreements with our employees, and confidentiality and non-disclosure agreements with third parties, and generally control access to and distribution of our documentation and other proprietary information. These measures may not be adequate in all cases to safeguard the proprietary technology underlying our products. It may be possible for a third party to copy or otherwise obtain and use our products or technology without authorization, develop similar technology independently or attempt to design around our patents. In addition, effective patent, copyright, trademark and trade secret protection may be unavailable or limited outside of the United States, Europe and Japan. We may not be able to obtain any meaningful intellectual property protection in other countries and territories. Additionally, we may, for a variety of reasons, decide not to file for patent, copyright, or trademark protection outside of the United States. Moreover we occasionally agree to incorporate a customer’s or supplier’s intellectual property into our designs, in which case we have obligations with respect to the non-use and non-disclosure of that intellectual property. We also license technology from other companies, including Northrop Grumman Corporation. There are no limitations on our rights to make, use or sell products we may develop in the future using the chip technology licensed to us by Northrop Grumman Corporation. Steps taken by us to prevent misappropriation or

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

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

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

Risks Relating to Our Industry

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

Among merchant suppliers in the mobile communication market who provide integrated transceivers to radio OEMs, we primarily compete with Compel Electronics Inc., Filtronic plc, and Microelectronics Technology Inc. Additionally, there are mobile communication OEMs, such as Ericsson and NEC Corporation, that use their own captive resources for the design and manufacture of their high-frequency RF transceiver modules, rather than using merchant suppliers like us. We believe that over one-half of the high-frequency RF transceiver modules manufactured today are being produced by these captive resources. To the extent that mobile communication 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 mobile communication OEM were to sell its captive operation to a competitor, we would lose the opportunity to acquire those potential sales.

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

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

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

The markets that we serve are highly regulated. Communications service providers must obtain regulatory approvals to operate broadband wireless access networks within specified licensed bands of the frequency spectrum. Further, the Federal Communications Commission and foreign regulatory agencies have adopted regulations that impose stringent RF emissions standards on the communications industry. In response to the new environmental regulations on health and safety in Europe and China, we are required to design and build a lead-free product. Changes to these regulations may require that we alter the performance of our products.

Risks Relating to Ownership of Our Stock

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

The price of our common stock has fluctuated widely since our initial public offering in October 2000. In the first half of 2009, the lowest daily sales price for our common stock was $1.36 and the highest daily sales price for our common stock was $3.08. In 2008, the lowest daily sales price for our common stock was $1.93 and the highest daily sales price for our common stock was $7.69. 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 mobile communication networks;

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

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

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

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

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

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

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

	•		the low trading volume of our common stock.

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

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

Oak Technology Partners XI, Limited Partnership, or Oak, owns 300,000 shares of our Series B preferred stock that are convertible into 3,000,000 shares of our common stock. Assuming the conversion of Oak’s preferred shares into common stock, as of May 15, 2009, Oak beneficially owned 24.1% of our capital stock. In addition, two other shareholders each beneficially owned more than 10% of our capital stock on May 15, 2009.

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, arrangements with executive officers and the rights of our preferred shareholder 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.

The preferred shareholder has certain rights upon any liquidation, merger, reorganization and/or consolidation of Endwave into or with another corporation or any transaction or series of related transactions in which a person, entity or group acquires 50% or more of the combined voting power of our then outstanding securities. If such an event were to occur the holders of the preferred shares are entitled to receive prior and in preference to any distribution to holders of our common stock or any other class or series of stock subordinate in liquidation preference to the preferred stock, the amount invested plus all accumulated or accrued and unpaid dividends thereon. The preferred shareholder also has the right to approve certain other transactions including cash dividends and stock repurchases.

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 6.		Exhibits.


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

2.2		Asset Purchase Agreement among the Registrant, Microsemi Corporation and SHR Corporation dated April 30, 2009.

2.3		Indemnification Agreement between the Registrant and Microsemi Corporation dated April 30, 2009.

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

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

3.3(4)		Certificate of Designation for Series A Junior Participating Preferred Stock.

3.4(5)		Certificate of Designation for Series B Preferred Stock.

3.5(6)		Certificate of Amendment of Amended and Restated Certificate of Incorporation effective July 26, 2007.

3.6(7)		Amended and Restated Bylaws.

4.1(2)		Form of Specimen Common Stock Certificate.

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

4.3(4)		Form of Rights Certificate

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

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

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

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

10.2(2)*		1992 Stock Option Plan.

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

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

10.5(9)*		2007 Equity Incentive Plan.

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

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

10.8(2)*		2000 Employee Stock Purchase Plan.

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

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

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

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

10.13(13)*		2009 Base Salaries for Named Executive Officers.

10.14*		Executive Officer Severance and Retention Plan.

10.15(2)		License Agreement by and between TRW Inc. and TRW Milliwave Inc. dated February 28, 2000.

10.16(14)†		Purchase Agreement between Nokia and the Registrant dated January 1, 2006.

10.17(14)†		Frame Purchase Agreement by and between the Registrant and Siemens Mobile Communications Spa dated January 16, 2006.

10.18(15)†		Lease Agreement by and between Legacy Partners I San Jose, LLC and the Registrant dated May 24, 2006.

10.19(16)†		Services Agreement by and between Hana Microelectronics Co., Ltd. and the Registrant dated October 15, 2006.

10.20(17)		Lease Agreement by and between 8812, a California limited partnership, and the Registrant dated May 20, 2008.

10.21(17)†		Amended and Restated Supply Agreement by and between Northrop Grumman Space and Mission Systems Corp. and the Registrant dated May 12, 2008.


Number		Description
10.22(13)†		First Amendment, dated as of December 1, 2008, to Amended and Restated Supply Agreement by and between Northrop Grumman Space and Mission Systems Corp. and the Registrant dated May 12, 2008.

10.23(13)†		Amendment, dated as of February 13, 2009, to Amended and Restated Supply Agreement by and between Northrop Grumman Space and Mission Systems Corp. and the Registrant dated May 12, 2008.

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

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

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


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

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

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

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

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

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

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

(8)		Previously filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on December 28, 2007 and incorporated herein by reference.

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

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

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

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

(13)		Previously filed as an exhibit to the Registrant’s Quarterly Report on Form 10-Q filed for the quarter year ended March 31, 2009 and incorporated herein by reference.

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

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

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

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

*		Indicates a management contract or compensatory plan or arrangement.

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

SIGNATURES

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


ENDWAVE CORPORATION
Date: August 14, 2009	By:	/s/ Edward A. Keible, Jr.
	Edward A. Keible, Jr.
	Vice Chairman and Chief Executive Officer (Duly Authorized Officer and Principal Executive Officer)


	By:	/s/ Curt P. Sacks
	Curt P. Sacks
	Chief Financial Officer and Senior Vice President (Duly Authorized Officer and Principal Financial and Accounting Officer)

Index to Exhibits


Number		Description
2.2		Asset Purchase Agreement among the Registrant, Microsemi Corporation and SHR Corporation dated April 30, 2009.

2.3		Indemnification Agreement between the Registrant and Microsemi Corporation dated April 30, 2009.

10.14		Executive Officer Severance and Retention Plan.

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

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

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