e10vq

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended September 30, 2010


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 Noo.

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 Noo.

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


Large accelerated filer o	Accelerated filer o	Non-accelerated filer o	Smaller reporting company þ
		(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 October 29, 2010 was 9,802,084 shares.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ENDWAVE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)


	September 30,			December 31,
	2010			2009
	(unaudited)			(1)
ASSETS
Current assets:
Cash and cash equivalents	$	9,834		$	55,158
Short-term investments		14,892			11,307
Accounts receivable, net		3,641			3,009
Inventories		4,499			4,879
Other current assets		532			788

Total current assets		33,398			75,141
Property and equipment, net		2,076			1,796
Other assets, net		78			179

Total assets	$	35,552		$	77,116


LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable	$	2,562		$	1,726
Accrued warranty		809			1,087
Accrued compensation		647			590
Restructuring liabilities, short-term		467			570
Other current liabilities		339			426

Total current liabilities		4,824			4,399
Restructuring liabilities, long-term		351			638
Other long-term liabilities		124			127

Total liabilities		5,299			5,164

Commitments and contingencies (Note 7)
Stockholders’ equity:
Convertible preferred stock, $0.001 par value; 5,000,000 shares authorized; zero and 300,000 shares issued and outstanding at September 30, 2010 and December 31, 2009, respectively		—			43,092
Common stock, $0.001 par value; 50,000,000 shares authorized; 9,802,084 and 9,684,756 shares issued and outstanding at September 30, 2010 and December 31, 2009, respectively		10			10
Additional paid-in capital, common stock		317,256			309,755
Accumulated other comprehensive income		3			15
Accumulated deficit		(287,016	)		(280,920	)

Total stockholders’ equity		30,253			71,952

Total liabilities and stockholders’ equity	$	35,552		$	77,116


(1)		Derived from the Company’s audited consolidated financial statements as of December 31, 2009.

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

ENDWAVE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share amounts)

(unaudited)


	Three months ended						Nine months ended
	September 30,						September 30,
	2010			2009			2010			2009
Revenues:
Product revenues	$	4,058		$	3,126		$	12,645		$	15,948


Costs and expenses:
Cost of product revenues*		3,169			2,369			10,596			11,425
Research and development*		1,221			1,452			3,302			4,463
Sales and marketing*		594			594			1,745			1,656
General and administrative*		996			1,374			3,009			4,605
Restructuring		63			(21	)		49			1,212


Total costs and expenses		6,043			5,768			18,701			23,361


Loss from continuing operations		(1,985	)		(2,642	)		(6,056	)		(7,413	)
Interest and other income (expense), net		(14	)		(3	)		(40	)		197

Loss from continuing operations before benefit from income taxes		(1,999	)		(2,645	)		(6,096	)		(7,216	)
Benefit from income taxes		—			(11	)		—			(32	)

Loss from continuing operations		(1,999	)		(2,634	)		(6,096	)		(7,184	)
Income from discontinued operations, net of tax* (Note 9)		—			41			—			17,571

Net income (loss)	$	(1,999	)	$	(2,593	)	$	(6,096	)	$	10,387


Basic and diluted net loss per share from continuing operations	$	(0.20	)	$	(0.27	)	$	(0.62	)	$	(0.76	)
Basic and diluted net income per share from discontinued operations	$	—		$	—		$	—		$	1.86
Basic and diluted net income (loss) per share	$	(0.20	)	$	(0.27	)	$	(0.62	)	$	1.10

Shares used in computing basic and diluted net loss per share		9,798,972			9,625,583			9,757,899			9,477,516


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


Cost of product revenues	$	(15	)	$	80	$	6	$	190
Research and development		13			186		65		374
Sales and marketing		35			215		69		390
General and administrative		107			458		270		999
Income from discontinued operations, net of tax		—			—		—		355

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

ENDWAVE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)


	Nine months ended
	September 30,
	2010			2009
Operating activities:
Net income (loss)	$	(6,096	)	$	10,387
Income from discontinued operations		—			17,571

Loss from continuing operations, net of tax		(6,096	)		(7,184	)
Adjustments to reconcile net loss to net cash used in continuing operating activities:
Depreciation		654			576
Stock compensation expense		410			1,953
Amortization of investments, net		249			198
Changes in operating assets and liabilities:
Accounts receivable, net		(632	)		478
Inventories		376			3,448
Other assets		357			(1,015	)
Accounts payable		836			528
Accrued warranty		(278	)		(631	)
Accrued compensation and other liabilities		(420	)		(831	)

Net cash used in operating activities		(4,544	)		(2,480	)

Investing activities:
Proceeds from sale of discontinued operations		—			28,000
Change in restricted cash		—			600
Purchases of property and equipment		(934	)		(289	)
Proceeds on sales and maturities of investments		15,530			19,715
Purchases of investments		(19,376	)		(30,331	)

Net cash (used in) provided by investing activities		(4,780	)		17,695

Financing activities:
Repurchase of preferred stock		(36,238	)		—
Payments on capital leases		(3	)		(13	)
Proceeds from common stock issuance		74			242
Proceeds from exercises of stock options		167			331

Net cash (used in) provided by financing activities		(36,000	)		560

Cash flows from discontinued operations:
Operating activities		—			(2,472	)
Investing activities		—			(794	)
Financing activities		—			—

Net cash used in discontinued operations		—			(3,266	)


Net change in cash and cash equivalents		(45,324	)		12,509
Cash and cash equivalents at beginning of period		55,158			33,998

Cash and cash equivalents at end of period	$	9,834		$	46,507

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, or RF, products that enable the transmission, reception and processing of high frequency RF signals. The Company currently has two key product lines:

	•		The Company’s transceiver modules, which serve as the core RF sub-system in digital microwave radios, are produced for telecommunication network original equipment manufacturers and system integrators located throughout the world, collectively referred to as telecom OEMs.

	•		The Company’s semiconductor product line consists of a broad range of monolithic microwave integrated circuits, or MMICs, including amplifiers, voltage controlled oscillators, up and down converters, variable gain amplifiers, voltage variable attenuators, fixed attenuators and filters. These types of devices find wide application in numerous telecommunications, avionic, defense, homeland security, instrumentation and consumer systems.

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, 2010 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, 2009.

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

On April 30, 2009, the Company sold its Defense and Security RF module business to Microsemi Corporation (“Microsemi”). The Company’s financial statements have been presented to reflect the Defense and Security RF module business as a discontinued operation for all periods presented. See additional discussion at Note 9, Discontinued Operations.

2. Investments

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


	September 30, 2010
			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses		Fair Value
	(In thousands)
Investments:
Commercial paper	$	2,649	$	—	$	—	$	2,649
United States government agencies		12,240		3		—		12,243

Total	$	14,889	$	3	$	—	$	14,892


	December 31, 2009
			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses			Fair Value
	(In thousands)
Investments:
Commercial paper	$	799	$	—	$	—		$	799
United States government agency		8,759		5		(2	)		8,762
Corporate securities		1,734		12		—			1,746

Total	$	11,292	$	17	$	(2	)	$	11,307

At September 30, 2010, the Company had $14.9 million of short-term investments with maturities of less than one year and no long term investments.

At September 30, 2010, the Company had unrealized gains of $3,000 related to $9.0 million of investments. The investments mature through 2011 and the Company believes that it has the ability to hold these investments until their maturity dates. Realized gains and losses were insignificant for the three and nine months ended September 30, 2010 and 2009.

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 September 30, 2010 and December 31, 2009 (in thousands):


	Quoted Prices in
	Active Markets of				Significant Other
	Identical Assets				Observable Inputs
	(Level 1)				(Level 2)
	Sept 30,		Dec 31,		Sept 30,		Dec 31,
	2010		2009		2010		2009
Assets:
Cash equivalents:
Money market funds	$	7,491	$	54,097	$	—	$	—
Commercial paper		—		—		650		—
Short-term investments:
Commercial paper		—		—		2,649		799
United States government agencies		—		—		12,243		8,762
Corporate securities		—		—		—		1,746

Total	$	7,491	$	54,097	$	15,542	$	11,307


Liabilities:	$	—	$	—	$	—	$	—

The Company’s financial assets and liabilities are valued using market prices on both active markets (Level 1) and less active markets (Level 2). Level 1 instrument valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level 2 instrument valuations are obtained from

readily-available pricing sources for comparable instruments. As of September 30, 2010, 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).

As of September 30, 2010 and December 31, 2009, the Company did not have any significant transfers of investments between Level 1 and Level 2.

The amounts reported as cash and cash equivalents, accounts receivable, accounts payable and accrued warranty, compensation and other 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.

3. Inventories

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


	September 30,		December 31,
	2010		2009
Raw materials	$	3,597	$	4,046
Work in process		398		292
Finished goods		504		541

	$	4,499	$	4,879

4. Note Receivable

During the third quarter of 2008, the Company was issued a note receivable by one of its customers, Allgon Microwave Corporation AB (“Allgon”) which failed to meet the terms of its accounts receivable owed to the Company. 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. At the time of default, the note receivable balance was $420,000. Based on Allgon’s bankruptcy liquidation and the related estimates of payments to Allgon’s creditors, the Company reserved 100%, or $420,000, of the remaining balance of the note receivable.

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 which includes amounts owed under the note receivable and for purchased inventory and authorized and accepted purchase orders resulting in shippable finished goods. See additional discussion at Note 7, Commitments and Contingencies.

5. Warranty

The warranty periods for the Company’s products are between 12 and 30 months from date of shipment. The Company provides for estimated warranty expense at the time of shipment. While the Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of component suppliers, its warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from the estimates, revisions to the estimated warranty accrual and related costs may be required.

Changes in the Company’s product warranty liability during the nine months ended September 30, 2010 and 2009 are as follows (in thousands):


	Nine months ended Sept 30,
	2010			2009
Balance at January 1	$	1,087		$	2,439
Warranties accrued		345			641
Warranties settled or reversed		(623	)		(1,190	)
Warranties transferred due to sale of business		—			(728	)

Balance at September 30	$	809		$	1,162

6. Restructuring

During the first quarter of 2009, the Company undertook certain restructuring activities to reduce expenses. The components of the restructuring charge included severance, benefits, payroll taxes and other costs associated with employee terminations. The net charge for these restructuring activities was $1.2 million and all cash payments have been made. Of this amount, approximately $182,000 has been included in the discontinued operations line item on the consolidated statements of operations.

During the second quarter of 2009, the Company undertook certain additional restructuring activities to reduce expenses. The components of the restructuring charge included severance, benefits, payroll taxes and other costs associated with employee terminations. The net charge for these restructuring activities was $243,000 and all cash payments have been made. Of this amount, approximately $39,000 has been included in the discontinued operations line item on the consolidated statements of operations.

During the fourth quarter of 2009, the Company undertook certain additional restructuring activities, including the departure of a senior executive, to reduce expenses. The components of the restructuring charge included severance, benefits, payroll taxes and other costs associated with employee terminations. The net charge for these restructuring activities was $1.2 million. The remaining restructuring liability of $755,000 at September 30, 2010 is expected to be substantially paid by the end of the third quarter of 2012.

During the third quarter of 2010, the Company undertook certain additional restructuring activities to reduce expenses. The components of the restructuring charge included severance, benefits, payroll taxes and other costs associated with an employee termination. The net charge for these restructuring activities was $63,000 and is expected to be substantially paid by the end of the fourth quarter of 2010.

Changes in all of the Company’s restructuring liabilities discussed are summarized as follows (in thousands):


	Nine months ended September 30,
	2010			2009
Accrual at January 1	$	1,208		$	—
Restructuring charge		63			1,507
Cash payments		(475	)		(1,351	)
Imputed interest		36			—
Restructuring charge adjustment		(14	)		(76	)

Accrual at September 30	$	818		$	80

At September 30, 2010, $467,000 and $351,000 of accrued restructuring charges were included in current liabilities and long-term liabilities, respectively, on the condensed consolidated balance sheet. At December 31, 2009, $570,000 and $638,000 of accrued restructuring charges were included in current liabilities and long-term liabilities, respectively, on the audited consolidated balance sheet. The restructuring liability related to a senior executive was recorded at its fair value based on an assumed interest rate of 5.0%, which represents the current market rate of interest at which the Company could borrow, due to the long-term nature of the liability. The

Company will recognize interest expense associated with amortizing the $77,000 discount on this liability over the 30 month term of the restructuring payout. During the three and nine months ended September 30, 2010, the Company recognized interest expense of $12,000 and $36,000, respectively.

The Company’s restructuring estimates will be reviewed and revised quarterly, if necessary, and may result in an increase or decrease to restructuring charges. During the first quarter of 2010, the Company recorded a $14,000 positive adjustment as a result of lower benefit charges in connection with the first quarter 2009 restructuring plan than were originally anticipated.

7. 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 Microwave Corporation AB, had breached its contractual obligations with Endwave and owes the Company $994,500, which includes amounts owed under the note receivable discussed in Note 4 and for purchased inventory and authorized and accepted purchase orders resulting in shippable finished goods. The Company cannot predict the outcome of these proceedings. Other than the complaint against Advantech, the Company is not currently a party to any material litigation

8. Stockholders’ Equity

Preferred Stock and Warrant Purchase Agreement

The Company had 5,000,000 shares of convertible preferred stock authorized as of September 30, 2010 and December 31, 2009.

In April 2006, the Company entered into a purchase agreement with Oak Investment Partners XI, Limited Partnership (“Oak”). Pursuant to the purchase agreement, Oak purchased 300,000 shares of the Company’s Series B preferred stock, par value $0.001 per share, for $150 per preferred share, or a total of $45.0 million. The preferred shares were convertible initially into 3,000,000 shares of common stock, for an effective purchase price of $15 per common share equivalent. The Company also issued Oak a warrant granting Oak the right to purchase an additional 90,000 shares of Series B preferred stock at an exercise price of $150 per share. The warrant expired on April 24, 2009. The Company received net proceeds of $43.1 million from the sale of the Series B preferred stock and the warrant after the payment of legal fees and other expenses, including commissions.

On January 21, 2010, the Company repurchased all 300,000 outstanding shares of its preferred stock held by Oak for $120 per share, or a total of $36.0 million in cash. The total cost of the repurchase was $36.2 million, which included fees and expenses. The 300,000 outstanding shares represented 3,000,000 shares of Endwave common stock on an as-converted basis. Such shares had entitled Oak to a liquidation preference equal to its original investment of $45.0 million before any proceeds from a liquidation or sale of the Company would have been paid to the holders of Endwave’s common stock. In connection with the share repurchase, Eric Stonestrom, Oak’s designee to Endwave’s board of directors, resigned from the board of directors.

Since the Company repurchased the preferred stock for official retirement, the excess of the stated value, $43.1 million, over the effective repurchase price of $36.2 million was credited to additional paid-in capital.

Stock Option Exchange

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 three old options for one 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 by or acting as a member of the Board of Directors of the Company and held eligible options. The exchange offer expired on September 9, 2009. A total of 1,570,938 options were eligible to participate in the

exchange offer and a total 1,559,113 options were exchanged for 519,624 new options. The new options have a two-year vesting period, except for 67,143 director’s shares which primarily have a one-year vesting period. All new options have an exercise price of $2.53 per share which was the closing price of the Company’s common stock on September 10, 2009.

The exchange of original options for new options was treated as a modification of the original options. As such, the Company will continue to incur compensation cost for the incremental difference between the fair value of the new options and the fair value of the original options immediately before modification, reflecting the current facts and circumstances on the modification date, over the expected term of the new options. Since the incremental difference between the fair value of the new options and the fair value of the original options immediately before modification was immaterial, the value of the options of $661,000 is primarily due to the carry-forward value of the old options into the new options.

Stock-based Compensation

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

The effect of recording stock-based compensation for the three months ended September 30, 2010 and 2009 was as follows (in thousands, except per share data):


	Three months ended September 30,
	2010			2009
Stock-based compensation expense by type of award:
Employee stock options and restricted stock units	$	81		$	847
Employee stock purchase plan		58			109
Amounts capitalized into inventory during the three month period		—			(17	)
Amounts previously capitalized into inventory and expensed		1			—

Total stock-based compensation		140			939
Tax effect on stock-based compensation		—			—

Total stock-based compensation expense	$	140		$	939

Impact on net loss per share — basic and diluted	$	(0.01	)	$	(0.10	)

The effect of recording stock-based compensation for the nine months ended September 30, 2010 and 2009 was as follows (in thousands, except per share data):


	Nine months ended September 30,
	2010			2009
Stock-based compensation expense by type of award:
Employee stock options and restricted stock units	$	443		$	1,998
Employee stock purchase plan		(38	)		314
Amounts capitalized into inventory during the nine month period		(6	)		(29	)
Amounts previously capitalized into inventory and expensed		11			25

Total stock-based compensation		410			2,308
Tax effect on stock-based compensation		—			—

Total stock-based compensation expense	$	410		$	2,308

Impact on net income (loss) per share — basic and diluted	$	(0.04	)	$	(0.24	)

During the three months ended September 30, 2010, the Company granted options to purchase 6,400 shares of common stock, with an estimated total grant-date fair value of $10,000 or $1.57 per share. Of these amounts, the Company estimated that the stock-based compensation expense of the awards not expected to vest was $2,000.

During the three months ended September 30, 2009, the Company granted options to purchase 562,624 shares of common stock, including 519,624 options granted as part of an option exchange program. The 519,624 options granted as part of the exchange program had an estimated total grant-date fair value of $661,000 or $1.27 per share. The remaining 43,000 options had an estimated total grant-date fair value of $58,000 or $1.35 per share. The total estimated grant-date fair value of all 562,624 options granted was $719,000. Of this amount, the Company estimated that the stock-based compensation expense of the awards not expected to vest was $128,000.

During the three months ended September 30, 2010, the Company granted 50,000 restricted stock units with an estimated grant-date fair value of $133,000 or $2.65 per share. Of this amount, the Company estimated that the stock-based compensation expense of the awards not expected to vest was $15,000. The Company did not grant any restricted stock units during the three months ended September 30, 2009.

During the nine months ended September 30, 2010, the Company granted options to purchase 301,500 shares of common stock, with an estimated total grant-date fair value of $457,000 or $1.52 per share. Of these amounts, the Company estimated that the stock-based compensation expense of the awards not expected to vest was $77,000.

During the nine months ended September 30, 2009, the Company granted options to purchase 1,082,624 shares of common stock, including 519,624 options granted as part of an option exchange program. The remaining 563,000 options had an estimated total grant-date fair value of $596,000 or $1.06 per share. The total estimated grant-date fair value of all 1,082,624 options granted was $1.3 million. Of this amount, the Company estimated that the stock-based compensation expense of the awards not expected to vest was a total of $274,000.

During the nine months ended September 30, 2010, the Company granted 218,000 restricted stock units with an estimated grant-date fair value of $583,000 or $2.67 per share. Of this amount, the Company estimated that the stock-based compensation expense of the awards not expected to vest was $65,000. The Company did not grant any restricted stock units during the nine months ended September 30, 2009.

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 described in Note 9 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 September 30, 2010, the unrecorded stock-based compensation balance related to all stock options was $426,000, net of estimated forfeitures, and will be recognized over an estimated weighted-average service period of 1.3 years. As of September 30, 2010, the unrecorded stock-based compensation balance related to all restricted stock units was $367,000, net of estimated forfeitures, and will be recognized over an estimated weighted-average service period of 1.4 years. As of September 30, 2010 the unrecorded stock-based compensation balance related to the employee stock purchase plan was $108,000, net of estimated forfeitures, and will be recognized over an estimate weighted-average service period of 0.3 years.

Valuation Assumptions

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option valuation model and the graded-vesting method with the following weighted-average assumptions:


	Three months ended						Nine months ended
	September 30,						September 30,
	2010			2009			2010			2009
Risk-free interest rate		0.84% - 1.60	%		1.62% - 2.53	%		0.84% - 2.43	%		1.44% - 2.53	%
Expected life of options	4.6 years			3.7 years			4.6 years			4.1 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:


	Nine months ended
	September 30,
	2010			2009
Risk-free interest rate		0.24% - 1.06	%		0.35% - 0.93	%
Expected life of options	1.2 years			1.2 years
Expected dividends		0.0	%		0.0	%
Volatility		51	%		51	%

There were no enrollments or shares issued under the employee stock purchase plan for the three months ended September 30, 2010 or 2009.

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 September 30, 2010 and 2009 was $2,000 and $36,000, respectively. The total intrinsic value of options exercised during the nine months ended September 30, 2010 and 2009 was $53,000 and $145,000, 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. Under the Company’s equity incentive program, restricted stock units have a vesting period of two years.

The following table summarizes the stock option activity 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, 2009		1,010,561		$	2.31
Options granted		301,500			2.69
Options exercised		(80,725	)		2.07
Options cancelled		(57,957	)		2.97

Outstanding at September 30, 2010		1,173,379		$	2.39		6.69	$	122

Options vested and exercisable and expected to be exercisable at September 30, 2010		1,118,107		$	2.39		6.59	$	119
Options vested and exercisable at September 30, 2010		615,930		$	2.33		4.82	$	82

The options outstanding and options vested and exercisable at September 30, 2010 were in the following exercise price ranges:


							Options Vested and Exercisable
Options Outstanding at September 30, 2010							At September 30, 2010
					Weighted-Average
			Weighted-Average		Remaining				Weighted-Average
Range of Exercise Price	Shares		Exercise Price		Contractual Life		Shares		Exercise Price
$0.76 - $ 1.21		11,183	$	1.13		2.25		11,183	$	1.13
$1.81 - $ 1.81		278,926	$	1.81		5.36		166,539	$	1.81
$1.93 - $ 2.40		86,372	$	2.17		5.76		56,396	$	2.04
$2.53 - $ 2.53		460,617	$	2.53		6.15		306,035	$	2.53
$2.55 - $ 2.55		30,300	$	2.55		8.59		30,093	$	2.55
$2.65 - $ 2.65		261,825	$	2.65		9.05		32,740	$	2.65
$2.82 - $ 6.59		41,781	$	3.45		8.58		10,682	$	4.27
$9.90 - $13.23		2,375	$	10.43		5.54		2,262	$	10.40

		1,173,379	$	2.39		6.69		615,930	$	2.33

The following table summarizes the restricted stock unit activity for the indicated periods:


						Weighted-
				Weighted-		Average		Aggregate
				Average		Remaining		Intrinsic
	Number of			Grant Date		Contractual		Value
	Shares			Fair Value		Term (Years)		(In thousands)
Outstanding at December 31, 2009		—		$	0.00
Awarded		218,000			2.67
Released		—			0.00
Forfeited		(6,200	)		2.58

Outstanding at September 30, 2010		211,800		$	2.68		0.94	$	460

At September 30, 2010, the Company had 196,090 restricted stock units vested and expected to vest with a weighted average remaining contractual term of 0.93 years and an aggregate intrinsic value of $426,000.

At September 30, 2010, the Company had 4,718,185 shares available for grant under its equity incentive plans.

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.

For the compensation cost in connection with the purchase plan for the three months ended September 30, 2010, the Company recognized an expense of $58,000. For the compensation cost in connection with the purchase plan for the three months ended September 30, 2009, the Company recognized an expense of $109,000.

For the compensation cost in connection with the purchase plan for the nine months ended September 30, 2010, the Company recognized a benefit of $38,000 due to actual contributions being less than expected contributions for the offering period, resulting in the recognition of compensation cost only for those awards that actually vested. For the compensation cost in connection with the purchase plan for the nine months ended September 30, 2009, the Company recognized an expense of $314,000.

There were no shares issued under the purchase plan during the three months ended September 30, 2010 or the three months ended September 30, 2009. During the nine months ended September 30, 2010 and 2009, there were 36,603 and 103,075 shares issued under the purchase plan at weighted average prices of $2.03 and $2.35 per share, respectively. At September 30, 2010, there were 327,229 shares available for purchase under the purchase plan.

9. 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 RF module 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 $28.0 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.

During the fiscal year ended December 31, 2009, the Company recognized a $19.6 million gain on sale of discontinued operations, net of tax, which included the following: $28.0 million of cash received from Microsemi and $1.3 million of liabilities assumed by Microsemi reduced by $647,000 of deal fees and $9.1 million of assets transferred to Microsemi.

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


	Three months ended		Nine months ended
	September 30,		September 30,
	2009		2009
Revenue of discontinued operations	$	—	$	5,313

Loss from discontinued operations	$	—	$	(2,028	)
Gain on sale of discontinued operation, net of tax		41		19,599

Income from discontinued operations, net of tax	$	41	$	17,571

10. 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 the convertible preferred stock which was repurchased in January 2010, options to purchase common stock, restricted stock units and shares to be purchased in connection with the Company’s employee stock purchase plan.

As of September 30, 2009, 300,000 shares of preferred stock were outstanding, which were convertible into 3,000,000 shares of common stock. On January 21, 2010, the Company repurchased all 300,000 shares of its preferred stock.

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 were not included in the calculation of diluted net loss per share, as the effect would be anti-dilutive. Potential dilutive common shares of 1,385,179 as of September 30, 2010 and 1,034,167 as of September 30, 2009 from the assumed exercise of stock options and unvested restricted stock units 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.

11. 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 exchange translations represent the only components of comprehensive loss excluded from the reported net loss and are displayed in the statements of stockholders’ equity.

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


	Three months ended						Nine months ended
	September 30,						September 30,
	2010			2009			2010			2009
Net income (loss)	$	(1,999	)	$	(2,593	)	$	(6,096	)	$	10,387
Change in unrealized gain (loss) on investments		2			4			(12	)		(37	)

Total comprehensive income (loss)	$	(1,997	)	$	(2,589	)	$	(6,108	)	$	10,350

12. Segment Disclosures

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


	Three months ended September 30,
	2010				2009
United States	$	470	11.6	%	$	168	5.4	%
Finland		—	—			106	3.4	%
Germany		2,343	57.7	%		1,205	38.5	%
Slovakia		947	23.3	%		1,081	34.6	%
Hungary		230	5.7	%		448	14.3	%
Rest of the world		68	1.7	%		118	3.8	%

Total	$	4,058	100.0	%	$	3,126	100.0	%


	Nine months ended September 30,
	2010				2009
United States	$	3,793	30.0	%	$	213	1.3	%
Finland		—	—			9,997	62.7	%
Germany		5,520	43.7	%		2,181	13.7	%
Slovakia		2,280	18.0	%		2,178	13.7	%
Hungary		600	4.7	%		1,157	7.3	%
Rest of the world		452	3.6	%		222	1.3	%

Total	$	12,645	100.0	%	$	15,948	100	%

For the three months ended September 30, 2010, three customers each accounted for greater than 10% of total revenues and combined they accounted for 92% of the Company’s total revenues. For the three months ended September 30, 2009, three customers each accounted for greater than 10% of total revenues and combined they accounted for 91% of the Company’s total revenues.

In the first nine months of 2010, three customers each accounted for greater than 10% of total revenues and combined they accounted for 93% of the Company’s total revenues. In the first nine months of 2009, two customers accounted for 90% of our total revenues and no other customer accounted for more than 10% of our total revenues.

13. Recent Accounting Pronouncements

In October 2009, the Financial Accounting Standards Board (“FASB”) issued new standards for revenue agreements with multiple deliverables. These new standards impact the determination of when the individual deliverables included in a multiple-element arrangement may be treated as separate units of accounting. Additionally, these new standards modify the manner in which the transaction consideration is allocated across the separately identified deliverables by no longer permitting the residual method of allocating arrangement consideration. These new standards are required to be adopted in the first quarter of 2011; however, early adoption is permitted. The Company does not expect these new standards to significantly impact its consolidated financial statements.

In October 2009, the FASB issued new standards for the accounting for certain revenue arrangements that include software elements. These new standards amend the scope of pre-existing software revenue guidance by removing from the guidance non-software components of tangible products and certain software components of tangible products. These new standards are required to be adopted in the first quarter of 2011; however, early adoption is permitted. The Company does not expect these new standards to significantly impact its consolidated financial statements.

In January 2010, the FASB issued new standards for fair value measurement and disclosures. These new standards require disclosures for significant transfers in and out of Level 1 and Level 2 fair value measurements and the reasons for the transfers and activity. For Level 3 fair value measurements, purchases, sales, issuances and settlements must be reported on a gross basis. Further, additional disclosures are required by class of assets or liabilities, as well as inputs used to measure fair value and valuation techniques. These standards were required to be adopted in the first quarter of 2010. The Company adopted these standards which did not have a material impact on the Company’s consolidated financial statements.

In February 2010, the FASB issued new standards which amend the subsequent event disclosure requirements for public company filers. An entity that is an SEC filer is not required to disclose the date through which subsequent events have been evaluated. These standards were effective upon issuance and did not a material impact on the Company’s consolidated financial statements.

In July 2010, the FASB issued new standards which amend the receivable disclosure requirements, including the credit quality of financing receivables and the allowance for credit losses. These standards require additional disclosures that will facilitate financial statement user’s evaluation of the nature of credit risk inherent in financing receivables, how that risk is analyzed in arriving at the allowance for credit losses, and the reason for any changes in the allowance for credit losses. These new standards are required to be adopted for interim and annual reporting periods beginning on or after December 15, 2010. The Company does not expect these new standards to significantly impact its consolidated financials.

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, 2009. 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

We design, manufacture and market radio frequency, or RF, products that enable the transmission, reception and processing of high frequency RF signals.

As a result of the divestiture of our Defense and Security RF module business in April 2009, our products now consist of two key product lines:

•

Our transceiver modules, which serve as the core RF sub-system in digital microwave radios, are produced for telecommunication network original equipment manufacturers and system integrators located throughout the world, collectively referred to as telecom OEMs.

•

Our semiconductor product line consists of a broad range of monolithic microwave integrated circuits, or MMICs, including amplifiers, voltage controlled oscillators, up and down converters, variable gain amplifiers, voltage variable attenuators, fixed attenuators and filters. These types of devices find wide application in numerous telecommunications, avionic, defense, homeland security, instrumentation and consumer systems. Our semiconductor product line was formally introduced to the market in the latter part of 2009 and has not yet become a significant source of revenue for us.

On April 30, 2009, we entered into an Asset Purchase Agreement with Microsemi Corporation (“Microsemi”) pursuant to which Microsemi purchased our Defense and Security RF module business, including all of the outstanding capital stock of our subsidiary, Endwave Defense Systems, Incorporated. As consideration, Microsemi assumed certain liabilities associated exclusively with the Defense and Security RF module business and paid $28.0 million in cash. Additionally, as part of the sale, approximately 130 employees associated with the Defense and Security RF module business transferred to Microsemi. Accordingly, we reclassified the results of our Defense and Security RF module business as a discontinued operation in our consolidated statements of operations for all periods presented in this Quarterly Report on Form 10-Q, and all amounts set forth in this Management’s Discussion and Analysis of Financial Condition and Results of Operation reflect such reclassification.

Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States, or GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. In many instances, we could have reasonably used different accounting estimates, and in other instances changes in the accounting estimates are reasonably likely to occur from period-to-period. Accordingly, actual results could differ significantly from the estimates made by our management. To the

extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected.

We believe that the following critical accounting policies involve our more significant judgments, assumptions and estimates and, therefore, could potentially have a significant impact on our consolidated financial statements: Revenue recognition; Allowance for doubtful accounts; Warranty reserves; Inventory valuation; Stock-based compensation; Deferred taxes; Long-lived assets; Goodwill and intangible assets with an indefinite life; Fair value measurement; and Business combinations.

There have been no material changes in the matters for which we make critical accounting estimates in the preparation of our condensed consolidated financial statements during the nine months ended September 30, 2010 as compared to those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2009 filed with the Securities and Exchange Commission (“SEC”) on March 24, 2010.

Results of Operations

Three and nine months ended September 30, 2010 and 2009

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


	Three months ended						Nine months ended
	September 30,						September 30,
	2010			2009			2010			2009
Total revenues		100.0	%		100.0	%		100.0	%		100.0	%

Cost of product revenues		78.1			75.8			83.8			71.6
Research and development		30.1			46.5			26.1			28.0
Sales and marketing		14.6			19.0			13.8			10.4
General and administrative		24.5			44.0			23.8			28.9
Restructuring		1.6			(0.7	)		0.4			7.6

Total costs and expenses		148.9			184.5			147.9			146.5

Loss from continuing operations		(48.9	)		(84.5	)		(47.9	)		(46.5	)
Interest and other income (expense), net		(0.4	)		(0.1	)		(0.3	)		1.2

Loss from continuing operations before benefit from income taxes		(49.3	)		(84.6	)		(48.2	)		(45.3	)
Benefit from income taxes		—			(0.3	)		—			(0.2	)

Loss from continuing operations		(49.3	)		(84.3	)		(48.2	)		(45.1	)
Income from discontinued operations, net of tax		—			1.3			—			110.2

Net income (loss)		(49.3	)%		(83.0	)%		(48.2	)%		65.1	%

Total revenues


	Three months ended September 30,							Nine months ended September 30,
	2010		2009		% Change			2010		2009		% Change
	(In thousands)							(In thousands)
Total revenues	$	4,058	$	3,126		29.8	%	$	12,645	$	15,948		(20.7	)%

Total revenues primarily consist of product revenues for sales of our transceiver module and semiconductor products.

During the third quarter of 2010, total revenues increased by $932,000 or 29.8%, compared to the third quarter of 2009 primarily due to an increased demand for our new module designs supporting next generation, high capacity, internet protocol-based radios.

During first nine months of 2010, total revenues decreased by $3.3 million, or 20.7%, compared to the same period in 2009 primarily due to a rapid drop in sales for a key legacy product for a major customer’s radio platform while sales of our new module designs supporting next-generation radios were just beginning their production ramp. During the first nine months of 2010, the increased revenues from the new module designs did not offset the decline in revenues from the legacy product.

During the fourth quarter of 2010, we expect revenues to be comparable to revenues in the third quarter of 2010. We expect revenues from our new module designs and to a lesser extent our semiconductor product line to offset the continued decline in revenues from our legacy products.

Cost of product revenues


	Three months ended September 30,									Nine months ended September 30,
	2010			2009			% Change			2010			2009			% Change
	(In thousands)									(In thousands)
Cost of product revenues	$	3,169		$	2,369			33.8	%	$	10,596		$	11,425			(7.3	)%
Percentage of total revenues		78.1	%		75.8	%					83.8	%		71.6	%

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 third quarter of 2010, the cost of product revenues as a percentage of revenues increased compared to the third quarter of 2009 primarily due to a shift in product mix toward lower margin products. The cost of product revenues in both periods was favorably impacted by the utilization of inventory that was previously written off, amounting to approximately $219,000 during the third quarter of 2010 and $32,000 during the third quarter of 2009.

During the first nine months of 2010, the cost of product revenues as a percentage of revenues increased compared to the first nine months of 2009, primarily due to the write-off of inventory associated with excess material related to a rapid drop in sales of a legacy product for a major customer’s radio platform. The cost of product revenues in both periods was favorably impacted by the utilization of inventory that was previously written off, amounting to approximately $321,000 during the first nine months of 2010 and $97,000 during the first nine months of 2009.

We continue to focus on reducing the cost of product revenues as a percentage of total revenues through the introduction of new designs and technologies 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 September 30,									Nine months ended September 30,
	2010			2009			% Change			2010			2009			% Change
	(In thousands)									(In thousands)
Research and development expenses	$	1,221		$	1,452			(15.9	)%	$	3,302		$	4,463			(26.0	)%
Percentage of total revenues		30.1	%		46.5	%					26.1	%		28.0	%

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

During the third quarter of 2010, research and development costs decreased in absolute dollars compared to the third quarter of 2009 which was primarily due to a $173,000 decrease in stock-based compensation expense, a $30,000 decrease in personnel-related expenses and a $24,000 decrease in project related expenses.

During the first nine months of 2010, research and development costs decreased in absolute dollars compared to the first nine months of 2009 primarily due to a $555,000 decrease in personnel-related expenses, a $309,000 decrease in stock-based compensation expenses and a $300,000 decrease in project related expenses.

During the remainder of 2010, we will continue to invest in our semiconductor product line and expect research and development expenses to moderately increase relative to research and development expenses incurred during the third quarter of 2010.

Sales and marketing


	Three months ended September 30,									Nine months ended September 30,
	2010			2009			% Change			2010			2009			% Change
	(In thousands)									(In thousands)
Sales and marketing	$	594		$	594			0.0	%	$	1,745			$1,656			5.4	%
Percentage of total revenues		14.6	%		19.0	%					13.8	%		10.4	%

Sales and marketing consist primarily of salaries and related expenses for sales and marketing personnel, professional fees, facilities costs, expenses related to stock-based compensation and promotional activities.

During the third quarter of 2010, sales and marketing costs were comparable to the third quarter of 2009 primarily due to a $94,000 increase in sales commissions, a $59,000 increase in personnel-related expenses and a $20,000 increase in travel expenses which were offset by an $180,000 decrease in stock-based compensation expenses.

During the first nine months of 2010, sales and marketing costs increased in absolute dollars compared to the first nine months of 2009 primarily due to an $177,000 increase in sales commissions, a $73,000 increase in personnel-related expenses, a $67,000 increase in marketing expenses and a $59,000 increase in travel expenses which were partially offset by a $321,000 decrease in stock-based compensation expenses.

During the remainder of 2010, we expect sales and marketing expenses to remain flat on a quarterly basis relative to sales and marketing expenses incurred during the third quarter of 2010.

General and administrative


	Three months ended September 30,									Nine months ended September 30,
	2010			2009			% Change			2010			2009			% Change
	(In thousands)									(In thousands)
General and administrative	$	996		$	1,374			(27.5	)%	$	3,009		$	4,605			(34.7	)%
Percentage of total revenues		24.5	%		44.0	%					23.8	%		28.9	%

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

During the third quarter of 2010, general and administrative costs were $996,000 compared to $1.4 million in the third quarter of 2009. The decrease in general and administrative costs was primarily due to a $351,000 decrease in stock-based compensation and a $147,000 decrease in personnel-related expenses which were partially offset by a $114,000 increase for professional fees.

During the first nine months of 2010, general and administrative costs were $3.0 million compared to $4.6 million in the first nine months of 2009. The decrease in general and administrative costs was primarily due to a $758,000 decrease in personnel-related expenses, a $729,000 decrease in stock-based compensation and a $106,000 decrease for professional fees. The decrease in personnel-related expenses is primarily due to the restructuring activities undertaken during fiscal 2009.

During the remainder of 2010, we expect general and administrative expenses to remain flat on a quarterly basis relative to general and administrative expenses incurred during the third quarter of 2010.

Restructuring


	Three months ended September 30,								Nine months ended September 30,
	2010		2009			% Change			2010		2009		% Change
	(In thousands)								(In thousands)
Restructuring expenses	$	63	$	(21	)		400.0	%	$	49	$	1,212		(96.0	)%

During the first quarter of 2009, we undertook certain restructuring activities to reduce expenses. These terminations affected all areas of our operations. The components of the restructuring charge included severance, benefits, payroll taxes and other costs associated with employee terminations. The net charge for these restructuring activities in the first quarter of 2009 was $1.2 million. Of this amount, approximately $182,000 has been included in income from discontinued operations. During the first quarter of 2010, we recorded a $14,000 positive adjustment as a result of lower benefit charges in connection with our first quarter 2009 restructuring plan than were originally anticipated.

During the second quarter of 2009, we undertook certain additional restructuring activities to reduce expenses. These terminations affected all areas of our operations. The components of the restructuring charge included severance, benefits, payroll taxes and other costs associated with the employee terminations. The net charge for these restructuring activities was $243,000 and all cash payments have been made. Of this amount, approximately $39,000 has been included in the discontinued operations line item on the consolidated statements of operations.

During the third quarter of 2009, we recorded an adjustment of $6,000 to the first quarter 2009 restructuring plan and an adjustment of $15,000 to the second quarter 2009 restructuring plan.

During the third quarter of 2010, we undertook certain additional restructuring activities to reduce expenses. The components of the restructuring charge included severance, benefits, payroll taxes and other costs associated with an employee termination. The net charge for these restructuring activities was $63,000 and is expected to be substantially paid by the end of the fourth quarter of 2010.

Interest and other income (expense), net


	Three months ended September 30,									Nine months ended September 30,
	2010			2009			% Change			2010			2009		% Change
	(In thousands)									(In thousands)
Interest and other income (expense), net	$	(14	)	$	(3	)		(366.7	)%	$	(40	)	$	197		(120.3	)%

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 which ended in June 2009, gains and losses related to foreign currency transactions and interest expense imputed for a long-term restructuring liability.

The decrease in interest and other income, net during both the three and nine months ended September 30, 2010 was primarily the result of decreased interest earned on our investments and increased interest expense for a long-term restructuring liability.

During the third quarter of 2010, we earned $20,000 of interest income which was offset by interest expense for a long-term restructuring liability and banking charges. During the third quarter of 2009, we earned $21,000 of interest income which was offset by banking charges and losses on foreign currency transactions.

During the first nine months of 2010, we earned $66,000 of interest income which was offset by interest expense for a long-term restructuring liability, banking charges and losses on foreign currency transactions. During the first nine months of 2009, we earned $175,000 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.

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 third quarter of 2010, we recorded a foreign currency transaction gain of $1,000 and during the third quarter of 2009, we recorded a foreign currency transaction loss of $12,000. During the first nine months of 2010 and 2009, we recorded foreign currency transaction losses of $4,000 and $15,000, respectively.

Benefit from income taxes


	Three months ended September 30,								Nine months ended September 30,
	2010		2009			% Change			2010		2009			% Change
	(In thousands)								(In thousands)
Benefit from income taxes	$	—	$	(11	)		(100.0	)%	$	—	$	(32	)		(100.0	)%

During the third quarter of 2009, we recorded an income tax benefit of $11,000 due to a benefit from refundable research and development tax credits in the United States. During the nine months ended September 30, 2009, we recorded an income tax benefit of $32,000 due to a benefit from refundable research and development tax credits in the United States. No other income tax expense (benefit) has been recorded because we have incurred operating losses that cannot be benefitted due to a full valuation allowance.

Income from discontinued operations, net of tax


	Three months ended September 30,							Nine months ended September 30,
	2010		2009		% Change			2010		2009		% Change
	(In thousands)							(In thousands)
Income from discontinued operations, net of tax	$	—	$	41		(100.0	)%	$	—	$	17,571		(100.0	)%

On April 30, 2009, we entered into an Asset Purchase Agreement with Microsemi pursuant to which Microsemi purchased our Defense and Security RF module 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 RF module business and paid $28.0 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 nine months ended September 30, 2009, we recognized income from discontinued operations of $17.6 million net of tax expenses. The income was a result of the gain on sale of the discontinued operations of $19.6 million partially offset by a $2.0 million loss from the discontinued operations in 2009.

In the third quarter of 2009, based upon updated forecasts, we calculated a tax liability of $0 for the full year of 2009. As such, during the third quarter of 2009, we reversed the prior income tax accrual of $41,000 related to the sale.

Liquidity and Capital Resources

At September 30, 2010, we had $9.8 million of cash and cash equivalents, $14.9 million in short-term investments, working capital of $28.6 million and no debt outstanding. The following table sets forth selected condensed consolidated statement of cash flows data:


	Nine months ended
	September 30,
	2010			2009
	(in thousands)
Net cash used in operating activities	$	(4,544	)	$	(2,480	)
Net cash (used in) provided by investing activities		(4,780	)		17,695
Net cash (used in) provided by financing activities		(36,000	)		560
Cash, cash equivalents, short-term investments at end of period	$	24,726		$	68,238

During the first nine months of 2010, operating activities used $4.5 million of cash as compared to $2.5 million in the first nine months of 2009. During the first nine months of 2010, our net loss, adjusted for depreciation and other non-cash items, used $4.8 million of cash as compared to the first nine months of 2009, which used $4.5 million of cash. During the first nine months of 2010, the remaining provision of $239,000 of cash was primarily due to a $836,000 increase in accounts payable, a $376,000 decrease in inventories and a $357,000 decrease in other assets, which were partially offset by a $632,000 increase in accounts receivable, a $420,000 decrease in accrued compensation and other liabilities and a $278,000 decrease in accrued warranty. During the first nine months of 2009, the remaining provision of $2.0 million of cash was primarily due to a $3.4 million decrease in inventories, a $528,000 increase in accounts payable and a $478,000 decrease in accounts receivable, which were partially offset by a $1.0 million increase in other assets, a $831,000 decrease in accrued compensation and other liabilities and a $631,000 decrease in accrued warranty.

During the first nine months of 2010, investing activities used $4.8 million of cash as compared to the first nine months of 2009 which provided $17.7 million of cash. The use of cash during the first nine months of 2010 was due to a net increase in investments of $3.8 million, and the purchase of $934,000 of property and equipment. The source of cash during the first nine months of 2009 was due to the $28.0 million proceeds from sale of our Defense and Security RF module business and a $600,000 decrease to restricted cash, which were partially offset by a net increase in investments of $10.6 million and the purchase of $289,000 of property and equipment.

Financing activities used $36.0 million of cash during the first nine months of 2010 primarily due to the $36.2 million repurchase of our preferred stock, which was partially offset by $167,000 of proceeds from the exercise of stock options and $74,000 of cash from the proceeds of stock issuance. Financing activities provided $560,000 of cash during the first nine months of 2009 primarily due to $331,000 of proceeds from the exercise of stock options and $242,000 of cash from the proceeds of stock issuance, which were partially offset by capital lease payments.

At September 30, 2010, we had a net unrealized gain of $3,000 related to $14.9 million of investments in 20 debt securities. The investments all mature through 2011 and we believe that we have the ability to hold these investments until their maturity dates. During the first nine months of 2010 and 2009, we recorded foreign currency transaction losses of $4,000 and $15,000, 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. These potential 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 September 30, 2010:


	Payments Due by Period
			Less Than						More Than
	Total		1 Year		1 – 3 Years		3-5 Years		5 Years
	(In thousands)
Contractual Obligations:
Capital lease obligations, including interest	$	6	$	6	$	—		—	$	—
Operating lease obligations		872		539		318		15		—

Total	$	878	$	545	$	318	$	15	$	—

Recent Accounting Pronouncements

In October 2009, the Financial Accounting Standards Board (“FASB”) issued new standards for revenue agreements with multiple deliverables. These new standards impact the determination of when the individual deliverables included in a multiple-element arrangement may be treated as separate units of accounting. Additionally, these new standards modify the manner in which the transaction consideration is allocated across the separately identified deliverables by no longer permitting the residual method of allocating arrangement consideration. These new standards are required to be adopted in the first quarter of 2011; however, early adoption is permitted. We do not expect these new standards to significantly impact our consolidated financial statements.

In October 2009, the FASB issued new standards for the accounting for certain revenue arrangements that include software elements. These new standards amend the scope of pre-existing software revenue guidance by removing from the guidance non-software components of tangible products and certain software components of tangible products. These new standards are required to be adopted in the first quarter of 2011; however, early adoption is permitted. We do not expect these new standards to significantly impact our consolidated financial statements.

In January 2010, the FASB issued new standards for fair value measurement and disclosures. These new standards require disclosures for significant transfers in and out of Level 1 and Level 2 fair value measurements and the reasons for the transfers and activity. For Level 3 fair value measurements, purchases, sales, issuances and settlements must be reported on a gross basis. Further, additional disclosures are required by class of assets or liabilities, as well as inputs used to measure fair value and valuation techniques. These standards were required to be adopted in the first quarter of 2010. We adopted these standards which did not have a material impact on our consolidated financial statements.

In February 2010, the FASB issued new standards that amend the subsequent event disclosure requirements for public company filers. An entity that is an SEC filer is not required to disclose the date through which subsequent events have been evaluated. These standards were effective upon issuance and did not have a material impact on our consolidated financial statements.

In July 2010, the FASB issued new standards which amend the receivable disclosure requirements, including the credit quality of financing receivables and the allowance for credit losses. These standards require additional disclosures that will facilitate financial statement user’s evaluation of the nature of credit risk inherent in financing receivables, how that risk is analyzed in arriving at the allowance for credit losses, and the reason for any changes in the allowance for credit losses. These new standards are required to be adopted for interim and annual reporting periods beginning on or after December 15, 2010. We do not expect these new standards to significantly impact our consolidated financials.

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, 2009 under the heading corresponding to that set forth above. Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. In order to reduce this interest rate risk, we usually invest our cash primarily in investments with short maturities. As of September 30, 2010, 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, corporate bonds and commercial paper. Since our investments consist of cash equivalents and short-term investments, a change in interest rates would not

have a material effect on our financial condition or results of operations. Declines in interest rates over time will, however, reduce interest income.

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

We currently pay a number of expenses related to our Thai personnel and office in Thai Bhat. During the first nine months of 2010, the total payments made in Thai Bhat were $634,000 and we recorded a related foreign currency transaction loss of $4,000. During the first nine months of 2009, the total payments made in Thai Bhat were $608,000 and we recorded a related foreign currency transaction loss of $15,000.

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., or Advantech, the parent company of Allgon Microwave Corporation AB, or Allgon, had breached its contractual obligations with Endwave and owes us $994,500, which includes amounts owed under the note receivable and for purchased inventory and authorized and accepted purchase orders resulting in shippable finished goods. We cannot predict the outcome of these proceedings.

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.

The Company is not a party to any other material legal proceeding which is expected to have a material adverse effect on our consolidated financial statements or results of operations. From time to time, we may be subject to legal proceedings and claims in the ordinary course of business. These claims, even if not meritorious, could result in the expenditure of significant financial resources and diversion of management efforts.

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, 2009.

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 third quarter of 2010. We also had a net loss from continuing operations of $10.6 million and $4.0 million for the years ended December 31, 2009 and 2008, respectively. There is no guarantee that we will achieve or maintain profitability in the future.

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 and our profitability could continue to 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 global economic downturn has impacted the mobile communication industry. If the downturn in the mobile communication industry persists, our revenues will continue to suffer and we may be forced to write off excess inventories, uncollectible accounts receivable and abandoned or obsolete equipment and attempt to reduce our operating expenses through additional restructuring activities. We cannot guarantee that we will 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 for our products and, accordingly, delays or reductions in our anticipated revenues and reduced profitability or increased net losses.

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 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 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. For the three months ended September 30, 2010, three customers each accounted for greater than 10% of total revenues and combined they accounted for 92% of our total revenues. For the three months ended September 30, 2009, three customers each accounted for greater than 10% of total revenues and combined they accounted for 91% of our total revenues. In the first nine months of 2010, three customers each accounted for greater than 10% of total revenues and combined they accounted for 93% of our total revenues. In the first nine months of 2009, two customers accounted for 90% of our total revenues and no other customer accounted for more than 10% of our total revenues.

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

Over the past several years, global economic conditions have continued 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.

Our semiconductor product line will require us to incur significant expenses and may not be successful.**

Our new semiconductor product line will require us to incur expenses to design, test, manufacture and market these new products including the purchase of inventory, supplies and capital equipment. The future success of our semiconductor product line will depend on our ability to develop these new products in a cost-effective and timely manner and to market them effectively. The development of our products is complex, and from time to time we may experience delays in completing the development and introduction of our new products or fail to efficiently manufacture such products in the early production phase. The semiconductor product line may have little immediate impact on our revenue because a new standard product may not generate meaningful revenue. In the meantime, we will have incurred expenses to design, produce and market the products, and we may not recover these expenses if demand for the product fails to reach forecasted levels which may adversely affect our operating results.

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

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

•

passive components;

•

unusual or low usage components;

•

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

•

custom metal parts;

•

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.

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 reduced the prices of many of our telecommunication products 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 and improve our manufacturing efficiencies. 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.

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.

We intend 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 integrated circuits sold directly to our customers or 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.

We rely heavily on a Thailand facility of HANA, a contract manufacturer, to produce our RF modules and to package our microwave and millimeter wave integrated circuits. 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 our products to a Thailand facility of 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 2011, 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 integrated circuits and module products that were not apparent when the warranty period expired. These latent 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 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 meet. 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 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 integrated circuits and module products 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. 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 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;

•

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. The second quarter of 2010 included a $1.5 million write-off of inventory associated with excess materials related to a rapid drop in sales of a legacy product for a major customer’s radio platform.

Conversely, if we underestimate customer demand or if insufficient manufacturing capacity were available, we would lose revenue opportunities, market share and damage our customer relationships. On occasion, we have been unable to adequately respond to unexpected increases in customer purchase orders and were unable to benefit from this increased demand. There is no guarantee that we will be able to adequately respond to unexpected increases in customer purchase orders in the future, in which case we may lose the revenues associated with those additional purchase orders and our customer relationships and reputation may suffer.

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

Our success depends, in part, on our ability to protect our intellectual property. We rely primarily on a combination of patent, copyright, trademark and trade secret laws to protect our proprietary technologies and processes. As of September 30, 2010, we had 42 United States patents issued, many with associated foreign filings and patents. Our issued patents include those relating to basic circuit and device designs, semiconductors, our multilithic microsystems technology and system designs. Our issued United States patents expire between 2013 and 2028. 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.

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.

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 SpA, 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 transceiver modules, rather than using merchant suppliers like us. To the extent that mobile communication OEMs presently, or may in the future, produce their own transceiver modules, we lose the opportunity to provide our modules to them. However, as we launched our semiconductor product line, we gain the opportunity to provide integrated circuits to all radio OEMs.

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 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.

Our failure to continue to develop new or improved semiconductor process technologies could impair our competitive position.

Our future success depends in part upon our ability to continue to gain access to the current semiconductor process technologies in order to adapt to emerging customer requirements and competitive market conditions. If we fail to keep abreast of the new and improved semiconductor process technologies as they emerge, we may lose market share which could adversely affect our operating results.

The segment of the semiconductor industry in which we participate is intensely competitive, and our inability to compete effectively would harm our business.

The markets for our products are extremely competitive, and are characterized by rapid technological change and continuously evolving customer requirements. Many of our competitors have significantly greater financial, technical, manufacturing, sales and marketing resources than we do. As a result, our competitors may develop new technologies, enhancements of existing products or new products that offer price or performance features superior to ours. In addition, our competitors may be perceived by prospective customers to offer financial and operational stability superior to ours.

We expect competition in our markets to intensify, as new competitors enter the RF, microwave and millimeterwave component market, existing competitors merge or form alliances, and new technologies emerge. If we are not able to compete effectively, our market share and revenue could be adversely affected, and our business and results of operations could be harmed.

Risks Relating to Ownership of Our Stock

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

The price of our common stock has fluctuated widely since our initial public offering in October 2000. In the first nine months of 2010, the lowest daily sales price for our common stock was $2.00 and the highest daily sales price for our common stock was $3.61. In 2009, the lowest daily sales price for our common stock was $1.36 and the highest daily sales price for our common stock was $3.43. 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 significant trends or changes in the markets we serve;

•

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 customers not to purchase products from us or to pursue alternative technologies;

•

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

•

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

•

the low trading volume of our common stock.

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

We have a few stockholders 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.**

As of May 14, 2010, our four largest stockholders together owned approximately 37% of our outstanding common stock. 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 significantly affect the election of our directors and the outcome of corporate actions requiring stockholder approval. This concentration of ownership may also delay, deter or prevent a change in control and may make some transactions more difficult or impossible to complete without their support, even if the transaction is favorable to our stockholders as a whole.

Our certificate of incorporation, bylaws and arrangements with executive officers 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 a Senior Executive Officer Severance Retention Plan, an Executive Officer Severance Plan and a Key Employee Severance and Retention Plan that provide for severance payments and the acceleration of vesting of a percentage of certain stock options granted to our executive officers and certain senior, non-executive employees under specified conditions.

These plans may make us a less attractive acquisition target or may reduce the amount a potential acquirer may otherwise be willing to pay for our company.

Item 6. Exhibits.


Number		Description
2.1(1)		Asset Purchase Agreement among the Registrant, Microsemi Corporation and SHR Corporation dated April 20, 2009.

2.2(2)		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

4.6(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(18)*		Form of Restricted Stock Unit Grant Notice and Restricted Stock Unit Agreement under the 2007 Equity Incentive Plan.

10.9(2)*		2000 Employee Stock Purchase Plan.

10.10(2)*		Form of 2000 Employee Stock Purchase Plan Offering.

10.11(11)*		2000 Non-Employee Directors’ Stock Option Plan, as amended.

10.12(2)*		Form of Nonstatutory Stock Option Agreement under the 2000 Non-Employee Director Plan.

10.13(12)*		Description of Compensation Payable to Non-Employee Directors.

10.14(18)*		2010 Base Salaries for Named Executive Officers.

10.15(19)*		Executive Officer Severance Plan.

10.16(19)*		Senior Executive Officer Severance and Retention Plan.

10.17(2)		License Agreement by and between TRW Inc. and TRW Milliwave Inc. dated February 28, 2000.

10.18(14)†		Purchase Agreement between Nokia and the Registrant dated January 1, 2006.

10.19(14)†		Frame Purchase Agreement by and between the Registrant and Siemens Mobile Communications Spa dated January 16, 2006.

10.20(15)†		Lease Agreement by and between Legacy Partners I San Jose, LLC and the Registrant dated May 24, 2006.

10.21(16)†		Services Agreement by and between Hana Microelectronics Co., Ltd. and the Registrant dated October 15, 2006.

10.22(17)		Lease Agreement by and between 8812, a California limited partnership, and the Registrant dated May 20, 2008.

10.23(17)†		Amended and Restated Supply Agreement by and between Northrop Grumman Space and Mission Systems Corp. and the Registrant dated May 12, 2008.

10.24(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.


Number		Description
10.25(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 Quarterly Report on Form 10-Q filed on August 14, 2009 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.

(18)		Previously filed as an exhibit to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009 and incorporated herein by reference.

(19)		Previously filed as an exhibit to the Registrant’s Current Report on Form 8-K filed on September 17, 2009 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.


	ENDWAVE CORPORATION
Date: November 12, 2010

	By:	/s/ John J. Mikulsky
		John J. Mikulsky
		President 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)

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	Page
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements		3

Condensed Consolidated Balance Sheets as of September 30, 2010 (unaudited) and December 31, 2009		3

Unaudited Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2010 and 2009		4

Unaudited Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009		5

Notes to Condensed Consolidated Financial Statements (unaudited)		6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		18

Item 3. Quantitative and Qualitative Disclosure about Market Risk		25

Item 4. Controls and Procedures		26

PART II. OTHER INFORMATION

Item 1. Legal Proceedings		26

Item 1A. Risk Factors		27

Item 6. Exhibits		37

SIGNATURES		40

EXHIBITS		41
EX-31.1
EX-31.2
EX-32.1