UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended March 31, 2004

OR

For the transition period from                     to                    

000-31635
(Commission file number)

ENDWAVE CORPORATION

(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 [X]  No [   ].

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

          The number of shares of the registrant’s Common Stock outstanding as of April 28, 2004 was 9,585,277 shares.

ENDWAVE CORPORATION

INDEX

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ENDWAVE CORPORATION

(1)

Derived from the Company’s audited financial statements as of December 31, 2003

See accompanying notes.

3

ENDWAVE CORPORATION

See accompanying notes to the condensed financial statements.

4

ENDWAVE CORPORATION

See accompanying notes to the condensed financial statements.

5

ENDWAVE CORPORATION

1.

Business and Basis of Presentation

     Endwave Corporation (referred to below as Endwave or the Company) designs, manufactures and markets RF (radio frequency) subsystems that enable the transmission, reception and processing of high-speed electromagnetic signals in broadband wireless telecommunications systems, cellular telephone infrastructure networks, defense electronics systems, homeland security and other similar systems requiring RF, microwave and millimeter wave technology.

     The Company designs products to best satisfy its customers’ technical, inventory, logistical, and cost requirements by using proprietary technologies, RF design, and manufacturing expertise. Endwave offers a broad range of products at multiple levels of integration that are optimized for a customer’s specific product and performance needs. Products include RF modules such as power amplifiers, low noise amplifiers, up and down converters, frequency multipliers, oscillators, frequency synthesizers, integrated transceivers, and power amplifier switch combiners used in cellular base stations. The Company’s proprietary circuit and manufacturing technologies enable it to design and manufacture RF subsystems that minimize the use of expensive gallium arsenide and reduce manual labor. The Company uses third-party fabrication facilities both for the manufacture of gallium arsenide and other semiconductor devices, which it designs, and for the assembly and test of its commercial production.

     The accompanying unaudited condensed financial statements of Endwave have been prepared in conformity with generally accepted accounting principles 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 generally accepted accounting principles for complete financial statements. 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, 2004. These condensed financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2003.

2.

Summary of Significant Accounting Policies

Use of Estimates

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Revenue Recognition

     The Company’s customers are primarily wireless systems integrators and equipment manufacturers who integrate the Company’s products into their products. The Company recognizes product revenues at the time title passes, which is upon product shipment or when withdrawn from a consignment location. Revenues related to product sales are recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller’s price to the buyer is fixed or determinable, and collectibility is reasonably assured. The Company recognizes development fees ratably over the estimated term of the development period or when specific milestones are achieved. Up-front fees, if any, associated with development agreements are recognized over the estimated development and production period. In no event are revenues recognized prior to becoming payable by the customer. The costs incurred under these development agreements are included in research and development expenses.

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Warranty

     The warranty periods for the Company’s products are generally between one and three years from date of shipment. The Company generally 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. Based on a review of the warranty level made by management during the first quarter of 2004, no additional warranty provision was accrued for during the quarter.

     Changes in the Company’s product warranty liability during the period ended March 31, 2004 and 2003 are as follows:

Impairment of Long-Lived Assets

     For long-lived assets used in operations, the Company records impairment losses when events and circumstances indicate that these assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amounts of those assets. If less, the impairment losses are based on the excess of the carrying amounts over their respective fair values. Their fair values would then become the new cost basis. Fair value is determined by discounted future cash flows, appraisals, or other methods. For assets held for sale, impairment losses are measured at the lower of the carrying amount of the assets or the fair value of the assets less costs to sell. For assets to be disposed of other than by sale, impairment losses are measured as their carrying amount less salvage value, if any, at the time the assets cease to be used.

     During the first quarter of 2003, the Company recorded a charge of $2.4 million to reduce the carrying value of manufacturing equipment based on the amounts by which the carrying value of the assets exceeded their fair value. The evaluation took into consideration the move of production to the Company’s offshore supplier, which increased during 2003. The Company’s estimate of fair value of the assets was based on estimated salvage value of the equipment, less selling costs.

     During the third quarter of 2003, the Company recorded an additional charge of $139,000 to reduce engineering equipment based on the amounts by which the carrying value of these assets exceeded their fair value. The evaluation took in to consideration the reduction in engineering headcount that occurred during the third quarter of 2003. The Company’s estimate of the fair value of the assets was based on estimated salvage value of the equipment less selling costs.

Restructuring Charges

          The Company accounts for restructuring activities following formally approved plans that identify the actions and timeline over which the restructuring activities will occur. Restructuring charges include estimates pertaining to employee severance and fringe benefit costs and facility exit costs. The Company reviews remaining restructuring accruals on a quarterly basis and adjusts these accruals when changes in facts and circumstances suggest actual amounts will differ from management’s estimates. Changes in estimates occur when it is apparent that exit and other costs accrued will be more or less than originally estimated.

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Stock-Based Compensation

     The Company has elected to use the intrinsic value method under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employee” (APB 25), as permitted by Statement of Financial Accounting Standard No. 123, “Accounting for Stock-Based Compensation” (SFAS 123), subsequently amended by SFAS 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” to account for stock-based awards issued to its employees under its stock option plans and stock purchase plans. Deferred stock compensation is amortized using the graded vesting method over the vesting period of the related options, generally four years.

     For purposes of pro forma disclosures, the Company estimates the fair value of its stock-based awards to employees using a Black-Scholes option-pricing model.

     Following is the pro forma effect on net loss and net loss per share for all periods presented had the Company applied SFAS 123’s fair value method of accounting for stock-based awards issued to its employees.

3.

Inventories

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

4.

Notes Payable

     On May 29, 2002, the company obtained a loan, secured by fixed assets, in the amount of $1.5 million from U.S. Bancorp Finance Inc. This loan has a term of 3 years and has a variable interest rate. The rate is 25 basis points above Libor and is reviewed quarterly. The weighted average cost of debt is approximately 4.2% for the first quarter of 2004.

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

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5.

Property, Plant and Equipment Held for Sale

     At March 31, 2004 and December 31, 2003, the Company had $266,000 and $306,000 of equipment classified as held for sale.

     During the first quarter of 2004, the Company committed to a plan to sell its land and buildings located in Diamond Springs, California. As of March 31, 2004 the fair value of the land and buildings is estimated to exceed the net book value of $3.5 million. The sale may be structured as a sale/leaseback transaction.

6.

Restructuring Charges, Net

     Effective January 2004, the Company executed several agreements related to the leasing arrangements for its Sunnyvale headquarters. Due to declining commercial real estate lease rates, the original lease executed in August 2001 was at an above market rate, and would have expired in July 2006. This lease was cancelled, effective January 2004 and the Company exited the property. In consideration for the cancellation, the Company paid the landlord a settlement fee of approximately $3.0 million resulting in a net lease termination expense of $2.9 million. The Company also entered into a new lease for 16,000 square feet in Sunnyvale, California at a lower, at-market rate. The new lease rate is effective in January 2004 and will expire in August 2006.

     During the third quarter of 2003, the Company recorded a restructuring charge of $490,000 (“the Third Quarter 2003 Plan”), all of which was for severance payments. Through the end of the first quarter of 2004, the Company eliminated 18 positions and made cash payments of $ 483,000 under the Third Quarter 2003 Plan. Severance payments will be complete by the end of the second quarter of fiscal 2004.

     During the first quarter of 2002, the Company announced and began to implement a restructuring program (the “First Quarter 2002 Plan”) to reduce operating expenses and further align resources with long-term growth opportunities. The Company recorded a restructuring charge of $3.5 million, the components of which were $1.1 million for severance and fringe benefit costs related to the elimination of 107 positions across all functions, $310,000 for lease termination payments, and $2.1 million for excess equipment. In the fourth quarter of 2002, the Company lowered its estimate of the total costs associated with the First Quarter 2002 Plan and recorded an adjustment of $142,000, which reflected lower than estimated severance and related costs. With the exception of $160,000 of remaining net lease payments on abandoned facilities through 2006, the Company has substantially completed the activities associated with the First Quarter 2002 Plan. Total payments made on the lease during the first quarter of 2004 were $19,000.

7.

Loss (Recovery) on Sublease

     During the first quarter of 2003, the Company subleased 12,700 square feet of its Sunnyvale, California headquarter building to an unrelated third party. The rental income for the lease period was less than the rental expense that would be incurred, and therefore a loss at sublease inception of $662,000 was incurred. There have been no other losses on subleases recorded in the periods presented herein. During the first quarter of 2004, $359,000 of this loss was reversed as the sublease was terminated prior to its expiration date, as part of the overall lease termination described above in Note 6.

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8.

Net Loss Per Share

          Basic net loss per share is computed by dividing the net loss for the three months ended March 31, 2004 and 2003, by the weighted average number of shares of common stock outstanding during the period.

          Potential common shares from the assumed exercise of stock options, warrants and convertible securities have been excluded from the net loss per share calculations as their effect would be anti-dilutive due to the Company’s reported net loss.

9.

Comprehensive Income (Loss)

     The Company had $1,000 of other comprehensive income at March 31, 2004 and $2,000 of other comprehensive loss at December 31, 2003 resulting from unrealized gains and losses on its available for sale investments.

10.

Segment Disclosures

          The Company operates in a single segment. The Company’s product sales by geographic location for the three months ended March 31, 2004 and 2003 were as follows (in thousands and as a percentage of total revenues):

          For the three months ended March 31, 2004, Nokia, Stratex Networks and Siemens accounted for 48%, 13% and 11% of total revenues listed above, respectively. For the three months ended March 31, 2003, Nokia, Siemens and Stratex Networks accounted for 62%, 10% and 10% of total revenues listed above, respectively. Nokia, located in Finland, was the only customer in Finland for the quarters ended March 31, 2004 and 2003. No other customer accounted for more than 10% of the Company’s total revenues.

11.

Commitments and Contingencies

          From time to time, the Company 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 and other resources. The Company is not currently aware of any legal proceedings or claims, and management does not believe that the Company is subject to other claims that would constitute material contingencies.

12.

Related Party Transactions

     The Company maintains a supply agreement and a technology services agreement with Northrop Grumman, which is a principal stockholder of Endwave. The supply agreement specifies volume and price commitments, as well as a description of a consigned inventory arrangement. For purchases made under this agreement, the Company recorded charges to costs of product revenues of $685,000 and $647,000 for the first quarter of 2004 and 2003, respectively. The $685,000 of charges to costs of product revenues during the first quarter of 2004 included the reversal of a $793,000 liability that was settled during the quarter.

     The Company also sells various products and services under purchase orders and agreements to Northrop Grumman, and recognized revenues of $0 and $65,000 for the first quarter of 2004 and 2003, respectively. In the quarter ended March 31, 2003, the Company incurred costs related to this revenue of approximately $18,000.

     At March 31, 2004, the Company had accounts receivable of $67,000 and accounts payable of $703,000, related to its supplier and customer relationships with Northrop Grumman.

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

          The Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in this report on Form 10-Q contains forward-looking statements that involve risks and uncertainties, including statements regarding our expectations, beliefs, intentions or strategies regarding the future. The following discussion should be read together with our financial statements, notes to those financial statements and Risk Factors included elsewhere in this 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 financial statements and the notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2003. 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 described in our forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements. In the past, our operating results have fluctuated and are likely to continue to fluctuate in the future.

Overview

     Revenues for the first quarter of 2004 of $6.6 million were down $1.0 million, or 14%, from the first quarter of 2003, and were down $2.9 million, or 30%, from the fourth quarter of 2003. Revenues were lower than anticipated as slower sales due to seasonal fluctuations were compounded by lower than expected sales to our largest customer. We anticipate a modest increase in our revenues in the second quarter of 2004 with continuing increased demand for our products in the second half of 2004. However, the telecommunications market has been difficult to forecast as the economic recovery has remained slow and inconsistent. This demand outlook has led us to take steps during 2004 to reduce costs and better address our customers’ needs.

     We took the following steps during the first quarter of 2004 to control costs:

•		Effective January 2004, we executed several agreements related to the leasing arrangements for our Sunnyvale headquarters. Due to declining commercial real estate lease rates, the original lease executed in August 2001 was at an above market rate, and would have expired in July 2006. This lease has been cancelled, effective January 2004. In consideration for the cancellation, we paid our landlord a settlement fee of $3.0 million resulting in a net termination expense of $2.9 million. We also entered into a new lease for 16,000 square feet in Sunnyvale, California at a lower, at-market rate. The new lease rate is effective January 2004 and will expire August 2006. Through this settlement and new lease agreement we will realize significant reductions in the facility costs for our Sunnyvale headquarters through the new lease period.
•		In March 2004, we executed a renewal to our master supply agreement with Northrop Grumman through December 31, 2005. This renewal expands our access to Northrop Grumman’s custom wafer processing services, includes guaranteed pricing, and requires that Northrop Grumman hold specified amounts of consigned inventory on our behalf.

     We have continued to focus on consolidating our manufacturing at the location of our offshore partner in Southeast Asia. During the first quarter of 2004 over 70% of our shipped products were manufactured and shipped by our offshore partner. By shifting our production overseas we have realized cost reductions in the manufacturing of our products and have increased flexibility to scale our business.

     During the remainder of 2004 we expect to begin manufacturing product based on our customers’ designs at the location of our offshore partner in Southeast Asia. Accordingly, we expect these products will have a slightly lower gross margin than our internal designs. As a result, our gross margin may be negatively impacted in the near term. We believe, however, that this will allow us to increase market share, establish relationships with new customers, increase revenues, and absorb some of our fixed costs. We would not expect to incur other significant operating costs associated with this model unless we elect to redesign the product.

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Results of Operations

     Three months ended March 31, 2004 and 2003

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

  Revenues

     Total revenues in the first quarter of 2004 were $6.6 million, a 14% decrease from $7.7 million for the same period in 2003 and were comprised of product revenues and development fees. The first quarter of 2004 revenues were lower than anticipated as slower sales due to seasonal fluctuations were compounded by lower than expected sales to our largest customer.

     Product revenues were $6.5 million in the first quarter of 2004, a 15% decrease from $7.6 million for the same period in 2003. The decrease reflects the lower than expected sales noted above.

     We generate development fees by developing product prototypes and custom products pursuant to development agreements that provide for payment of a portion of our research and development or other expenses. Development fees were $122,000 for the three months ended March 31, 2004, as compared to $60,000 in the same period of 2003. The increase in development fees is attributable to increased development of custom designed products for new and existing customers. We expect to generate future product revenues as a result of these development agreements. We do not foresee development fees to be a significant component of our overall revenues in the near term.

  Cost and Expenses

     Cost of product revenues. Cost of product revenues consists primarily of: costs of direct materials and labor utilized to assemble and test our products; equipment depreciation; costs associated with procurement, production control, quality assurance, and manufacturing engineering; costs associated with maintaining our manufacturing facilities; fees paid to our offshore manufacturing partner; and costs associated with warranty returns offset by the benefit of usage of previously reserved material. Cost of product revenues was $4.0 million for the three months ended March 31, 2004, a 43% decrease from $7.0 million for the same period in 2003. As a percentage of revenues, cost of product revenues decreased to 60.0% in the quarter ended March 31, 2004, from 91.5% for the same period in 2003. The percentage improvement is attributable to cost reductions within the manufacturing process, a shift toward variable costs of manufacturing from fixed costs and the reversal of a $793,000 charge to cost of product revenues for a liability that was settled during the quarter. The actions we took to reduce manufacturing costs included the consolidation of our manufacturing sites, greater utilization of offshore manufacturing, introduction of lower cost products and elimination of excess overhead, equipment and capacity. The cost of product revenues was favorably impacted by the utilization of previously reserved inventory amounting to approximately $176,000 during the first quarter of 2004 as compared to $300,000 during the first quarter of 2003. We expect further, although less significant, improvements in cost of product revenues as a result of our continued efforts at cost reduction, introduction of new designs and technology, and further strengthening of our offshore manufacturing model.

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     Research and development expenses. Research and development expenses were $1.0 million for the three months ended March 31, 2004, a 12% decrease from $1.1 million for the same period in 2003. As a percentage of revenues, research and development expenses increased to 14.7% in the quarter ended March 31, 2004, from 14.4% for the same period in 2003. The decrease in dollars was primarily attributable to restructuring our engineering team to a more efficient and cost effective size, while still supporting development of new products and research associated with technology to be introduced in 2004. These decreases were partially offset by increased project costs incurred to support the development fees we earned during the first quarter of 2004. The increase in research and development expenses as a percent of revenues was due to lower sales during the first quarter of 2004 than the first quarter of 2003.

     During the remainder of 2004, we expect a moderate increase to research and development expenses as we accelerate certain development programs and begin new development programs. This increase could be more significant if we have an unexpected increase in new customer-specific development projects for which we could receive some development fees.

     Selling, general and administrative expenses. Selling, general and administrative expenses consist primarily of salaries and related expenses for executive, sales, marketing, finance, accounting, information technology, and human resources personnel, professional fees, facilities costs and promotional activities. Selling, general and administrative expenses were $1.8 million for the three months ended March 31, 2004, a 27% decrease from $2.5 million for the same period in 2003. As a percentage of revenues, selling, general and administrative expenses decreased to 27.6% in the quarter ended March 31, 2004, from 32.7% for the same period in 2003. The decrease was primarily attributable to our restructuring actions in the third quarter of 2003 and expense control measures. The latter were aimed at bringing operating expenses more in line with revenues and included a significant decrease in facility expenses, partially offset by an increase in professional service fees.

     During the remainder of 2004, we expect a further decline in selling, general and administrative expenses as a result of lower rent expense from our renegotiated lease.

     Restructuring charges, net. During the first quarter of 2004 we incurred a net lease termination fee of $2.9 million related to the termination of the lease agreement for our corporate headquarters in Sunnyvale, California. During the quarter we finalized the renegotiation of the lease, which resulted in a $3.0 million cash payment to our landlord in exchange for substantially reduced rent in a new location. This settlement was partially offset by a $101,000 benefit due to the reversal of deferred rent liability related to the previous lease agreement. There was no such charge in the first quarter of 2003.

     Amortization of deferred stock compensation. Deferred stock compensation charges consist primarily of charges related to the difference between deemed fair market values for financial reporting purposes on the date of employee option grants and the option price for option awards prior to our initial public offering, as well as expenses attributable to the acceleration of options. During the first quarter of 2004, amortization of deferred stock compensation and other option-related expenses were $119,000, a decrease from $512,000 in the same period in 2003. As a percentage of revenues, amortization of deferred stock compensation decreased to 1.8% in the quarter ended March 31, 2004, from 6.7% for the same period in 2003. The decrease was related to the timing of the termination of employees with deferred compensation associated with their stock options and the effects of the graded vested method of amortization, which accelerates the amortization of deferred compensation. Remaining deferred compensation of $85,000 will be amortized during the remainder of 2004.

     Loss (recovery) on building sublease. During the first quarter of 2003, we recorded a charge of $662,000 associated with the sublease of our Sunnyvale, California headquarter building for the excess of the remaining lease obligations over the anticipated sublease income. During the first quarter of 2004, $359,000 of this loss was reversed as the sublease was terminated prior to expiration date, as a part of lease termination noted above.

     Impairment of long-lived assets. During the first quarter of 2003, we evaluated the carrying value of the long- lived assets utilized in our manufacturing process. As we moved more of our production to our offshore partner, we did not need as much manufacturing equipment, and took an impairment charge of $2.4 million for excess manufacturing equipment. The impairment charge was calculated as the difference between the carrying

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value and the estimated fair value of the equipment, less selling costs. There was no such charge during the first quarter of 2004.

     Interest income, expense and other, net. Net interest income and other, net consists primarily of interest income earned on our cash and cash equivalents and short-term investments and gains and losses on the sale of fixed assets, offset by interest expense on notes payable and capital equipment leases. Interest income, expense and other, net was $637,000 for the three months ended March 31, 2004, an increase from $65,000 for the same period in 2003. As a percentage of revenues, interest income, expense and other, net increased to 9.6% in the quarter ended March 31, 2004, from 0.9% for the same period in 2003. The increase was due primarily to the sale of fixed assets and assets held-for-sale which resulted in a net gain of $473,000 during the quarter. Additionally, there was lower interest expense during the first quarter of 2004 as all of our capital leases were paid off prior to the start of the current fiscal year.

Liquidity and Capital Resources

Selected Financial Liquidity Data

     We had cash, restricted cash, cash equivalents and short-term investments at March 31, 2004 and December 31, 2003 of $26.9 million and $30.1 million, respectively.

     Our principal source of liquidity as of March 31, 2004, consisted of approximately $26.9 million in cash, restricted cash, cash equivalents and short-term investments. During the first quarter of 2004, we consumed $4.2 million of cash in operating activities, as compared to using $1.1 million in the same period of 2003. The increase in the use of cash for the first quarter of 2004 compared to the same period in 2003 was primarily due to the payment of a $3.0 million lease termination fee included in the net loss, the $1.0 million of cash used for the purchase of inventory and a $1.1 million decrease in accounts payable, accounts payable to affiliates and other current and long-term liabilities in the first quarter of 2004, as compared to $2.1 million of cash generated by the reduction of inventory and a minimal decrease in accounts payable, accounts payable to affiliates and other current and long-term liabilities in the first quarter of 2003. This was partially offset by a decrease in accounts receivable of $300,000 during the first quarter of 2004 due to lower revenues as compared to a $1.2 million increase in the first quarter of 2003.

     Investing activities provided cash of $1.6 million in the first quarter of 2004 as compared to $8.6 million in the first quarter of 2003. The decrease in the cash provided by investing activities was primarily due to fewer maturities of short-term investments in the current year as a result of lower investment balances. This was partially offset by $721,000 of proceeds from the sale of property and equipment during the first quarter of 2004.

     Financing activities provided cash of $445,000 in the first quarter of 2004 as compared to a use of $446,000 in the first quarter of 2003. The $445,000 provided by financing activities in the first quarter of 2004 was due to proceeds from the exercise of employee stock options. Financing activities in the first quarter of 2003 included payments on capital lease obligations of $324,000, which were paid off during 2003 and $122,000 on notes payable.

     We believe that our existing cash and investment balances and anticipated cash flows from operations will be sufficient to meet our operating and capital requirements for at least the next 12 months. However, revenues could decline below our expectations resulting in insufficient cash flow from operations or we may require additional financing to fund strategic acquisitions. As a result, we could be required, or could elect, to raise additional funds during that period and we may need to raise additional capital in the future. Additional capital may not be available at all, or may only be available on terms unfavorable to us. With the exception of operating leases, we have not entered into any off-balance sheet financing arrangements, we have not established any variable interest entities, we do not have any unconditional purchase obligations, nor do we have non-cancelable commitments for capital expenditures. We have not guaranteed the debt or obligations of other entities or entered into options on non-financial assets.

     The following table summarizes our future payment obligations for operating leases and notes payable including obligations under the new lease arrangement for our corporate headquarters (excluding interest):

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