UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

For the quarterly period ended March 31, 2005

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 þ No o.

     Indicate by check mark whether the registrant is an accelerated filer (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 May 6, 2005 was 10,639,584 shares.

ENDWAVE CORPORATION

INDEX

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ENDWAVE CORPORATION

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

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ENDWAVE CORPORATION

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

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ENDWAVE CORPORATION

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

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ENDWAVE CORPORATION

1. Business and Basis of Presentation

     Endwave Corporation and its wholly-owned subsidiary, Endwave Defense Systems Incorporated (“EDSI”), formerly JCA Technology, (together referred to as “Endwave” or the “Company”), design, manufacture and market radio frequency (“RF”) modules that enable the transmission, reception and processing of high frequency signals in telecommunication networks, defense electronics and homeland security systems. The Company’s RF modules are typically used in high-frequency applications and include integrated transceivers, amplifiers, synthesizers, oscillators, up and down converters, frequency multipliers and microwave switch arrays.

     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. 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, 2005. These condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2004. Certain prior period financial statement amounts have been reclassified to conform to the current period’s presentation. These reclassifications had no impact on previously reported total assets, stockholders’ equity or net losses.

2. Warranty

     The warranty periods for the Company’s products are between one and two years 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.

     In March 2005, the Company entered into a settlement and release agreement with Northrop Grumman Space & Mission Systems Corp. to settle all matters related to direct and indirect costs associated with a degraded semiconductor component originally provided by their foundry. Northrop Grumman Space & Missions Systems Corp. reimbursed the Company’s customer for indirect costs associated with a recall of the product incorporating the degraded semiconductor component. Under the settlement and release agreement, the Company obtained the right to make a final purchase of additional wafers at preferable pricing, agreed to pay $300,000 for final reimbursement of such indirect costs, and assumed sole responsibility for any future product failures attributable to the semiconductor component. As of March 31, 2005 the $300,000 settlement fee had not been paid and the related warranty accrual had not been relieved.

     Changes in the Company’s product warranty liability during the period ended March 31, 2005 and 2004 are as follows:

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3. 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 Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), subsequently amended by Statement of Financial Accounting Standards No. 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.

     The Company accounts for equity instruments issued to non-employees in accordance with the provisions of SFAS 123, Emerging Issues Task Force Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services,” and Financial Accounting Standards Board Interpretation No. 28, “Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans.”

     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.

4. Goodwill and Other Intangible Assets

Goodwill

     At December 31, 2004, the Company had goodwill of $1,546,000 associated with the purchase of EDSI. During the first quarter of 2005, the Company incurred an additional liability associated with the purchase of EDSI and increased the goodwill balance by $20,000.

Intangible Assets

     The components of intangible assets as of March 31, 2005 are as follows (in thousands):

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     The identifiable intangible assets are subject to amortization and have approximate original estimated weighted-average useful lives as follows: developed technology — five years, customer backlog — six months and customer relationships — five years.

     The tradename has a gross carrying value of $1.1 million and is not subject to amortization and will be evaluated for impairment at least annually or more frequently if events and changes in circumstances suggest that the carrying amount may not be recoverable. The customer backlog was fully amortized at March 31, 2005. The amortization of the identifiable intangible assets was $175,000 during the first quarter of 2005. The future amortization of the identifiable intangible assets is as follows (in thousands):

5. 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):

6. Restructuring Charges, Net

     During the third quarter of 2004, in connection with the acquisition of EDSI, the Company recorded a charge for restructuring of $431,000 (the “Third Quarter 2004 Plan”). The charge was included as part of the purchase price allocation in accordance with EITF 95-3, “Recognition of Liabilities in Connection with a Purchase Business Combination.” The Company has terminated a total of 39 employees, in order to eliminate duplicative activities and to reduce the cost structure of the combined company. These terminations primarily affected the manufacturing and operations group. The charge was for the related severance, benefits, payroll taxes and other associated costs. The remaining obligations as of March 31, 2005 were $92,000.

     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 will expire in August 2006.

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7. Recovery on Building Sublease

     During the first quarter of 2003, the Company subleased 12,700 square feet of its Sunnyvale, California headquarters 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. During the first quarter of 2004, $359,000 of this loss was reversed as the sublease was terminated prior to its expiration date.

8. Net Loss Per Share

     Basic net loss per share is computed by dividing the net loss for the three months ended March 31, 2005 and 2004, by the weighted average number of shares of common stock outstanding during the period. Options to purchase 1,808,420 and 1,588,360 shares of common stock were outstanding at March 31, 2005 and December 31, 2004, respectively, but were not included in the computation of diluted net loss per share as the effect would be anti-dilutive.

9. 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 on available-for-sale securities represent the component of comprehensive income (loss) that were excluded from the net loss and were $18,000 and $3,000 for the three months ended March 31, 2005 and 2004. Total comprehensive loss for the three months ended March 31, 2005 and 2004 was $829,000 and $2,176,000, respectively.

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, 2005 and 2004 were as follows (in thousands and as a percentage of total revenues):

     For the three months ended March 31, 2005, Nokia and Siemens accounted for 59% and 11% of total revenues listed above, respectively. 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. 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 Space & Mission Systems Corp., 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. Under this agreement, the Company purchased inventory of $1.4 million and $685,000 during the first quarter of 2005 and

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2004. 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 Space & Mission Systems Corp., and recognized revenues of $10,000 and $0 for the first quarter of 2005 and 2004, respectively. In the quarter ended March 31, 2005, the Company incurred costs related to this revenue of approximately $1,000.

     At December 31, 2004, the Company had accounts receivable of $15,000 and accounts payable of $1.3 million, related to its supplier and customer relationships with Northrop Grumman Space & Mission Systems Corp., respectively.

     At March 31, 2005, the Company had accounts receivable of $15,000 and accounts payable of $885,000, related to its supplier and customer relationships with Northrop Grumman Space & Mission Systems Corp.

13. Recent Accounting Pronouncements

     In November 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 151, “Inventory Costs — An Amendment of ARB No. 43, Chapter 4” (“SFAS 151”). SFAS 151 amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Among other provisions, the new rule requires that items such as idle facility expense, excessive spoilage, double freight and re-handling costs must be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal” as stated in ARB No. 43. Additionally, SFAS 151 requires that the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS 151 is effective for fiscal years beginning after June 15, 2005 and is required to be adopted by the Company in the first quarter of 2006, beginning on January 1, 2006. The Company is currently evaluating the effect that the adoption of SFAS 151 will have on its consolidated results of operations and financial condition but does not expect SFAS 151 to have a material financial statement impact.

     In December 2004, the FASB issued SFAS No. 153, “Exchanges of Non-monetary Assets — An Amendment of APB Opinion No. 29,” (“SFAS 153”). SFAS 153 eliminates the exception from fair value measurement for non-monetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, “Accounting for Non-monetary Transactions,” and replaces it with the exception for exchanges that do not have commercial substance. SFAS 153 specifies that a non-monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS 153 is effective for the fiscal periods beginning after June 15, 2005 and is required to be adopted by the Company in the first quarter of fiscal 2006, beginning on January 1, 2006. The Company is currently evaluating the effect that the adoption of SFAS 153 will have on its consolidated results of operations and financial condition but does not expect it to have a material financial statement impact.

     In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123R”), which requires the measurement of all share-based payments to employees, including grants of stock options, using a fair-value-based method and the recording of such expense in the consolidated statements of operations. The accounting provisions of SFAS 123R were originally effective for all reporting periods beginning after June 15, 2005. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to financial statement recognition. See “Stock-Based Compensation” above for the pro forma net loss and net loss per share amounts, for fiscal 2002 through fiscal 2004, as if the Company had used a fair-value-based method similar to the methods required under SFAS 123R to measure compensation expense for employee stock incentive awards. Although the Company has not yet determined whether the adoption of SFAS 123R will result in amounts that are similar to the current pro forma disclosures under SFAS 123, it is evaluating the requirements under SFAS 123R and expects the adoption to have a significant adverse impact on the Company’s consolidated statements of operations and net loss per share.

     In April 2005, the Securities and Exchange Commission approved a new rule that delays the effective date of SFAS 123R to the first annual reporting period beginning after June 15, 2005. SFAS123R will be effective for the Company beginning with the first quarter of 2006.

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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, 2004. In addition to historical consolidated financial information, this discussion contains forward-looking statements that involve known and unknown risks and uncertainties, including statements regarding our expectations, beliefs, intentions or strategies regarding the future. All forward-looking statements included in this report are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements. Our actual results could differ materially from those discussed in the forward-looking statements. You are cautioned not to place undue reliance on these forward-looking statements. In the past, our operating results have fluctuated and are likely to continue to fluctuate in the future.

Overview

          Revenues for the first quarter of 2005 of $9.1 million were up $2.5 million, or 38%, from the first quarter of 2004, and were down $2.3 million, or 20%, from the fourth quarter of 2004. Revenues for the first quarter of 2005 were higher than the first quarter of 2004 due to the full integration of the Endwave Defense Systems Incorporated (“EDSI”) acquisition and increased demand for our products in both the telecommunications networks and defense electronics business. Revenues for the first quarter of 2005 were lower than revenues for the fourth quarter of 2004 primarily due to the seasonality in the telecommunications networks market. The fourth quarter has historically been our strongest quarter as our customers expend their remaining capital budgets for the year, a trend that continued in the fourth quarter of 2004.

          We continue to seek growth through furthering our position as the leading supplier of high-frequency RF modules, continued diversification into the defense electronics and homeland security markets, and strategic acquisitions.

          During the first quarter of 2005 we took a number of steps in line with our growth strategy:

	o	In March 2005, we filed a registration statement on Form S-3 with the Securities and Exchange Commission to register for sale 5,000,000 shares of common stock, plus up to 750,000 shares pursuant to an overallotment option granted to the underwriters. Of these shares, we are offering 2,000,000. We intend to use the proceeds from the offering of these 2,000,000 shares primarily for working capital and general corporate purposes and to acquire complementary products, technologies or businesses. Northrop Grumman Space & Mission Systems Corp. is offering the remaining 3,000,000 registered shares.
	o	In January 2005, we announced the formation of EDSI to provide focus on the defense electronics and homeland security markets. The division consists of JCA Technology, which we purchased in July 2004, and our legacy defense products business. We plan to continue to use the JCA brand name and apply our expertise to surrounding components as a means to provide more highly integrated, value-added subsystem solutions for the defense and homeland security markets.
	o	During 2005, we will continue to manufacture products based on our customers’ designs at the location of our offshore partner in Southeast Asia. Accordingly, these products have a slightly lower gross margin than our internal designs, which utilize our proprietary technology. We believe our product mix will shift further toward these products during the remainder of 2005 and as a result, our gross margin may be negatively impacted. We believe, however, that this will allow us to increase market share, establish relationships with new customers, increase revenues,

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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.

Results of Operations

     Three months ended March 31, 2005 and 2004

          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 2005 were $9.1 million, a 38% increase from $6.6 million for the same period in 2004 and were comprised of product revenues and development fees. The first quarter of 2005 revenues were slightly higher than anticipated due to increased sales to our larger customers and the integration of EDSI.

          Product revenues were $9.0 million in the first quarter of 2005, a 38% increase from $6.5 million for the same period in 2005.