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Article by DailyStocks_admin    (03-03-08 03:50 AM)

Mid-February, CEO and President, Director Edward A. Keible bought 26,415 at $7. Since November of 2007, CEO Keible has purchased a total of 41,743 shares between $5.84 and $7.40. Endwave Corp. has a market cap of $80.39 million; its shares were traded at around $7.01 with P/S ratio of 1.39.

BUSINESS OVERVIEW

Introduction

We design, manufacture and market radio frequency, or RF, modules that enable the transmission, reception and processing of high frequency signals in telecommunication networks, defense electronics, homeland security and other systems. As used in this report, “we,” “us,” “our,” “Endwave” and words of similar import refer to Endwave Corporation and, except where the context otherwise requires, its consolidated subsidiary, Endwave Defense Systems Incorporated (formerly JCA Technology, Inc.).

Most of our RF modules are deployed in telecommunication networks, including current and next-generation cellular networks, carrier class trunking networks and point-to-point transmission networks. Our target customers for these applications are telecommunication network original equipment manufacturers and systems integrators, collectively referred to in this report as telecom OEMs. Telecom OEMs provide the wireless equipment used by service providers to deliver voice, data and video services to businesses and consumers. Telecom OEMs that purchased our products accounted for 84% of our total revenues during 2006 and included Allgon Microwave AB, Nera ASA, Nokia, Siemens AG and Stratex Networks, Inc.

Our RF modules are also designed into various applications outside of the telecommunication network market, including defense electronics and homeland security systems. Our target customers in the defense electronics market include defense systems integrators and their subcontractors that design aerospace systems, defense systems, weapons and electronics platforms for domestic and foreign defense customers. Our target customers in the homeland security market include those utilizing the properties of high-frequency RF to create new systems designed to detect security threats. In this report, we refer to our target customers in the defense electronics and homeland security markets as defense and homeland security systems integrators. Revenues from this group of customers, including The Boeing Company, L-3 SafeView Inc., Lockheed Martin Corporation, Northrop Grumman Corporation and Raytheon Company, accounted for 16% of our total revenues in 2006.

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

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

Industry Background and Markets

High-Frequency RF Technology

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

Our RF modules are typically designed to operate at frequencies between 5 GHz and 100 GHz, which we refer to in this report as high-frequency RF. Due to their physical attributes, high-frequency RF signals are well-suited for applications in telecommunication networks requiring high data throughput, defense systems demanding advanced radar and communication capabilities and homeland security systems requiring detection, measurement and imaging capabilities not available by conventional means.

Telecommunication Networks

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

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

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

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

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

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

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

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

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

Defense Electronics

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

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

Radar Systems. RF modules are used in traditional radar systems to detect large objects at significant distances. In addition, many new weapons systems employ complementary sophisticated radar systems designed to detect small vehicles and combat personnel. These new systems often use higher frequencies in order to provide greater resolution. A further use of high frequency radar is airborne vision equipment that allows pilots to see through low-lying haze and dust much in the same way night vision goggles permit one to see in the dark.

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

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

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

Homeland Security Systems

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

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

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

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

Our Opportunity

Historically, when telecom OEMs and defense electronics and homeland security systems integrators incorporated high-frequency RF modules into their products, they designed and manufactured them internally. However, faced with the need to generate greater cost efficiencies and technological innovations with fewer resources, we believe these telecom OEMs and systems integrators are increasingly looking to merchant suppliers for these items.

We have observed a trend of increasing use of merchant suppliers in the telecommunication network market. Of the top 15 microwave radio manufacturers that collectively represent over 95% of the microwave radio unit volume worldwide, 13 use merchant suppliers for all or some of their transceiver modules, with the use of merchant suppliers increasing. We believe that outside sourcing using merchant suppliers represents approximately one half of total unit volume. We believe the same dynamic will also occur in the defense electronics and homeland security markets.

We believe there are several key characteristics that telecom OEMs and defense and homeland security systems integrators value in a potential supply partner of high-frequency RF modules:

Low Cost. Telecom OEMs and defense and homeland security systems integrators are under increasing pricing pressure from their customers so they expect effective cost-reduction programs from their merchant suppliers. These cost-reduction programs require merchant suppliers to make a comprehensive effort at multiple levels, including the integration of multiple functions, efficient manufacturing, effective supply chain management, streamlined life cycle support and use of low-cost sub-contractors, as appropriate.

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

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

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

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

Our Strengths

We are a provider of high-frequency RF modules to telecom OEMs and defense and homeland security systems integrators. We believe we possess several key strengths that enable us to provide our customers with superior products and services. These strengths include:

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

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

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

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

Our Strategy

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

Revenue Growth

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

Expand into New Growth Markets. While our core market historically has been the telecommunication network market, we intend to leverage our high-frequency RF module expertise to expand in new growth markets, such as defense electronics and homeland security systems, to increase revenues and diversify our customer base. In 2006, revenues from defense and homeland security systems integrators accounted for 16% of our total revenues. We believe we are well positioned to take advantage of these markets as high-frequency RF modules become a more integral component of defense electronics and homeland security systems.

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

Offer the Highest Level of Manufacturing Efficiency and Flexibility

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

Outsource to Low-Cost, Contract Manufacturers. In 2002, we began moving most of our high-volume manufacturing to Hana Microelectronics Co., Ltd., or HANA, in Thailand, a low-cost, offshore contract manufacturer. We consign raw materials to HANA, as well as provide the specialized assembly and test equipment needed to manufacture our products. HANA provides the direct labor to assemble and test our products. Our readily manufacturable designs, which can tolerate a wide range of component performance and assembly process variations, and our automated production test systems enabled this successful transition to offshore contract manufacturing. The portion of our product revenues attributable to products manufactured offshore increased from approximately 8% in 2002 to over 80% in 2006. This transition has significantly improved our product margins and converted many of our fixed costs into variable costs. This conversion of our cost structure enables us to adjust costs flexibly in response to changing customer demand. We intend to continue to use contract manufacturers to enable us to respond flexibly to changing customer demands and the seasonality of our business.

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

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

Leverage Technical Breadth and Strength

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

Develop New Circuit and Packaging Technologies. A key component of our value proposition is providing our customers with powerful and cost-effective technologies that offer them a major technical and economic advantage. We have developed and maintain a strong base of high-frequency RF technology supported by an experienced design team, a large library of circuit designs, extensive proprietary know-how and a large portfolio of patents. Our efforts to create and acquire new technology led to four new patents issued during 2006, bringing our total issued United States patents to 42 and our total issued foreign patents to 13. We intend to continue to invest in research and development, maintain a team of talented engineers and scientists, and build on our manufacturing technologies. To that end, we have introduced a proprietary circuit technology known as Multilithic Microsystems, or MLMS, and a proprietary circuit packaging technology called Epsilon, both of which reduce the cost of producing our products and improve technical performance.

Products and Technology

Products

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

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

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

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

Circuit Technologies

In high-frequency RF modules, the choice and implementation of the basic circuit technology determine the performance, cost and manufacturability of the product. Currently, most of our products employ one of two alternate technologies, either hybrid microwave integrated circuit, or HMIC, technology or monolithic microwave integrated circuit, or MMIC, technology. In each case, we apply our circuit design capabilities to develop custom circuits that are optimized for cost, performance and manufacturability. All of our products manufactured at HANA employ MMIC technology. We have advanced the design of our HMIC and MMIC circuits significantly and have benefited from those advancements in reduced costs and higher production yields. Multilithic Microsystem technology, or MLMS, is a proprietary next generation circuit technology, that we believe significantly reduces costs and allows improved performance.

CEO BACKGROUND

John M. McGrath, Jr.

Mr. McGrath , age 42 , has served as a director of Endwave since January 2005. Mr. McGrath is currently the Vice President and Chief Financial Officer for Network Equipment Technologies, a manufacturer of data networking equipment for government and enterprise applications, a position he has held since 2001. Prior to joining Network Equipment Technologies, Mr. McGrath was an independent consultant to enterprise software firm Niku Corporation. From 1997 to 2000, Mr. McGrath served in various financial capacities at Aspect Communications, including as Vice President of Finance and Director of Finance for Europe, Middle East and Africa. Prior to that, he was Director of Finance for TCSI Corporation. From 1986 to 1991, Mr. McGrath worked as a Manager in the High Technology/Manufacturing Group at Ernst & Young LLP. Mr. McGrath holds a B.S. in Accounting from the University of Wyoming and an M.B.A. from the Stanford Graduate School of Business and is a registered C.P.A. in the state of California. Mr. McGrath is also on the board of the Presidio Fund, a publicly traded mutual fund.

Wade Meyercord

Mr. Meyercord , age 66, has served as a director of Endwave since March 2004. From 1987 to present, Mr. Meyercord has served as President of Meyercord and Associates, a consulting firm specializing in board of directors and executive compensation. From 1999 to 2002, Mr. Meyercord served as Senior Vice President and Chief Financial Officer of RioPort.com, Inc., a company that delivers an integrated, secure platform for acquiring, managing and experiencing music and spoken audio programming from the Internet. From 1998 to 1999, Mr. Meyercord Served as Senior Vice President, e-commerce of Diamond Multimedia. Prior to 1998, Mr. Meyercord held various management and/or executive level positions with Read-Rite Corporation, Memorex Corporation and IBM Corporation. Mr. Meyercord received a B.S. in mechanical engineering from Purdue University and an M.B.A. in engineering administration from Syracuse University. Mr. Meyercord serves as a member on the Board of Directors of Microchip and California Micro Devices.

Edward A. Keible

Mr. Keible , age 63, has served as our President and Chief Executive Officer and as a director since January 1994. From 1973 until 1993, Mr. Keible held various positions at Raychem Corporation, a materials science company, culminating in the position of Senior Vice President with specific oversight of Raychem’s International and Electronics Groups. Mr. Keible holds a B.A. in engineering sciences and a B.E. and an M.E. in materials science from Dartmouth College and an M.B.A. from Harvard Business School.

Edward C.V. Winn

Mr. Winn , age 68, has served as director of Endwave since July 2000. From March 1992 to January 2000, Mr. Winn served in various capacities with TriQuint Semiconductor, Inc., a semiconductor manufacturer, most recently as Executive Vice President, Finance and Administration and Chief Financial Officer. Previously, Mr. Winn served in various capacities with Avantek, Inc., a microwave component and subsystem manufacturer, most recently as Product Group Vice President. Mr. Winn received a B.S. in Physics from Rensselaer Polytechnic Institute and an M.B.A. from Harvard Business School. Mr. Winn serves as a member on the Board of Directors of Volterra Semiconductor Corporation.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

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

Markets and Growth Strategy

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

From 2005 to 2006, we experienced growth of 34% in our telecommunications-relate d revenues. We benefited both from increased demand experienced by our customers and by capturing a greater share of our customers’ overall high-frequency RF transceiver business. Telecom OEMs that purchased our products accounted for 84% of our total revenues during 2006.

We believe the demand for microwave radios and the transceiver modules used to build them is increasing. As service providers deploy more cellular base stations to serve their growing subscriber base and upgrade existing facilities, they will require more microwave radio links for cellular backhaul. We believe this projected increased demand is also driven by growth of wireless telephony in developing nations, increase in data-sensitive cellular traffic, deployment of third-generation, or “3G,” networks and the introduction of other high capacity data only telecommunication networks.

During 2006, our two largest customers, Nokia and Siemens announced plans to merge their telecommunications network businesses. The ongoing impact, if any, of this merger on our ongoing relationship with the combined company is uncertain. During the fourth quarter of 2006, we experienced a decrease in revenues from Nokia as they decreased their inventory of our products in anticipation of the closing of the merger. The closing of the merger has been delayed and we may continue to experience revenue fluctuations in 2007 as a result.

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

From 2005 to 2006, we experienced growth of 4% in our defense and homeland security-related revenues. Such revenues, accounted for approximately 16% of our total revenues in 2006.

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

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

In support of this growth strategy, on April 24, 2006 we entered into a Preferred Stock and Warrant Purchase Agreement with Oak Investment Partners XI, Limited Partnership, which we refer to as Oak. Pursuant to this agreement, Oak purchased 300,000 shares of our Series B preferred stock for $150 per share and a warrant to purchase up to an additional 90,000 shares of our Series B preferred stock with an exercise price of $150 per share. From this private placement, we received gross proceeds of $45.0 million and net proceeds of $43.1 million after the payment of legal fees and other expenses including commissions to Needham & Co., the Company’s sole placement agent and financial advisor for the private placement. Each share of Series B preferred stock is convertible into 10 shares of our common stock. The Series B preferred stock and the warrant were issued pursuant to an exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended. We intend to use the net proceeds of this financing to continue to expand our business in the telecommunications and defense and homeland security markets, particularly through strategic acquisitions.

Seasonality

In the past, our operating results have reflected lower revenues in the first and third calendar quarters due to seasonality in the telecommunication network market. Revenues attributable to telecom OEMs typically have contracted in the first quarter due to delays in purchasing resulting from wireless carriers’ budgeting processes. The third quarter generally has been slow in our telecommunication network market as many of our European telecom OEM customers shut down their factories for a portion of the summer months. The fourth quarter historically has been our strongest quarter as the wireless carriers expend their remaining capital budgets for the year. However, we did not experience this seasonality in 2005 or 2006, and we cannot be certain what seasonal factors, if any, will impact our revenues in the future or the extent of such potential fluctuations.

Critical Accounting Policies

General

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

Revenue Recognition

Our primary customers are telecom OEMs and defense and homeland security systems integrators that incorporate our products into their systems. We recognize product revenues at the time title passes, which is generally upon product shipment or when withdrawn from a consignment location, and persuasive evidence that 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. Revenues under development contracts are generally recorded on a percentage of completion basis, using project hours as the basis to measure progress toward completing the contract and recognizing revenues. Revenues attributable to development fees accounted for 2.5% of our total revenues in 2004, 3.3% of our total revenues in 2005 and 2.0% of our total revenues in 2006. The costs incurred under these development agreements are included in research and development expenses.

Allowance for Doubtful Accounts

We make ongoing assumptions relating to the collectibility of our accounts receivable in our calculation of the allowance for doubtful accounts. In determining the amount of the allowance, we make judgments about the creditworthiness of customers based on ongoing credit evaluations and assess current economic trends affecting our customers that might impact the level of credit losses in the future and result in different rates of bad debts than previously seen. We also consider our historical level of credit losses. Our reserves, which were $296,000 at December 31, 2005 and $131,000 at December 31, 2006, historically have been adequate to cover our actual credit losses. If actual credit losses were to be significantly greater than the reserves we have established, our selling, general and administrative expenses would increase.

Warranty Reserves

We generally offer a one-year to two-year warranty on all of our products. We record a liability based on estimates of the costs that may be incurred under our warranty obligations and charge to cost of product revenues the amount of such costs at the time revenues are recognized. Our warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Our estimates of anticipated rates of warranty claims and costs per claim are primarily based on historical information and future forecasts. At December 31, 2005 and 2006 our warranty reserves were $3.3 million and $2.9 million, respectively. We periodically assess the adequacy of our recorded warranty liabilities and adjust the amounts as necessary. If actual warranty claims are significantly higher than forecast, or if the actual costs incurred to provide the warranty is greater than the forecast, our gross margins could be adversely affected.

Inventory Valuation

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

Stock-Based Compensation

Effective January 1, 2006, we adopted the provisions of Statement of Financial Accounting Standards, or SFAS, No. 123 (revised 2004) “Share-Based Payment”, or SFAS No. 123(R). SFAS No. 123(R) establishes accounting for stock-based awards exchanged for employee services. Accordingly, stock-based compensation cost is measured at the grant date, based on the fair value of the award, and is recognized as expense over the requisite service period. All of our stock compensation is accounted for as an equity instrument. We previously applied Accounting Principles Board, or APB, Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations and provided the required pro forma disclosures of SFAS No. 123, “Accounting for Stock-Based Compensation,” or SFAS No. 123.

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

Consistent with prior years, we use the “with and without” approach as described in Emerging Issues Task Force Topic No. D-32 in determining the order in which our tax attributes are utilized. The “with and without” approach results in the recognition of the windfall stock option tax benefits after all other tax attributes of ours have been considered in the annual tax accrual computation. SFAS No. 123(R) prohibits the recognition of a deferred tax asset for an excess tax benefit that has not yet been realized. As a result, we will only recognize a benefit from stock-based compensation in paid-in capital if an incremental tax benefit is realized after all other tax attributes currently available to us have been utilized. In addition, we have elected to account for the indirect benefits of stock-based compensation on items such as the alternative minimum tax, the research tax credit or the domestic manufacturing deduction through the consolidated statements of operations rather than through paid-in capital.

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

The guidance in SFAS No. 123(R) is relatively new and its application may be subject to further interpretation and guidance. There are significant variations among allowable valuation models, and there is a possibility that we may refine the inputs and assumptions under our current valuation model in the future resulting in a lack of consistency in future periods. Our current or future valuation model and the inputs and assumptions we make may also lack comparability to other companies that use different models, inputs, or assumptions, and the resulting differences in comparability could be material.

Deferred Taxes

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

Long-Lived Assets

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

Business Combinations

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

At December 31, 2006, the carrying value of goodwill was $1.6 million and the carrying value of identifiable intangible assets was $2.6 million. In accordance with the provisions of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” we assess goodwill and intangible assets with indefinite lives for impairment at least annually, or more frequently if events and changes in circumstances suggest that the carrying amount may not be recoverable. To the extent the carrying amount exceeds its fair value, an impairment charge to income is recorded. This assessment is based upon a discounted cash flow analysis and analysis of our market capitalization. The estimate of cash flow is based upon, among other things, certain assumptions about expected future operating performance and an appropriate discount rate determined by our management. Our estimates of discounted cash flows may differ from actual cash flows due to, among other things, economic conditions, changes to our business model or changes in operating performance. Significant differences between these estimates and actual cash flows could materially affect our future financial results. We completed our annual goodwill impairment test as of September 30, 2006 and determined that no adjustment to the carrying value of goodwill was required. We have determined that no events have occurred from that date through December 31,
2006 that would require an updated analysis. Our future operating performance will be impacted by the future amortization of these acquired intangible assets and potential impairment charges related to goodwill if indicators of potential impairment exist. As a result of business acquisitions, the allocation of the purchase price to goodwill and intangible assets could have a significant impact on our future operating results.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Results of Operations
Three and nine months ended September 30, 2007 and 2006
Total revenues consist of product revenues and development fees. Product revenues are attributable to sales of our RF modules. Development fees are attributable to the development of product prototypes and custom products pursuant to development agreements that provide for payment of a portion of our research and development or other expenses. We expect to enter into more development contracts in the future as we seek to further penetrate the defense electronics market, where development contracts are customary, but we do not expect development fees to represent a significant percentage of our total revenues for the foreseeable future.
During the three months ended September 30, 2007, total revenues decreased by 27% compared to the same period in 2006. This decrease in total revenues was due to a $5.9 million decrease in revenues from our telecommunications customers which was offset in part by an $831,000 increase in revenues from our defense and homeland security customers. For the three months ended September 30, 2007, revenues from our defense electronics and homeland security customers comprised 23% of our total revenues and revenues from our telecommunication customers comprised 77% of our total revenues.
During the nine months ended September 30, 2007, total revenues decreased by 14% compared to the same period in 2006. This decrease in total revenues was primarily due to a $7.6 million decrease in revenues from our telecommunications customers which was offset in part by a $779,000 increase in revenues from our defense and homeland security customers. The decrease in telecommunication revenue was primarily attributable to decreased revenues from the Siemens product lines of Nokia Siemens Networks as they decreased purchases of legacy products that historically have been outsourced to us. For the nine months ended September 30, 2007, revenues from our defense electronics and homeland security customers comprised 20% of our total revenues and revenues from our telecommunication customers comprised 80% of our total 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 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 2007, the cost of product revenues as a percentage of revenues increased primarily due to the decreased absorption of our overhead costs resulting from decreased production. The cost of product revenues in both periods was favorably impacted by the utilization of inventory that was previously written off, amounting to approximately $62,000 during the third quarter of 2007 and $129,000 during the third quarter of 2006.
During the first nine months of 2007, the cost of product revenues as a percentage of revenues increased due primarily to the decreased absorption of our overhead costs resulting from decreased total revenues, the write down of certain raw material inventory to the lower of cost or market pursuant to a price decrease from our supplier and increased inventory reserves associated with the end of life of one our customer programs. The cost of product revenues in both periods was favorably impacted by the utilization of inventory that was previously written off, amounting to approximately $477,000 during the first nine months of 2007 and $458,000 during the first nine months of 2006.
We intend to continue to focus on reducing the cost of product revenues as a percentage of total revenues through the introduction of new designs and technology and further improvements to our offshore manufacturing processes. In addition, our product costs are impacted by the mix and volume of products sold and will continue to fluctuate as a result.

Research and development expenses 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 three months ended September 30, 2007, research and development costs increased both as a percentage of total revenues and in absolute dollars compared to the same period in 2006. The increase in research and development costs was primarily attributable to an increase of $190,000 for research and development project-related expenses, an increase of $136,000 related to acquisition of the ALC engineering group, and an increase of $101,000 for SFAS No. 123 (R) stock-based compensation expense.
During the first nine months of 2007, research and development costs increased both as a percentage of total revenues and in absolute dollars compared to the same period in 2006. The increase in research and development costs was primarily attributable to an increase of $443,000 for research and development project-related expenses, an increase of $383,000 of personnel-related expenses, an increase of $230,000 related to acquisition of the ALC engineering group, and an increase of $203,000 for SFAS No. 123 (R) stock-based compensation expense.
During the remainder of 2007, we anticipate research and development expenses will remain relatively constant in absolute dollar terms.

Selling, general and administrative expenses consist primarily of salaries and related expenses for executive, sales, marketing, finance, accounting, legal, information technology and human resources personnel, professional fees, facilities costs, expenses related to stock-based compensation and promotional activities.
During the third quarter of 2007, selling, general and administrative expenses increased as a percentage of revenues but decreased in absolute dollars compared to the same period in 2006. The decrease in absolute dollars was due to a decrease of $161,000 in personnel-related expenses which was partially offset by an increase of $52,000 for SFAS No. 123 (R) stock-based compensation expense.
During the first nine months of 2007, selling, general and administrative expenses increased as a percentage of revenues but decreased in absolute dollars compared to the same period in 2006. The decrease in absolute dollars was primarily due to a decrease of $305,000 in sales commissions which was partially offset by an increase of $173,000 for SFAS No. 123 (R) stock-based compensation expense.
During the remainder of 2007, we anticipate selling, general and administrative expenses will remain relatively constant in absolute dollar terms.

As part of our acquisition of ALC in April 2007, we acquired $2.9 million of identifiable intangible assets, including $900,000 for customer relationships, $880,000 for developed technology, $560,000 for customer backlog, $370,000 for the non-compete agreement and $230,000 for the tradename. These assets are subject to amortization and have approximate estimated useful lives as follows: customer relationships – six years, developed technology – six years, customer backlog – two years, non-compete agreement – four years, and tradename – six years.
As part of our acquisition of JCA Technology, Inc. in July 2004, we acquired $4.2 million of identifiable intangible assets, including $2.3 million for developed technology, $1.1 million for the tradename, $780,000 for customer relationships and $140,000 for customer backlog. These assets are subject to amortization and have approximate estimated useful lives as follows: developed technology – five years, customer backlog – six months and customer relationships – five years. The tradename intangible asset is not subject to amortization and will be evaluated for impairment at least annually or more frequently if events and changes in circumstances suggest that the carrying amount may not be recoverable.
The amortization associated with the developed technology is a charge to cost of product revenues. The amortization associated with the developed technology was $149,000 for the third quarter of 2007 and $113,000 for the third quarter of 2006. The increase in cost of product revenues, amortization of intangible assets was due to $36,000 of amortization for the ALC developed technology.

During the first nine months of 2007, the amortization associated with the developed technology was $399,000 compared to $337,000 during the first nine months of 2006. The increase in cost of product revenues, amortization of intangible assets for 2007 was due to the amortization of the ALC developed technology.
The amortization associated with the customer backlog, customer relationships, non-compete and tradename is a charge to operating expenses. During the third quarter of 2007, the $180,000 of amortization was comprised of the following: $77,000 for customer relationships, $70,000 for customer backlog, $23,000 for the non-compete agreement and $10,000 for the tradename. During the third quarter of 2006, the $39,000 of amortization was due to the amortization of customer relationships of JCA. This increase in amortization was attributable to the amortization of ALC intangibles.
During the first nine months of 2007, the $352,000 of amortization was comprised of the following: $180,000 for customer relationships, $117,000 for customer backlog, $38,000 for the non-compete agreement and $17,000 for the tradename. During the first nine months of 2006, the $117,000 of amortization was due to the amortization of customer relationships of JCA. This increase was attributable to the amortization of the ALC intangibles.

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