<PAGE>

                          SECURITIES AND EXCHANGE COMMISSION
                                WASHINGTON, D.C. 20549

                                      FORM 10-Q
                  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
                        OF THE SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended                 Commission file number:  0-15895
December 31, 1998
------------------


                           DIGITAL MICROWAVE CORPORATION
                           ------------------------------
                (Exact name of registrant specified in its charter)

           Delaware                                          77-0016028
---------------------------------                   --------------------------
   (State or other jurisdiction                            (IRS employer
of incorporation or organization)                       identification number)

    170 Rose Orchard Way
       San Jose, CA                                             95134
----------------------------------------                     -------------
(Address of Principal Executive Offices)                      (Zip Code)

Registrant's telephone number, including area code:           (408) 943-0777
                                                             ---------------

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
                      --------        -------

The number of outstanding shares of  the Registrant's common stock, par value
$.01 per share, was 61,795,083 on January 31, 1999.

<PAGE>


                                       INDEX

                                                                          PAGE

<TABLE>
<CAPTION>
<S>                                                                       <C>
COVER PAGE                                                                 1

INDEX                                                                      2

PART I - FINANCIAL INFORMATION


     Item 1 - Financial Statements

         Condensed Consolidated Balance Sheets                             3

         Condensed Consolidated Statements of Operations                   4

         Condensed Consolidated Statements of Cash Flows                   5

         Notes to Condensed Consolidated Financial Statements              6-11

     Item 2 - Management's Discussion and Analysis of                      12-19
              Financial Condition and Results of Operations

PART II - OTHER INFORMATION

     Item 4 - Other Matters                                                20
     Item 5 - Other Information                                            20
     Item 6 - Exhibits and Reports on Form 8-K                             20-21


SIGNATURE                                                                  22

</TABLE>


                                                                               2
<PAGE>


                            PART I - FINANCIAL INFORMATION
                            ITEM I - FINANCIAL STATEMENTS

                            DIGITAL MICROWAVE CORPORATION
                        CONDENSED CONSOLIDATED BALANCE SHEETS
                                    (In thousands)
<TABLE>
<CAPTION>


ASSETS                                                              12/31/98      03/31/98
------                                                              --------      --------
                                                                   (Unaudited)
<S>                                                                 <C>          <C>
CURRENT ASSETS:
     Cash and cash equivalents                                     $ 17,372       $ 46,904
     Short-term investments                                          10,569         15,221
     Accounts receivable, net                                        53,824         86,061
     Inventories                                                     55,018         73,029
     Deferred tax asset                                               6,765          6,685
     Other current assets                                             6,221          9,145
                                                                   --------       --------
     Total current assets                                           149,769        237,045

PROPERTY AND EQUIPMENT, NET                                          43,831         43,662
OTHER ASSETS                                                          7,389         16,489
                                                                   --------       --------
     Total assets                                                  $200,989       $297,196
                                                                   --------       --------
                                                                   --------       --------
LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
     Current maturities of capital lease obligations               $    920       $  1,342
     Notes payable                                                      410            -
     Accounts payable                                                22,877         39,572
     Income taxes payable                                               570          1,298
     Accrued liabilities                                             42,061         27,211
                                                                   --------       --------
     Total current liabilities                                       66,838         69,423
LONG-TERM LIABILITIES:
     Capital lease obligations, net of current maturities               452          1,174
                                                                   --------       --------
     Total liabilities                                               67,290         70,597
STOCKHOLDERS' EQUITY
     Common stock and paid-in capital                               250,134        249,057
     Accumulated other comprehensive income                          (3,671)        (1,959)
     Accumulated deficit                                           (112,764)       (20,499)
                                                                   --------       --------

     Total stockholders' equity                                     133,699        226,599

     Total liabilities and stockholders' equity                    $200,989       $297,196
                                                                   --------       --------
                                                                   --------       --------

</TABLE>


See accompanying Notes to Condensed Consolidated Financial Statements.


                                                                              3
<PAGE>

                            DIGITAL MICROWAVE CORPORATION
                   CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                       (In thousands, except per share amounts)
                                     (Unaudited)

<TABLE>
<CAPTION>


                                                            Three Months Ended            Nine Months Ended
                                                               December 31,                 December 31,
                                                               ------------                 ------------
                                                            1998           1997           1998           1997
                                                         ---------     ---------       ---------      --------
<S>                                                      <C>           <C>             <C>            <C>
Net sales                                                $ 58,278        $93,885       $176,774       $251,271
Cost of sales                                              84,252         58,514        179,230        160,396
                                                         ---------     ---------       ---------      --------
Gross profit (loss)                                       (25,974)        35,371         (2,456)        90,875
                                                         ---------     ---------       ---------      --------

Operating expenses:
     Research and development                               5,231          6,334         18,118         17,454
     Selling, general and administrative                   12,611         17,096         43,881         47,984
     Merger and restructuring charges                      22,728              0         29,941              0
                                                         ---------     ---------       ---------      --------

       Total operating expenses                            40,570         23,430         91,940         65,438
                                                         ---------     ---------       ---------      --------

Operating income (loss)                                   (66,544)        11,941        (94,396)        25,437
Other income (expense):
     Interest and other
      income (expense), net                                  (342)           591          1,047          2,805
     Interest expense                                        (163)           (23)          (199)          (581)
                                                         ---------     ---------       ---------      --------

Income (loss) before provision for
      income taxes                                        (67,049)        12,509        (93,548)        27,661

Provision for income taxes                                    425          1,754            522          4,461
                                                         ---------     ---------       ---------      --------

Net income (loss)                                        $(67,474)       $10,755       $(94,070)      $ 23,200
                                                         ---------     ---------       ---------      --------
                                                         ---------     ---------       ---------      --------

Basic earnings (loss) per share                          $  (1.09)     $    0.20       $  (1.53)      $   0.48
                                                         ---------     ---------       ---------      --------
                                                         ---------     ---------       ---------      --------

Diluted earnings (loss) per share                        $  (1.09)     $    0.19       $  (1.53)      $   0.46
                                                         ---------     ---------       ---------      --------
                                                         ---------     ---------       ---------      --------

Basic weighted average shares
     outstanding                                           61,713         53,908         61,519         48,210
Diluted stock options                                           0          2,697              0          2,311
                                                         ---------     ---------       ---------      --------
Diluted weighted average shares
     outstanding                                           61,713         56,605         61,519         50,521
                                                         ---------     ---------       ---------      --------
                                                         ---------     ---------       ---------      --------

</TABLE>


See accompanying Notes to Condensed Consolidated Financial Statements.


                                                                              4
<PAGE>

                           DIGITAL MICROWAVE CORPORATION
                  CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (In thousands)
                                     (Unaudited)

<TABLE>
<CAPTION>


                                                                                   Nine Months Ended
                                                                                      December 31,
                                                                                      ------------
CASH FLOWS FROM OPERATING ACTIVITIES:                                           1998                1997
                                                                                ----                ----
<S>                                                                         <C>                  <C>
Net income (loss)                                                            $(94,070)           $ 23,200
   Adjustments to reconcile net income (loss) to net cash
   used in operating activities:
   Adjustment to conform year-end of pooled company                             1,804                 -
   Depreciation and amortization                                               20,738               8,557
   Provision for valuation reserves                                            22,135               7,361
   Provision for warranty reserves                                              6,257               3,511
   Compensation expense on employee stock options                                 -                 1,070
   Changes in assets and liabilities, net of effect of acquisition:
     Decrease (increase) in accounts receivable                                26,849             (29,806)
     Increase in inventories                                                   (1,160)            (20,369)
     Decrease (increase) in other assets                                       10,723              (4,718)
     Increase (decrease) in accounts payable                                  (16,262)              7,181
     Decrease in income tax payable                                              (728)               (385)
     Increase (decrease) in other accrued liabilities                           9,247              (8,344)
                                                                             ---------           ---------
NET CASH USED IN OPERATING ACTIVITIES                                         (14,467)            (12,742)
CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchases of available-for-sale securities                                 (13,457)            (12,137)
   Proceeds from available-for-sale securities                                 18,084              10,873
   Acquisition of businesses, net of cash acquired                             (2,412)            (11,913)
   Investment in Granger Associates Ltd.                                          -                (4,000)
   Proceeds from the sale of investments                                          601                 -
   Proceeds from disposal of fixed assets                                       1,166                   9
   Purchases of property and equipment                                        (18,805)            (14,880)
                                                                             ---------           ---------
NET CASH USED IN INVESTING ACTIVITIES                                         (14,823)            (32,048)
CASH FLOWS FROM FINANCING ACTIVITIES:
   Repayments to bank                                                             -                (6,352)
   Borrowings from banks                                                          410                 -
   Payment of capital lease obligations                                        (1,144)             (1,486)
   Payment of assumed acquisition debt                                            -                (3,286)
   Sale of common and preferred stock                                           1,077              75,028
                                                                             ---------           ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES                                         343              63,904
Effect of exchange rate changes on cash                                          (585)              1,899
                                                                             ---------           ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                          (29,532)             21,013
Cash and cash equivalents at beginning of period                               46,904              40,546
                                                                             ---------           ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                                   $ 17,372            $ 61,557
                                                                             ---------           ---------
                                                                             ---------           ---------

SUPPLEMENTAL DATA
   Interest paid                                                             $    388            $    254
   Income taxes paid                                                         $  1,233            $  3,340

</TABLE>


See accompanying Notes to Condensed Consolidated Financial Statements.


                                                                              5
<PAGE>

                            DIGITAL MICROWAVE CORPORATION
                 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                     (Unaudited)

BASIS OF PRESENTATION

     The condensed consolidated financial statements include the accounts of
     Digital Microwave Corporation and its wholly owned subsidiaries.
     Intercompany accounts and transactions have been eliminated.  Prior year
     reported results have been restated to include MAS Technology Limited (MAS)
     which merged with the Company in March 1998 and Innova Corporation (Innova)
     which merged with the Company in October 1998.

     While the financial information furnished is unaudited, the financial
     statements included in this report reflect all adjustments (consisting only
     of normal recurring adjustments) which the Company considers necessary for
     a fair presentation of the results of operations for the interim periods
     covered and of the financial condition of the Company at the date of the
     interim balance sheet.  The results for interim periods are not necessarily
     indicative of the results for the entire year.  The condensed consolidated
     financial statements should be read in connection with the Digital
     Microwave Corporation financial statements included in the Company's annual
     report and Form 10-K for the fiscal year ended March 31, 1998.

CASH AND CASH EQUIVALENTS

     For purposes of the consolidated statements of cash flows, the Company
     considers all highly liquid debt instruments with an original maturity of
     three months or less to be cash equivalents.  The Company is required to
     segregate and maintain certain cash balances as security for letters of
     credit provided to secure performance or bid bonds under certain of the
     Company's revenue contracts.  As of December 31, 1998, this amounted to
     $700,760 and was included in cash and cash equivalents in the accompanying
     Consolidated Balance Sheet.  There was no restricted cash as of March 31,
     1998.

INVENTORIES

     Inventories are stated at the lower of cost (first-in, first-out) or market
     where cost includes material, labor and manufacturing overhead.
     Inventories consist of:

<TABLE>
<CAPTION>

                                                     (In thousands)
                                          December 31, 1998     March 31, 1998
                                          -----------------     --------------
                                                 (Unaudited)
     <S>                                  <C>                   <C>
     Raw materials                          $   27,599            $  25,183
     Work in process                            12,719               19,104
     Finished goods                             14,700               28,742
                                            ----------            ---------
                                            $   55,018            $  73,029
                                            ----------            ---------
                                            ----------            ---------

</TABLE>



                                                                              6
<PAGE>

OTHER ASSETS

     Included in other assets are goodwill and other intangibles which are being
     amortized on a straight line basis over their useful lives ranging from 5
     to 10 years.

COST OF SALES

     In the third quarter ended December 31, 1998, the Company recorded $37.7
     million of inventory valuation and related charges which are reflected in
     cost of sales.   These inventory valuation charges consisted primarily of
     two main components, an excess and obsolescence adjustment, and recognition
     of liabilities to vendors on purchase commitments. The merger with Innova
     and planned introduction of new product lines accelerated the obsolescence
     of the Spectrum II-TM- product line.  Accordingly, inventory related
     charges of $30.3 million were recorded. The reduction in the Company's
     sales volume compared to the prior year has had an adverse affect on
     purchase order commitments to vendors.  Accordingly, liabilities of $7.4
     million were recognized to account for vendor cancellation charges on
     purchase order commitments.

MERGER AND RESTRUCTURING CHARGES

     Merger and restructuring charges of $22.7 million were recorded in the
     third quarter ended December 31, 1998.  These charges consisted of $2.7
     million for merger costs related to the Innova merger, $2.8 million for
     severance costs, $4.1 million for facility termination costs, and an
     impairment loss of $13.1 million resulting from the reduction of the
     carrying value of goodwill and other assets related to Granger Inc., a
     subsidiary of the Company.  Due to a change in business conditions, the
     Company is pursuing the sale of the assets related to the Granger
     operations.

     In addition, restructuring costs of $7.2 million were recorded in the
     quarter ended June 30, 1998.  These costs consisted of a $5.8 million
     write-off related to the discontinuance of internal information technology
     systems projects and a write-off of $1.4 million related to severance and
     other related costs associated with a reduction in the Company's workforce.

CURRENCY TRANSLATION

     The functional currency of the Company's subsidiaries located in the United
     Kingdom and Latin America is the U.S. dollar. Accordingly, all of the
     monetary assets and liabilities of these subsidiaries are remeasured into
     U.S. dollars at the current exchange rate as of the applicable balance
     sheet date, and all non-monetary assets and liabilities are remeasured at
     historical rates. Sales and expenses are remeasured at the average exchange
     rate prevailing during the period. Gains and losses resulting from the
     remeasurement of the subsidiaries'


                                                                              7
<PAGE>

     financial statements are included in the Consolidated Statements of
     Operations.  The Company's other international subsidiaries use their local
     currency as their functional currency.  Assets and liabilities of these
     subsidiaries are translated at the exchange rates in effect at the balance
     sheet date, and income and expense accounts are translated at the average
     exchange rates during the year.  The resulting translation adjustments are
     recorded directly to a separate component of stockholders' equity.


FINANCIAL INSTRUMENTS

     The Company enters into forward foreign exchange contracts to hedge some of
     its firm committed backlog and certain assets and liabilities denominated
     in foreign currencies.  At December 31, 1998, the Company had forward
     foreign exchange contracts to exchange various foreign currencies for U.S.
     dollars in the gross amount of $10.2 million.  Market value gains and
     losses on forward foreign exchange contracts are recognized as offsets to
     the exchange gains or losses on the hedged transactions.

NET INCOME PER SHARE

     In February 1997, the Financial Accounting Standards Board (the "FASB")
     issued Statement on Financial Accounting Standards No. 128 ("SFAS 128"),
     "Earnings per Share," which became effective on December 15, 1997.   As a
     result, the Company's reported earnings per share, after adjustment for the
     November 1997 stock split, were restated for all prior periods presented.

     Under SFAS 128, basic earnings per share are computed by dividing net
     income by the weighted average number of common shares outstanding during
     the period.   Diluted earnings per share are computed by dividing net
     income by the weighted average number of common shares and dilutive stock
     options outstanding during the period. Net loss per share is computed using
     only the weighted average number of common shares outstanding during the
     period, as the inclusion of common equivalent shares would be
     anti-dilutive.

MERGERS AND ACQUISITIONS

     In March 1998, the Company's stockholders approved the issuance of Common
     Stock of the Company pursuant to an agreement to merge with MAS Technology
     Limited ("MAS Technology"), a New Zealand company, which designs,
     manufactures, markets and supports digital microwave radio links for the
     worldwide telecommunications market.  Under the terms of the agreement, the
     Company exchanged 1.2 shares of its Common Stock for each outstanding share
     of MAS Technology stock and stock options. The Company issued approximately
     8.6 million shares to MAS Technology share and option holders. The
     combination qualified as a tax-free reorganization and was accounted for as
     a pooling-of-interests transaction. Accordingly, the historical financial
     statements


                                                                              8
<PAGE>

     of the Company have been restated to reflect the results of MAS Technology
     for all periods presented.

     On October 8, 1998, after receiving approval from its stockholders, the
     Company completed its merger with Innova Corporation, a Washington
     corporation, which designs, manufactures, markets and supports millimeter
     wave radios for use as low-to-medium capacity wireless communication links
     in developed and developing telecommunications markets. Under the terms of
     the merger agreement, the Company exchanged 1.05 shares of its Common Stock
     for each outstanding share of common stock of Innova.  The Company issued
     approximately 14.7 million shares to Innova shareholders, representing
     approximately 24% of the Company's outstanding Common Stock following
     consummation of the merger. In addition, the Company assumed and converted
     Innova stock options and warrants into stock options and warrants to
     purchase approximately 3.8 million shares of Digital Microwave Corporation
     Common Stock using the same exchange ratio.  The merger qualified as a
     tax-free reorganization and has been accounted for as a
     pooling-of-interests transaction. Accordingly, the historical financial
     statements of the Company have been restated to reflect the results of
     Innova for all periods presented.


     The following table shows the reconciliation of the historical results of
     the Company to the results presented in the accompanying Statements of
     Operations for the three and nine months ended December 31, 1997.

<TABLE>
<CAPTION>

                                       Three Months Ended     Nine Months Ended
                                       December 31, 1997      December 31, 1997
                                       ------------------     -----------------
     <S>                               <C>                    <C>
     Revenue:  Digital Microwave               $ 71,950            $195,790
               MAS Technology                    13,536              38,846
               Innova Corporation                10,418              22,986
               Intercompany sales                (2,019)             (6,351)
                                               --------            --------
               Total                           $ 93,885            $251,271
                                               --------            --------

     Net Income (loss):
               Digital Microwave               $  8,863            $ 22,067
               MAS Technology                     1,468               3,770
               Innova Corporation                   390              (2,623)
               Intercompany profit
                eliminations                         34                 (14)
               Total                           $ 10,755            $ 23,200
                                               --------            --------
                                               --------            --------
</TABLE>

LITIGATION AND CONTINGENCIES

     The Company is subject to legal proceedings and claims that arise in the
     normal course of its business.  In the opinion of management, these
     proceedings will not have a material adverse effect on the financial
     position and results of operations of the Company.


                                                                              9
<PAGE>

CONCENTRATION OF CREDIT RISK

     Trade receivables concentrated with certain customers primarily in the
     telecommunications industry and in certain geographic locations potentially
     subject the Company to concentration of credit risk.  In addition to sales
     in Western Europe and North America, the Company actively markets and sells
     products in Asia, Eastern Europe, South America, the Middle East and
     Africa.  The Company performs on-going credit evaluations of its customers'
     financial conditions and generally requires no collateral, although certain
     sales to Asia, Eastern Europe, South America, the Middle East and Africa
     are primarily paid through letters of credit.  During the second quarter
     ended September 30, 1998, the Company wrote off a $2.7 million receivable
     related to an Asian customer that filed for bankruptcy protection.

     The Company will continue to be affected, for the foreseeable future, by
     the unstable economies in Asia.  Further, it is not possible to determine
     the future effect a continuation of the economic crisis may have on the
     Company's liquidity and earnings.  Related effects will be reported in the
     financial statements as they become known and estimable.


CREDIT ARRANGEMENTS

     On October 30, 1998, an amended and restated agreement was executed with a
     bank to provide for the issuance of standby letters of credit on a cash
     collateralized basis.  The letters of credit, which totaled $0.6 million as
     of December 31, 1998, are issued in conjunction with bid and performance
     bond requirements under certain contracts with the Company's customers.

     In November 1998, the Company signed a credit facility agreement with a
     U.S. lender for a new $40 million asset-based borrowing facility.  The
     working capital line of credit, which includes a $5.0 million term loan, is
     secured by certain receivables, inventory and fixed assets of the Company.
     This credit facility provides borrowings at prime plus 1.5% per annum.
     There is a minimum monthly interest requirement of $20,000.  As of December
     31, 1998, approximately $20.8 million was available for borrowing under
     this facility of which $0.4 million was outstanding.

COMPREHENSIVE INCOME

     In June 1997, the FASB issued Statement on Financial Accounting Standards
     No. 130 ("SFAS 130"),  "Reporting Comprehensive Income,"


                                                                             10
<PAGE>

     which establishes standards for reporting and display of comprehensive
     income and its components (revenue, expenses, gains and losses) in a full
     set of general-purpose financial statements.  The following table
     reconciles comprehensive income under the provisions of SFAS 130 for the
     three and nine months ended December 31, 1998 and 1997.

<TABLE>
<CAPTION>


                                                                      Three Months Ended             Nine Months Ended
                                                                          December 31,                 December 31,
                                                                      -------------------           -------------------
                                                                      1998           1997           1998           1997
                                                                      ----           ----           ----           ----
          <S>                                                     <C>             <C>            <C>             <C>
          Net income (loss)                                       $ (67,474)      $ 10,755      $ (94,070)       $23,200
          Other comprehensive income (loss), net of tax
            Unrealized currency gain (loss)                           1,294           (504)        (1,999)          (895)
            Unrealized holding gain on short-
               term investments                                          12             51            (46)            37
                                                                  ---------       --------      ---------        --------
          Comprehensive income (loss)                             $ (66,168)      $ 10,302      $ (96,115)       $22,342
                                                                  ---------       --------      ---------        --------
                                                                  ---------       --------      ---------        --------

</TABLE>


NEW ACCOUNTING PRONOUNCEMENTS

     In June 1997, the FASB issued Financial Accounting Standards No. 131 ("SFAS
     131"), "Disclosures About Segments of an Enterprise and Related
     Information," which establishes annual and interim reporting standards for
     business segments of a company and related disclosures. SFAS 131 is
     effective for companies with fiscal years beginning after December 15,
     1997.  Interim reporting is not required in the initial year of adoption.
     The Company believes that the adoption of this new pronouncement will not
     have a material effect on the Company's financial statements.

     In June 1998, the FASB issued Statement on Financial Accounting Standards
     No. 133 ("SFAS 133") "Accounting for Derivative and Similar Financial
     Instruments and for Hedging Activities" which requires companies to value
     derivative financial instruments, including those used for hedging foreign
     currency exposures, at current market value with the impact of any changes
     in market value being charged against earnings.  The Company must adopt
     SFAS 133 in the first quarter of the fiscal year ended March 31, 2000.  The
     Company has not determined the effect that SFAS 133 will have on its
     financial statements.


                                                                             11
<PAGE>

ITEM 2 -MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
        RESULTS OF OPERATIONS

The following table sets forth the percentage relationships of certain items
from the Company's Condensed Consolidated Statements of Operations as
percentages of net sales:

<TABLE>
<CAPTION>


                                                       Three Months Ended            Nine Months Ended
                                                          December 31,                   December 31,
                                                          -----------                    ------------
                                                       1998           1997           1998           1997
                                                       ----           ----           ----           ----
<S>                                                    <C>            <C>            <C>            <C>

Net sales                                              100.0%         100.0%         100.0%         100.0%
Cost of sales                                          144.6           62.3          101.4           63.8
                                                     -------          -----          -----          -----
Gross profit (loss)                                    (44.6)          37.7           (1.4)          36.2

Research & development                                   9.0            6.7           10.2            6.9
Selling, general & administrative                       21.6           18.2           24.8           19.1
Restructuring costs                                     39.0              -           17.0              -
                                                     -------          -----          -----          -----
Operating income (loss)                               (114.2)          12.8          (53.4)          10.2

Other income, net                                       (0.9)           0.6            0.5            0.8
                                                     -------          -----          -----          -----
Income (loss) before provision
     for income taxes                                 (115.1)          13.4          (52.9)          11.0
Provision for income taxes                               0.7            1.9            0.3            1.8
                                                     -------          -----          -----          -----

       Net income (loss)                             (115.8)%          11.5%         (53.2)%           9.2%
                                                     -------          -----          -----          -----
                                                     -------          -----          -----          -----
</TABLE>

Net sales for the third quarter of Fiscal 1999 were $58.3 million, compared to
$93.9 million reported in the same quarter of Fiscal 1998.  Net sales for the
first nine months of Fiscal 1999 were $176.8 million, compared to $251.3 million
in the first nine months of Fiscal 1998.  The decrease in net sales was
primarily due to a slowdown in demand for the Company's products in Asia, which
began with the downturn in Asian economies.  However, such decrease in the
Company's net sales has been accelerated by the heightened pricing and
competitive pressures of the telecommunications market in other regions of the
world.   As a result, revenues from Asia and Europe in the third quarter and
first nine months of Fiscal 1999 significantly decreased from the comparable
periods of the prior year.

During the third quarter of Fiscal 1999, the Company received $56.3 million in
new orders shippable over the next twelve months, compared to $104.9 million in
the third quarter of Fiscal 1998.  Twelve month backlog at December 31, 1998 was
$61.3 million, compared to $102.2 million at March 31, 1998. During the quarter,
the Company deleted from its backlog $12 million in orders of which $3.3 million
were previously recorded in the second quarter of Fiscal 1999, with the balance
in prior years, as customers could not provide a firm delivery schedule.

The Company includes in its backlog purchase orders with respect to which a
delivery schedule has been specified for product shipment within one year.
Orders in the Company's

                                                                             12
<PAGE>

current backlog are subject to changes in delivery schedules or to cancellation
at the option of the purchaser without significant penalty.  Accordingly,
although useful for scheduling production, backlog as of any particular date may
not be a reliable measure of sales for any future period.

Gross profit (loss) as a percentage of net sales for the third quarter of Fiscal
1999 was (44.6%) compared to 37.7% in the same quarter of Fiscal 1998. Gross
profit (loss) as a percentage of net sales for the first nine months of Fiscal
1999 was (1.4%) compared to 36.2% in the same period in Fiscal 1998.  Inventory
valuation charges during the quarter totaled $37.7 million and are included in
cost of sales. These inventory valuation charges consisted primarily of two main
components, an excess and obsolescence adjustment, and recognition of
liabilities to vendors on purchase commitments. The merger with Innova and
planned introduction of new product lines accelerated the obsolescence of the
Spectrum II-TM- product line.  Accordingly, inventory related charges of $30.3
million were recorded. The reduction in the Company's sales volume compared to
the prior year has had an adverse affect on purchase order commitments to
vendors.  Accordingly, liabilities of $7.4 million were recognized to account
for vendor cancellation charges on purchase order commitments. Excluding these
inventory valuation charges, gross profit in the third quarter and first nine
months of Fiscal 1999 was 20.2% and 20.0%, respectively.  The decline in gross
profit excluding the inventory valuation charges was primarily the result of
under-utilization of the Company's manufacturing capacity due to the Company's
lower sales volume and lower average selling prices.  The Company reduced its
workforce at the end of the first quarter of Fiscal 1999 and in the third
quarter of Fiscal 1999 to reduce the impact of the unfavorable capacity
utilization.  The Company believes that its sales volume has stabilized during
the past six months; however, management cannot provide assurance that the
continuing economic and political instability in Asia and recent economic
instability in Latin America will not have a material adverse effect on the
Company's business, financial condition and results of operations. SEE "FACTORS
THAT MAY AFFECT FUTURE FINANCIAL RESULTS."

Research and development expenses of $5.2 million in the third quarter of Fiscal
1999 decreased from $6.3 million from the same period in Fiscal 1998.  As a
percentage of net sales, research and development expenses were 9.0% in the
third quarter of Fiscal 1999 compared to 6.7% in the third quarter of Fiscal
1998.  Such increase was due primarily to the decrease in net sales over the
comparable period. The increase in research and development expenses from $17.5
million in the first nine months of Fiscal 1998 to $18.1 million in the first
nine months of Fiscal 1999 was primarily attributable to the Company's
development of its XP4 and XP2 product offerings and its new Altium-TM-
high-capacity wireless product platform. The Company believes research and
development expenses will be slightly lower in absolute dollars in the second
half of Fiscal 1999 compared to the first half of Fiscal 1999 due to the
Company's workforce reductions as described above.  The Company remains
committed  to continuing its new product rollouts in order to maintain and
enhance its competitive position.

Selling, general and administrative expenses decreased to $12.6 million in the
third quarter of Fiscal 1999 from $17.1 million in the third quarter of Fiscal
1998.  As a percentage of net sales, selling, general and administrative
expenses were 21.6% in the third quarter of Fiscal 1999 compared to 18.2% in the
comparable quarter of Fiscal 1998.  Such increase in percentage was due
primarily to the decrease in net sales over the comparable period.  The


                                                                             13
<PAGE>

decrease in selling, general and administrative expenses in absolute dollars was
mostly attributable to the workforce reductions in the first and third quarters
of Fiscal 1999. Selling, general and administrative expenses of $43.9 million in
the first nine months of Fiscal 1999 decreased from $48.0 million in the first
nine months of Fiscal 1998.  The decrease in selling, general and administrative
expenses between these periods is due to the workforce reduction in the first
and third quarters of Fiscal 1999.  Partially offsetting this decrease is an
increase in the provision for bad debts which is included in selling, general
and administrative expenses.  The provision for bad debts included in the first
nine months of Fiscal 1999 was $4.3 million compared to $1.2 million in the
first nine months of Fiscal 1998.

Merger and restructuring charges of $22.7 million were recorded in the third
quarter ended December 31, 1998.  These charges consisted of $2.7 million for
merger costs related to the Innova merger, $2.8 million for severance costs,
$4.1 million for facility termination costs, and an impairment loss of $13.1
million resulting from the reduction of the carrying value of goodwill and other
assets related to Granger Inc., a subsidiary of the Company.  The Company is
pursuing the sale of assets related to the Granger operations due to a change in
business conditions. Approximately $9.6 million of the $22.7 million in merger
and restructuring charges will be a cash outflow, of which $3.7 million has been
paid as of December 31, 1998.  The remaining amounts are expected to be paid
during Fiscal 2000.

In the first quarter of Fiscal 1999, restructuring costs of $7.2 million were
recorded.  These charges consisted of a write off of $5.8 million related to the
discontinuance of several internal information technology ("IT") systems
projects and $1.4 million for severance and related costs associated with a
reduction in the Company's workforce.  At December 31, 1998, the remaining
restructuring reserve related to the first quarter of Fiscal 1999 was comprised
primarily of $0.8 million for the discontinuance of IT systems projects.

Interest and other income, net decreased in the third quarter of Fiscal 1999
compared to the similar quarter of Fiscal 1998 due to a $0.4 million decrease in
interest income resulting from lower cash balances and $0.5 million of foreign
exchange related losses. The $0.1 million increase in interest expense in the
third quarter of Fiscal 1999 was primarily attributable to higher debt balances
as compared to the same quarter of the prior year.

The Company did not record a tax benefit in the first nine months of Fiscal 1999
due to the uncertainty of realizing this benefit in the future.  Tax provisions
recorded in the third quarter and first nine months of Fiscal 1999 relate to
taxable income at certain of the Company's foreign subsidiaries.  The majority
of the deferred tax asset balance at December 31, 1998 will be realized through
the carry back of current year net operating losses.  In the first nine months
of Fiscal 1998, the Company recorded a provision for income taxes at an
effective rate of 16%.  This was less than the statutory rate primarily due to
the utilization of net operating loss carry forwards.

FACTORS THAT MAY AFFECT FUTURE FINANCIAL RESULTS

The statements in this Form 10-Q concerning the Company's future products,
expenses, revenues, gross margins, liquidity and cash needs, as well as the
Company's plans and strategies, contain forward-looking statements concerning
the Company's future operations


                                                                             14
<PAGE>

and financial results within the meaning of Section 27A of the Securities Act
and Section 21E of the Exchange Act.  These forward-looking statements are based
on current expectations and the Company assumes no obligation to update this
information.  Numerous factors, such as economic and competitive conditions,
timing and volume of incoming orders, shipment volumes, product margins, and
foreign exchange rates, could cause actual results to differ materially from
those described in these statements, and prospective investors and stockholders
should carefully consider the factors set forth below in evaluating these
forward-looking statements.

Sales of the Company's products are concentrated in a small number of customers.
For the third quarter of Fiscal 1999, the top three customers accounted for 25%
of the net sales.  As of December 31, 1998, three of the Company's customers
accounted for approximately 20% of the backlog.  The worldwide
telecommunications industry is dominated by a small number of large
corporations, and the Company expects that a significant portion of its future
product sales will continue to be concentrated in a limited number of customers.
In addition, the financing available to the Company's customers for microwave
interconnection and access equipment has decreased currently, which has
adversely affected the ability of the Company's customers to purchase equipment
from the Company. The loss of any existing customer, a significant reduction in
the level of sales to any existing customer, or the failure of the Company to
gain additional customers could have a material adverse effect on the Company's
business, financial condition and results of operations.  In addition, a
substantial portion of shipments may occur near the end of each quarter.
Accordingly, the Company's results are difficult to predict and delays in
product delivery or closing of a sale can cause revenues and net income to
fluctuate significantly from anticipated levels and from quarter to quarter.

Manufacturers of digital microwave telecommunications equipment are
experiencing, and are likely to continue to experience, intense price pressure
which has resulted, and is expected to continue to result, in downward pricing
pressure on the Company's products.  As a result, the Company has experienced,
and expects to continue to experience, declining average sales prices for its
products.  The Company's ability to maintain its gross profit margins is
dependent upon its ability to continue to improve manufacturing efficiencies,
reduce material costs of products, and to continue to introduce new products and
product enhancements.   Any inability of the Company to respond to increased
price competition would have a material adverse effect on the Company's
business, financial condition and results of operations.

The markets for the Company's products are extremely competitive, and the
Company expects that competition will increase.  The Company's existing and
potential competitors include established and emerging companies, such as L.M.
Ericsson, Siemens AG, Microwave Communications Division of Harris Corporation,
P-COM, Alcatel, Nokia, NERA, NEC, and SIAE, many of which have more extensive
engineering, manufacturing, and marketing capabilities and significantly greater
financial, technical, and personnel resources than the Company.  The Company
believes that its ability to compete successfully will depend on a number of
factors, both within and outside its control, including price, quality,
availability, customer service and support, breadth of product line, product
performance and features, rapid delivery, reliability, timing of new product
introductions by the Company, its customers and its competitors, and the ability
of its customers to obtain financing.


                                                                             15
<PAGE>

The Company expects that international sales will continue to account for the
majority of its net product sales for the foreseeable future.  As a result, the
Company is subject to the risks of doing business internationally, including
unexpected changes in regulatory requirements, fluctuations in foreign currency
exchange rates, imposition of tariffs and other barriers and restrictions, the
burdens of complying with a variety of foreign laws, and general economic and
geopolitical conditions, including inflation and trade relationships.  In
addition, recent events in Asia and Latin America, including depreciation of
certain currencies, failures of financial institutions, stock market declines,
and reduction in planned capital investment at key enterprises, may continue to
adversely impact the Company's revenues in those markets.  There can be no
assurance that currency fluctuations, changes in the rate of inflation or any of
the aforementioned factors will not continue to have a material adverse effect
on the Company's business, financial condition and results of operations.

The Company's manufacturing operations are highly dependent upon the delivery of
materials by outside suppliers in a timely manner.  In addition, the Company
depends in part upon subcontractors to assemble major components and subsystems
used in its products in a timely and satisfactory manner.  The Company does not
generally enter into long-term or volume purchase agreements with any of these
suppliers, and no assurance can be given that such materials, components, and
subsystems will be available in the quantities required by the Company, if at
all.  The inability of the Company to develop alternative sources of supply
quickly and on a cost-effective basis could materially impair the Company's
ability to manufacture and deliver its products in a timely manner.  There can
be no assurance that the Company will not experience material supply problems or
component or subsystem delays in the future.

The Company has pursued, and will continue to pursue, growth opportunities
through internal development and acquisitions of complementary businesses and
technologies.  Acquisitions may involve difficulties in the retention of
personnel, diversion of management's attention, unexpected legal liabilities,
and tax and accounting issues.  There can be no assurance that the Company will
be able to successfully identify suitable acquisition candidates, complete
acquisitions, integrate acquired businesses into its operations, or expand into
new markets.  Once integrated, acquired businesses may not achieve comparable
levels of revenues, profitability, or productivity as the existing business of
the Company or otherwise perform as expected.  The Company's failure to manage
its growth effectively could have a material adverse effect on the Company's
business, financial condition and results of operations.

The Company is aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches.  The "Year 2000" problem
is concerned with whether computer systems will properly recognize date
sensitive information when the year changes to 2000.  Systems that do not
properly recognize such information could generate erroneous data or cause a
system to fail.  The Year 2000 problem is pervasive and complex as virtually
every company's computer operation will be affected in some way.  The Company's
computer programs, which process its operational and financial transactions,
were designed and developed without considering the impact of the upcoming
change in century.  In addition, some of the Company's products being shipped
today are not Year 2000 ready.  If not corrected, the Company's computer
programs and products could fail or create erroneous results by or at the Year
2000.




                                                                             16
<PAGE>

The Company is taking steps to ensure its products and computer programs will
continue to operate on and after January 1, 2000.  The Company has formed a
project team consisting of staff from Manufacturing, Customer Service, Finance,
Human Resources, Sales, Marketing, Legal, Engineering and Information Technology
departments and is lead by a project manager.   A five phase solution process
has been established consisting of (1) awareness, (2) assessment, (3)
renovation, (4) validation, and (5) implementation.   The Company is currently
in the renovation stage with respect to most of its Year 2000 issues.  The
Company estimates that it will complete this five phase process for all of its
significant systems by the summer of 1999.  The Company's Year 2000 project team
identified its manufacturing IT system as its highest priority and has
implemented Year 2000 upgrades to its manufacturing systems.  The Company's
network operating systems also are Year 2000 ready.  Most of the Company's
personal computers have been evaluated and have been found to be non-compliant
and software upgrades have been purchased. The Company is currently installing
these upgrades to correct the non-compliance.   Some older personal computers
will be replaced or taken out of service.

The Company has completed an assessment of most of its products.  Most of its
hardware products are not affected by the Year 2000 issue because no internal
clock exists in these products.  Year 2000 readiness testing is in process for
the Company's newer products, such as Altium and network software products.
Some older network software products are not Year 2000 ready and the Company has
developed an upgrade plan for customers who are using this software.

The Company has mailed letters to its primary suppliers and subcontractors to
determine whether they are developing plans to address processing transactions
in the Year 2000 and to monitor their progress toward Year 2000 capability.
Less than a third of the vendors contacted have responded and the Year 2000 team
is currently following up with vendors who have not responded.  In addition,
responses from vendors who have responded are being evaluated to ensure the
readiness plans of the vendors are adequately addressing the Year 2000 issue.

The Company believes that it will expend approximately $0.5 million
investigating and remedying issues related to Year 2000 readiness involving
internal operations. Approximately $70,000 has been expensed to date for
purchases of software test tools, software upgrades and upgrading a security
system related to Year 2000 readiness.  In addition, the Company estimates that
$100,000 of internal personnel costs have been incurred to date supporting the
Company's Year 2000 readiness plan.

If systems material to the Company's operations have not been made Year 2000
ready by the completion of the project, the Year 2000 issue could have a
material adverse effect on the Company's financial statements.  The Company is
currently developing a contingency plan to operate in the event that any
non-compliant critical systems are not remedied by January 1, 2000.  The Company
expects to finalize its contingency plan by August 31, 1999.

Based on the steps being taken to address this issue and the progress to date,
the Company's management believes that the Year 2000 readiness expenses will not
have a material adverse effect on the Company's earnings.  However, there can be
no assurance that Year 2000


                                                                             17
<PAGE>

problems will not occur with respect to the Company's computer systems.
Furthermore, the Year 2000 problem may impact other entities with which the
Company transacts business, and the Company cannot predict the effect of the
Year 2000 problem on such entities or the resulting effect on the Company.  As a
result, if preventative and/or corrective actions by the Company or those the
Company does business with are not made in a timely manner, the Year 2000 issue
could have a material adverse effect on the Company's business, financial
condition and results of operations.

In January 1999, a new currency called the "euro" was introduced in certain
Economic and Monetary Union ("EMU") countries.  During 2002, all EMU countries
are expected to be operating with the euro as their single currency.
Uncertainty exists as to the effect the euro currency will have on the
marketplace.  Additionally, all of the rules and regulations have not yet been
defined and finalized by the European Commission with regard to the euro
currency.  The Company has assessed the effect the euro formation will have on
its internal systems and the sale of its products.  The Company's European sales
and operating transactions are based primarily in U.S. dollars or U.K. pounds
sterling, neither of which are subject to the euro conversion.  In addition, the
Company plans to upgrade its internal computer systems in early 1999 to convert
the European currency to euro.  The Company's management believes that the cost
of upgrading the Company's systems in connection with the euro conversion will
not be material and that such conversion will not have a material adverse effect
on the Company's business, financial condition and results of operations.


LIQUIDITY AND CAPITAL RESOURCES

Net cash used for operating activities in the first nine months of Fiscal 1999
was $14.5 million, compared to net cash used for operating activities of $12.7
million in the first nine months of Fiscal 1998. The increase in cash used in
operations was primarily the result of the net loss for the period. Accounts
receivable decreased proportionately with the decrease in revenues during the
period. Inventory purchases during the first nine months of Fiscal 1999 were
significantly less than the same period of the prior year due to the lower
revenue level.  The decrease in other assets in Fiscal 1999 relates to an
impairment loss of $13.1 million resulting from reduction of the carrying value
of goodwill and other assets related to Granger Inc., a subsidiary of the
Company. Other accrued liabilities increased during the first nine months of
Fiscal 1999 due to the accrual for merger costs and restructuring costs in the
third quarter of Fiscal 1999.  Accounts payable decreased due to reduced
inventory purchases.

To partially offset the cash used by operations, the Company received over $4.6
million in net proceeds from the maturities of its short-term investments during
the first nine months of Fiscal 1999.  Purchases of property and equipment
increased by $3.9 million in the first nine months of Fiscal 1999 compared to
the first nine months of Fiscal 1998 and were mostly attributable to payments on
the Company's new facility in the United Kingdom and test equipment for Altium
production.  In Fiscal 1998, the Company acquired Granger, Inc. for a total
consideration of $14.7 million and purchased a minority interest in Granger
Associates, Ltd., a UK company, for $4.0 million.


                                                                             18
<PAGE>

In the first nine months of Fiscal 1998, MAS Technology, a subsidiary of the
Company, sold approximately  $23.2 million of ordinary shares in a public
offering.  In the first nine months of Fiscal 1998, Innova Corporation, a
subsidiary of the Company, sold $45.8 million of common and preferred stock in a
public offering and private placement. Proceeds from the sale of stock to
employees in the first nine months of Fiscal 1999 and 1998 were $1.1 million and
$6.1 million, respectively.

On October 30, 1998, an amended and restated agreement was executed with a bank
to provide for the issuance of standby letters of credit on a cash
collateralized basis.  The letters of credit, which totaled $0.6 million as of
December 31, 1998, are issued in conjunction with bid and performance bond
requirements under certain contracts with the Company's customers.



In November 1998, the Company signed a credit facility agreement with a U.S.
lender for a new $40 million asset-based borrowing facility.  The working
capital line of credit, which includes a $5.0 million term loan, is secured by
certain receivables, inventory and fixed assets of the Company.  This credit
facility provides borrowings at prime plus 1.5% per annum.  There is a minimum
monthly interest requirement of $20,000.  As of December 31, 1998, approximately
$21.2 million was available for borrowing under this agreement of which $0.4
million was outstanding.  The new credit facility does not require the
maintenance of financial covenants.

In addition, the Company may require additional financing from other sources;
however, there can be no assurance that the Company will be able to obtain such
additional financing in the required time frame on commercially reasonable
terms, or at all. Management has implemented plans to reduce the Company's cash
requirements through a combination of reductions in working capital, equipment
purchases and operating expenditures.  Management believes that such plans
combined with existing cash balances and other sources of liquidity will enable
the Company to meet its cash requirements through Fiscal 1999.  However, there
can be no assurance that the Company will be able to implement these plans or
that it will be able to do so without a material adverse effect on the Company's
business, financial results or results of operations.


                                                                             19
<PAGE>

PART II - OTHER INFORMATION

ITEM 4 - SUBMISSION OF MATTERS  TO A VOTE OF SECURITY HOLDERS

(a)  The Company held a special meeting of stockholders on October 7, 1998.

(b)  At the Special Meeting of Stockholders, the following matter was voted
     upon:
     1.   A proposal to approve the issuance of shares of the Company's Common
          Stock in connection with the Agreement and Plan of Reorganization and
          Merger, dated as of July 22, 1998, by and among the Company, Iguana
          Merger Corp. and Innova Corporation.

<TABLE>
          <S>                                <C>
          Affirmative votes:                 26,746,376
          Negative Votes:                       305,811
          Abstentions:                           80,848
          Non-Votes:                                  0

</TABLE>


ITEM 5 - OTHER INFORMATION

None


ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits

     For a list of exhibits to this Form 10-Q, see the exhibit index located on
     page 21.

(b)  Reports on Form 8-K

     The Company filed a report on Form 8-K on October 20, 1998 relating the
     Company's completion of its merger with Innova Corporation, a Washington
     corporation, on October 8, 1998.


                                                                             20
<PAGE>


                                    EXHIBIT INDEX

<TABLE>
<CAPTION>

EXHIBIT
NUMBER    DESCRIPTION
<S>       <C>
  3.1     Amended and Restated Bylaws, dated as of October 8, 1998.

  4.1     Amended and Restated Rights Agreement, dated as of November 3, 1998,
          between the Company and ChaseMellon Shareholder Services, L.L.C.,
          including the form of the Certificate of Designations for the Series A
          Junior Participating Stock.

*10.1     Purchase Agreement by and between the Company and Microelectronics 
          Technology, Inc., dated as of January 15, 1998.

*10.2     Purchase Agreement by and between the Company and REMEC Inc., dated 
          as of January 15, 1998. 

*10.3     Business Agreement by and between the Company and MTI, dated as of 
          January 26, 1998.

 10.4     Loan and Security Agreement dated as of October 1, 1998 between the
          Company and Greyrock Capital and related (a) Schedule to Loan and
          Security Agreement and (b) Secured Promissory Note, each as of the
          same date.

 10.5     Employment Agreement dated as of October 8, 1998 between the Company
          and Jean Francois Grenon.

 10.6     Amended and Restated Agreement dated as of October 30, 1998 between
          the Company and Bank of America National Trust and Savings
          Association.

 27.1     Financial Data Schedule for the quarter ended December 31, 1998.

 27.2     Restated Financial Data Schedule for the quarter ended December 31,
          1997.

</TABLE>

*  Portions of this exhibit have been omitted and have been filed separately 
   with an amended request for confidential treatment.

                                                                             21
<PAGE>

                                      SIGNATURE

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



                                   DIGITAL MICROWAVE CORPORATION





Date:  February 16,1999             By  /s/   Carl A. Thomsen
                                        -----------------------------------
                                         Carl A. Thomsen
                                         Vice President, Chief Financial Officer
                                         and Secretary




                                                                             22