<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
September 30, 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 61,708,342 on October 31, 1998.


<PAGE>

                                      INDEX
                                      -----

<TABLE>
<CAPTION>
                                                                          PAGE
<S>      <C>                                                              <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
                  Financial Condition and Results of Operations            12-19

PART II - OTHER INFORMATION

         Item 4 - Other Matters                                            19
         Item 5 - Other Information                                        20
         Item 6 - Exhibits and Reports on Form 8-K                         20


SIGNATURE                                                                  22
</TABLE>


                                                                              2

<PAGE>

                         PART I - FINANCIAL INFORMATION
                          ITEM I - FINANCIAL STATEMENTS

                          DIGITAL MICROWAVE CORPORATION
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                    (In thousands, except per share amounts)

<TABLE>
<CAPTION>
ASSETS                                                              9/30/98           03/31/98
------                                                              -------           --------
                                                                  (Unaudited)
<S>                                                               <C>                <C>
CURRENT ASSETS:
     Cash and cash equivalents                                     $  16,984         $  25,130
     Short-term investments                                            6,592            15,220
     Accounts receivable, net                                         46,458            74,897
     Inventories                                                      62,144            60,981
     Deferred tax asset                                                6,522             6,685
     Other current assets                                              7,186             8,896
                                                                    --------          --------
        Total current assets                                         145,886           191,809

PROPERTY AND EQUIPMENT, NET                                           35,040            32,528
OTHER ASSETS                                                          15,208            16,063
                                                                      ------            ------
        Total assets                                               $ 196,134          $240,400
                                                                   ---------          --------
                                                                   ---------          --------

LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------

CURRENT LIABILITIES:
     Current maturities of capital lease obligations              $      446        $      238
     Accounts payable                                                 21,302            33,793
     Income taxes payable                                                736             1,298
     Accrued liabilities                                              16,868            26,373
                                                                      ------          --------
        Total current liabilities                                     39,352            61,702

LONG-TERM LIABILITIES:
     Capital lease obligations, net of current maturities              1,701               204
                                                                     -------          --------
        Total liabilities                                             41,053            61,906

STOCKHOLDERS' EQUITY
     Common Stock and paid-in capital                                160,046           159,173
     Accumulated other comprehensive income                           (4,853)           (1,615)
     Retained earnings (accumulated deficit)                            (112)           20,936
                                                                     --------           ------
        Total stockholders' equity                                   155,081           178,494

     Total liabilities and stockholders' equity                    $ 196,134          $240,400
                                                                   ---------          --------
                                                                   ---------          --------
</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                  Six Months Ended
                                                          September 30,                      September 30,
                                                          -------------                      -------------
                                                      1998            1997                1998            1997
                                                      ----            ----                ----            ----
<S>                                                 <C>             <C>                <C>             <C>
Net sales                                           $ 49,611        $ 80,298           $ 102,614       $ 144,856
Cost of sales                                         39,288          51,004              80,948          92,350
                                                   ---------       ---------           ---------        --------
Gross profit                                          10,323          29,294              21,666          52,506
                                                   ---------       ---------           ---------        --------

Operating Expenses:
 Research and development                              4,572           4,603               9,547           8,902
 Selling, general and administrative                  13,150          14,501              27,146          27,410
 Restructuring costs                                       0               0               7,212               0
                                                   ---------       ---------           ---------        --------

  Total operating expenses                            17,722          19,104              43,905          36,312
                                                   ---------       ---------           ---------        --------

Operating income (loss)                               (7,399)         10,190             (22,239)         16,194

Other income (expense):
  Interest and other income, net                         439           1,602               1,367           2,293
  Interest expense                                       (56)           (118)                (79)            (321)
                                                   ---------       ---------           ---------        --------

Income (loss) before provision for
  income taxes                                        (7,016)         11,674             (20,951)         18,166

Provision for income taxes                                69           2,025                  96           2,707
                                                   ---------       ---------           ---------        --------

Net income (loss)                                  $  (7,085)      $   9,649           $ (21,047)       $ 15,459
                                                   ---------       ---------           ---------        --------
                                                   ---------       ---------           ---------        --------

Basic earnings (loss) per share                   $    (0.15)     $     0.21         $     (0.45)     $     0.35
                                                   ---------       ---------           ---------        --------
                                                   ---------       ---------           ---------        --------

Diluted earnings (loss) per share                 $    (0.15)     $     0.20         $     (0.45)     $     0.33
                                                   ---------       ---------           ---------        --------
                                                   ---------       ---------           ---------        --------

Basic weighted average shares
  outstanding                                         46,774          45,932              46,728          44,348
Diluted stock options                                      0           2,282                   0           2,137
                                                   ---------       ---------           ---------        --------
Diluted weighted average shares
  outstanding                                         46,774          48,214              46,728          46,485
                                                   ---------       ---------           ---------        --------
                                                   ---------       ---------           ---------        --------
</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>
                                                                                 Six Months Ended
                                                                                   September 30,
                                                                                   -------------
                                                                               1998            1997
                                                                               ----            ----
<S>                                                                       <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)                                                         $ (21,047)       $ 15,459
   Adjustments to reconcile net income (loss) to net cash
   used in operating activities:
   Depreciation and amortization                                              6,170           4,842
   Provision for valuation reserves                                           7,779           3,073
   Provision for warranty reserves                                            3,967           2,072
   Changes in assets and liabilities, net of effect of acquisition:
     Decrease (increase) in accounts receivable                              22,884         (10,687)
     Increase in inventories                                                 (7,025)         (6,550)
     Decrease (increase) in other assets                                      3,343          (2,272)
     Decrease in accounts payable                                           (11,825)         (1,396)
     Increase (decrease) in income tax payable                                 (562)            900
     Decrease in other accrued liabilities                                  (12,595)        (10,040)
                                                                            -------         -------
NET CASH USED IN OPERATING ACTIVITIES                                        (8,911)         (4,599)
CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchases of available-for-sale securities                                (8,658)         (3,193)
   Proceeds from available-for-sale securities                               17,078           7,933
   Acquisition of businesses, net of cash acquired                                -         (11,383)
   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                                       (9,842)         (7,141)
                                                                            -------         -------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES                             345         (17,775)
CASH FLOWS FROM FINANCING ACTIVITIES:
   Repayments to bank                                                             -          (6,239)
   Payment of capital lease obligations                                         151            (583)
   Payment of assumed acquisition debt                                            -          (3,286)
   Sale of common stock                                                         872          32,420
                                                                            -------         -------
NET CASH PROVIDED BY FINANCING ACTIVITIES                                       721          22,312
Effect of exchange rate changes on cash                                        (301)            313
                                                                            -------         -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                         (8,146)            251
Cash and cash equivalents at beginning of year                               25,130          40,374
                                                                            -------         -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                                  $16,984         $40,625
                                                                            -------         -------
                                                                            -------         -------

SUPPLEMENTAL DATA
  Interest paid                                                             $    79         $   230
  Income taxes paid                                                         $   565         $   540
</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 which
     merged with the Company in March 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.

NON-CASH TRANSACTIONS

     Equipment acquired and financed under capital leases during the six months
     ended September 30, 1998 totaled $1.9 million.

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)
                               September 30, 1998          March 31, 1998
                               ------------------          --------------
                                      (Unaudited)
     <S>                       <C>                         <C>
     Raw materials                      $  25,951               $  23,524
     Work in process                       14,118                  18,545
     Finished goods                        22,075                  18,912
                                        ---------               ---------
                                        $  62,144               $  60,981
                                        ---------               ---------
                                        ---------               ---------
</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.

RESTRUCTURING COSTS

     The restructuring costs of $7.2 million recorded in the quarter ended June
     30, 1998 consist 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' 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 September 30, 1998, the Company had forward
     foreign exchange contracts to exchange various foreign currencies for U.S.
     dollars in the gross amount of $10.7 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


                                                                              7

<PAGE>

     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 May 1997, the Company acquired all of the outstanding shares of Granger,
     Inc., a U.S. manufacturer of wireless products and provider of installation
     services. The purchase price of Granger, Inc., including the assumption of
     debt and the purchase of certain product rights, totaled $14.7 million. A
     portion of the purchase price was allocated to the net assets acquired
     based on their estimated fair values. The fair value of the tangible assets
     acquired and liabilities assumed was $5.8 million and $1.9 million,
     respectively. The purchase price in excess of the net assets acquired of
     $10.8 million is recorded as goodwill on the accompanying balance sheet and
     is being amortized over 10 years. The acquisition has been accounted for
     using the purchase method of accounting. Accordingly, the accompanying
     financial statements include the results of Granger, Inc. since the date of
     acquisition. No pro forma financial statements for the periods presented
     have been provided as the pro forma amounts are not materially different
     from the amounts as presented.

     In addition, concurrent with the acquisition of Granger, Inc., the Company
     made a minority investment in Granger Associates, Ltd., a privately held
     company based in the United Kingdom, for $4.0 million. This minority
     investment has been accounted for using the cost method of accounting. In
     the first six months of Fiscal 1999, the Company sold approximately 15% of
     this investment for $601,000, net of selling costs.

     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 accounted for as a
     pooling-of-interests transaction. Accordingly, the historical financial
     statements of 


                                                                              8

<PAGE>

     the Company have been restated to reflect the results of MAS Technology 
     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 six months ended September 30, 1997.

<TABLE>
<CAPTION>
                                                  Three Months Ended          Six Months Ended
                                                  September 30, 1997        September 30, 1997
     <S>                                          <C>                       <C>
     Revenue:    Digital Microwave                           $67,106            $123,839
                 MAS Technology                               15,746              25,310
                 Intercompany sales                           (2,554)             (4,293)
                                                             -------             -------
                 Total                                       $80,298            $144,856
                                                             -------             -------

     Net Income: Digital Microwave                           $ 7,418            $ 13,203
                 MAS Technology                                2,306               2,302
                 Intercompany profit eliminations                (75)                (46)
                                                             -------             -------
                 Total                                       $ 9,649            $ 15,459
                                                             -------             -------
</TABLE>

     On October 8, 1998, the Company announced the completion of 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, 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 ratio. The merger
     is intended to qualify as a tax-free reorganization and will be accounted
     for as a pooling-of-interests transaction.

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.

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


                                                                              9

<PAGE>

     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 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

     The Company's existing credit agreement with a major U.S. bank expired
     October 30, 1998. There were no outstanding borrowings under this facility.
     On October 31, 1998, an amended and restated agreement was executed with
     the bank to provide for the issuance of standby letters of credit on a cash
     collateralized basis. The letters of credit, which totaled $1.7 million as
     of October 30, 1998, are issued in conjunction with bid and performance
     bond requirements under certain contracts with the Company's customers.

     In September 1998, the Company received a commitment from a U.S. lender for
     a new $40 million asset based credit facility. Loan documents are currently
     under review and the Company's management expects to sign this new credit
     facility by the end of November 1998.

COMPREHENSIVE INCOME

     In June 1997, the FASB issued Statement on Financial Accounting Standards
     No. 130 ("SFAS 130"), "Reporting Comprehensive Income," 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 six
     months ended September 30, 1998 and 1997.


                                                                             10

<PAGE>

<TABLE>
<CAPTION>
                                                             Three Months Ended         Six Months Ended
                                                                 September 30,            September 30,
                                                                 ------------             ------------
                                                               1998         1997         1998        1997
                                                               ----         ----         ----        ----
<S>                                                        <C>           <C>          <C>           <C>
     Net income (loss)                                     $ (7,085)     $  9,649     $(21,047)     $15,459
     Other comprehensive income (loss), net of tax
          Unrealized currency gain (loss)                    (1,053)          304       (3,266)          80
          Unrealized holding gain on short-
             term investments                                    28            51           28           23
                                                            --------     --------      --------     -------
     Comprehensive income (loss)                           $ (8,110)     $ 10,004     $(24,285)     $15,562
                                                            --------     --------      --------     -------
                                                            --------     --------      --------     -------
</TABLE>

NEW ACCOUNTING PRONOUNCEMENTS

     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.

     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. The Company believes that the
     adoption of this new pronouncement will not have a material effect on the
     Company's 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               Six Months Ended
                                            September 30,                   September 30,
                                            ------------                    ------------
                                         1998            1997           1998             1997
                                         ----            ----           ----             ----
<S>                                     <C>             <C>            <C>              <C>
Net sales                               100.0%          100.0%         100.0%           100.0%
Cost of sales                            79.2            63.5           78.9             63.8
                                         ----            ----           ----             ----
Gross profit                             20.8            36.5           21.1             36.2

Research & development                    9.2             5.7            9.3              6.1
Selling, general & administrative        26.5            18.1           26.5             18.9
Restructuring costs                         -               -            7.0                -
                                         ----            ----           ----             ----
Operating income (loss)                 (14.9)           12.7          (21.7)            11.2

Other income, net                         0.8             1.8            1.3              1.4
                                          ---             ---            ---              ---
Income (loss) before provision
    for income taxes                    (14.1)           14.5          (20.4)            12.6
Provision for income taxes                0.1             2.5            0.1              1.9
                                          ---             ---            ---              ---

      Net income (loss)                 (14.2)%          12.0%         (20.5)%           10.7%
                                        -------          -----         -------           -----
                                        -------          -----         -------           -----
</TABLE>

Net sales for the second quarter of Fiscal 1999 were $49.6 million, compared to
$80.3 million reported in the same quarter of Fiscal 1998. Net sales for the
first six months of Fiscal 1999 were $102.6 million, compared to $144.9 million
in the first half 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 second quarter and first half of Fiscal 1999
significantly decreased from the comparable periods of the prior year.

During the second quarter of Fiscal 1999, the Company received $52.1 million in
new orders shippable over the next twelve months, compared to $74.5 million in
the second quarter of Fiscal 1998. Twelve month backlog at September 30, 1998
was $65.5 million, compared to $83.2 million at March 31, 1998.

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 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 


                                                                             12

<PAGE>

production, backlog as of any particular date may not be a reliable measure of 
sales for any future period.

Gross profit as a percentage of net sales for the second quarter of Fiscal 1999
was 20.8% compared to 36.5% in the same quarter of Fiscal 1998. Gross profit as
a percentage of net sales for the first half of Fiscal 1999 was 21.1% compared
to 36.2% in the same period in Fiscal 1998. The decline in gross profit was
primarily the result of the under-utilization of the Company's manufacturing
capacity due to the Company's lower sales volume, lower average selling prices
and higher provision for inventory reserves. The Company reduced its workforce
at the end of the first quarter of Fiscal 1999 and plans to reduce its workforce
by approximately 20% in the third quarter of Fiscal 1999 as it expects sales
volumes to remain at current levels for at least the next six months and
competitive pricing pressure on the Company's products to continue. In addition,
the Company expects continued decreased sales in Asia for the foreseeable future
due to the continuing economic and political instability there. SEE "FACTORS
THAT MAY AFFECT FUTURE FINANCIAL RESULTS."

Research and development expenses of $4.6 million in the second quarter of
Fiscal 1999 were unchanged from the same period in Fiscal 1998. As a percentage
of net sales, research and development expenses were 9.2% in the second quarter
of Fiscal 1999 compared to 5.7% in the second 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 $8.9 million in
the first half of Fiscal 1998 to $9.5 million in the first half of Fiscal 1999
was primarily attributable to the Company's development of 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 $13.2 million in the
second quarter of Fiscal 1999 from $14.5 million in the second quarter of Fiscal
1998. As a percentage of net sales, selling, general and administrative expenses
were 26.5% in the second quarter of Fiscal 1999 compared to 18.1% in the
comparable quarter of Fiscal 1998. Such increase in percentage was due primarily
to the decrease in net sales over the comparable period. However, the decrease
in selling, general and administrative expenses in absolute dollars was mostly
attributable to the workforce reduction in the first quarter of Fiscal 1999 and
was partially offset by a $1.8 million increase in a provision for bad debts
related to uncollectable accounts receivables. Selling, general and
administrative expenses of $27.1 million in the first half of Fiscal 1999 were
slightly less than $27.4 million of such expenses in the first half of Fiscal
1998. However, the provision for bad debts related to uncollectable accounts
receivables increased by $3.2 million in the first half of Fiscal 1999 compared
to the same period of the prior year.

The restructuring costs of $7.2 million in the first half of Fiscal 1999 consist
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
September 30, 1998, the remaining restructuring reserve was 


                                                                             13

<PAGE>

comprised primarily of $0.8 million for the discontinuance of IT systems 
projects and $0.1 million for severance and related costs. In addition, in 
the fourth quarter of Fiscal 1998, the Company recorded merger and 
restructuring expenses of $14.6 million, which primarily included payments to 
the Company's investment bankers of $3.4 million for brokering the Company's 
merger with MAS Technology, legal and accounting fees of $0.9 million, asset 
valuation reserves for inventory, receivables and warranty totaling $7.1 
million, as well as various other costs of $3.2 million, which included 
office closures and contract terminations. As of September 30, 1998, the 
remaining restructuring reserve related to the Company's merger with MAS 
Technology was comprised principally of $4.6 million for asset valuation 
reserves, and $0.4 million for other restructuring costs.

As disclosed in the Company's most recent Registration Statement on Form S-4 
filed with the Securities and Exchange Commission in connection with the 
merger with Innova Corporation, the Company expects to incur a substantial 
charge of approximately $40 million in the third quarter ending December 31, 
1998. This charge will include merger transaction-related expenses, as well 
as expenses relating to the integration of the two companies, including 
inventory write-downs due to duplicative product lines, costs relating to 
severance and employee relocation, elimination of duplicative facilities and 
other integration costs.

Interest income decreased to $0.3 million in the second quarter of Fiscal 
1999 compared to $0.7 million in the similar quarter of Fiscal 1998. This 
decrease was due primarily to lower average cash balances. The decrease in 
interest expense in the second quarter of Fiscal 1999 was primarily 
attributable to lower debt balances as compared to the same quarter of the 
prior year. Other income decreased by $1.2 million in the second quarter of 
Fiscal 1999 due primarily to lower foreign exchange gains.

The Company did not record a tax benefit in the first half of Fiscal 1999 as 
it cannot be certain of profitability in Fiscal 1999. In the first half of 
Fiscal 1998, the Company recorded a provision for income taxes at an 
effective rate of 15%. This was less than the statutory rate primarily due to 
the utilization of net operating loss carry forwards and the deferred tax 
asset originated from warranty and asset valuation reserves.

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 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.


                                                                             14

<PAGE>

Sales of the Company's products are concentrated in a small number of 
customers. For the second quarter of Fiscal 1999, the top three customers 
accounted for 14% of the net sales. As of September 30, 1998, three of the 
Company's customers accounted for 22% 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. 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, Northern Telecom, Siemens AG, Farinon 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.

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, such as recently experienced in Asia, 
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, including depreciation of certain Asian 
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 Asian markets. There can be no 
assurance that currency fluctuations, changes in 


                                                                             15

<PAGE>

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.

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 December 31, 1998. The Company's Year 2000 project team
has identified its manufacturing 


                                                                             16

<PAGE>

IT system as its highest priority and is currently installing an upgrade to 
the Company's current manufacturing system supplied by the vendor of that 
system. The Company expects its manufacturing systems to be Year 2000 ready 
by December 31,1998. 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 ordered 
to correct the non-compliance. Some older personal computers will be replaced 
or taken out of service.

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

The Company is sending out letters in November 1998 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.

The Company believes that it will expend approximately $0.5 million 
investigating and remedying issues related to Year 2000 readiness involving 
internal operations. Approximately $60,000 has been expensed to date for 
purchases of software test tools, software upgrades and upgrading a security 
system related to Year 2000 readiness.

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 
has not yet developed 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 develop such a contingency plan by December 31, 1998.

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 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.

Beginning in January 1999, a new currency called the "euro" is scheduled to 
be 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. 
Most of the Company's European sales and 


                                                                             17

<PAGE>

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 half of Fiscal 1999 was 
$8.9 million, compared to net cash used for operating activities of $4.6 
million in the first half of Fiscal 1998. The decline in cash provided from 
operations was primarily the result of the net loss for the quarter. In 
addition, despite a significant reduction in inventory purchases during the 
first half of Fiscal 1999, inventories increased during the first half of 
Fiscal 1999 as actual sales were less than forecasted sales. Other accrued 
liabilities decreased during the first half of Fiscal 1999 due to payments 
for merger costs, bonuses, and profit sharing accrued at March 31, 1998, the 
end of Fiscal 1998. Accounts payable decreased due to reduced inventory 
purchases. Accounts receivable decreased significantly due to higher 
collections and lower sales during the first half of Fiscal 1999.

To partially offset the cash used by operations, the Company received over 
$8.4 million in net proceeds from the sale of its short-term investments 
during the first half of Fiscal 1999. Purchases of property and equipment 
increased by $2.7 million in the first half of Fiscal 1999 compared to the 
first half of Fiscal 1998 and were mostly attributable to payments on the 
Company's new facility in the United Kingdom. In the first half of Fiscal 
1998, the Company completed the acquisition of Granger, Inc. for total 
consideration of $14.7 million and purchased a minority interest in Granger 
Associates, Ltd., a UK company, for $4.0 million.

In the first half of Fiscal 1998, MAS Technology, a subsidiary of the 
Company, sold approximately $26.7 million of ordinary shares in a public 
offering. A portion of these proceeds were used to pay off MAS Technology's 
outstanding debt of approximately $4.6 million. Proceeds from the sale of 
stock to employees in the first half of Fiscal 1999 and 1998 were $0.9 
million and $5.7 million, respectively. In addition, Digital Microwave 
Corporation paid off its outstanding debt of $2.0 million in the first 
quarter of Fiscal 1998, excluding lease obligations.

During June and July 1998, the Company amended its agreement with a major 
U.S. bank to increase the unsecured credit facility from $20.0 million to 
$25.0 million, extend the expiration date of the agreement to September 30, 
1998, and to change certain terms of the agreement. In September 1998, an 
additional extension was granted through October 1998 and this existing 
agreement expired October 30, 1998. There were no outstanding borrowings 
under this facility. On October 31, 1998, an amended and restated agreement 
was executed with the bank to provide for the issuance of standby letters of 
credit on a cash collateralized basis. The letters of credit, which totaled 
$1.7 million as of October 30, 1998, are issued in 


                                                                             18

<PAGE>

conjunction with bid and performance bond requirements under certain 
contracts with the Company's customers.

In September 1998, the Company received a commitment from a U.S. lender for a 
new $40 million asset based credit facility. Loan documents are currently 
under review and the Company's management expects to sign this new credit 
facility by the end of November 1998. The new credit facility is expected to 
provide for the extension of credit based on the availability of certain 
eligible receivables, inventory and fixed assets of the Company at an 
interest rate of prime plus 1.5%. The new credit facility will not require 
the maintenance of financial covenants.

The Company believes that it will be necessary to borrow against its credit 
facility to meet both its working capital and capital expenditure 
requirements through Fiscal 1999. 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.



PART II - OTHER INFORMATION


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

   (a)  The Company held an Annual Meeting of Stockholders on August 4, 1998.

   (b)  At the Annual Meeting of Stockholders, the following directors were
        elected:

<TABLE>
<CAPTION>
                                                         Votes
                                                         -----
                                              For                  Withheld
                                              ---                  --------
        <S>                                <C>                     <C>
        Charles D. Kissner                 40,454,351              305,903
        Richard C. Alberding               40,457,487              302,767
        John W. Combs                      40,544,430              215,824
        Clifford H. Higgerson              40,577,199              183,055
        James D. Meindl                    40,571,074              189,180
        Billy B. Oliver                    40,418,618              341,636
        Howard Oringer                     40,571,671              188,583
</TABLE>

   (c)  At the Annual Meeting of Stockholders, the following additional matters
        were voted upon:


                                                                             19

<PAGE>

        1.   A proposal to ratify and approve certain amendments to the
             Company's 1994 Stock Incentive Plan including increasing the
             maximum number of shares of Common Stock granted to any
             participant.

<TABLE>
                      <S>                        <C>
                      Affirmative votes:         33,041,808
                      Negative votes:             6,055,872
                      Abstain:                    1,414,473
                      Non-votes:                    248,101
</TABLE>

        2.   A proposal to ratify the selection of Arthur Andersen LLP as
             independent public accountants for the fiscal year ending March 31,
             1999.

<TABLE>
                      <S>                        <C>
                      Affirmative votes:         40,524,285
                      Negative votes:               146,948
                      Abstain                        89,021
                      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 July 29, 1998 relating to the
      Company's entering into the Agreement and Plan of Reorganization and
      Merger, dated as of July 22, 1998, by and among the Company, Innova
      Corporation and Iguana Merger Corp.


                                                                             20

<PAGE>

                                 EXHIBIT INDEX

EXHIBIT
NUMBER     DESCRIPTION

10.1*      Product Purchase Agreement, dated as of July 30, 1998, by and
           between Digital Microwave Corporation and REMEC Inc.

10.2       Restated Employment Agreement, dated as of August 3, 1998, by and 
           between Digital Microwave Corporation and Charles D. Kissner.

10.3       Third Amendment to Credit Agreement dated as of September 30, 1998,
           by and between Digital Microwave Corporation and Bank of America
           National Trust and Savings Association.

27.1       Financial Data Schedule for the quarter ended September 30, 1998.

27.2       Restated Financial Data Schedule for the quarter ended
           September 30, 1997.


* Confidential treatment of certain portions of this exhibit has been requested.


                                                                             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:    November 16, 1998                     By   /s/ Carl A. Thomsen
     --------------------------                  ------------------------------
                                                   Carl A. Thomsen
                                              Vice President, Chief Financial
                                              Officer and Secretary


                                                                             22