<PAGE>

                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D. C. 20549
                        ------------------------------


                                   FORM 10-Q


[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
    EXCHANGE ACT OF 1934
    For the quarterly period ended March 31, 2001

                                      or

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
    EXCHANGE ACT OF 1934
    For the transition period from __________ to __________

                        Commission File Number  0-26858


                            BLUE WAVE SYSTEMS INC.
            (Exact name of registrant as specified in its charter)


           Delaware                                               41-1425902
(State or other jurisdiction of                                 (IRS Employer
incorporation or organization)                               Identification No.)



          2410 Luna Road                                               75006
          Carrollton, Texas                                         (Zip Code)
(Address of principal executive offices)


                                (972) 277-4600
                        (Registrant's telephone number)


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
                             Yes   X     No
                                 -----      -----


Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.

                                                       Outstanding at
                        Class                            May 8, 2001
                        -----                            -----------

          Common Stock, par value $0.01 per share         15,804,644

<PAGE>

                            Blue Wave Systems Inc.

                                   Form 10-Q
                     For the Quarter Ended March 31, 2001

                                     INDEX
<TABLE>
<CAPTION>
                                                                                Page No.
                                                                                --------
<S>            <C>                                                              <C>
PART I.   FINANCIAL  INFORMATION

Item 1.        Consolidated Financial Statements

               Balance Sheets
               March 31, 2001 and June 30, 2000                                      3

               Statements of Operations
               for the three and the nine months ended March 31, 2001 and 2000       4

               Statements of Cash Flows
               for the nine months ended March 31, 2001 and 2000                     5

               Notes to Interim Consolidated Financial Statements                  6-9

Item 2.        Management's Discussion and Analysis of
               Financial Condition and Results of Operations                     10-13

PART II.  OTHER INFORMATION

Item 6.        Exhibits and Reports on Form 8-K                                     14

SIGNATURE                                                                           15
</TABLE>


                                       2
<PAGE>

                            Blue Wave Systems Inc.

                          Consolidated Balance Sheets
                  (in thousands, except par value per share)

<TABLE>
<CAPTION>
                                                                                                 March 31,     June 30,
                                                                                                    2001         2000
                                                                                                 ----------   ----------
                                                                                                 (unaudited)
<S>                                                                                             <C>          <C>
                                     ASSETS
                                     ------
 Current assets:
  Cash and cash equivalents                                                                        $ 7,402   $  6,120
  Restricted cash                                                                                      460        491
  Accounts receivable, net of allowances of $206 and $137, respectively                             10,151      8,616
  Inventories, net                                                                                   9,510      6,231
  Merger costs                                                                                         613          -
  Prepaid expenses and other                                                                         1,526        935
  Deferred tax asset                                                                                   271        271
                                                                                                   -------   --------
    Total current assets                                                                            29,933     22,664
                                                                                                   -------   --------

 Plant and equipment:
  Machinery and equipment                                                                            7,848      7,432
  Furniture and fixtures                                                                             2,441      2,568
                                                                                                   -------   --------
                                                                                                    10,289     10,000
  Less accumulated depreciation                                                                     (7,866)    (7,398)
                                                                                                   -------   --------
    Plant and equipment, net                                                                         2,423      2,602
                                                                                                   -------   --------

 Deferred tax asset-noncurrent                                                                       1,748      1,602
                                                                                                   -------   --------
    Total assets                                                                                   $34,104   $ 26,868
                                                                                                   =======   ========

                          LIABILITIES AND STOCKHOLDERS' EQUITY
                          ------------------------------------
 Current liabilities:
  Accounts payable                                                                                 $ 8,600   $  4,257
  Accrued compensation                                                                                 596        491
  Other accrued liabilities                                                                          1,978      1,795
  Customer deposits                                                                                  1,109        431
                                                                                                   -------   --------
    Total current liabilities                                                                       12,283      6,974
                                                                                                   -------   --------

 Deferred income taxes                                                                                 756        788
 Other noncurrent liabilities                                                                            9         43
 Long-term debt, net of current maturities                                                             460        491
                                                                                                   -------   --------
    Total liabilities                                                                               13,508      8,296
                                                                                                   -------   --------

 Stockholders' equity:
  Preference stock, $.01 par value; 1,000 shares authorized; no shares
   issued and outstanding at March 31, 2001 and June 30, 2000, respectively                              -          -
  Common stock, $.01 par value; 50,000 shares authorized; 16,327 and 16,207
   shares issued; 15,669 and 15,548 shares outstanding at March 31, 2001 and
   June 30, 2000, respectively                                                                         163        162
  Additional paid-in capital                                                                        31,977     31,498
  Accumulated deficit                                                                               (8,709)   (11,394)
  Accumulated other comprehensive loss                                                              (1,753)      (605)
                                                                                                   -------   --------
                                                                                                    21,678     19,661
                                                                                                   -------   --------
  Less -- treasury stock, at cost                                                                   (1,082)    (1,089)
                                                                                                   -------   --------
    Total stockholders' equity                                                                      20,596     18,572
                                                                                                   -------   --------
    Total liabilities and stockholders' equity                                                     $34,104   $ 26,868
                                                                                                   =======   ========
</TABLE>

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

                                       3
<PAGE>

                            Blue Wave Systems Inc.

                     Consolidated Statements of Operations
                   (in thousands, except per share amounts)
                                  (unaudited)

<TABLE>
<CAPTION>
   Three Months Ended                                                              Nine Months Ended
        March 31,                                                                       March 31,
  2001            2000                                                               2001       2000
--------        --------                                                           --------   --------

<C>           <C>           <S>                                                  <C>           <C>
$ 11,176      $  9,271      Net sales                                            $ 27,206      $ 25,115
   5,074         4,364      Cost of sales                                          12,938        11,635
--------      --------                                                           --------      --------
   6,102         4,907      Gross margin                                           14,268        13,480

                            Operating expenses:
   1,595         1,470        Product development and engineering                   4,801         4,134
   1,362         1,647        Sales and marketing                                   3,875         4,631
     954           925        General and administrative                            3,041         2,830
--------      --------                                                           --------      --------
   3,911         4,042           Total operating expenses                          11,717        11,595
--------      --------                                                           --------      --------

   2,191           865      Operating income                                        2,551         1,885
--------      --------                                                           --------      --------

                            Other income (expense):
      94            43        Interest income                                         267            50
      (3)           (1)       Interest expense                                         (5)          (80)
      (3)            -        Other, net                                               (3)           19
--------      --------                                                           --------      --------
      88            42           Total other income (expense)                         259           (11)
--------      --------                                                           --------      --------

   2,279           907      Income before provision for income taxes                2,810         1,874

      16            90      Provision for income taxes                                125           187
--------      --------                                                           --------      --------
$  2,263      $    817      Net income                                           $  2,685      $  1,687
========      ========                                                           ========      ========

$   0.14      $   0.05      Basic net income per share                           $   0.17      $   0.12
========      ========                                                           ========      ========

$   0.14      $   0.05      Diluted net income per share                         $   0.16      $   0.11
========      ========                                                           ========      ========

                            Weighted average common shares outstanding:
  15,795        15,528          Basic                                              15,753        14,519
========      ========                                                           ========      ========
  16,386        16,517          Diluted                                            16,302        15,913
========      ========                                                           ========      ========
</TABLE>

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

                                       4
<PAGE>

                            Blue Wave Systems Inc.

                     Consolidated Statements of Cash Flows
                                (in thousands)
                                  (unaudited)

<TABLE>
<CAPTION>
                                                                                               Nine Months Ended
                                                                                                    March 31,
                                                                                          2001                       2000
                                                                                         -------                    -------
<S>                                                                                      <C>                        <C>
 CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                                                             $ 2,685                    $ 1,687
  Adjustments to reconcile net income to net cash provided
   (used) by operating activities -
    Depreciation                                                                             790                        894
    Deferred tax provision                                                                   (48)                       101
  Changes in assets and liabilities -
    Accounts receivable, net                                                              (1,535)                    (3,009)
    Inventories, net                                                                      (3,279)                    (1,572)
    Merger costs                                                                            (613)                         -
    Prepaid expenses and other                                                              (591)                      (130)
    Accounts payable and accrued liabilities                                               5,275                        392
                                                                                         -------                    -------
     Net cash provided (used) by operating activities                                      2,684                     (1,637)
                                                                                         -------                    -------

 CASH FLOWS FROM INVESTING ACTIVITIES:
    Purchases of machinery, equipment, furniture and fixtures                               (751)                      (396)
                                                                                         -------                    -------
     Net cash used by investing activities                                                  (751)                      (396)
                                                                                         -------                    -------

 CASH FLOWS FROM FINANCING ACTIVITIES:
    Sale of common stock and warrants (net of expenses)                                        -                      6,923
    Exercise of stock options                                                                357                        735
    Sale of treasury stock                                                                     -                        306
    Restricted cash in escrow                                                                  -                        297
    Net payments on long-term debt                                                             -                       (297)
    Net reductions associated with bank borrowings                                             -                     (1,707)
                                                                                         -------                    -------
     Net cash provided by financing activities                                               357                      6,257
                                                                                         -------                    -------

    Effect of translation rates on cash                                                   (1,008)                       (84)

 NET INCREASE IN CASH AND CASH EQUIVALENTS                                                 1,282                      4,140
 CASH AND CASH EQUIVALENTS, beginning of period                                            6,120                        551
                                                                                         -------                    -------
 CASH AND CASH EQUIVALENTS, end of period                                                $ 7,402                    $ 4,691
                                                                                         =======                    =======

 SUPPLEMENTAL CASH FLOW DISCLOSURES:
    Cash paid for income taxes                                                           $     -                    $    10
    Cash paid for interest                                                                    27                         84
    Tax effect of disqualifying dispositions of stock options                                130                        339
</TABLE>

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

                                       5
<PAGE>

                            Blue Wave Systems Inc.

              Notes to Interim Consolidated Financial Statements


1.   Basis of Presentation

     While the accompanying interim consolidated financial statements are
unaudited, they have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission. In the opinion of the
Company, all material adjustments and disclosures necessary to fairly present
the results of such periods have been made. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange Commission.
These consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto for the year ended June 30,
2000, as included in Form 10-K, previously filed. Certain previously reported
amounts have been reclassified to conform with current year presentation. The
interim results of operations for the period ended March 31, 2001, are not
necessarily indicative of results to be expected for the year ending June 30,
2001.

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The Company has shifted its planned strategy to focus on the
ComStruct telecommunications products. Certain estimates related to bad debt,
inventory, warranty and other reserves have been made in the financial
statements. Actual results could differ from those estimates.

2.   Inventories

     Inventories at March 31,2001 and June 30, 2000, consisted of the following
(in thousands):

<TABLE>
<CAPTION>
                                                                        March 31, 2001            June 30, 2000
                                                                       ---------------            -------------
<S>                                                                    <C>                        <C>
     Raw materials                                                             $ 4,218                   $3,135
     Work-in-process                                                             5,328                    2,636
     Finished goods                                                              1,600                    1,258
     Reserves                                                                   (1,636)                    (798)
                                                                               -------                   ------
     Inventories, net                                                          $ 9,510                   $6,231
                                                                               =======                   ======
</TABLE>

3.   Debt

     Lines of Credit

     The Company utilizes credit facilities to support its operations. As of
March 31, 2001, there were no loans outstanding under a facility with a
commercial bank in the United Kingdom, with approximately $1,400,000 in
aggregate availability under such credit facility. This facility is
collateralized by the assets of the Company's European operations, guaranteed by
the U.S. parent company, bears interest at the bank's base rate plus 1.75% and
is due on demand. As of March 31, 2001, there were no loans outstanding under a
$3,500,000 facility with a commercial bank in the United States. This facility
is collateralized by the assets of the Company's U.S. operations, bears interest
at the bank's base rate plus 1% and contains financial covenants. As of March
31, 2001, the Company was in compliance with all its financial covenants under
its agreements with both banks.

     Long-term Debt

     In connection with the establishment of an employee stock ownership plan
("ESOP"), which provides for the issuance of stock options for the benefit of
employees of the Company's UK subsidiary, the Company has guaranteed the debt of
the ESOP. The guarantee required the Company to place in escrow an amount equal
to the debt, which was $460,000 at March 31, 2001. Such cash has been reflected
as restricted cash in the accompanying consolidated balance sheets. The
guarantee is reflected as long-term debt in the accompanying consolidated
balance sheets. This debt consists of a note payable to a commercial bank with
interest at the bank's base rate (5.75% at March 31, 2001) plus 1.5%, for a
total rate of 7.25% at March 31, 2001. The note is subject to renewal annually.
The debt agreements related to this note contain warranties and financial
covenants and require maintenance of certain financial ratios. Default on any
warranty or covenant

                                       6
<PAGE>

                            Blue Wave Systems Inc.

              Notes to Interim Consolidated Financial Statements

could, if not waived or corrected, accelerate the maturity of any borrowings
outstanding. As of March 31, 2001, the Company was in compliance with such
warranties and financial covenants under its agreement with the bank.

4.   Income Taxes

At fiscal year-end 2000, Blue Wave had federal and foreign net operating loss
(NOL) carryforwards of approximately $11,000,000 and $2,000,000, respectively,
which begin to expire in fiscal 2002 if not utilized. Research and development
tax credit carryforwards of approximately $41,000 at fiscal year end 2000, were
also available to reduce future federal income taxes. Pursuant to Section 382 of
the Internal Revenue Code, the Company's annual U. S. utilization limitation
related to its net federal operating loss carryforward is now $1,373,000.

     Blue Wave had net deferred tax assets of $1,085,000 as of fiscal year end
2000 and $1,263,000 as of March 31, 2001, which is reflected in the accompanying
consolidated balance sheets. Deferred tax assets are reflected net of a
valuation allowance. In accordance with the criteria contained in SFAS no. 109,
Accounting for Income Taxes, the Company has recorded a valuation allowance
against the majority of its NOL. The Company believes it is more likely than not
that it will realize the benefit of the remaining net deferred tax asset, and
accordingly no valuation allowance has been provided on this portion of the
asset. Among the factors the Company considers when making this evaluation are
(1) the realignment of the Company including its strategy to expand its markets
in the telecommunications industry, (2) the limitation of the net operating loss
carryforwards, as described above, related to the LSI merger, and (3)
projections of sufficient taxable US income to fully realize the net recognized
deferred tax asset by the end of fiscal 2002. Management continually evaluates
the realizability of the net deferred tax assets and the need for a valuation
allowance on such assets.

5.   Income Per Share

     Basic net income per share for the three and the nine months ended March
31, 2001 and March 31, 2000 was computed by dividing net income by the weighted
average number of shares of common stock outstanding during the periods
presented. Diluted net income per share for the three and the nine months ended
March 31, 2001 and March 31, 2000 was computed by dividing net income by the
weighted average number of shares of common stock and common stock equivalents
outstanding during the periods presented. Common stock equivalents included in
diluted net income per share are stock options and warrants calculated under the
treasury stock method using the prevailing average market price for the periods
presented. Shares used in basic and diluted net income per share calculations
are as follows (in thousands):

<TABLE>
<CAPTION>
                                                                               Three Months Ended          Nine Months Ended
                                                                                    March 31,                   March 31,
                                                                               2001          2000          2001          2000
                                                                              ------        ------        ------        ------

<S>                                                                <C>           <C>           <C>           <C>
     Basic:
     ------
     Weighted average common stock outstanding during the period              15,795        15,528        15,753        14,519
                                                                              ======        ======        ======        ======

     Diluted:
     --------
     Weighted average common stock outstanding during the period              15,795        15,528        15,753        14,519
     Other dilutive securities of stock option/warrant programs                  591           989           549         1,394
                                                                              ------        ------        ------        ------
     Shares used in calculation of diluted net income per share               16,386        16,517        16,302        15,913
                                                                              ======        ======        ======        ======
</TABLE>

     Stock options scheduled to expire within the five years following March 31,
2001, aggregate 409,432 underlying shares, exercisable for a total of
approximately $229,000, and begin to expire in 2003. Additional disclosures
regarding the stock option plan activity during the past three fiscal years are
disclosed in Note 13 to the consolidated financial statements in the Company's
Form 10-K for the year ended June 30, 2000.

                                       7
<PAGE>

                            Blue Wave Systems Inc.

              Notes to Interim Consolidated Financial Statements


6.   Comprehensive Income

     SFAS No. 130, Reporting Comprehensive Income, establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. Comprehensive income is defined as the
total of net income and all other non-owner changes in equity. Excluding net
income, the Company currently has one type of non-owner change in equity, which
is foreign currency translation gains and losses. The computation of
comprehensive income for the three and the nine months ended March 31, 2001 and
2000 follows (in thousands):

<TABLE>
<CAPTION>
                                                            Three Months Ended            Nine Months Ended
                                                                 March 31,                     March 31,
                                                            2001           2000           2001           2000
                                                           ------          -----        -------         ------
<S>                                                  <C>            <C>            <C>            <C>
Net income                                                 $2,263          $ 817        $ 2,685         $1,687
Foreign currency translation adjustment                      (706)          (129)        (1,148)           (52)
                                                           ------          -----        -------         ------
Total comprehensive income                                 $1,557          $ 688        $ 1,537         $1,635
                                                           ======          =====        =======         ======
</TABLE>

7.   Operating Segments

     The Company's net sales, operating income (loss), capital expenditures,
depreciation and identifiable assets by operating segment were as follows (in
thousands):

<TABLE>
<CAPTION>
                                                        For the three months ended March 31,
                              ----------------------------------------------------------------------------------------------
                                                  2001                                                2000
                              ----------------------------------------           -------------------------------------------
                                North          Outside of                          North           Outside of
                               America        North America     Total             America         North America     Total
                               -------        -------------     -----             -------         -------------     -----
<S>                            <C>            <C>              <C>                <C>             <C>               <C>
Net sales                      $ 4,377           $ 6,799       $11,176            $ 3,946             $ 5,325       $ 9,271
Operating income (loss)            802             1,389         2,191               (404)              1,269           865
Capital expenditures                21               418           439                 58                 167           225
Depreciation                        43               216           259                 78                 209           287
Identifiable assets             14,028            20,076        34,104             10,713              15,627        26,340

<CAPTION>
                                                         For the nine months ended March 31,
                              ----------------------------------------------------------------------------------------------
                                                  2001                                                2000
                              ----------------------------------------           -------------------------------------------
                                North          Outside of                          North           Outside of
                               America        North America     Total             America         North America     Total
                               -------        -------------     -----             -------         -------------     -----
<S>                            <C>            <C>              <C>                <C>             <C>               <C>
Net sales                      $ 9,866           $17,340       $27,206            $12,414             $12,701       $25,115
Operating income (loss)            240             2,311         2,551               (780)              2,665         1,885
Capital expenditures                57               694           751                 80                 316           396
Depreciation                       163               627           790                264                 630           894
Identifiable assets             14,028            20,076        34,104             10,713              15,627        26,340
</TABLE>

8.   Recent Accounting Pronouncements

     In June 1998, Financial Accounting Standards Board Statement 133,
Accounting for Derivative and Similar Financial Instruments For Hedging
Activities ("SFAS 133"), was issued. SFAS 133 requires all derivatives to be
recognized as either assets or liabilities in the statement of financial
position and measured at fair value. In addition, SFAS 133 specifies the
accounting for changes in the fair value of a derivative based on the intended
use of the derivative and the resulting designation. The Company does not have
any derivatives and SFAS 133 does not have a material impact on the Company's
financial position or disclosures. SFAS 133, as amended by SFAS 137 and SFAS
138, is effective for all quarters in fiscal year 2001.

     In December 1999, the SEC staff issued SAB 101, Revenue Recognition in
Financial Statements. SAB 101 provides guidance on applying generally accepted
accounting principles to revenue recognition issues in financial statements. SAB
101 is effective in our fourth fiscal quarter of 2001. Management does not
believe the adoption of SAB 101 will have a material impact on the Company's
financial position or results of operations.

                                       8
<PAGE>

                            Blue Wave Systems Inc.

              Notes to Interim Consolidated Financial Statements


9.   Merger Agreement

     On February 21, 2001, the Company and Motorola, Inc. announced the
execution of an Agreement and Plan of Merger. This agreement was amended on
April 24, 2001. The combination will be completed by Motorola issuing 7,250,000
shares for the Company's fully diluted shares outstanding. The combination is
subject to shareholder and governmental and regulatory approvals and is expected
to be completed in the second or third calendar quarter of 2001. Costs incurred
to date associated with the merger are currently reflected as merger costs in
the accompanying consolidated balance sheets.

                                       9
<PAGE>

          Management's Discussion and Analysis of Financial Condition
                           and Results of Operations


     The following table expresses the Company's statements of operations as a
percentage of net sales.

<TABLE>
<CAPTION>
                                                                 Three Months Ended            Nine Months Ended
                                                                      March 31,                     March 31,
                                                                 2001           2000           2001           2000
                                                                ------         ------         ------         ------
<S>                                                           <C>            <C>            <C>            <C>
Net sales                                                         100%           100%           100%           100%
Cost of sales                                                      45%            47%            48%            46%
                                                                 ----           ----           ----           ----
     Gross margin                                                  55%            53%            52%            54%
Operating expenses:
     Product development and engineering                           14%            16%            18%            17%
     Sales and marketing                                           12%            18%            14%            18%
     General and administrative                                     9%            10%            11%            11%
                                                                 ----           ----           ----           ----
Total operating expenses                                           35%            44%            43%            46%
                                                                 ----           ----           ----           ----
Operating income                                                   20%             9%             9%             8%
Total other income (expense)                                        0%             1%             1%             0%
                                                                 ----           ----           ----           ----
Income before provision for income taxes                           20%            10%            10%             8%
Provision for income taxes                                          0%             1%             0%             1%
                                                                 ----           ----           ----           ----
Net income                                                         20%             9%            10%             7%
                                                                 ====           ====           ====           ====
</TABLE>

Results of operations for the three months ended March 31, 2001 compared to the
three months ended March 31, 2000.

     For the three months ended March 31, 2001 (third quarter of fiscal 2001),
the Company reported net sales of $11,176,000, compared to $9,271,000 in the
same period last year. Net sales from the ComStruct line of telecommunications
products represented 50% of total net sales during the third fiscal quarter.
When compared to the same quarter last fiscal year, net sales from the ComStruct
product line grew 60%. The ComStruct telecommunications product line
incorporates a new generation of DSP microprocessors (digital signal processor)
developed by Texas Instruments ("TI"). Net sales from the Company's
military/aerospace and industrial businesses combined represented 50% of
revenues during the third fiscal quarter. When compared to the same quarter last
fiscal year, net sales from these combined businesses decreased 3%, primarily as
a result of the planned strategy to focus the Company on the ComStruct line of
telecommunications products.

     Gross margin percentage for the three months ended March 31, 2001, was 55%,
compared to 53% in the same period last year. This increase is due primarily to
the reduction of direct material costs, which were partially offset by general
provisions for excess and obsolete inventory taken during the period. The
increase in the provision for excess and obsolete inventory is primarily the
result of the strategy shift to focus on the Company's telecommunications
products. The Company's historical gross margin percentage has also varied by
quarter in both a positive and negative fashion due to volume-related
efficiencies, changes in product and customer mix, and provisions for
manufacturing scrap and obsolescence.

     During the three months ended March 31, 2001, product development and
engineering expenses were $1,595,000, or 14% of net sales, compared to
$1,470,000, or 16% of net sales, during the same period last year. The increase
in absolute spending is the result of the Company's focus on continued
development and expansion of the telecommunications product line and an increase
in headcount to facilitate that focus.

     During the three months ended March 31, 2001, sales and marketing expenses
were $1,362,000, or 12% of net sales, compared to $1,647,000, or 18% of net
sales, during the same period last year. The reduction in absolute spending is
the result of the Company's focus on specific vertical markets and a lower
average foreign currency exchange rate related to the Company's foreign
subsidiaries for the three months ended March 31, 2001 as compared to the
average exchange rate for the same period last year.

     During the three months ended March 31, 2001, general and administrative
expenses were $954,000, or 9% of net sales, compared to $925,000, or 10% of net
sales, during the same period last year. The increase in spending is primarily
the result of bonus plan accruals.

     During the three months ended March 31, 2001, total other income was
$88,000, compared to $42,000 during the same period last year. As a result of
receiving the approximately $6.9 million in net proceeds from the private
placement and the subsequent exercise of the warrants issued in conjunction with
the private placement in the first half of fiscal 2000, short-term borrowings
have been eliminated and interest income was generated from the investment of
excess available cash.

                                       10
<PAGE>

     The Company reported net income of $2,263,000 for the three months ended
March 31, 2001, compared to net income of $817,000 during the same period last
year. The increase in the Company's net operating result is primarily
attributable to the 21% increase in net sales.

Results of operations for the nine months ended March 31, 2001 compared to the
nine months ended March 31, 2000.

     For the nine months ended March 31, 2001 (first nine months of fiscal
2001), the Company reported net sales of $27,206,000, compared to $25,115,000 in
the same period last year. Net sales from the ComStruct line of
telecommunications products represented 56% of total net sales during the first
nine months of the fiscal year. When compared to the same period last fiscal
year, net sales from the ComStruct product line grew 134%. The ComStruct
telecommunications product line incorporates a new generation of DSP
microprocessors (digital signal processor) developed by Texas Instruments
("TI"). Net sales from the Company's military/aerospace and industrial
businesses combined represented 44% of revenues during the first nine months of
the fiscal year. When compared to the same period last fiscal year, net sales
from these combined businesses decreased 36%, primarily as a result of the
planned strategy to focus the Company on the ComStruct line of
telecommunications products. As reported previously, the level of shipments in
the second half of the fiscal year for the military/aerospace and industrial
businesses is projected to be higher than it was in the first half of the fiscal
year and this was true for the third fiscal quarter.

     Gross margin percentage for the nine months ended March 31, 2001, was 52%,
compared to 54% in the same period last year. Decreases in direct material costs
for the nine months ended March 31, 2001 were offset by general provisions for
excess and obsolete inventory taken during the period. The increase in the
provisions for excess and obsolete inventory is primarily the result of the
strategy shift to focus on the Company's telecommunications products. The
Company's historical gross margin percentage has also varied by quarter in both
a positive and negative fashion due to volume-related efficiencies, changes in
product and customer mix, and provisions for manufacturing scrap and
obsolescence.

     During the nine months ended March 31, 2001, product development and
engineering expenses were $4,801,000, or 18% of net sales, compared to
$4,134,000, or 17% of net sales, during the same period last year. The increase
in absolute spending is the result of the Company's focus on continued
development and expansion of the telecommunications product line and an increase
in headcount to facilitate that focus.

     During the nine months ended March 31, 2001, sales and marketing expenses
were $3,875,000, or 14% of net sales, compared to $4,631,000, or 18% of net
sales, during the same period last year. The reduction in absolute spending is
the result of the Company's focus on specific vertical markets and a lower
average foreign currency exchange rate related to the Company's foreign
subsidiaries for the nine months ended March 31, 2001 as compared to the average
exchange rate for the same period last year.

     During the nine months ended March 31, 2001, general and administrative
expenses were $3,041,000, or 11% of net sales, compared to $2,830,000, or 11% of
net sales, during the same period last year. The increase in absolute spending
is the result of increased costs associated with the annual report and the
shareholders' meeting, recruitment fees, compensation related to vesting of
stock options given to a former employee, increased costs associated with
professional services, an increase in the bad debt provision and various bonus
plan accruals. Included in the same period last year was a provision related to
the resignation of Simon Yates, the Company's former CEO, and expenses
associated with obtaining a binding credit facility commitment from a U. S.
commercial bank.

     During the nine months ended March 31, 2001, total other income was
$259,000, as compared to total other expense of $11,000 during the same period
last year. As a result of receiving the approximately $6.9 million in net
proceeds from the private placement and the subsequent exercise of the warrants
issued in conjunction with the private placement in the first half of fiscal
2000, short-term borrowings have been eliminated and interest income was
generated from the investment of excess available cash. In the first half of
fiscal 2000, interest expense was incurred on the Company's credit facilities
with two commercial banks.

     The Company reported net income of $2,685,000 for the nine months ended
March 31, 2001, compared to net income of $1,687,000 during the same period last
year. The increase in the Company's net operating result is primarily
attributable to the increase in net sales.

                                       11
<PAGE>

Liquidity and Capital Resources

     The Company's total cash and cash equivalents, including restricted cash,
was $7,862,000 at March 31, 2001, as compared to $6,611,000 at June 30, 2000.
Net working capital at March 31, 2001, was $17,650,000, as compared to
$15,690,000 at June 30, 2000, an increase of $1,960,000. Accounts receivable
increased at March 31, 2001 due to the higher level of net sales and the timing
of those shipments in the quarter ended March 31, 2001. Inventories at March 31,
2001 increased since June 30, 2000 due to the high level of order backlog, the
long completion time associated with complex products and the mix of product
that was shipped in the quarter ended March 31, 2001. Primarily as a result of
the increase in inventory, accounts payable also increased. The amount shown as
merger costs in the accompanying consolidated balance sheets at March 31, 2001
relates to costs incurred in relation to the merger with Motorola. Prepaid
expenses and other increased since June 30, 2000 primarily due to an increase in
value added tax (VAT) receivable. The amount shown as customer deposits in the
accompanying consolidated balance sheets increased at March 31, 2001 as compared
to June 30, 2000 due to advanced billings to customers for uncompleted
contracts. The largest amount included in customer deposits relates to a
contract under which product began shipping in the quarter ended March 31, 2001,
and shipments for this contract are expected to increase in the quarter ended
June 30, 2001.

     Expenditures for capital equipment were $751,000 for the nine months ended
March 31, 2001, as compared to $396,000 in the same period of the prior year.

     The Company utilizes credit facilities to support its operations. As of
March 31, 2001, there were no loans outstanding under a facility with a
commercial bank in the United Kingdom, with approximately $1,400,000 in
aggregate availability under such credit facility. This facility is
collateralized by the assets of the Company's European operations, guaranteed by
the U.S. parent company, bears interest at the bank's base rate plus 1.75% and
is due on demand. As of March 31, 2001, there were no loans outstanding under a
$3,500,000 facility with a commercial bank in the United States. This facility
is collateralized by the assets of the Company's U.S. operations, bears interest
at the bank's base rate plus 1% and contains financial covenants. As of March
31, 2001, the Company was in compliance with all its financial covenants under
its agreements with both banks.

     In connection with the establishment of an employee stock ownership plan
("ESOP"), which provides for the issuance of stock options for the benefit of
employees of the Company's UK subsidiary, the Company has guaranteed the debt of
the ESOP. The guarantee required the Company to place in escrow an amount equal
to the debt, which was $460,000 at March 31, 2001. Such cash has been reflected
as restricted cash in the accompanying consolidated balance sheets. The
guarantee is reflected as long-term debt in the accompanying consolidated
balance sheets. This debt consists of a note payable to a commercial bank with
interest at the bank's base rate (5.75% at March 31, 2001) plus 1.5%, for a
total rate of 7.25% at March 31, 2001. The note is subject to renewal annually.
The debt agreements related to this note contain warranties and financial
covenants and require maintenance of certain financial ratios. Default on any
warranty or covenant could, if not waived or corrected, accelerate the maturity
of any borrowings outstanding. As of March 31, 2001, the Company was in
compliance with such warranties and financial covenants under its agreement with
the bank.

     Management believes that through its current cash resources and currently
available debt facilities it will have adequate resources to fund the Company's
operating plan for at least twelve months.

     On February 21, 2001, the Company and Motorola, Inc. announced the
execution of an Agreement and Plan of Merger. This agreement was amended on
April 24, 2001. The combination will be completed by Motorola issuing 7,250,000
shares for the Company's fully diluted shares outstanding. The combination is
subject to shareholder and governmental and regulatory approvals and is expected
to be completed in the second or third calendar quarter of 2001. Costs incurred
to date associated with the merger are currently reflected in merger costs in
the accompanying consolidated balance sheets.


Quantitative and Qualitative Disclosures about Market Risk

     Interest Rate Risk. The Company generally invests cash balances in excess
of operating requirements in money market funds and short-term certificates of
deposit. The Company's investments are subject to interest rate fluctuations,
but management believes this risk is immaterial due to the nature of these
investments. If the Company were to experience a 1% change in the effective
interest rate, the effect on annual interest income would be approximately
$50,000. The carrying value of the funds would not be affected. The Company's
lines of credit provide for borrowings which bear interest at a variable rate
equal to the prime rates of the lenders. As of March 31, 2001, the Company did
not have any borrowings outstanding under the credit agreements. The Company has
a note payable which bears interest at a variable rate equal to the prime rate
of the lender. If the Company were to experience a 5% change in the variable
rate of interest, the effect on interest expense would be approximately $25,000
annually. The Company believes that the effects, if any, of possible near-

                                       12
<PAGE>

term changes in interest rates on the Company's financial position, results of
operations and cash flows should not be material.

     Foreign Currency Risk. The operations of the Company's international
subsidiaries are primarily conducted in their respective local currencies. The
Company is exposed to foreign exchange rate fluctuations since the financial
results of foreign subsidiaries are translated into U.S. dollars in
consolidation. As exchange rates vary, these results, when translated, may vary
from expectations and adversely impact overall expected profitability and
financial position. If the Company were to have experienced a 10% change in the
United Kingdom pound sterling to US dollar foreign exchange rate, the impact on
both the nine months ended March 31, 2001 and the fiscal year ended June 30,
2000 would have been approximately $100,000 to $150,000. The effect of foreign
exchange rate fluctuations on the Company's operations in the first nine months
of fiscal 2001 and for fiscal year 2000 was not material. The Company, to date,
has not attempted to hedge foreign currency exposures. The Company does not
enter into financial instrument transactions for trading or other speculative
purposes.

Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995

     This Form 10-Q contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995. Similar forward-looking
statements are made periodically in reports to the Commission, press releases,
reports and documents and in written and oral presentations to investors,
shareholders, analysts and others, regarding future results or expected
developments. Words such as "anticipates," "believes," "estimates," "expects,"
"foresees," "forecasts," "goal," "intends," "is likely," "plans," "predicts,"
"projects," and variations of such words and similar expressions are intended to
identify such forward-looking statements. Similarly, such statements herein that
describe the Company's business strategy, outlook, objectives, plans, intentions
or goals also are forward-looking statements. All such forward-looking
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from those in forward-looking statements.
These risk factors include, but are not limited to, rapid technological change,
quarterly fluctuations, dependence on the defense and the telecommunications
industries, commercial market uncertainties, dependence upon key suppliers,
customers, subcontractors and employees, competition, and potential future
operating losses. The foregoing list should not be construed as exhaustive and
the Company disclaims any obligation subsequently to revise forward-looking
statements to reflect unanticipated events. For a further explanation of risk
factors, please see the Company's most recent SEC filings. The Company further
cautions users who may utilize published bookings and backlog information as
tools to forecast the Company's revenue during a given timeframe since certain
purchase orders may be subject to cancellation and/or revision to delivery
schedules.

                                       13
<PAGE>

                             Blue Wave Systems Inc.

                          Part II. Other Information


Item 6.   Exhibits and Reports on Form 8-K

(a)  Exhibits (exhibit reference numbers refer to Item 601 of Regulation S-K)

     11(a) Computation of Per Share Net Income for the three months ended March
           31, 2001 and 2000.

     11(b) Computation of Per Share Net Income for the nine months ended March
           31, 2001 and 2000.

(b)  Reports on Form 8-K

     The Company filed a report on Form 8-K dated February 23, 2001 related to
     the Agreement and Plan of Merger by and among Motorola, Inc. and the
     Company. The Company filed a report on Form 8-K dated April 25, 2001
     regarding the amendment to the Agreement and Plan of Merger by and among
     Motorola, Inc. and the Company.

                                       14
<PAGE>

                            Blue Wave Systems Inc.

                                  Signatures


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.


                             Blue Wave Systems Inc.


Date: May 9, 2001            By:  /s/ Donald B. Crosbie
                                ----------------------------------------------
                             Donald B. Crosbie
                             Chief Financial Officer and President of North
                             American Operations (Principal Financial Officer)


                                       15
<PAGE>

                                 Exhibit Index

Exhibit
  No.                      Description
-------     --------------------------------
11(a)       Computation of Per Share Net Income for the three months ended March
            31, 2001 and 2000.

11(b)       Computation of Per Share Net Income for the nine months ended March
            31, 2001 and 2000.

                                       16