---





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 September 28, 2003
| | -------------------------------------------------



OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
|- | --------------------------------------------------------------------------------------------



| | For the transition period from

to
| | ----------------------------------





Commission File Number 000-21507





POWERWAVE TECHNOLOGIES, INC.

(Exact
name of registrant as specified in its charter)





|Delaware                                                       |  | 11-2723423                          
|-------------------------------------------------------------- |  | ------------------------------------
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)





1801 E. St. Andrew Place, Santa Ana, CA 92705

(Address of principal executive
offices, zip code)





Registrants telephone number, including area code:  (714) 466-1000





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 by check mark whether the Registrant is an
accelerated filer as defined in Rule 12b-2 of the Securities Exchange Act of 1934. Yes  x    No ̈



As of October
27, 2003 the number of outstanding shares of Common Stock, par value $0.0001 per share, of the Registrant was 63,125,690.





---



---

POWERWAVE TECHNOLOGIES, INC.



INDEX





|CAUTIONARY STATEMENT RELATED TO FORWARD LOOKING STATEMENTS |  | 3                                                                                    
|---------------------------------------------------------- |  | -------------------------------------------------------------------------------------
|                                                           | 
|HOW TO OBTAIN POWERWAVE SEC FILINGS                        |  | 3                                                                                    
|                                                           | 
|PART IFINANCIAL INFORMATION                               |  | 3                                                                                    
|                                                           |  |                                                                                      
|Item 1.                                                    |  | Financial Statements                                                                 
|                                                           |  |                                                                                      
|                                                           |  | Condensed Consolidated Balance Sheets                                                
|                                                           |  |                                                                                      
|                                                           |  | Condensed Consolidated Statements of Operations                                      
|                                                           |  |                                                                                      
|                                                           |  | Condensed Consolidated Statements of Comprehensive Income (Loss)                     
|                                                           |  |                                                                                      
|                                                           |  | Condensed Consolidated Statements of Cash Flows                                      
|                                                           |  |                                                                                      
|                                                           |  | Notes to Condensed Consolidated Financial Statements                                 
|                                                           |  |                                                                                      
|Item 2.                                                    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                           |  |                                                                                      
|Item 3.                                                    |  | Quantitative and Qualitative Disclosures About Market Risk                           
|                                                           |  |                                                                                      
|Item 4.                                                    |  | Controls and Procedures                                                              
|                                                           | 
|PART IIOTHER INFORMATION                                  |  | 46                                                                                   
|                                                           |  |                                                                                      
|Item 1.                                                    |  | Legal Proceedings                                                                    
|                                                           |  |                                                                                      
|Item 2.                                                    |  | Changes in Securities and Use of Proceeds                                            
|                                                           |  |                                                                                      
|Item 4.                                                    |  | Submission of Matters to a Vote of Security Holders                                  
|                                                           |  |                                                                                      
|Item 6.                                                    |  | Exhibits and Reports on Form 8-K                                                     
|                                                           | 
|SIGNATURES                                                 |  | 49                                                                                   





2



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CAUTIONARY STATEMENT RELATED TO FORWARD LOOKING STATEMENTS



This Quarterly Report on Form 10-Q includes forward-looking statements as defined within Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act
of 1934, as amended, relating to revenue, revenue composition, demand and pricing trends, future expense levels, competition in our industry, trends in average selling prices and gross margins, the transfer of certain manufacturing operations to
contract manufacturers, product and infrastructure development, market demand and acceptance, the timing of and demand for 3G products, customer relationships, employee relations, plans and predictions for acquired companies and assets, future
acquisition plans, restructuring charges and the level of expected capital and research and development expenditures. Such forward-looking statements are based on the beliefs of, estimates made by, and information currently available to Powerwave
Technologies, Inc.s (Powerwave or the Company) management and are subject to certain risks, uncertainties and assumptions. Any other statements contained herein (including without limitation statements to the effect
that Powerwave or management estimates, expects, anticipates, plans, believes, projects, continues, may, will, could, or
would or statements concerning potential or opportunity or variations thereof or comparable terminology or the negative thereof) that are not statements of historical fact are also forward-looking statements. The
actual results of Powerwave may vary materially from those expected or anticipated in these forward-looking statements. The realization of such forward-looking statements may be impacted by certain important unanticipated factors, including those
discussed in Additional Factors That May Affect Our Future Results under Item 2, Managements Discussion and Analysis of Financial Condition and Results of Operations, at pages 20-44. Because of these and other factors
that may affect Powerwaves operating results, past performance should not be considered as an indicator of future performance, and investors should not use historical results to anticipate results or trends in future periods. We undertake no
obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Readers should carefully
review the risk factors described in this and other documents that Powerwave files from time to time with the Securities and Exchange Commission (SEC), including subsequent Current Reports on Form 8-K, Quarterly Reports on Form 10-Q and
Annual Reports on Form 10-K.



HOW TO OBTAIN POWERWAVE SEC FILINGS



All reports filed by Powerwave with the SEC are available free of charge via EDGAR through the SEC website at www.sec.gov. In addition, the public may read and copy materials filed by the Company with the SEC at
the SECs public reference room located at 450 Fifth St., N.W., Washington, D.C. 20549. Powerwave also provides copies of its Forms 8-K, 10-K, 10-Q, Proxy and Annual Report at no charge to investors upon request and makes electronic copies of
its most recently filed reports available through its website at www.powerwave.com/investor.html as soon as reasonably practicable after filing such material with the SEC.



PART IFINANCIAL INFORMATION



ITEM 1.    FINANCIAL STATEMENTS



3



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POWERWAVE TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)



|                                                                                                                                                                                     |  | September 28,2003 |         |   | December 29,2002 |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------- | ------- | - | ---------------- | -
|                                                                                                                                                                                     |  | (Unaudited)       |         |   | (See Note)       |  
|ASSETS                                                                                                                                                                               |  |                   |         |   |                  |  
|Current assets:                                                                                                                                                                      |  |                   |         |   |                  |  
|Cash and cash equivalents                                                                                                                                                            |  | $                 | 253,549 |   |                  | $
|Accounts receivable, net of allowance for sales returns and doubtful accounts of $2,474 and $2,505 at September 28, 2003 and
December 29, 2002, respectively                         |  |                   | 46,304  |   |                  |  
|Inventories                                                                                                                                                                          |  |                   | 21,008  |   |                  |  
|Prepaid expenses and other current assets                                                                                                                                            |  |                   | 3,899   |   |                  |  
|Deferred tax assets                                                                                                                                                                  |  |                   | 7,708   |   |                  |  
|                                                                                                                                                                                     |  |                   |         |   |                  |  
|Total current assets                                                                                                                                                                 |  |                   | 332,468 |   |                  |  
|Property, plant and equipment                                                                                                                                                        |  |                   | 118,447 |   |                  |  
|Less: accumulated depreciation and amortization                                                                                                                                      |  |                   | (48,523 | ) |                  |  
|                                                                                                                                                                                     |  |                   |         |   |                  |  
|Net property, plant and equipment                                                                                                                                                    |  |                   | 69,924  |   |                  |  
|Goodwill                                                                                                                                                                             |  |                   | 3,439   |   |                  |  
|Deferred tax assets                                                                                                                                                                  |  |                   | 34,355  |   |                  |  
|Other non-current assets                                                                                                                                                             |  |                   | 10,157  |   |                  |  
|                                                                                                                                                                                     |  |                   |         |   |                  |  
|TOTAL ASSETS                                                                                                                                                                         |  | $                 | 450,343 |   |                  | $
|                                                                                                                                                                                     |  |                   |         |   |                  |  
|                                                                                                                                                                                     |  |                  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                 |  |                   |         |   |                  |  
|Current liabilities:                                                                                                                                                                 |  |                   |         |   |                  |  
|Accounts payable                                                                                                                                                                     |  | $                 | 33,044  |   |                  | $
|Accrued expenses and other current liabilities                                                                                                                                       |  |                   | 15,518  |   |                  |  
|                                                                                                                                                                                     |  |                   |         |   |                  |  
|Total current liabilities                                                                                                                                                            |  |                   | 48,562  |   |                  |  
|Long-term debt                                                                                                                                                                       |  |                   | 130,000 |   |                  |  
|Other non-current liabilities                                                                                                                                                        |  |                   | 85      |   |                  |  
|                                                                                                                                                                                     |  |                   |         |   |                  |  
|Total liabilities                                                                                                                                                                    |  |                   | 178,647 |   |                  |  
|                                                                                                                                                                                     |  |                   |         |   |                  |  
|                                                                                                                                                                                     |  |                  
|Commitments and contingencies                                                                                                                                                        |  |                   |        |   |                  |  
|                                                                                                                                                                                     |  |                  
|Shareholders equity:                                                                                                                                                                |  |                   |         |   |                  |  
|Preferred stock, $0.0001 par value, 5,000 shares authorized and no shares issued or outstanding                                                                                      |  |                   |        |   |                  |  
|Common Stock, $0.0001 par value, 135,000 shares authorized, 63,124 shares issued and outstanding at September 28, 2003 and 65,707
shares issued and outstanding at December 29, 2002 |  |                   | 224,922 |   |                  |  
|Accumulated other comprehensive loss                                                                                                                                                 |  |                   | (1      | ) |                  |  
|Retained earnings                                                                                                                                                                    |  |                   | 46,775  |   |                  |  
|                                                                                                                                                                                     |  |                   |         |   |                  |  
|Total shareholders equity                                                                                                                                                           |  |                   | 271,696 |   |                  |  
|                                                                                                                                                                                     |  |                   |         |   |                  |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                           |  | $                 | 450,343 |   |                  | $
|                                                                                                                                                                                     |  |                   |         |   |                  |  



Note: December 29, 2002
balances were derived from audited financial statements.



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



4



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POWERWAVE TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share data)



|                                          |  | Three Months Ended |         | Nine Months Ended
|----------------------------------------- |  | ------------------ | ------- | -----------------
|                                          |  | September 28,2003  |         |                  
|Net sales                                 |  | $                  | 63,158  |                  
|Cost of sales                             |  |                    | 56,749  |                  
|                                          |  |                    |         |                  
|Gross profit                              |  |                    | 6,409   |                  
|Operating expenses:                       |  |                    |         |                  
|Sales and marketing                       |  |                    | 3,130   |                  
|Research and development                  |  |                    | 9,821   |                  
|General and administrative                |  |                    | 3,878   |                  
|Restructuring and impairment charges      |  |                    | 399     |                  
|                                          |  |                    |         |                  
|Total operating expenses                  |  |                    | 17,228  |                  
|                                          |  |                    |         |                  
|Operating income (loss)                   |  |                    | (10,819 | )                
|Other income, net                         |  |                    | 607     |                  
|                                          |  |                    |         |                  
|Income (loss) before income taxes         |  |                    | (10,212 | )                
|Provision for (benefit from) income taxes |  |                    | (4,546  | )                
|                                          |  |                    |         |                  
|Net income (loss)                         |  | $                  | (5,666  | )                
|                                          |  |                    |         |                  
|                                          |  |                    |         |                  
|Basic earnings (loss) per share           |  | $                  | (0.09   | )                
|                                          |  |                    |         |                  
|Diluted earnings (loss) per share         |  | $                  | (0.09   | )                
|                                          |  |                    |         |                  
|                                          |  |                    |         |                  
|Basic weighted average common shares      |  |                    | 63,639  |                  
|                                          |  |                    |         |                  
|Diluted weighted average common shares    |  |                    | 63,639  |                  
|                                          |  |                    |         |                  



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



5



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POWERWAVE TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(In thousands)



|                                         |  | Three Months Ended |        | Nine Months Ended
|---------------------------------------- |  | ------------------ | ------ | -----------------
|                                         |  | September 28,2003  |        |                  
|Net income (loss)                        |  | $                  | (5,666 | )                
|Other comprehensive loss, net of tax:    |  |                    |        |                  
|Foreign currency translation adjustments |  |                    |       |                  
|                                         |  |                    |        |                  
|Comprehensive income (loss)              |  | $                  | (5,666 | )                
|                                         |  |                    |        |                  



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



6



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POWERWAVE TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)



|                                                                                         |  | Nine Months Ended |        
|---------------------------------------------------------------------------------------- |  | ----------------- | -------
|                                                                                         |  | September 28,2003 |        
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                    |  |                   |        
|Net income (loss)                                                                        |  | $                 | (31,471
|Adjustments to reconcile net income (loss) to net cash provided by operating activities: |  |                   |        
|Depreciation and amortization                                                            |  |                   | 14,310 
|Non-cash restructuring and impairment charges                                            |  |                   | 11,143 
|Provision for sales returns and doubtful accounts                                        |  |                   | 1,500  
|Provision for excess and obsolete inventories                                            |  |                   | 2,050  
|Deferred income taxes                                                                    |  |                   | (19,736
|Compensation costs related to stock options                                              |  |                   | 38     
|Loss (gain) on disposal of property, plant and equipment                                 |  |                   | (31    
|Changes in operating assets and liabilities:                                             |  |                   |        
|Accounts receivable                                                                      |  |                   | 5,460  
|Inventories                                                                              |  |                   | 6,161  
|Prepaid expenses and other current assets                                                |  |                   | 3,244  
|Accounts payable                                                                         |  |                   | 6,201  
|Accrued expenses and other current liabilities                                           |  |                   | (712   
|Other non-current assets                                                                 |  |                   | 1,917  
|Other non-current liabilities                                                            |  |                   | 3      
|                                                                                         |  |                   |        
|Net cash provided by operating activities                                                |  |                   | 77     
|                                                                                         |  |                  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                    |  |                   |        
|Purchase of property, plant and equipment                                                |  |                   | (2,296 
|Proceeds from the sale of property, plant and equipment                                  |  |                   | 388    
|Acquisition, net of cash acquired                                                        |  |                   | (9,934 
|                                                                                         |  |                   |        
|Net cash used in investing activities                                                    |  |                   | (11,842
|                                                                                         |  |                  
|CASH FLOW FROM FINANCING ACTIVITIES:                                                     |  |                   |        
|Proceeds from long-term debt, net of issuance costs                                      |  |                   | 125,869
|Principal payments on long-term debt                                                     |  |                   | (79    
|Common stock repurchases                                                                 |  |                   | (25,000
|Proceeds from the sale of stock under Employee Stock Purchase Plan                       |  |                   | 1,505  
|Proceeds from exercise of stock options                                                  |  |                   | 490    
|                                                                                         |  |                   |        
|Net cash provided by financing activities                                                |  |                   | 102,785
|                                                                                         |  |                   |        
|NET INCREASE IN CASH AND CASH EQUIVALENTS                                                |  |                   | 91,020 
|CASH AND CASH EQUIVALENTS, beginning of period                                           |  |                   | 162,529
|                                                                                         |  |                   |        
|CASH AND CASH EQUIVALENTS, end of period                                                 |  | $                 | 253,549
|                                                                                         |  |                   |        



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



7



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POWERWAVE TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED

(Unaudited)

(In thousands)



|                                                                                          |  | Nine Months Ended |    
|----------------------------------------------------------------------------------------- |  | ----------------- | ---
|                                                                                          |  | September 28,2003 |    
|SUPPLEMENTAL CASH FLOW INFORMATION:                                                       |  |                   |    
|Cash paid (received) for:                                                                 |  |                   |    
|Interest expense                                                                          |  | $                 | 29 
|                                                                                          |  |                   |    
|Income taxes                                                                              |  | $                 | 29 
|                                                                                          |  |                   |    
|                                                                                          |  |                  
|NON-CASH ITEMS:                                                                           |  |                   |    
|Tax benefit related to stock options exercised                                            |  | $                 | 278
|                                                                                          |  |                   |    
|Tax benefit related to the issuance of Common Stock under theEmployee Stock Purchase Plan |  | $                 | 196
|                                                                                          |  |                   |    
|Liabilities assumed in business acquisitions (Note 14)                                    |  | $                 | 425
|                                                                                          |  |                   |    



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



8



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POWERWAVE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Tabular amounts in thousands, except per share data)



Note 1.    Nature of Operations



Powerwave Technologies, Inc. (Powerwave or the Company) is a Delaware corporation engaged in the design,
manufacture and marketing of radio frequency (RF) power amplifiers and related equipment for use in the wireless communications market. The Company sells both single and multi-carrier RF power amplifiers for a variety of frequency ranges
and a wide range of digital and analog transmission protocols. The Companys products are currently being utilized in cellular, PCS and 3G base stations throughout the world.



Note 2.    Summary of Significant Accounting Policies



Basis of Presentation



The accompanying condensed consolidated financial statements
of Powerwave have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include certain footnotes and financial presentations normally required under accounting principles generally accepted in the United States of America for complete financial reporting. The interim financial information is
unaudited, but reflects all normal adjustments and accruals, which are, in the opinion of management, considered necessary to provide a fair presentation for the interim periods presented. The accompanying condensed consolidated financial statements
should be read in conjunction with the audited consolidated financial statements included in the Companys Annual Report on Form 10-K for the fiscal year ended December 29, 2002.



The results of operations for the three and nine months ended September 28, 2003 are not necessarily
indicative of the results to be expected for the entire fiscal year ending December 28, 2003 (fiscal year 2003.)



New Accounting Pronouncements



In June 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 146,
Accounting for Costs Associated with Exit or Disposal Activities (SFAS 146), which addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes Emerging Issues Task Force
(EITF) Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity(including Certain Costs Incurred in a Restructuring). SFAS 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF Issue 94-3, a liability for an exit cost as defined in EITF Issue 94-3 was recognized at the date of an entitys commitment to an exit plan.
SFAS 146 also establishes that the liability should initially be measured and recorded at fair value. The Company adopted the provisions of SFAS 146 effective January 1, 2003 and such adoption did not have a material impact on the consolidated
financial statements. All restructuring charges recognized during the nine months ended September 28, 2003 have been recorded in accordance with the requirements of SFAS 146.



In November 2002, the FASB issued Interpretation No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Others(FIN 45). FIN 45 elaborates on the disclosures to be made by the guarantor in its interim and annual financial statements about its obligations
under certain guarantees that it has issued. It also requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The Company adopted the disclosure
provisions of FIN 45 during the fourth quarter of fiscal 2002 and the recognition provisions of FIN 45 effective January 1, 2003. Such adoption did not have a material impact on the consolidated financial statements.



In December 2002, the FASB issued Statement of Financial
Accounting Standards No. 148, Accounting for Stock-Based CompensationTransition and Disclosure(SFAS 148). SFAS 148 amends Statement No. 123, Accounting for Stock-Based Compensation(SFAS 123), to provide
alternative methods for voluntary transition to the fair value method of accounting for stock-based employee compensation prescribed by SFAS 123. SFAS 148 also requires disclosure of the effects of an entitys accounting policy with respect to
stock-based employee compensation on reported net income (loss) and earnings (loss) per share in annual and interim financials statements. The Company adopted the disclosure provisions of SFAS 148 effective December 30, 2002 and has





9



---

included the additional required disclosures below under Stock-Based Compensation. Such
adoption did not have a material impact on the consolidated financial statements.



In January 2003, FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities(FIN 46). In general, a variable interest entity is a corporation, partnership,
trust or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities.
FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial support from other parties. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation
requirements apply to older entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable
interest entity was established. The Company adopted the provisions of FIN 46 effective February 1, 2003 and such adoption did not have a material impact on its consolidated financial statements since the Company currently has no variable interest
entities.



In April 2003, FASB issued Statement
of Financial Accounting Standards No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities(SFAS 149). SFAS 149 amends and clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS 133. SFAS 149 is effective for contracts and hedging relationships entered into or modified after June 30, 2003. The Company adopted the provisions of SFAS 149 effective
June 30, 2003 and such adoption did not have a material impact on its consolidated financial statements since the Company has not entered into any derivative or hedging transactions.



In May 2003, FASB issued Statement of Financial Accounting Standards No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity (SFAS 150). SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both debt and equity
and requires an issuer to classify the following instruments as liabilities in its balance sheet:



| |  | a financial instrument issued in the form of shares that is mandatorily redeemable and embodies an unconditional obligation that requires the issuer to redeem it
by transferring its assets at a specified or determinable date or upon an event that is certain to occur;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | a financial instrument, other than an outstanding share, that embodies an obligation to repurchase the issuers equity shares, or is indexed to such an
obligation, and requires the issuer to settle the obligation by transferring assets; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | a financial instrument that embodies an unconditional obligation that the issuer must settle by issuing a variable number of its equity shares if the monetary
value of the obligation is based solely or predominantly on (1) a fixed monetary amount, (2) variations in something other than the fair value of the issuers equity shares, or (3) variations inversely related to changes in the fair value
of the issuers equity shares.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003 and is effective for all other financial instruments as of the first interim period beginning after June 15, 2003. SFAS 150 is to be implemented by
reporting the cumulative effect of a change in accounting principle. The Company adopted the provisions of SFAS 150 effective June 30, 2003 and such adoption did not have a material impact on its consolidated financial statements.



Stock-Based Compensation



Pursuant to SFAS No. 123, Powerwave has elected to continue
using the intrinsic value method of accounting for stock-based awards granted to employees and directors in accordance with Accounting Principles Board (APB) Opinion No. 25 and related interpretations in accounting for its stock option
and purchase plans. As a result, Powerwave only records compensation expense for stock-based awards granted with an exercise price below the market value of the Companys stock at the date of grant.



The Black-Scholes option valuation model prescribed by SFAS
No. 123 was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Option valuation methods require the input of highly subjective assumptions including the expected stock price
volatility. Using the Black-Scholes option valuation model, the estimated weighted average fair value of options granted during the third quarter of 2003 was $4.03 per share and for fiscal year 2002 was $7.07 per share. Had compensation cost for the
Companys stock option plans and its stock purchase plans been determined based on the estimated fair value at the grant dates for awards under those plans consistent with the fair value method of SFAS No. 123 utilizing the Black-



10



---

Scholes option-pricing model and an incremental tax rate of 40%, the Companys net income (loss) and
basic and diluted earnings (loss) per share for the three and nine months ended September 28, 2003 and September 29, 2002 would have approximated the pro forma amounts indicated below:



|                                                                                         |  | Three Months Ended |        |   | Nine Months Ended |  
|---------------------------------------------------------------------------------------- |  | ------------------ | ------ | - | ----------------- | -
|                                                                                         |  | September 28,2003  |        |   | September 29,2002 |  
|Net income (loss):                                                                       |  |                    |        |   |                   |  
|As reported                                                                              |  | $                  | (5,666 | ) |                   | $
|Less: Additional expense per SFAS No. 123, fair value method, net of related tax effects |  |                    | (1,587 | ) |                   |  
|                                                                                         |  |                    |        |   |                   |  
|Pro forma                                                                                |  | $                  | (7,253 | ) |                   | $
|                                                                                         |  |                    |        |   |                   |  
|Basic earnings (loss) per share:                                                         |  |                    |        |   |                   |  
|As reported                                                                              |  | $                  | (0.09  | ) |                   | $
|Pro forma                                                                                |  | $                  | (0.11  | ) |                   | $
|                                                                                         |  |                    |        |  
|Diluted earnings (loss) per share:                                                       |  |                    |        |   |                   |  
|As reported                                                                              |  | $                  | (0.09  | ) |                   | $
|Pro forma                                                                                |  | $                  | (0.11  | ) |                   | $



The
fair value of options granted under Powerwaves stock incentive plans during the nine months ended September 28, 2003 and September 29, 2002 were estimated on the date of grant using the Black-Scholes option-pricing model utilizing the multiple
option approach using the following weighted-average assumptions:



|                                         |  | Nine Months Ended
|---------------------------------------- |  | -----------------
|                                         |  | September 28,2003
|Weighted average risk-free interest rate |  | 1.73%  2.01%    
|Expected life (in years)                 |  | 5.1              
|Expected stock volatility                |  | 74%  177%       
|Dividend yield                           |  | None             



Due to
the fact that the Companys employee stock options have characteristics significantly different from those of traded options and any changes in the subjective input assumptions can materially affect the fair value estimates, management does not
believe that the existing Black-Scholes option pricing model provides a reliable single measure of the fair value of its employee stock options. Therefore, Powerwave believes that the pro forma net expense per SFAS No. 123 calculated above is not a
reliable measure of the costs of its stock option plans.



Foreign Currency Translation



In accordance with Statement of Financial Accounting Standards No. 52, Foreign Currency Translation(SFAS 52), some of Powerwaves international operations use the respective local currencies as their functional
currency while other international operations use the U.S. Dollar as their functional currency. Revenue and expenses from the Companys international subsidiaries are translated using the monthly average exchange rates in effect for the period
in which the items occur. The Companys international subsidiaries that have the U.S. Dollar as their functional currency translate monetary assets and liabilities using current rates of exchange at the balance sheet date and translate
non-monetary assets and liabilities using historical rates of exchange for non-monetary assets and liabilities. Gains and losses from remeasurement for such subsidiaries are included in other income, net. The Companys international
subsidiaries that do not have the U.S. Dollar as their functional currency translate assets and liabilities at current rates of exchange in effect at the balance sheet date. The resulting gains and losses from translation for such subsidiaries are
included as a component of shareholders equity. Translation adjustments have not historically had a significant impact on Powerwaves financial results.



Use of Estimates



The preparation of the condensed consolidated financial statements, in conformity with accounting principles generally accepted in the
United States of America, 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



11



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the financial statements and the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.



Reclassifications



Certain
prior period amounts have been reclassified to conform to the current period presentation.



Note 3.    Inventories



Net inventories consist of the following:



|                     |  | September 28,2003 |        | December 29,2002
|-------------------- |  | ----------------- | ------ | ----------------
|Parts and components |  | $                 | 7,124  |                 
|Work-in-process      |  |                   | 384    |                 
|Finished goods       |  |                   | 13,500 |                 
|                     |  |                   |        |                 
|Total inventories    |  | $                 | 21,008 |                 
|                     |  |                   |        |                 



Inventories are net of an allowance for excess and obsolete inventory of approximately $9.3 million and $9.0 million as of September 28, 2003 and December 29, 2002, respectively. Powerwave regularly reviews inventory quantities on hand and
records an allowance for excess and obsolete inventory based primarily on sales backlog, forecasted product demand and production requirements for the next twelve months.



Note 4.    Property, Plant and Equipment



Net property, plant and equipment consist of the following:



|                                                 |  | September 28,2003 |         |   | December 29,2002 |  
|------------------------------------------------ |  | ----------------- | ------- | - | ---------------- | -
|Machinery and equipment                          |  | $                 | 53,326  |   |                  | $
|Buildings and improvements                       |  |                   | 38,660  |   |                  |  
|Land                                             |  |                   | 14,838  |   |                  |  
|Office furniture and equipment                   |  |                   | 10,670  |   |                  |  
|Leasehold improvements                           |  |                   | 953     |   |                  |  
|Construction in progress                         |  |                   |        |   |                  |  
|                                                 |  |                   |         |   |                  |  
|Gross property, plant and equipment              |  |                   | 118,447 |   |                  |  
|Less:  Accumulated depreciation and amortization |  |                   | (48,523 | ) |                  |  
|                                                 |  |                   |         |   |                  |  
|Total property, plant and equipment              |  | $                 | 69,924  |   |                  | $
|                                                 |  |                   |         |   |                  |  



During
the quarter ended June 29, 2003, Powerwave determined that certain of its equipment had become excess to its production requirements as a result of its restructuring efforts and, therefore, was no longer useful to the Company. This equipment was
physically segregated from the Companys remaining active equipment for sale and disposition and reclassified in the condensed consolidated balance sheet as assets held for sale within other non-current assets. The difference
between the estimated net selling price for such equipment and its net book value resulted in an impairment charge of approximately $3.2 million for the quarter ended June 29, 2003. See Note 12. Restructuring and Impairment Charges for
additional details.



Note 5.    Other Non-Current Assets



Other non-current assets consist of the
following:



|                               |  | September 28,2003 |        | December 29,2002
|------------------------------ |  | ----------------- | ------ | ----------------
|Assets held for sale           |  | $                 | 5,485  |                 
|Debt issue costs               |  |                   | 3,960  |                 
|Long-term prepaid expenses     |  |                   | 373    |                 
|Other non-current assets       |  |                   | 339    |                 
|                               |  |                   |        |                 
|Total other non-current assets |  | $                 | 10,157 |                 
|                               |  |                   |        |                 





12



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Note 6.    Accrued Expenses and Other Current Liabilities



Accrued expenses and other current liabilities consist of
the following:



|                                                     |  | September 28,2003 |        | December 29,2002
|---------------------------------------------------- |  | ----------------- | ------ | ----------------
|Accrued warranty costs                               |  | $                 | 5,443  |                 
|Accrued payroll and employee benefits                |  |                   | 2,492  |                 
|Accrued vendor cancellations costs                   |  |                   | 1,195  |                 
|Income taxes                                         |  |                   | 2,286  |                 
|Other accrued expenses                               |  |                   | 4,102  |                 
|                                                     |  |                   |        |                 
|Total accrued expenses and other current liabilities |  | $                 | 15,518 |                 
|                                                     |  |                   |        |                 



Note
7.    Financing Arrangements and Long-Term Debt



On July 18, 2003, Powerwave completed the private placement of $130.0 million aggregate principal amount of 1.25% convertible subordinated notes due July 2008. The notes are convertible into the Common Stock of
Powerwave at a conversion price of $10.49 per share and accrue interest at an annual rate of 1.25% with interest payable semi-annually on January 15 and July 15. The notes are general unsecured obligations of the Company and are subordinate in right
of payment to all of the Companys existing and future senior indebtedness. In addition, the indenture for the notes does not restrict the Company from incurring senior debt or other indebtedness and does not impose any financial covenants on
the Company. The notes are callable by the Company beginning July 22, 2007. Powerwave used a portion of the proceeds of the offering to fund the repurchase of $25.0 million of the Companys Common Stock (3,144,654 shares) simultaneously
with the issuance of the notes. The Company received net cash proceeds of approximately $101.0 million after the deduction of the amount used for the Common Stock repurchase and debt issuance costs.



The Company reinstated its unsecured revolving credit
agreement with Comerica Bank-California (Comerica) on September 15, 2003. This credit facility provides for a revolving line of credit up to a maximum principal amount outstanding at any one time of $20 million (the Revolving
Commitment Amount). The Company is required to pay a commitment fee of 0.25% per annum on the unused portion of the Revolving Commitment Amount. The commitment fee is payable quarterly in arrears. The revolving credit facility allows for
borrowings based either upon the banks prime rate (4.00% at September 28, 2003) or Comericas LIBOR rate plus an applicable LIBOR margin of 1.25% or 1.50%, based upon the Companys debt leverage ratio. The revolving credit facility
expires on May 31, 2004. The revolving credit facility contains certain standard affirmative and negative covenants, including limitations on future indebtedness, restricted payments, transactions with affiliates, liens, dividends, mergers,
transfers of assets and leverage ratios. At September 28, 2003, the Company was in compliance with all covenants contained in the revolving credit facility. There were no amounts outstanding and the full $20 million of the Revolving Commitment
Amount was available to the Company at September 28, 2003.



Note
8.    Employee Stock Purchase Plan



The thirteenth offering under Powerwaves Employee Stock Purchase Plan (the ESPP) concluded on July 31, 2003, with 175,579 shares of the Companys Common Stock purchased under the ESPP at a price
per share of $3.49. At September 28, 2003, there were rights to purchase approximately 60,000 shares of Common Stock outstanding under the ESPPs fourteenth offering, which will conclude on January 31, 2004.



Note 9.    Stock Option Plans



The following is a summary of stock option transactions
under Powerwaves stock option plans, including the 1995 Stock Option Plan, the 1996 Stock Incentive Plan, the 1996 Director Stock Option Plan, the 2000 Stock Option Plan and the 2002 Stock Option Plan, for the nine months ended September 28,
2003:





13



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|                              |  | Number ofShares |   |  | Price Per Share |                | WeightedAverageExercisePrice |   | Number ofOptionsExercisable |  | WeightedAverageExercisePrice
|----------------------------- |  | --------------- | - |  | --------------- | -------------- | ---------------------------- | - | --------------------------- |  | ----------------------------
|Balance at December 29, 2002  |  | 9,599           |   |  | $               | 0.82  $73.56  |                              | $ | 14.40                       |  | 4,545                       
|Granted                       |  | 342             |   |  | $               | 3.12  $10.04  |                              | $ | 6.76                        |  |                             
|Exercised                     |  | (179            | ) |  | $               | 1.33  $  6.52 |                              | $ | 3.39                        |  |                             
|Canceled                      |  | (1,506          | ) |  | $               | 4.58  $73.56  |                              | $ | 22.74                       |  |                             
|                              |  |                 |   |  |                 |                |                              |   |                             |  |                             
|Balance at September 28, 2003 |  | 8,256           |   |  | $               | 0.82  $67.08  |                              | $ | 12.80                       |  | 4,659                       
|                              |  |                 |   |  |                 |                |                              |   |                             |  |                             



At
September 28, 2003, a total of 2,790,930 shares were available for grant under all of the Companys stock option plans.



During the nine months ended September 28, 2003 and September 29, 2002, Powerwave recorded compensation expense related to stock options
of approximately $38,000 and $44,000, respectively. There was no unamortized compensation expense remaining at September 28, 2003.



Note 10.    Commitments and Contingencies



Powerwave had various outstanding leases as of September 28, 2003, the majority of which relate to real estate operating leases, including
115,000 square feet of warehouse space in Santa Ana, California, 31,500 square feet of engineering and office space in El Dorado Hills, California, and 8,100 square feet of engineering and office space in Bristol, United Kingdom.



Future minimum lease payments required under all operating
leases at September 28, 2003 are payable as follows:



|Fiscal Year                         |  | Total
|----------------------------------- |  | -----
|Remainder of 2003                   |  | $    
|2004                                |  |      
|2005                                |  |      
|2006                                |  |      
|2007                                |  |      
|Thereafter                          |  |      
|                                    |  |      
|Total future minimum lease payments |  | $    
|                                    |  |      



Powerwave is subject to various legal proceedings from time to time as part of its business. As of September 28, 2003, Powerwave was not currently party to any legal proceedings or threatened legal proceedings, the adverse outcome of which,
individually or in the aggregate, it believes would have a material adverse effect on its business, financial condition and results of operations.



Note 11.    Contractual Guarantees and Indemnities



During its normal course of business, the Company makes certain contractual guarantees and indemnities pursuant to which the Company may
be required to make future payments under specific circumstances. Powerwave has not recorded any liability for these contractual guarantees and indemnities in the accompanying condensed consolidated financial statements. A description of significant
contractual guarantees and indemnities existing as of September 28, 2003 is included below:



| |  | Intellectual Property Indemnities  The Company indemnifies certain customers and its contract manufacturers against liability arising from
third-party claims of intellectual property rights infringement related to the Companys products. These indemnities appear in development and supply agreements with our customers as well as manufacturing service agreements with our contract
manufacturers, are not limited in amount or duration and generally survive the expiration of the contract. Given that the amount of any potential liabilities related to such indemnities cannot be determined until an infringement claim has been made,
Powerwave is unable to determine the maximum amount of losses that it could incur related to such indemnifications. Historically, any amounts payable pursuant to such intellectual property indemnifications have not had a material effect on the
Companys business, financial condition or results of operations.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





14



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| |  | Director and Officer Indemnities  The Company has entered into indemnification agreements with its directors and executive officers which
require the Company to indemnify such individuals to the fullest extent permitted by Delaware law. The Companys indemnification obligations under such agreements are not limited in amount or duration. Certain costs incurred in connection with
such indemnifications may be recovered under certain circumstances under various insurance policies. Given that the amount of any potential liabilities related to such indemnities cannot be determined until a lawsuit has been filed against a
director or executive officer, the Company is unable to determine the maximum amount of losses that it could incur relating to such indemnifications. Historically, any amounts payable pursuant to such director and officer indemnifications have not
had a material negative effect on the Companys business, financial condition or results of operations.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | General Contractual Indemnities/Products Liability  During the normal course of business, the Company enters into contracts with customers
where it has agreed to indemnify the other party for personal injury or property damage caused by the Companys products. The Companys indemnification obligations under such agreements are not limited in duration and are generally not
limited in amount. The Company maintains product liability insurance as well as errors and omissions insurance which may provide a source of recovery to the Company in the event of an indemnification claim.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Workers Compensation Insurance Guarantees  The Company has issued a guarantee in the form of a standby letter of credit in the amount of
$600,000 as a security for contingent liabilities under certain workers compensation insurance policies. This letter of credit is supported by a pledge of a cash deposit of $600,000 with the bank that issued the letter of credit. The Companys
workers compensation insurance carrier may draw upon the letter of credit if the Company does not fund its required portion of workers compensation claims.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Company establishes reserves for future product warranty costs that are expected to be incurred pursuant
to specific warranty provisions with its customers. The Company also has contractual requirements with various customers that could require the Company to incur costs to repair an epidemic defect with respect to its products outside of the normal
warranty period if such defect were to occur. The Companys warranty reserves are generally established at the time of sale and updated throughout the warranty period based upon numerous factors including historical warranty return rates and
expenses over various warranty periods. The Company also accrues additional warranty liabilities for significant and unusual product performance issues at the time such issues are identified and the associated warranty related costs can be
reasonably estimated. A summary of the activity that affected the Companys accrued warranty costs for the nine months ended September 28, 2003 is as follows:



|Description                                              |  | AccruedWarranty Costs |       
|-------------------------------------------------------- |  | --------------------- | ------
|Balance at December 29, 2002                             |  | $                     | 5,133 
|Reductions for warranty costs incurred                   |  |                       | (2,788
|Warranty accrual related to current year sales           |  |                       | 3,536 
|Change in estimate related to previous warranty accruals |  |                       | (438  
|                                                         |  |                       |       
|Balance at September 28, 2003                            |  | $                     | 5,443 
|                                                         |  |                       |       



Note
12.    Restructuring and Impairment Charges



As a result of the significant economic downturn effecting demand in the wireless infrastructure industry, Powerwave determined that it was necessary to test its previously recorded goodwill for impairment during the
quarter ended March 30, 2003. Since Powerwave operates in a single business segment as a single reporting unit, the determination of whether any potential impairment of goodwill exists is based on a comparison of the fair value of the entire Company
to the accounting value of its net assets. In estimating the fair value of the entire Company, Powerwave reviewed the average and closing stock prices for its Common Stock, valuations based on multiples of sales, EBITDA and EBIT, as well as other
factors. Based on a comparison of these valuations to the accounting value of the underlying assets and liabilities, the Company concluded that the entire amount of its recorded goodwill had been impaired and, therefore, recorded a non-cash
impairment charge of $4.9 million within operating expenses in the first quarter of fiscal 2003. The Company did not record any similar goodwill impairment charge during the nine months ended September 29, 2002 or during the second and third
quarters of fiscal 2003.



During the second and
third quarters of fiscal 2003, Powerwave accelerated the restructuring of its manufacturing operations to outsource the majority of its production to contract manufacturers located in Asia in order to further reduce the Companys operating cost
structure and enable it to be more competitive. Additionally, the Company accelerated the timing of technology transitions and new product introductions due to its transition to



15



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outsourced manufacturing and the continued economic downturn that has significantly impacted demand in
the wireless infrastructure industry. As a result, the Company recorded approximately $9.9 million of restructuring and impairment charges during the second quarter ended June 29, 2003 and approximately $0.9 million of additional restructuring
charges during the third quarter ended September 28, 2003. These charges included cash restructuring charges of approximately $4.5 million related primarily to severance payments made prior to September 28, 2003 in connection with a reduction of its
work force of approximately 550 employees. The remaining non-cash impairment charges of approximately $6.3 million related to a $3.2 million write-down of excess manufacturing and test equipment that is being held for sale and a $3.1 million
write-down of certain product/technology and customer related intangibles, the value of which was impaired by the technology and product transitions that were implemented during the quarter. These restructuring and impairment charges were recorded
in cost of sales or operating expenses based upon the job classification of the impacted employees or the character of the underlying assets. During the second and third quarters of 2003, approximately $8.1 million of the total $10.8 million
restructuring and impairment charges was recorded in cost of sales and approximately $2.7 million was recorded in operating expenses.



A summary of the Companys restructuring and impairment activities during the nine months ended September 28, 2003 is as follows:



|                                                         |  | EmployeeSeverance |       | EquipmentWritedown |   | Goodwill &IntangibleWritedown |  | Total
|-------------------------------------------------------- |  | ----------------- | ----- | ------------------ | - | ----------------------------- |  | -----
|Amounts expensed during quarter ended March 30, 2003     |  | $                 |      |                    | $ |                              |  | $    
|Amounts expensed during quarter ended June 29, 2003      |  |                   | 3,611 |                    |   | 3,240                         |  |      
|Amounts expensed during quarter ended September 28, 2003 |  |                   | 884   |                    |   |                              |  |      
|                                                         |  |                   |       |                    |   |                               |  |      
|Total amounts expensed to date                           |  | $                 | 4,495 |                    | $ | 3,240                         |  | $    
|Identified future restructuring and impairment costs     |  |                   | 53    |                    |   |                              |  |      
|                                                         |  |                   |       |                    |   |                               |  |      
|Total identified restructuring and impairment costs      |  | $                 | 4,548 |                    | $ | 3,240                         |  | $    
|                                                         |  |                   |       |                    |   |                               |  |      



A
summary of the activity that affected the Companys accrued restructuring costs for the nine months ended September 28, 2003 is as follows:



|                              |  | EmployeeSeverance |        |   | EquipmentWritedown |   |        | Goodwill &IntangibleWritedown |  |   | Total  |  
|----------------------------- |  | ----------------- | ------ | - | ------------------ | - | ------ | ----------------------------- |  | - | ------ | -
|Balance at December 30, 2002  |  | $                 |       |   |                    | $ |       |                               |  | $ |       |  
|Amounts expensed              |  |                   | 4,495  |   |                    |   | 3,240  |                               |  |   | 7,927  |  
|Amounts paid/incurred         |  |                   | (4,228 | ) |                    |   | (3,240 | )                             |  |   | (7,927 | )
|                              |  |                   |        |   |                    |   |        |                               |  |   |        |  
|Balance at September 28, 2003 |  | $                 | 267    |   |                    | $ |       |                               |  | $ |       |  
|                              |  |                   |        |   |                    |   |        |                               |  |   |        |  



Note
13.    Earnings (Loss) Per Share



In accordance with SFAS No. 128, Earnings Per Share (SFAS 128), basic earnings (loss) per share is based upon the weighted average number of common shares outstanding. Diluted earnings (loss) per
share is based upon the weighted average number of common and potential common shares for each period presented. Potential common shares include stock options under the treasury stock method and convertible subordinated debt under the if-converted
method. Potential common shares of 10,698,122 and 3,699,569 have been excluded from diluted weighted average common shares for the three and nine months ended September 28, 2003, as the effect would be anti-dilutive.



16



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The following details the calculation of basic and diluted earnings (loss) per share:



|                                       |  | Three Months Ended |        | Nine Months Ended
|-------------------------------------- |  | ------------------ | ------ | -----------------
|                                       |  | September 28,2003  |        |                  
|Basic:                                 |  |                    |        |                  
|Basic weighted average common shares   |  |                    | 63,639 |                  
|Net income (loss)                      |  | $                  | (5,666 | )                
|                                       |  |                    |        |                  
|Basic earnings (loss) per share        |  | $                  | (0.09  | )                
|                                       |  |                    |        |                  
|Diluted:                               |  |                    |        |                  
|Basic weighted average common shares   |  |                    | 63,639 |                  
|Potential common shares                |  |                    |       |                  
|                                       |  |                    |        |                  
|Diluted weighted average common shares |  |                    | 63,639 |                  
|Net income (loss)                      |  | $                  | (5,666 | )                
|                                       |  |                    |        |                  
|Diluted earnings (loss) per share      |  | $                  | (0.09  | )                
|                                       |  |                    |        |                  



Note
14.    Acquisitions



On July 10, 2003, the Company completed the acquisition of certain assets and liabilities of Ericsson Amplifier Technologies, Inc. (AMT) pursuant to an asset purchase agreement with AMT, Microwave Power Devices, Inc. and
Ericsson AB. Under the asset purchase agreement, the Company purchased selected assets of AMT, including certain inventories, equipment and real estate for a cash payment of $9.8 million. The Company also assumed certain warranty obligations of AMT
and made offers of employment to a limited number of employees of AMT as part of the purchase. In connection with the asset purchase, the Company also entered into an agreement to become a supplier of certain 2.1 GHz W-CDMA RF power amplifiers of
Ericsson AB. The acquisition was accounted for under the purchase method of accounting and the total purchase price of approximately $10.3 million, including assumed liabilities of $0.4 million and capitalized acquisition costs of $0.1 million, has
been preliminarily allocated as follows: $1.0 million to equipment, $5.8 million to assets held for sale, $0.1 million to contract intangibles and $3.4 million to goodwill. The Company has engaged a third party to assist it with the valuation of the
assets acquired and will finalize the purchase price allocation upon the receipt of the final valuation report. The results of operations of AMT are included in the condensed consolidated financial statements from the date of acquisition. The
pro-forma effect of the acquisition is not material to the Companys results of operations for 2002 or 2003.



Note 15.    Customer Concentrations



Powerwaves product sales have historically been concentrated in a small number of customers. During the quarter ended September 28,
2003 and September 29, 2002, sales to customers that accounted for 10% or more of revenues for the quarter totaled $52.4 million and $75.2 million, respectively. Sales to Nortel Networks Corporation and related entities (Nortel)
accounted for approximately 62% and 67% of total revenues during such quarters, respectively. During the quarter ended September 28, 2003, two customers in addition to Nortel each accounted for approximately 12% and 10% of total revenues during such
quarter. During the quarter ended September 29, 2002, one customer in addition to Nortel accounted for approximately 15% of total revenues during such quarter.



During the nine months ended September 28, 2003 and September 29, 2002, sales to customers that accounted for 10% or more of revenues
for the period totaled $122.7 million and $238.3 million, respectively. Sales to Nortel accounted for approximately 57% and 48% of total revenues during such periods, respectively. During the nine months ended September 28, 2003, one customer in
addition to Nortel accounted for approximately 17% of total revenues during such period. During the nine months ended September 29, 2002, two customers in addition to Nortel accounted for approximately 15% and 14% of total revenues during such
period.



As of September 28, 2003,
approximately 83% of total accounts receivable related to three customers that each accounted for 10% or more of Powerwaves total revenue during the third quarter of 2003. The loss of, or reduction in, sales to any of these customers could
have a material adverse effect on the Companys business, financial condition and results of operations.





17



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Note 16.    Supplier Concentrations



Certain of Powerwaves products utilize components that
are available in the short-term only from a single or a limited number of sources. In addition, in order to take advantage of volume pricing discounts, the Company purchases certain customized components for its RF power amplifiers from
single-source suppliers as well as finished RF amplifiers from single-source contract manufacturers. The inability to obtain single-sourced components or finished RF amplifiers in the amounts needed on a timely basis or at commercially reasonable
prices could result in delays in product introductions, interruption in product shipments or increases in product costs, which could have a material adverse effect on the Companys business, financial condition and results of operations until
alternative sources could be developed at a reasonable cost.



Note
17.    Segments



Powerwave operates in a single business segment as a designer and manufacturer of RF power amplifiers for wireless telecommunications equipment. Net sales are derived primarily from the sale of RF power amplifiers for use in wireless
communications networks. The Company reviews its revenues based upon the RF frequency in which the product is utilized (i.e., 800-1000 MHz (commonly referred to as cellular), 1800-2000 MHz (commonly referred to as PCS) and
over 2000 MHz, which includes 3G frequency bands). Cost of sales, operating expenses and specific assets are not tracked or allocated to these RF frequency ranges. The following schedule presents an analysis of Powerwaves net sales based upon
RF frequency range:



|                    |  | Three Months Ended |        | Nine Months Ended
|------------------- |  | ------------------ | ------ | -----------------
|RF Frequency Ranges |  | September 28,2003  |        | September 29,2002
|800-1000 MHz        |  | $                  | 24,841 |                  
|1800-2000 MHz       |  |                    | 28,039 |                  
|2000+ MHz           |  |                    | 10,278 |                  
|                    |  |                    |        |                  
|Total sales         |  | $                  | 63,158 |                  
|                    |  |                    |        |                  



The
following schedule presents an analysis of Powerwaves net sales based upon the geographic area to which a product was shipped:



|                               |  | Three Months Ended |        | Nine Months Ended
|------------------------------ |  | ------------------ | ------ | -----------------
|Geographic Area                |  | September 28,2003  |        | September 29,2002
|North America                  |  | $                  | 29,495 |                  
|Asia                           |  |                    | 10,881 |                  
|Europe and other international |  |                    | 22,782 |                  
|                               |  |                    |        |                  
|Total sales                    |  | $                  | 63,158 |                  
|                               |  |                    |        |                  



North
American sales include sales to the United States, Canada and Mexico. Asian sales include sales to China, South Korea and other locations in Asia. Europe and Other International sales include sales to Europe and all other foreign countries. Sales to
Canada were $15.0 million and $38.9 million during the quarters ended September 28, 2003 and September 29, 2002, respectively. Sales to Canada were $44.7 million and $99.5 million during the nine months ended September 28, 2003 and September 29,
2002, respectively. Sales to Finland were $7.2 million and $13.4 million during the quarters ended September 28, 2003 and September 29, 2002, respectively. Sales to Finland were $27.5 million and $43.1 million during the nine months ended
September 28, 2003 and September 29, 2002, respectively.



The majority of Powerwaves assets are located in the United States, in the State of California. Total accounts receivable as of September 28, 2003 include 34% from customers based in Canada, 23% from customers
based in France, 17% from customers based in the United States and 11% from customers based in Finland.



Note 18.    Related Party Transactions



During fiscal 2000, 2001 and until August 2002, the President and CEO of the Company, Bruce C. Edwards, was a member of the Board of Directors of Metawave Communications Corporation
(Metawave), a supplier of smart antennas to the wireless communications market and a customer of the Company. Mr. Edwards resigned from his Board position with Metawave effective August 20, 2002. Powerwave had no sales to
Metawave during



18



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the three and nine months ended September 28, 2003 and had no outstanding accounts receivable as of
September 28, 2003 or December 29, 2002. During the three and nine months ended September 29, 2002, the Company had $0.6 million and $2.9 million in sales to Metawave, respectively.







19



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|ITEM 2. |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- |  | -------------------------------------------------------------------------------------



The
following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto. This discussion contains forward-looking statements, the realization of which may be impacted by certain important factors
including, but not limited to, those discussed in Additional Factors That May Affect Our Future Results.



Critical Accounting Policies



We prepare the condensed consolidated financial statements of Powerwave in conformity with accounting principles generally accepted in the
United States of America. As such, we are required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information currently available. These estimates and assumptions affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. Any future changes to these estimates and assumptions could cause a material change to our reported
amounts of revenue, expenses, assets and liabilities. The critical accounting policies which we believe are the most significant for purposes of fully understanding and evaluating our reported financial results include the following:



Revenue Recognition



Powerwave recognizes revenue from product sales at the time
of shipment and passage of title. We also offer certain of our customers the right to return products that do not function properly within a limited time after delivery. We continuously monitor and track such product returns and record a provision
for the estimated amount of such future returns based on historical experience and any notification we receive of pending returns. While such returns have historically been within our expectations and the provisions established, we cannot guarantee
that we will continue to experience the same return rates that we have in the past. Any significant increase in product failure rates and the resulting credit returns could have a material adverse effect on our operating results for the period or
periods in which such returns materialize.



Accounts
Receivable



We perform ongoing credit
evaluations of our customers and adjust credit limits based upon payment history, the customers current credit worthiness and various other factors, as determined by our review of their current credit information. We continuously monitor
collections and payments from our customers and maintain a provision for estimated credit losses based upon our historical experience and any specific customer collection issues that we have identified. While such credit losses have historically
been within our expectations and the provisions established, we cannot guarantee that we will continue to experience the same credit loss rates that we have in the past. Since our accounts receivable are highly concentrated in a small number of
customers, a significant change in the liquidity or financial position of any one of these customers could have a material adverse effect on the collectibility of our accounts receivables, our liquidity and our future operating results. See
Additional Factors That May Affect Future ResultsWe rely upon a few customers for a majority of our revenues



Inventories



We value our inventory at the lower of the actual cost to purchase and/or manufacture the inventory or the current estimated market value
of the inventory. We regularly review inventory quantities on hand and record a provision for excess and obsolete inventory based primarily on our estimated forecast of product demand and production requirements for the next twelve months. Our
industry is characterized by rapid technological change, frequent new product development, and rapid product obsolescence that could result in an increase in the amount of obsolete inventory quantities on hand. As demonstrated during 2001, 2002 and
2003, demand for our products can fluctuate significantly. A significant increase in the demand for our products could result in a short-term increase in the cost of inventory purchases while a significant decrease in demand could result in an
increase in the amount of excess inventory quantities on hand. In addition, our estimates of future product demand may prove to be inaccurate, in which case we may have understated or overstated the provision required for excess and obsolete
inventory. In the future, if our inventory is determined to be overvalued, we would be required to recognize additional expense in our cost of goods sold at the time of such determination. Likewise, if our inventory is determined to be undervalued,
we may have over-reported our costs of goods sold in previous periods and would be required to recognize additional operating income at the time such inventory is sold. Therefore, although we make



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every reasonable effort to ensure the accuracy of our forecasts of future product demand, any significant
unanticipated changes in demand or technological developments could have a material effect on the value of our inventory and our reported operating results. See Additional Factors That May Affect Future ResultsWe have experienced, and
will continue to experience, significant fluctuations in sales and operating results from quarter to quarter; and The wireless communications infrastructure equipment industry is extremely competitive and is characterized by rapid
technological change



Deferred Taxes



We recognize deferred tax assets and
liabilities based on the differences between the financial statement carrying values and the tax bases of assets and liabilities. Powerwave regularly reviews its deferred tax assets for recoverability and establishes a valuation allowance based on
historical taxable income, projected future taxable income, and the expected timing of the reversals of existing temporary differences. If we operate at a loss for an extended period of time or are unable to generate sufficient future taxable
income, or if there is a material change in the actual effective tax rates or time period within which the underlying temporary differences become taxable or deductible, we could be required to increase the valuation allowance against all or a
significant portion of our deferred tax assets which could substantially increase our effective tax rate for such period. Alternatively, if our future taxable income is significantly higher than expected and/or we are able to utilize our tax
credits, we may be required to reverse all or a significant part of our valuation allowance against such deferred tax assets which could substantially reduce our effective tax rate for such period. Therefore, any significant changes in statutory tax
rates or the amount of our valuation allowance could have a material effect on the value of our deferred tax assets and liabilities, and our reported financial results.



Goodwill and Long Lived Assets



We review the recoverability of the carrying value of goodwill on an annual basis or more frequently when an
event occurs or circumstances change to indicate that an impairment of goodwill has possibly occurred. Since we operate in a single business segment as a single reporting unit, the determination of whether any potential impairment of goodwill exists
is based upon a comparison of the fair value of the entire Company to the accounting value of our net assets. As a result of the significant economic downturn effecting demand in the wireless infrastructure industry, we determined that it was
necessary to test the carrying value of our previously recorded goodwill for impairment during the first quarter of fiscal 2003. Based on a comparison of the accounting value of our underlying assets and liabilities to the average and closing stock
prices for our Common Stock, valuations based on multiples of sales, EBITDA and EBIT, as well as other valuation metrics, we concluded that the entire amount of our recorded goodwill had been impaired and, therefore, recorded a $4.9 million non-cash
charge to operating expenses during the quarter ended March 30, 2003. See Restructuring and Impairment Charges.



We also review the recoverability of the carrying value of identified intangibles and other long lived assets on an annual basis or
whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of these assets is determined based upon the forecasted undiscounted future net cash flows from the operations to which
the assets relate, utilizing our best estimates, appropriate assumptions and projections at the time. These projected future cash flows may vary significantly over time as a result of increased competition, changes in technology, fluctuations in
demand, consolidation of our customers and reductions in average selling prices. If the carrying value is determined not to be recoverable from future operating cash flows, the asset would be deemed impaired and an impairment loss would be
recognized to the extent the carrying value exceeded the estimated fair market value of the asset. As a result of the restructuring of our manufacturing operations to outsource the majority of our production to contract manufacturers, new product
introductions that accelerated the timing of technology transitions, and the continued economic downturn which has significantly reduced demand in the wireless infrastructure industry, we determined that it was necessary to test the carrying value
of certain long lived assets for impairment during the second quarter of fiscal 2003. Based on the forecasted undiscounted future net cash flows relating to these long lived assets, we concluded that the carrying value of certain assets, including
excess equipment and specific product/technology and customer related intangibles, had been impaired. Therefore, we recorded approximately $6.3 million of non-cash impairment charges within cost of sales and operating expenses during the quarter
ended June 29, 2003, based upon the character of the underlying assets. As a result of these impairment charges, the recorded value of the excess equipment was reduced to its estimated net realizable value at disposition and reclassified on the face
of our condensed consolidated balance sheet as assets held for sale within other non-current assets pending actual disposal. See Restructuring and Impairment Charges. Also see Additional Factors That May Affect Future
ResultsThe wireless communications infrastructure equipment industry is extremely competitive and is characterized by rapid technological change; Our success is tied to the growth of the wireless services communications
market; We have experienced, and will continue to



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experience, significant fluctuations in sales and operating results from quarter to quarter;
We rely upon a few customers for a majority of our revenues; and Our average sales prices have declined



Warranties



We offer warranties of various lengths to our customers depending upon the specific product and terms of the customer purchase agreement.
Our standard warranties require us to repair or replace defective product returned to us during such warranty period at no cost to the customer. We record an estimate for standard warranty-related costs based on our actual historical return rates
and repair costs at the time of the sale and update such estimate throughout the warranty period. While our standard warranty costs have historically been within our expectations and the provisions established, we cannot guarantee that we will
continue to experience the same warranty return rates or repair costs that we have in the past. We also have contractual commitments to various customers that require us to incur costs to repair an epidemic defect with respect to our products
outside of our standard warranty period if such defect were to occur. Any costs related to epidemic defects are generally recorded at the time the epidemic defect becomes known to us and the costs of repair can be reasonably estimated. While we have
not historically experienced significant costs related to epidemic defects, we cannot guarantee that we will not experience significant costs to repair epidemic defects in the future. A significant increase in product return rates, a significant
increase in the costs to repair our products, or an unexpected epidemic defect in our products, could have a material adverse effect on our operating results for the period or period in which such returns or additional costs materialize.



Stock-Based Compensation



Powerwave accounts for employee stock-based compensation
under the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), as opposed to the fair value method prescribed by Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (SFAS 123). Pursuant to the provisions of APB 25, we generally do not record an expense for the value of stock-based awards granted to employees. If
proposals currently under consideration by various accounting standards organizations and governmental authorities are adopted, we may be required to treat the value of stock-based awards granted to employees as compensation expense in the future,
which could have a material adverse effect on our reported operating results and could negatively affect the price of our Common Stock. If these proposals are adopted, we could decide to reduce the number of stock-based awards granted to employees
in the future, which could adversely impact our ability to attract qualified candidates or retain existing employees without increasing their cash compensation and, therefore, have a material adverse effect on our business, results of operations and
financial condition. See Additional Factors That May Affect Future ResultsIf we are unable to hire and retain highly qualified technical and managerial personnel



New Accounting Pronouncements



In June 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 146,
Accounting for Costs Associated with Exit or Disposal Activities (SFAS 146), which addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes Emerging Issues Task Force
(EITF) Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity(including Certain Costs Incurred in a Restructuring). SFAS 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF Issue 94-3, a liability for an exit cost as defined in EITF Issue 94-3 was recognized at the date of an entitys commitment to an exit plan.
SFAS 146 also establishes that the liability should initially be measured and recorded at fair value. We adopted the provisions of SFAS 146 effective January 1, 2003 and such adoption did not have a material impact on our consolidated financial
statements. All restructuring charges recognized during the nine months ended September 28, 2003 have been recorded in accordance with the requirements of SFAS 146.



In November 2002, the FASB issued Interpretation No. 45, Guarantors Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees and Indebtedness of Others(FIN 45). FIN 45 elaborates on the disclosures to be made by the guarantor in its interim and annual financial statements about its obligations
under certain guarantees that it has issued. It also requires that a guarantor recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. We adopted the disclosure provisions of
FIN 45 during the fourth quarter of fiscal 2002 and the recognition provisions of FIN 45 effective January 1, 2003. Such adoption did not have a material adverse effect on our consolidated results of operations or financial position.



In December 2002, the FASB issued Statement of Financial
Accounting Standards No. 148, Accounting for Stock-Based CompensationTransition and Disclosure(SFAS 148). SFAS 148 amends SFAS 123 to provide



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alternative methods for voluntary transition to the fair value method of accounting for stock-based
employee compensation prescribed by SFAS 123. SFAS 148 also requires disclosure of the effects of an entitys accounting policy with respect to stock-based employee compensation on reported net income (loss) and earnings (loss) per share in
annual and interim financials statements. We adopted the disclosure provisions of SFAS 148 effective December 30, 2002 and have included the additional required disclosures in Note 2. Summary of Significant Accounting PoliciesStock-Based
Compensation within the Notes to Condensed Consolidated Financial Statements under Item 1, Financial Statements. Such adoption did not have a material adverse effect on our consolidated results of operations or
financial position.



In January 2003, the FASB
issued Interpretation No. 46, Consolidation of Variable Interest Entities(FIN 46). In general, a variable interest entity is a corporation, partnership, trust or any other legal structure used for business purposes that either
(a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46 requires certain variable interest entities to be consolidated by
the primary beneficiary of the entity if the investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial
support from other parties. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period
beginning after June 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. We adopted the provisions of FIN 46 effective
February 1, 2003 and such adoption did not have a material impact on our consolidated financial statements since we currently have no variable interest entities.



In April 2003, FASB issued Statement of Financial Accounting Standards No. 149, Amendment of Statement
133 on Derivative Instruments and Hedging Activities(SFAS 149). SFAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities
under SFAS 133. SFAS 149 is effective for contracts and hedging relationships entered into or modified after June 30, 2003. We adopted the provisions of SFAS 149 effective June 30, 2003 and such adoption did not have a material impact on our
consolidated financial statements since we have not entered into any derivative or hedging transactions.



In May 2003, FASB issued Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity (SFAS 150). SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both debt and equity and requires an issuer to
classify the following instruments as liabilities in its balance sheet:



| |  | a financial instrument issued in the form of shares that is mandatorily redeemable and embodies an unconditional obligation that requires the issuer to redeem it
by transferring its assets at a specified or determinable date or upon an event that is certain to occur;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | a financial instrument, other than an outstanding share, that embodies an obligation to repurchase the issuers equity shares, or is indexed to such an
obligation, and requires the issuer to settle the obligation by transferring assets; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | a financial instrument that embodies an unconditional obligation that the issuer must settle by issuing a variable number of its equity shares if the monetary
value of the obligation is based solely or predominantly on (1) a fixed monetary amount, (2) variations in something other than the fair value of the issuers equity shares, or (3) variations inversely related to changes in the fair value of
the issuers equity shares.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003 and is effective for all other financial instruments as of the first interim period beginning after June 15, 2003. We adopted the provisions of SFAS
150 effective June 30, 2003 and such adoption did not have a material impact on our consolidated financial statements.



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Results of Operations



The following table summarizes Powerwaves results of operations as a percentage of net sales for the three and nine months ended
September 28, 2003 and September 29, 2002:



|                                          |  | Three Months Ended |    |  | Nine Months Ended |  
|----------------------------------------- |  | ------------------ | -- |  | ----------------- | -
|                                          |  | September 28,2003  |    |  | September 29,2002 |  
|Net sales                                 |  | 100.0              | %  |  | 100.0             | %
|Cost of sales                             |  | 89.9               |    |  | 85.1              |  
|                                          |  |                    |    |  |                   |  
|Gross profit                              |  | 10.1               |    |  | 14.9              |  
|Operating expenses:                       |  |                    |    |  |                   |  
|Sales and marketing                       |  | 5.0                |    |  | 2.2               |  
|Research and development                  |  | 15.6               |    |  | 8.3               |  
|General and administrative                |  | 6.1                |    |  | 3.7               |  
|Restructuring and impairment charges      |  | 0.6                |    |  |                  |  
|                                          |  |                    |    |  |                   |  
|Total operating expenses                  |  | 27.3               |    |  | 14.2              |  
|                                          |  |                    |    |  |                   |  
|Operating income (loss)                   |  | (17.2              | )  |  | 0.7               |  
|Other income, net                         |  | 1.0                |    |  | 0.9               |  
|                                          |  |                    |    |  |                   |  
|Income (loss) before income taxes         |  | (16.2              | )  |  | 1.6               |  
|Provision for (benefit from) income taxes |  | (7.2               | )  |  | 0.5               |  
|                                          |  |                    |    |  |                   |  
|Net income (loss)                         |  | (9.0               | )% |  | 1.1               | %
|                                          |  |                    |    |  |                   |  



Restructuring and Impairment
Charges



As a result of the significant
economic downturn effecting demand in the wireless infrastructure industry, we determined that it was necessary to test our previously recorded goodwill for impairment during the first quarter of fiscal 2003. Since we operate in a single business
segment as a single reporting unit, the determination of whether any potential impairment of goodwill exists is based on a comparison of the fair value of the entire Company to the accounting value of our net assets. In estimating the fair value of
the entire Company, we reviewed the average and closing stock prices for our Common Stock, valuations based on multiples of sales, EBITDA and EBIT, as well as other factors. Based on a comparison of these valuations compared to the accounting value
of our underlying assets and liabilities, we concluded that the entire amount of our recorded goodwill had been impaired and, therefore, recorded a non-cash charge of $4.9 million within operating expenses during the first quarter of fiscal 2003. We
did not record any similar goodwill impairment charge during the nine months ended September 29, 2002.



During the second and third quarters of 2003, we accelerated the restructuring of our manufacturing operations to outsource the majority
of our production to contract manufacturers located in Asia in an effort to further reduce our operating cost structure and enable us to be more competitive. In addition, we also accelerated the timing of technology transitions and new product
introductions due to our transition to outsourced manufacturing and the continued economic downturn that has significantly impacted demand in the wireless infrastructure industry. As a result, we recorded approximately $9.9 million of restructuring
and impairment charges during the second quarter ended June 29, 2003 and approximately $0.9 million of additional restructuring charges during the third quarter ended September 28, 2003. These charges included cash restructuring charges of
approximately $4.5 million related primarily to severance payments made in connection with a reduction in our work force of approximately 550 employees. The remaining non-cash impairment charges of approximately $6.3 million related to a $3.2
million write-down of excess manufacturing and test equipment that is being held for sale and a $3.1 million write-down of certain product/technology and customer related intangibles, the value of which was impaired by the technology and product
transitions that occurred during the quarter. These restructuring and impairment charges have been recorded in cost of sales or operating expenses based upon the job classification of the impacted employees or the character of the underlying assets.



Of the total $10.8 million restructuring and
impairment charges recorded during the second and third quarters, approximately $8.1 million was recorded within cost of sales and approximately $2.7 million was recorded within operating expenses. We currently expect to incur additional
restructuring charges in the range of $1.0 million to $2.0 million during the fourth quarter of fiscal year 2003 as we complete the execution of the remainder of our restructuring plan.



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Three months ended September 28, 2003 and September 29, 2002



Net Sales



Our sales are derived primarily from the sale of RF power
amplifiers for use in wireless communications networks. Sales decreased by 31% to $63.2 million, for the quarter ended September 28, 2003, from $91.3 million, for the quarter ended September 29, 2002. This reduction in demand was due to the
significant economic downturn that has impacted the wireless communications industry and resulted in curtailed wireless infrastructure spending. For the quarter ended September 28, 2003, total sales of products for networks in the 800-1000 MHz range
accounted for approximately 39% of sales, or $24.9 million, compared to approximately 71% of sales, or $64.6 million, for the quarter ended September 29, 2002. Sales of products for networks in the 1800-2000 MHz range accounted for approximately 45%
of sales, or $28.0 million, for the third quarter of fiscal 2003, compared to approximately 14% of sales, or $13.0 million, for the third quarter of fiscal 2002. For the quarter ended September 28, 2003, sales of products for use in networks over
2000 MHz, which largely consist of 3G products, accounted for approximately 16% of sales, or $10.3 million, compared to 15% of sales, or $13.7 million for the quarter ended September 29, 2002.



We track the geographic location of our sales based upon the
location of our customers to which our products are shipped. Since many of our customers purchase products from us at central locations and then reship the product with other base station equipment to locations throughout the world, we are unable to
identify the final installation location of our products. Sales to customers in North America accounted for approximately 47% of sales, or $29.5 million, for the quarter ended September 28, 2003, compared to approximately 58% of sales, or $52.9
million, for the quarter ended September 29, 2002. Total international sales (excluding North American sales) accounted for approximately 53% of sales, or $33.7 million, for the third quarter of fiscal 2003, compared to approximately 42% of sales,
or $38.4 million, for the third quarter of fiscal 2002. Total Asian sales accounted for approximately 17% of sales, or $10.9 million, for the quarter ended September 28, 2003, compared to 16% of sales, or $14.3 million, for the quarter ended
September 29, 2002. Total European and other international sales accounted for approximately 36% of sales, or $22.8 million, for the third quarter of fiscal 2003, compared to 26%, or $24.1 million, for the third quarter of fiscal 2002. See
Additional Factors That May Affect Future ResultsWe rely upon a few customers for a majority of our revenues; We have experienced, and will continue to experience, significant fluctuations in sales and operating results from
quarter to quarter; and Our future success is dependent upon our ability to compete globally



For the quarter ended September 28, 2003, total sales to Nortel accounted for approximately 62% of sales and sales to Samsung and Nokia
each accounted for 10% or more of sales for such quarter. For the quarter ended September 29, 2002, total sales to Nortel accounted for approximately 67% of sales and sales to Nokia accounted for 10% or more of sales for such quarter.



We cannot guarantee that we will continue to be successful in
attracting new customers or retaining or increasing business with our existing customers. In addition, we believe that a significant portion of our business with original equipment manufacturers (OEMs), such as Ericsson, Lucent,
Motorola, Nokia and Nortel, is dependent upon the deployment schedules of wireless network operators who are purchasing wireless infrastructure equipment from such OEMs and on such OEMs strategy concerning the outsourcing of RF power
amplifiers. Reduced demand for our products negatively impacted our revenues and operating results during the second half of fiscal 2002 and continues to do so in fiscal 2003. If reductions in overall market demand continue to result in a
significant reduction in the future demand for our products by our customers, our business, financial condition and results of operations will be negatively impacted. See Additional Factors That May Affect Future ResultsWe have
experienced, and will continue to experience, significant fluctuations in sales and operating results from quarter to quarter; and Our future success is dependent upon our ability to compete globally



A number of factors have caused delays and may cause future
delays in new wireless infrastructure and upgrade deployment schedules for both North American and international deployments, including deployments in the United States, Europe, Asia, South America and other areas. In addition, a number of factors
may cause OEMs to alter their outsourcing strategy concerning RF power amplifiers, which could cause such OEMs to reduce or eliminate their demand for external supplies of RF power amplifiers or shift their demand to alternative suppliers or
internal suppliers. Such factors include lower perceived internal manufacturing costs and competitive reasons to remain vertically integrated. Due to the possible uncertainties associated with wireless infrastructure deployments and OEM demand, we
have experienced and expect to continue to experience significant fluctuations in demand from our OEM and network operator customers. Such fluctuations have caused and may continue to cause significant reductions in our revenues and/or operating
income, which has harmed and may continue to harm our business, financial condition and results of operations. See Additional Factors That May Affect Future ResultsWe rely



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upon a few customers for a majority of our revenues; We have experienced, and will continue
to experience, significant fluctuations in sales and operating results from quarter to quarter; and Our future success is dependent upon our ability to compete globally



Cost of Sales and Gross Profit



Our cost of goods sold includes both variable and fixed cost
components and consist primarily of materials, assembly and test labor, overhead which includes equipment and facility depreciation, transportation costs and warranty costs. One of the goals of our on-going restructuring efforts has been to reduce
the fixed portion of our cost structure while providing us with increased operating flexibility. Major components of our remaining fixed cost structure include test equipment and facility depreciation, manufacturing supervision expenses, purchasing
and procurement expenses and quality assurance costs. Given the fixed nature of such costs, our actual overhead costs per unit increase as production volumes decline since we have fewer units against which to absorb these overhead costs. Conversely,
our actual overhead costs per unit decrease as production volumes increase since we have more units against which to absorb our overhead costs. As a result, our per unit cost and associated cost of sales generally increase as revenue and production
volumes decline, resulting in lower gross profit per unit/revenue dollar, and our per unit cost and associated cost of sales generally decrease as revenue and production volumes increase, resulting in higher gross profit per unit/revenue dollar.



Our gross profit margins for the third quarter
of fiscal 2003 and fiscal 2002 were 10.1% and 14.9%, respectively. The reduction in our gross profit margins during the third quarter of fiscal 2003 as compared to the third quarter of fiscal 2002 was due to several factors, including approximately
$0.5 million of restructuring charges related to severance costs included in cost of sales for the third quarter of 2003. Additionally, the third quarter of 2003 was impacted by the continued reduction in demand for wireless infrastructure which
resulted in lower revenue and lower absorption of our manufacturing overhead expenses and increased labor costs when viewed as a percentage of revenues. We expect that our gross margins will continue to be negatively impacted during the fourth
quarter of fiscal 2003 by additional restructuring charges related to further work force reductions and warehouse closing costs as we execute the remainder of our restructuring plan. See Additional Factors That May Affect Future
ResultsWe rely upon a few customers for a majority of our revenues; We have experienced, and will continue to experience, significant results in sales and operating results from quarter to quarter; and Our reliance on
contract manufacturers to produce our products exposes us to increased risks Also see Restructuring and Impairment Charges.



The wireless communications infrastructure equipment industry is extremely competitive and is characterized by rapid technological change,
new product development and product obsolescence, evolving industry standards and significant price erosion over the life of a product. Certain of our competitors have aggressively lowered prices in an attempt to gain market share. Due to these
competitive pressures, we expect that the average sales prices of our products will continue to decrease and negatively impact our gross margins. We have introduced new products at lower sales prices and these lower sales prices have impacted the
average sales prices of our products. We have also reduced prices on our existing products in response to our competitors. Future pricing actions by our competitors and us may adversely impact our gross profit margins and profitability, which could
result in decreased liquidity and adversely effect our business, financial condition and results of operations. See Additional Factors That May Affect Future ResultsThe wireless communications infrastructure equipment industry is
extremely competitive



We continue
to strive for manufacturing and engineering cost reductions to offset pricing pressures on our products, as evidenced by our recent moves to outsource a higher percentage of our production to contract manufacturers in order to reduce our cost
structure. However, we cannot guarantee that these cost reduction, outsourcing or product redesign efforts will keep pace with price declines and cost increases. If we are unable to further reduce our costs through our manufacturing, outsourcing
and/or engineering efforts, our gross margins and profitability will be adversely affected. See Additional Factors That May Affect Future ResultsOur average sales prices have declined; and Our reliance on contract
manufacturers to produce our products exposes us to increased risks



Operating Expenses



Sales and marketing expenses consist primarily of sales salaries and commissions, travel expenses, charges for customer demonstration units and trade show expenses. Sales and marketing expenses increased by 51% to
$3.1 million for the quarter ended September 28, 2003, from $2.1 million for the quarter ended September 29, 2002. As a percentage of sales, sales and marketing expenses were 5.0% and 2.2% for the third fiscal quarters ended 2003 and 2002,
respectively. The increase in the amount of our sales and marketing expenses was primarily attributable to an increase in demonstration units being provided to customers as well as increased personnel costs during the third quarter of fiscal 2003.



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Research and development expenses consist primarily of ongoing RF power amplifier design
and development expenses as well as design expenses associated with reducing the cost and improving the manufacturability of existing RF power amplifiers. Current programs include cellular, PCS and next generation 2.5G and 3G products. Research and
development expenses can fluctuate dramatically from period to period depending on numerous factors including new product introduction schedules, prototype developments, hiring patterns and the depreciation of capital equipment. Research and
development expenses increased by 30% to $9.8 million for the quarter ended September 28, 2003, from $7.6 million for the quarter ended September 29, 2002. As a percentage of sales, research and development expenses were 15.6% and 8.3% for the third
fiscal quarters ended 2003 and 2002, respectively. The increase in research and development expenses was primarily attributable to material and personnel costs associated with prototype and pre-production product development builds and other product
development activities during the third quarter of fiscal 2003.



General and administrative expenses consist primarily of salaries and other expenses for management, finance, information systems, facilities maintenance and human resources. General and administrative expenses
increased by 16% to $3.9 million for the quarter ended September 28, 2003, from $3.3 million for the quarter ended September 29, 2002. As a percentage of sales, general and administrative expenses were 6.1% and 3.7% for the third fiscal quarters
ended 2003 and 2002, respectively. The increase in the amount of our general and administrative expenses was primarily attributable to higher professional fees during the third quarter of fiscal 2003 and the reallocation of certain facility costs as
a result of the outsourcing of the majority of our manufacturing activities.



Restructuring charges amounted to $0.4 million for the third fiscal quarter of 2003 compared to no such charges during the third fiscal quarter of 2002. These charges related primarily to severance payments in
connection with a reduction to our work force. See Restructuring and Impairment Charges.



Other Income



Other income consists primarily of interest income, net of any interest expense. Other income decreased slightly to $0.6 million for the
quarter ended September 28, 2003, from $0.8 million during the quarter ended September 29, 2002. The decrease in other income was primarily due to lower short-term interest rates on our cash investments and interest expense related to the issuance
of our 1.25% $130 million convertible subordinated notes during the third quarter of 2003, which was partially offset by the additional interest income earned on our increased cash balances.



Provision (Benefit) for Income Taxes



We recorded a tax benefit at a rate of 44.5% during the
quarter ended September 28, 2003 as compared to a tax provision of 30.0% for the quarter ended September 29, 2002. Our effective tax rate differs from the U.S. federal statutory tax rate of 35% primarily due to the impact of state taxes on domestic
operations and foreign taxes on non-U.S. operations. The increase in our tax rate during the quarter was primarily due to a true-up in our year-to-date tax rate to 38.5% resulting from the impact of higher net operating losses.



Net Income (Loss)



The net loss for the quarter ended September 28, 2003 was
$5.7 compared to net income of $1.0 million for the quarter ended September 29, 2002. The net loss for the third quarter of 2003 was primarily due to the decline in revenues combined with lower gross profit margins resulting in an operating loss as
compared to the prior year period.



Nine months ended September 28, 2003 and
September 29, 2002



Net Sales



Sales decreased by 46% to $166.8 million, for the nine
months ended September 28, 2003, from $308.8 million, for the nine months ended September 29, 2002. This reduction in demand was due to the significant economic downturn that has impacted the wireless communications industry and resulted in
curtailed wireless infrastructure spending. We have experienced lower demand across all of our products in both the OEM and direct network operator markets. For the nine months ended September 28, 2003, total sales of products for networks in the
800-1000 MHz range accounted for approximately 50% of sales, or $83.9 million, compared to approximately 63% of sales, or $195.4 million, for the nine months ended September 29, 2002. Sales of products for networks in the 1800-2000 MHz range
accounted for approximately 31% of sales, or $51.7 million, for the first nine months of fiscal 2003, compared to approximately 23% of sales, or $69.9 million, for the first nine months of fiscal 2002. For the nine months ended September 28, 2003,
sales of products for use in networks over 2000 MHz, which largely consist



27



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of 3G products, accounted for approximately 19% of sales, or $31.2 million, compared to 14% of sales, or
$43.5 million for the nine months ended September 29, 2002.



Sales to customers in North America accounted for approximately 51% of sales, or $84.4 million, for the nine months ended September 28, 2003, compared to approximately 68% of sales, or $211.0 million, for the nine
months ended September 29, 2002. Total international sales (excluding North American sales) accounted for approximately 49% of sales, or $82.4 million, for the first nine months of fiscal 2003, compared to approximately 32% of sales, or $97.8
million, for the first nine months of fiscal 2002. Total Asian sales accounted for approximately 15% of sales, or $26.1 million, for the nine months ended September 28, 2003, compared to 9% of sales, or $26.8 million, for the nine months ended
September 29, 2002. Total European and other international sales accounted for approximately 34% of sales, or $56.3 million, for the first nine months of fiscal 2003, compared to 23%, or $71.0 million, for the first nine months of fiscal 2002. See
Additional Factors That May Affect Future ResultsWe rely upon a few customers for a majority of our revenues; We have experienced, and will continue to experience, significant fluctuations in sales and operating results from
quarter to quarter; and Our future success is dependent upon our ability to compete globally



For the nine months ended September 28, 2003, total sales to Nortel accounted for approximately 57% of sales and sales to Nokia accounted
for 10% or more of sales for such period. For the nine months ended September 29, 2002, total sales to Nortel accounted for approximately 48% of sales and sales to Cingular Wireless and Nokia each accounted for 10% or more of sales for such period.



Cost of Sales and Gross Profit



Gross profit margins for the first nine months of fiscal
2003 and fiscal 2002 were 1.8% and 17.5%, respectively. The reduction in our gross profit margins during the first nine months of fiscal 2003 as compared to the first nine months of fiscal 2002 is due to the significant reduction in demand which
resulted in lower revenue and higher cost of sales as a percentage of revenue due to lower absorption of our manufacturing overhead expenses and increased labor costs. In addition, approximately $8.1 million of restructuring and impairment charges
were recorded as a result of the outsourcing of our manufacturing operations, new product introductions that accelerated the timing of technology transitions and the continued economic downturn that has significantly reduced demand in the wireless
infrastructure industry. See Additional Factors That May Affect Future ResultsWe rely upon a few customers for a majority of our revenues; We have experienced, and will continue to experience, significant results in sales and
operating results from quarter to quarter; and Our reliance on contract manufacturers to produce our products exposes us to increased risks Also see Restructuring and Impairment Charges.



Operating Expenses



Sales and marketing expenses decreased by 4% to $8.6 million
for the nine months ended September 28, 2003, from $9.0 million for the nine months ended September 29, 2002. As a percentage of sales, sales and marketing expenses were 5.2% and 2.9% for the first nine months ended 2003 and 2002, respectively. The
decrease in actual sales and marketing expenses was primarily attributable to lower sales commissions related to the reduction in our revenues during the first nine months of fiscal 2003.



Research and development expenses increased by 19% to $29.6 million for the nine months ended September 28,
2003, from $24.9 million for the nine months ended September 29, 2002. As a percentage of sales, research and development expenses were 17.7% and 8.1% for the first nine months ended 2003 and 2002, respectively. The increase in research and
development expenses was primarily attributable to material and personnel costs associated with prototype and pre-production product development builds and other product development activities during the first nine months of fiscal 2003.



General and administrative expenses decreased slightly to
$10.4 million for the nine months ended September 28, 2003, compared to $10.7 million for the nine months ended September 29, 2002. As a percentage of sales, general and administrative expenses were 6.2% and 3.5% for the first nine months ended 2003
and 2002, respectively.



Restructuring and
impairment charges amounted to $7.6 million for the first nine months of 2003 compared to no such charges during the first nine months of 2002. For the first nine months, these charges include $4.9 million of goodwill impairment charges, $1.8
million of impairment charges related to the write-down of excess equipment and certain customer related intangibles and $0.9 million of restructuring related to reductions in our work force. See Restructuring and Impairment Charges.





28



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Other Income



Other income decreased slightly to $2.0 million for the nine months ended September 28, 2003, from $2.2
million during the nine months ended September 29, 2002. The decrease in other income was primarily due to lower short-term interest rates on our cash investments and interest expense related to the issuance of our 1.25% $130 million convertible
subordinated notes during the third quarter of 2003, which was partially offset by the additional interest income earned on our increased cash balances.



Provision (Benefit) for Income Taxes



We recorded a tax benefit at a rate of 38.5% during the nine months ended September 28, 2003 as compared to a tax provision of 30.0% for
the nine months ended September 29, 2002. Our effective tax rate differs from the U.S. federal statutory tax rate of 35% primarily due to the impact of state taxes on domestic operations and foreign taxes on non-U.S. operations. The increase in our
tax rate was primarily due to the availability of additional net operating loss carry-forwards.



Net Income (Loss)



Our net loss increased to $31.5 million for the nine months ended September 29, 2003 compared to net income of $8.1 million during the
nine months ended September 29, 2002. The increase in our net loss is primarily due to the decline in revenues and the resulting lower gross profit, the increase in our operating expenses and the restructuring and impairment charges recorded
during the nine-month period.



Liquidity and Capital Resources



We have historically financed our
operations through a combination of cash on hand, cash provided from operations, equipment lease financings, available borrowings under bank lines of credit, private debt placements and both private and public equity offerings. Our principal sources
of liquidity consist of existing cash balances and funds expected to be generated from future operations. As of September 28, 2003, we had working capital of $283.9 million, including $253.5 million in cash and cash equivalents, as compared to
working capital of $218.5 million at December 29, 2002, which included $162.5 million in cash and cash equivalents. We currently invest our excess cash in short-term, investment-grade, money-market instruments with maturities of three months or
less. We typically hold such investments until maturity and then reinvest the proceeds in similar money market instruments. We believe that all of our cash investments would be readily available to us should the need arise.



Cash Flows



The following table summarizes Powerwaves cash flows
for the nine months ended September 28, 2003 and September 29, 2002:



|                                             |  | Nine Months Ended (in thousands) |        
|-------------------------------------------- |  | -------------------------------- | -------
|                                             |  | September 28,2003                |        
|Net cash provided by (used in):              |  |                                  |        
|Operating activities                         |  | $                                | 77     
|Investing activities, including acquisitions |  |                                  | (11,842
|Financing activities                         |  |                                  | 102,785
|                                             |  |                                  |        
|Net increase in cash and cash equivalents    |  | $                                | 91,020 
|                                             |  |                                  |        



Net
cash provided by operations in the first nine months of fiscal 2003 decreased by $35.8 million as compared to the first nine months of fiscal 2002. This decrease was due to several factors, the majority of which was related to our significantly
lower revenues and operating loss, including our cash outlays associated with our restructuring charges. During the nine months ended September 28, 2003, our net accounts receivable decreased to $46.3 million from $53.3 million at December 29, 2002,
consistent with our lower sales volume during the third quarter of fiscal 2003 as compared to fourth quarter of fiscal 2002. See Additional Factors That May Affect Future ResultsWe rely upon a few customers for a majority of our
revenues Our net inventories decreased to $21.0 million during the nine months ended September 28, 2003, from $29.9 million at December 29, 2002. During the nine months ended September 28, 2003, our accounts payable increased to $33.0
million from $26.8 million at December 29, 2002, primarily as a result of our move to outsourced manufacturing.





29



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Net cash used in investing activities reflects our acquisitions and capital spending. The
increase in net cash used in investing activities for the first nine months of fiscal 2003 compared to the first nine months of fiscal 2002 was primarily attributable to the acquisition of certain assets and liabilities of Ericsson that was
completed in the third quarter of fiscal 2003. Total capital expenditures during the first nine months of fiscal 2003 and 2002 were approximately $2.3 million and $4.2 million, respectively. The majority of the capital spending during the first nine
months of fiscal 2003 and 2002 was for computer hardware and test equipment utilized in our manufacturing and research and development areas. For the remainder of fiscal 2003, we currently anticipate our capital spending to be in the range of $1.0
million to $2.0 million, and we plan to fund these expenditures from our existing cash balances.



The increase in net cash provided by financing activities in the first nine months of fiscal 2003 as compared to the first nine months of fiscal 2002 resulted from our issuance of $130 million in
1.25% convertible subordinated notes during the third quarter of 2003, of which $25 million was used to simultaneously repurchase our Common Stock.



We currently believe that our existing cash balances and funds expected to be generated from operations will provide us with sufficient
funds to finance our current operations for at least the next twelve months. Our principal source of liquidity consists of our existing cash balances. We regularly review our cash funding requirements and attempt to meet those requirements through a
combination of cash on hand and cash provided by operations. Our ability to increase revenues and generate profits is subject to numerous risks and uncertainties and any significant further decrease in our revenues or profitability would reduce our
operating cash flows and erode our existing cash balances. During the first nine months of fiscal 2003, several major OEMs have made announcements that they were lowering their expectations for wireless infrastructure demand for 2003 due to lower
than anticipated capital spending plans by major wireless network operators. No assurances can be given that we will be able to generate positive operating cash flows in the future or maintain and/or grow our existing cash balances. See
Additional Factors That May Affect Future ResultsWe rely upon a few customers for significant amount of our revenues; The wireless communications infrastructure equipment industry is extremely competitive; Our
average sales prices have declined; Our success is tied to the growth of the wireless services communications market; and We have experienced, and will continue to experience, significant fluctuations in sales and operating
results from quarter to quarter



Financing
Activities



On July 18, 2003, we completed
a private placement for $130.0 million aggregate principal amount of 1.25% convertible subordinated notes due 2008 and raised approximately $101.0 million in net proceeds after the deduction of debt issuance costs and the repurchase of $25 million
of our Common Stock (3,144,654 shares). The notes require semi-annual interest payments on January 15 and July 15 and the $130 million principal balance is due on July 15, 2008. The notes are convertible into common shares of Powerwave at the
conversion price of $10.49 per share. This represents a conversion rate of approximately 95.3289 shares of Common Stock per $1,000 principal amount of notes. We currently expect to use the net proceeds for general corporate purposes and possible
future acquisitions. See Note 7. Financing Arrangements and Long-Term Debt in our condensed consolidated financial statements under Part I, Item 1, Financial Statements included herein.



We reinstated our $20 million revolving credit agreement with
Comerica Bank-California on September 15, 2003. This credit facility provides for an unsecured revolving line of credit up to a maximum principal amount outstanding at any one time of $20 million (the Revolving Commitment Amount). We are
required to pay a commitment fee of 0.25% per annum on the unused portion of the Revolving Commitment Amount, payable quarterly in arrears. The revolving credit facility allows for borrowings based either upon the banks prime rate (4.00% at
September 28, 2003) or the banks LIBOR rate plus an applicable LIBOR margin of 1.25% or 1.50%, based upon our debt leverage ratio. The revolving credit facility contains certain standard affirmative and negative covenants, including
limitations on future indebtedness, restricted payments, transactions with affiliates, liens, dividends, mergers, transfers of assets and leverage ratios. At September 28, 2003, we were in full compliance with all covenants contained in the
revolving credit facility. There were no amounts outstanding and the full $20 million of the Revolving Commitment Amount was available to us as of September 28, 2003. The revolving credit facility expires on May 31, 2004.



In the past, we have occasionally utilized both operating and
capital lease financing for certain equipment purchases used in our manufacturing and research and development operations and may continue to do so selectively in the future. We may also require additional funds in the future to support our working
capital requirements or for other purposes, and we may seek to raise such additional funds through the sale of public or private equity and/or debt financings, as well as from other sources. Our ability to maintain existing financing arrangements
and to secure additional financing or sources of funding is dependent upon our credit rating and the market price for our Common Stock, which are both directly impacted by our ability to grow revenues and generate



30



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profits. We can make no guarantees that we will be able to obtain additional financing or secure new
financing arrangements in the future. See Additional Factors That May Affect Future ResultsWe rely upon a few customers for a majority of our revenues; The wireless communications infrastructure equipment industry is
extremely competitive; Our average sales prices have declined; Our success is tied to the growth of the wireless services communications market; We have experienced, and will continue to experience, significant
fluctuations in sales and operating results from quarter to quarter; and We may need additional capital in the future



Contractual Obligations and Commercial Commitments



We incur various contractual obligations and commercial commitments in our normal course of business. Such obligations and commitments
consist primarily of the following:



Long-Term Debt



At September 28, 2003, we had $130
million of 1.25% convertible subordinated notes due July 2008 outstanding. The notes are convertible into our Common Stock at the option of the holder at a conversion price of $10.49 per share and accrue interest at an annual rate of 1.25%, payable
semi-annually on January 15 and July 15. See Note 7. Financing Arrangements and Long-Term Debt in our condensed consolidated financial statements under Part I, Item 1, Financial Statements included herein for additional
information.



Capital Lease Obligations



We do not currently have any outstanding capital lease
obligations. Such obligations, if any, would be included under debt and recorded on our condensed consolidated balance sheets.



Operating Lease Obligations



We have various operating leases covering facilities in Santa Ana and El Dorado Hills, California, Bristol, United Kingdom, and various
sales offices throughout the world. We also have some minor operating leases relating to equipment rentals that amount to less than $0.05 million per quarter.



Purchase Commitments with Contract Manufacturers



We generally issue purchase orders to our contract manufacturers with delivery dates from four to six weeks from the purchase order date.
In addition, we regularly provide such contract manufacturers with rolling six-month forecasts of material and finished goods requirements for planning and long-lead time parts procurement purposes only. We are committed to accept delivery of
materials pursuant to our purchase orders subject to various contract provisions which allow us to delay receipt of such order or allow us to cancel orders beyond certain agreed lead times. Such cancellations may or may not include cancellation
costs payable by us. In the past, we have been required to take delivery of materials from our suppliers that were in excess of our requirements and we have previously recognized charges and expenses related to such excess material. If we are unable
to adequately manage our contract manufacturers and adjust such commitments for changes in demand, we may incur additional inventory expenses related to excess and obsolete inventory. Such expenses could have a material adverse effect on our
business, financial condition and results of operations.



Other Purchase Commitments



We
also incur various purchase obligations with other vendors and suppliers for the purchase of inventory, as well as other goods and services, in the normal course of business. These obligations are generally evidenced by purchase orders with delivery
dates from four to six weeks from the purchase order date, and in certain cases, supply agreements that contain the terms and conditions associated with these purchase arrangements. We are committed to accept delivery of such materials pursuant to
such purchase orders subject to various contract provisions which allow us to delay receipt of such order or allow us to cancel orders beyond certain agreed lead times. Such cancellations may or may not include cancellation costs payable by us. In
the past, we have been required to take delivery of materials from our suppliers that were in excess of our requirements and we have previously recognized charges and expenses related to such excess material. If we are not able to adequately manage
our supply chain and adjust such commitments for changes in demand, we may incur additional inventory expenses related to excess and obsolete inventory. Such expenses could have a material adverse effect on our business, financial condition and
results of operations.



31



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Guarantees Under Letters of Credit



We have issued standby letters of credit from time to time as a security for certain liabilities. At
September 28, 2003, total outstanding letters of credit approximated $0.6 million and are related to contingent liabilities under our workers compensation insurance policies in the United States.



As of September 28, 2003, expected future cash payments
related to contractual obligations and commercial commitments were as follows:



|                                                         |  | Amounts Due by Period (in thousands)
|-------------------------------------------------------- |  | ------------------------------------
|                                                         |  | Less than1 Year                     
|Long-term debt (including interest)                      |  | $                                   
|Capital lease obligations                                |  |                                     
|Operating lease obligations                              |  |                                     
|Purchase commitments with contract manufacturers         |  |                                     
|Other purchase commitments                               |  |                                     
|Guarantees under letters of credit                       |  |                                     
|                                                         |  |                                     
|Total contractual obligations and commercial commitments |  | $                                   
|                                                         |  |                                     



We
believe that our existing cash balances and funds expected to be generated from future operations will be sufficient to satisfy these contractual obligations and commercial commitments and that the ultimate payments associated with these commitments
will not have a material adverse effect on our liquidity position.



Disclosure About Stock Option Plans



Our stock option program is a broad-based, long-term retention program that is intended to attract and retain talented employees and align stockholder and employee interests. The program consists of five separate plans: one under which
non-employee directors may be granted options to purchase shares of stock and four broad-based plans under which options may be granted to all employees, including officers. Options granted under these plans expire either 5 or 10 years from the
grant date and generally vest over two to four years.



All stock option grants to our executive officers and vice presidents are made after a review by, and with the approval of, either the Compensation Committee of the Board of Directors or the entire Board of Directors. All members of the
Compensation Committee are independent directors, as defined in the applicable rules for issuers traded on the Nasdaq Stock Market. Our executive officers include Bruce C. Edwards, President and Chief Executive Officer, Ronald J. Buschur,
Chief Operating Officer, and Kevin T. Michaels, Senior Vice President, Finance, Chief Financial Officer and Secretary. See the Report Of the Compensation Committee On Executive Compensation appearing in the Companys Proxy
Statement dated May 28, 2003 for further information concerning the policies and procedures of the Company and the Compensation Committee regarding the use of stock options.



During the nine months ended September 28, 2003, we granted options to purchase a total of 342,800 shares of
Common Stock to employees. After deducting 1,506,442 shares for options forfeited, the result was net option forfeitures of 1,163,642. Net option forfeitures during the nine-month period represented 1.8% of our total outstanding common shares of
63,123,977 as of September 28, 2003. The following table summarizes the net stock option grants to our employees, directors and executive officers during the three most recent fiscal periods:



32



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|                                                                                                 |  | Nine MonthsEndedSeptember 28,2003 |    |  | Fiscal YearEndedDecember 29,2002 |   |  | Fiscal YearEndedDecember 30,2001 |  
|------------------------------------------------------------------------------------------------ |  | --------------------------------- | -- |  | -------------------------------- | - |  | -------------------------------- | -
|Net grants (forfeitures) during the period as a % of total outstanding common shares             |  | (1.8                              | )% |  | 3.1                              | % |  | 1.6                              | %
|Grants to executive officers during the period as a % of total options granted during the period |  | 0.0                               | %  |  | 19.0                             | % |  | 19.6                             | %
|Grants to executive officers during the period as a % of total outstanding common shares         |  | 0.0                               | %  |  | 0.9                              | % |  | 0.7                              | %
|Cumulative options held by executive officers as a % of total options outstanding                |  | 14.8                              | %  |  | 19.5                             | % |  | 17.6                             | %



At
September 28, 2003, a total of 2,790,930 options were available for grant under all of our option plans and a total of 268,548 shares of Common Stock were held in escrow to cover all remaining exercises under the 1995 Stock Option Plan. See
Note 12. Stock Option Plans in the Notes to Consolidated Financial Statements included under Item 8, Financial Statements and Supplementary Data in our Annual Report on Form 10-K for the year ended December 29,
2002 for additional information regarding the 1995 Stock Option Plan. The following table summarizes activity under all of our stock option plans for the nine months ended September 28 2003:



|                              |  | Number ofShares |   |  | Price Per Share |  | WeightedAverageExercisePrice |       | Number ofOptionsExercisable |           | WeightedAverageExercisePrice
|----------------------------- |  | --------------- | - |  | --------------- |  | ---------------------------- | ----- | --------------------------- | --------- | ----------------------------
|Balance at December 29, 2002  |  | 9,598,722       |   |  | $0.82 - $73.56  |  | $                            | 14.40 |                             | 4,544,883 |                             
|Granted                       |  | 342,800         |   |  | $3.12 - $10.04  |  | $                            | 6.76  |                             |           |                             
|Exercised                     |  | (179,024        | ) |  | $1.33 - $  6.52 |  | $                            | 3.39  |                             |           |                             
|Canceled                      |  | (1,506,442      | ) |  | $4.58 - $73.56  |  | $                            | 22.74 |                             |           |                             
|                              |  |                 |   |  |                 |  |                              |       |                             |           |                             
|Balance at September 28, 2003 |  | 8,256,056       |   |  | $0.82 - $67.08  |  | $                            | 12.80 |                             | 4,659,414 |                             
|                              |  |                 |   |  |                 |  |                              |       |                             |           |                             



There
were no grants of options to any of our executive officers or directors during the nine months ended September 28, 2003.



The following table summarizes outstanding stock options that are in-the-money and out-of the-money as of
September 28, 2003. For purposes of this table, in-the-money stock options are those options with an exercise price less than $6.40 per share, the closing price of Powerwave Common Stock on September 26, 2003, the last trading day of the third
fiscal quarter, and out-of-the-money stock options are stock options with an exercise price greater than or equal to the $6.40 per share closing price.



|                          |  | Exercisable |  | Unexercisable          |       |       
|------------------------- |  | ----------- |  | ---------------------- | ----- | ------
|                          |  | Shares      |  | Wtd. Avg.ExercisePrice |       | Shares
|In-the-Money              |  | 1,904,796   |  | $                      | 4.11  |       
|Out-of-the-Money          |  | 2,754,618   |  | $                      | 20.18 |       
|                          |  |             |  |                        |       |       
|Total Options Outstanding |  | 4,659,414   |  | $                      | 13.61 |       
|                          |  |             |  |                        |       |       



The
following table sets forth certain information concerning the exercise of options by each of our executive officers during the nine months ended September 28, 2003, including the aggregate value of gains on the date of exercise held by such
executive officers, as well as the number of shares covered by both exercisable and unexercisable stock options as of September 28, 2003. Also reported are the values for the in-the-money options which represent the positive spread between the
exercise prices of any such existing stock options and the closing price of the Companys Common Stock on the last trading day of the fiscal quarter.



33



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|Name              |  | Shares Acquired on Exercise |             | Value Realized |               | Number of Securities Underlying Unexercised Options at September 28, 2003 |             | Value of Unexercised In-the-Money Options at September 28, 2003(1)
|----------------- |  | --------------------------- | ----------- | -------------- | ------------- | ------------------------------------------------------------------------- | ----------- | ------------------------------------------------------------------
|                  |  |                             | Exercisable |                | Unexercisable |                                                                           | Exercisable |                                                                   
|Bruce C. Edwards  |  |                            |             | $              |              |                                                                           | 108,332     |                                                                   
|Ronald J. Buschur |  |                            |             | $              |              |                                                                           | 252,083     |                                                                   
|Kevin T. Michaels |  |                            |             | $              |              |                                                                           | 238,728     |                                                                   

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|(1) | In accordance with the Securities and Exchange Commissions rules,
values are calculated by subtracting the exercise price from the fair market value of the underlying Common Stock. For purposes of this table, fair market value per share is deemed to be $6.40, the Companys closing Common Stock price reported
by Nasdaq on September 26, 2003, the last trading day of the fiscal quarter.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



All stock option plans under which our Common Stock is reserved for issuance have previously been approved by our shareholders. The following table provides summary information as of September
28, 2003, for all of our stock option plans:



|                             |  | Number of Shares ofCommon Stock tobe Issued uponExercise ofOutstandingOptions, Warrantsand Rights |  | Weighted AverageExercise Price ofOutstanding Options,Warrants and Rights |       | Number of Shares ofCommon StockRemaining Availablefor Future Issuanceunder our StockOption Plans(Excluding
SharesReflected in Column 1)
|---------------------------- |  | ------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------ | ----- | ---------------------------------------------------------------------------------------------------------------------------------------
|Approved by shareholders     |  | 8,256,056                                                                                         |  | $                                                                        | 12.80 |                                                                                                                                        
|Not Approved by shareholders |  |                                                                                                  |  |                                                                          |      |                                                                                                                                        
|                             |  |                                                                                                   |  |                                                                          |       |                                                                                                                                        
|Total                        |  | 8,256,056                                                                                         |  | $                                                                        | 12.80 |                                                                                                                                        
|                             |  |                                                                                                   |  |                                                                          |       |                                                                                                                                        



Disclosure About Foreign Currency
Risk



We have various types of operations
in several foreign locations including Finland, France, the United Kingdom, Singapore and the Peoples Republic of China (China). These operations incur expenses in foreign currencies and certain locations have the ability to
generate local currency revenue. These expenses and revenues expose us to foreign currency transactions and result in gains and losses from such transactions. In addition, a significant portion of our revenues are derived from international sources,
with our international customers accounting for approximately 49% of our net sales for the first nine months of fiscal 2003, 33% of our fiscal 2002 net sales and 41% of our fiscal 2001 net sales. We regularly pursue new customers in various domestic
and international locations where new deployments or upgrades to existing wireless communication networks are planned. Such international locations include Europe, Asia and South America, where there has been instability in several of the
regions currencies. Although we currently invoice most of our customers in U.S. Dollars, changes in the value of the U.S. Dollar versus the local currency in which our products are sold, along with economic and political conditions of such
foreign countries, could adversely affect our business, financial condition and results of operations. In addition, the weakening of an international customers local currency and banking market may negatively impact such customers
ability to meet their payment obligations to us. Although we currently believe that our international customers have the ability to meet all of their obligations to us, there can be no assurance that they will continue to be able to meet such
obligations. We regularly monitor the credit worthiness of our international customers and make credit decisions based on both prior sales experience with such customers and their current financial performance, as well as overall economic
conditions. In the future, we may be required or decide to offer certain international customers extended payment terms and/or sell products or services in the local currency of such customers. In fiscal 2003, we began to sell products to customers
in China in their local foreign currency and receive payments in such local foreign currency. If we sell products or services in a foreign currency, we may be required to convert the payments received into U.S. Dollars or utilize such foreign
currencies as payments for expenses of our business. Given the uncertainty as to when and what specific foreign currencies we may be required or decide to accept as payment from our international customers, we cannot predict the ultimate impact that
such a decision would have on our business, gross margins and results of operations.





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Several of the international markets in which we sell our products have experienced
significant weaknesses in their currencies, banking systems and equity markets in the last few years. Such weaknesses could negatively impact demand for wireless services and thereby reduce demand for our products. Such a reduction in demand for our
products could have a negative impact on our future sales and gross margins. Our foreign customers generally pay for our products with U.S. Dollars. The past strengthening of the U.S. Dollar as compared to the Brazilian Real or the South Korean Won
effectively increased the cost of our products by as much as 100% or more for our Brazilian and South Korean customers. Such a significant increase in the equivalent local currency cost of such products makes them less attractive to such customers.
Accordingly, changes in exchange rates, and in particular a strengthening of the U.S. Dollar, may negatively affect our future sales and gross margins. See Additional Factors That May Affect Future ResultsOur future success is dependent
upon our ability to compete globally



Disclosure About Terrorist
Risk



We did not experience any direct
impact from the September 11, 2001 terrorist attacks on the United States other than minor delays in certain material shipments due to disruptions in the air transportation system. These delays did not have a material impact on us. We are unable to
estimate or predict what impact future terrorist attacks will have on us, our customers, our suppliers and the market demand for our products. Any production delays or shutdowns, reduction in demand or loss of customers due to terrorist attacks
could have a material adverse effect on our business, financial condition, results of operations and future sales.



Additional Factors That May Affect Our Future Results



We rely upon a few customers for the majority of our revenues and the loss of any one of these customers, or a significant loss,
reduction or rescheduling of orders from any of these customers, would have a material adverse effect on our business, results of operations and financial condition.



We sell most of our products to a small number of customers, and we expect that this will continue. For the
fiscal quarter ended September 28, 2003, our largest customer, Nortel, accounted for approximately 62% of our net sales, or $39.0 million. For fiscal 2002, Nortel accounted for approximately 49% of our revenues. For the third quarter ended September
28, 2003, Nokia and Samsung each accounted for 10% or more of our net sales. The majority of our product sales are to original equipment manufacturers of wireless base station equipment. Our future success is dependent upon the continued purchases
of our products by such manufacturers and any fluctuations in demand from such customers could negatively impact our results of operations. If we are unable to broaden our customer base and expand relationships with major wireless original equipment
manufacturers and major operators of wireless networks, our business will continue to be impacted by unanticipated demand fluctuations due to our dependence on a small number of customers. Unanticipated demand fluctuations can have a negative impact
on our revenues and business and an adverse effect on our results of operations and financial condition. In addition, our dependence on a small number of major customers exposes us to numerous other risks, including:



| |  | a slowdown or delay in deployment of wireless networks by any one customer could significantly reduce demand for our products;
| | - | ------------------------------------------------------------------------------------------------------------------------------



| |  | we could experience direct competition from our customers should they decide to manufacture or increase their current level of radio frequency power amplifier
manufacturing;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | reductions in a single customers forecasts and demand could result in excess inventories;
| | - | ------------------------------------------------------------------------------------------



| |  | each of our customers have significant purchasing leverage over us to require changes in sales terms including pricing, payment terms and product delivery
schedules; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | our concentration of accounts receivable credit risk could have a material adverse affect on our liquidity and financial condition if one of our major customers
declared bankruptcy or delayed payment of their receivables.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We have a history of significant reductions in demand which demonstrates the risks related to our customer and industry concentration levels. During 2001, we experienced an overall reduction in revenue of $147.1
million from our 2000 revenue levels, $80.0 million of which related to a single customer, Nortel, as a result of an industry-wide reduction in demand during fiscal year 2001. During 1998, we had a significant geographic customer concentration in
South Korea, which experienced an economic and financial crisis. In addition, many of our customers, including Nortel, provide minimal lead-time prior to the release of their purchase orders and have non-binding commitments to purchase from us. It
is therefore difficult for us to predict our future sales.



35



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We have experienced significant reductions in demand for our products from both
original equipment manufacturers and network operator customers, and if this continues, our operating results will continue to be adversely impacted.



During 2002 and the first nine months of fiscal 2003, a number of major original equipment manufacturers made announcements lowering their
expectations for total wireless infrastructure demand for fiscal 2003 due to lower than anticipated capital spending plans by major wireless network operators. As a result, we have experienced decreased revenues during the first nine months of
fiscal 2003. If these forecasted reductions in overall market demand continue to result in significant reductions in future demand for our products, our revenues will be flat or down and our results of operations will continue to be negatively
impacted.



In addition, we have experienced
significant reductions in network operator demand as well as significant delays in demand for WCDMA, or 3G, based products due to the high projected capital cost of building such networks and market concerns regarding the inoperability of such
network protocols. In combination with these market issues, a majority of wireless network operators have reduced their capital spending plans in order to improve their overall cash flow. The continuation of any delays in development of 3G networks
will result in continued reduced demand for our products which will have a material adverse effect on our business.



We have experienced, and will continue to experience, significant fluctuations in sales and operating results from quarter to quarter.



Our quarterly results fluctuate due to a
number of factors, including:



| |  | our customers have no obligation to purchase their forecasted demand for our products;
| | - | --------------------------------------------------------------------------------------



| |  | variations in the timing, cancellation, or rescheduling of customer orders and shipments;
| | - | -----------------------------------------------------------------------------------------



| |  | high fixed expenses that increase operating expenses, especially during a quarter with a sales shortfall;
| | - | ---------------------------------------------------------------------------------------------------------



| |  | product failures and associated warranty and in-field service support costs; and
| | - | --------------------------------------------------------------------------------



| |  | discounts given to certain customers for large volume purchases.
| | - | ----------------------------------------------------------------



We have regularly generated a large percentage of our revenues in the last month of a quarter. Since we
attempt to ship products quickly after we receive orders, we may not always have a significant backlog of unfilled orders at the start of each quarter and we may be required to book a substantial portion of our orders during the quarter in which
they ship. Our major customers generally have no obligation to purchase forecasted amounts and may cancel orders, change delivery schedules or change the mix of products ordered with minimal notice and without penalty. As a result, we may not be
able to accurately predict our quarterly sales. Because our expense levels are partially based on our expectations of future sales, our expenses may be disproportionately large relative to our revenues, and we may be unable to adjust spending in a
timely manner to compensate for any unexpected revenue shortfall. Any shortfall in sales relative to our quarterly expectations or any delay of customer orders would adversely affect our revenues and results of operations.



Order deferrals and cancellations by our customers, declining
average sales prices, changes in the mix of products sold, delays in the introduction of new products and longer than anticipated sales cycles for our products have, in the past, adversely affected our results of operations. Despite these factors,
we, along with our contract manufacturers, maintain significant finished goods, work-in-progress and raw materials inventory to meet estimated order forecasts. If our customers purchase less than the forecasted amounts or cancel or delay existing
purchase orders, there will be higher levels of inventory that face a greater risk of obsolescence. If our customers desire to purchase products in excess of the forecasted amounts or in a different product mix, there may not be enough inventory or
manufacturing capacity to fill their orders.



Due to these and other factors, our past results are not reliable indicators of our future performance. Future revenues and operating results may not meet the expectations of public market analysis investors. In either case, the price of
our common stock could be materially adversely affected.



Our average sales prices have declined, and we anticipate that the average sales prices for our products will continue to decline and negatively impact our gross profit margins.



Wireless service providers are placing increasing price
pressure on wireless infrastructure manufacturers, which in turn, has resulted in downward pricing pressure on our products with certain competitors aggressively reducing prices in an effort to increase their market share. The average sales price
for our products have declined by between 5% and 24% from 2002 to 2003. Fierce competition among our competitors has also contributed to the downward price pressure on our products. Since wireless infrastructure manufacturers frequently negotiate
supply



36



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arrangements far in advance of delivery dates, we must often commit to price reductions for our products
before we know how, or if, we can obtain such cost reductions. In addition, average sales prices are affected by price discounts negotiated without firm orders for large volume purchases by certain customers. To offset declining average sales
prices, we must reduce manufacturing costs and ultimately develop new products with lower costs or higher average sales prices. If we cannot achieve such cost reductions or product improvements, our gross margins will continue to decline.



Our success is tied to the growth of the
wireless services communications market and our future revenue growth is dependent upon the expected increase in the size of this market.



Our revenues come primarily from the sale of radio frequency power amplifiers for wireless communications networks. Our future success
depends upon the continued growth and increased availability of wireless communications services. Wireless communications services may not grow and create demand for our products, as we have experienced during the first nine months of 2003. During
this period, wireless network operators reduced or delayed capital spending on wireless networks in order to preserve their operating cash and improve their balance sheets. Such reduced spending on wireless networks has had a negative impact on our
operating results during the first nine months of 2003. If wireless network operators continue to delay or maintain reduced levels of capital spending our operating results will continue to be negatively impacted.



Many of our wireless infrastructure manufacturer customers
have internal radio frequency power amplifier production and/or design capabilities and thereby effectively compete against us. If these manufacturers begin offering their own radio frequency power amplifiers, demand for our products would be
reduced and our business, results of operations and financial condition would be adversely affected.



Many of our customers internally design and/or manufacture their own radio frequency power amplifiers. Many of our customers also
continuously evaluate whether to manufacture their own radio frequency power amplifiers or utilize contract manufacturers to produce their own internal designs. Certain of our customers regularly produce or design radio frequency power amplifiers in
an attempt to replace products manufactured by us. We believe that this practice will continue. In the event that our customers manufacture or design their own radio frequency power amplifiers, such customers could reduce or eliminate their
purchases of our products, which would result in reduced revenues and would adversely impact our results of operations and liquidity. Wireless infrastructure equipment manufacturers with internal manufacturing capabilities, including many of our
customers, could also sell radio frequency power amplifiers externally to other manufacturers, thereby competing directly with us. If, for any reason, our customers decide to produce their radio frequency power amplifiers internally, increase the
percentage of their internal production, require us to participate in joint venture manufacturing with them or compete directly against us, our revenues would decrease which would adversely impact our results of operations.



We are in the process of outsourcing manufacturing of the
majority of our products to contract manufacturers and we are subject to various risks associated with this transition.



In the second quarter of 2003, we announced that we were accelerating our efforts to outsource the majority of our production to contract
manufacturers in Asia in order to further reduce our operating cost structure. Our ability to successfully transition and outsource the majority of production of our products to contract manufacturers depends upon numerous factors, which include our
ability to:



| |  | maintain positive employee relations with our remaining U.S. workforce;
| | - | -----------------------------------------------------------------------



| |  | maintain pricing leverage with our existing supplier base;
| | - | ----------------------------------------------------------



| |  | develop additional suppliers to support our offshore contract manufacturers;
| | - | ----------------------------------------------------------------------------



| |  | design products which our contract manufacturers can effectively manufacture and timely resolve any quality issues;
| | - | -------------------------------------------------------------------------------------------------------------------



| |  | provide our offshore contract manufacturers with product volumes that are stable and sufficient enough to achieve adequate cost savings;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------



| |  | obtain customer acceptance and qualification of the products that are manufactured by our offshore contract manufacturers within a reasonable time frame;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | develop efficient and cost effective methods to transport products produced offshore to our customers;
| | - | ------------------------------------------------------------------------------------------------------



| |  | manage, motivate and retain impacted employees during the transition; and
| | - | ---------------------------------------------------------------------------



| |  | minimize the risk of product damage or loss in transport from Asia to our customers locations.
| | - | -----------------------------------------------------------------------------------------------



37



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As a result of outsourcing the majority of our production to contract manufacturers, the
cost, quality, performance and availability of our offshore contract manufacturing operations are, and will continue to be, essential to the successful production and sale of our products. Any delays in the ramp-up of our production lines in Asia at
contract manufacturers, or any delays in the qualification by our customers of the contract manufacturer facilities and the products produced there, could cause us to miss customer agreed product delivery dates. Similarly, the inability of our
contract manufacturers to meet production schedules or produce products in accordance with the quality and performance standards established by us or our customers could also cause us to miss customer agreed product delivery dates. Any failure to
meet customer agreed delivery dates could result in lost revenues due to customer cancellations, potential financial penalties payable by us to our customers and additional costs to expedite products or production schedules.



Our reliance on contract manufacturers to produce our
products exposes us to increased risks of excess inventory or inventory carrying costs.



If our contract manufacturers are unable to timely respond to changes in customer demand, we may be unable to produce enough product to respond to sudden increases in demand resulting in lost
revenues, or alternatively, in the case of order cancellations or decreases in demand, we may be liable for excess or obsolete inventory or cancellation charges resulting from contractual purchase commitments that we have with our contract
manufacturers. We regularly provide rolling forecasts of our requirements for planning purposes pursuant to our agreements with our contract manufacturers, a portion of which is binding upon us. Additionally, we are committed to accept delivery on
the forecasted terms for a portion of the rolling forecast. Cancellations of orders or changes to the forecasts provided to any of our contract manufacturers may result in cancellation costs payable by us. In the past, we have been required to take
delivery of materials from other suppliers and subcontractors that were in excess of our requirements and we have previously recognized charges and expenses related to such excess material.



With the use of contract manufacturers, our ability to
directly control the use of all inventory is reduced since we do not have full operating control over our contract manufacturers. If we are unable to accurately forecast demand for our contract manufacturers and manage the costs associated with our
contract manufacturers, we may be required to pay inventory carrying costs or purchase excess inventory from our contract manufacturers. If we or our contract manufacturers are unable to utilize such excess inventory in a timely manner, and are
unable to sell excess components or products due to their customized nature, the result would be a negative impact on our operating results and liquidity.



Our reliance on contract manufacturers in Asia exposes us to additional product transportation risks which can impact the timely
delivery of our products.



If we are
unable to obtain cargo space or secure delivery of components or products due to labor strikes, lockouts, work slowdowns or work stoppages by longshoremen, dock workers, truck drivers, airline pilots and other transportation industry workers, our
transportation costs could increase due to the utilization of alternative transportation methods or our delivery of products could be adversely delayed. Any prolonged work slowdowns or future lockouts similar to the one experienced in fiscal 2002 on
the West Coast of the United States could cause our transportation costs or transit times to significantly increase due to an increased demand for air transportation of cargo. In addition, our products built in Asia for export to other countries
require air or ocean transport. These transportation costs would escalate if there were a shortage of air or ocean cargo space. Any significant increase in transportation costs would cause an increase in our expenses and negatively impact our
results of operations.



We depend on single
sources or limited sources for key components and products, which exposes us to risks related to product shortages or delays, all of which could increase the cost of our products thereby reducing our operating profits.



A number of the parts used in our products are available
from only one or a limited number of outside suppliers due to unique component designs as well as certain quality and performance requirements. To take advantage of volume pricing discounts, we, along with our contract manufacturers, also purchase
certain customized components from single or limited sources. We have experienced, and expect to continue to experience, shortages of single-sourced and limited-sourced components. Shortages have compelled us to adjust our product designs and
production schedules and have caused us to miss customer requested delivery dates. If single-sourced or limited-sourced components become unavailable in sufficient quantities in the desired time periods, are discontinued or are available only on
unsatisfactory terms, we would be required to purchase comparable components from other sources and retune our products to function with the replacement components, or we may be required to redesign our products to use other components,
either of which could delay production and delivery of our products. If production and delivery of our products are delayed such that we do not meet the agreed upon delivery dates of our



38



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customers, such delays could result in lost revenues due to customer cancellations, as well as potential
financial penalties payable to our customers. Any such loss of revenue or financial penalties would have a material adverse effect on our results of operations.



Our reliance on single or limited sources for components exposes us to potential product quality issues.



Our reliance on certain single-sourced and limited-sourced
components and products exposes us and our contract manufacturers to quality control risks if these suppliers experience a failure in their production process or otherwise fail to meet our quality requirements. A failure in a single-sourced or
limited-sourced component or product could force us to repair or replace a product utilizing replacement components. If we cannot obtain comparable replacements or effectively retune or redesign our products, we could lose customer orders or incur
additional costs, which would have a material adverse effect on our results of operations.



The wireless communications infrastructure equipment industry is extremely competitive and is characterized by rapid technological change, frequent new product development, rapid product
obsolescence, evolving industry standards and significant price erosion over the life of a product. If we are unable to compete effectively, our business, results of operations and financial condition would be adversely affected.



Our products compete on the basis of the following
characteristics:



| |  | performance;
| | - | ------------



| |  | functionality;
| | - | --------------



| |  | reliability;
| | - | ------------



| |  | pricing;
| | - | --------



| |  | quality;
| | - | --------



| |  | designs that can be efficiently manufactured in large volumes;
| | - | --------------------------------------------------------------



| |  | time-to-market delivery capabilities; and
| | - | -----------------------------------------



| |  | compliance with industry standards.
| | - | -----------------------------------



If we fail to address the above factors, there could be a material adverse effect on our business, results of operations and financial
condition.



Our current competitors include
Andrew Corporation, Fujitsu Limited, Hitachi Kokusai Electric Inc., Japan Radio Co., Ltd., Mitsubishi Electric Corporation and Remec, Inc., in addition to a number of privately held companies throughout the world, subsidiaries of certain
multinational corporations and the internal radio frequency power amplifier manufacturing operations and radio frequency amplifier design groups of the leading wireless infrastructure manufacturers such as Ericsson, Motorola, Nokia, Nortel and
Samsung. Some competitors have adopted aggressive pricing strategies in an attempt to gain market share, which has caused us to lower our prices in order to remain competitive. Such pricing actions have had an adverse effect on our financial
condition and results of operations. In addition, some competitors have significantly greater financial, technical, manufacturing, sales, marketing and other resources than we do and have achieved greater name recognition for their products and
technologies than we have. If we are unable to successfully increase our market penetration or our overall share of the radio frequency power amplifier market, our revenues will decline, which would negatively impact our results of operations.



Our failure to enhance our existing
products or to develop and introduce new products that meet changing customer requirements and evolving technological standards could have a negative impact on our ability to sell our products.



To succeed, we must improve current products and develop and
introduce new products that are competitive in terms of price, performance and quality. These products must adequately address the requirements of wireless infrastructure manufacturing customers and end-users.



To develop new products, we invest in the research and
development of radio frequency power amplifiers for wireless communications networks. We target our research and development efforts on major wireless network deployments worldwide, which cover a broad range of frequency and transmission protocols.
In addition, we are currently working on products for new generation networks, as well as development projects for products requested by our customers and improvements to our existing products. The deployment of a wireless network may be delayed
which could result in the failure of a particular research or development effort to generate a revenue producing product. Additionally, the new products we develop may not achieve market acceptance or may not be



39



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able to be manufactured cost effectively in sufficient volumes. Our research and development efforts are
generally funded internally and our customers do not normally pay for our research and development efforts. These costs are expensed as incurred. Therefore, if our efforts are not successful at creating or improving products that are purchased by
our customers, there will be a negative impact on our operating results due to high research and development expenses.



We may fail to develop products that are sufficiently manufacturable, which could negatively impact our ability to sell our products.



Manufacturing our products is a complex
process that requires significant time and expertise to meet customers specifications. Successful manufacturing is substantially dependent upon the ability to tune these products to meet specifications in an efficient manner. In this regard,
we depend on our staff of trained technicians and those of our contract manufacturers. If we cannot design our products to minimize the manual tuning process or if we or our contract manufacturers lose a number of trained technicians, or are unable
to attract additional trained technicians, we may be unable to manufacture our products in a cost effective manner.



We may fail to develop products that are of adequate quality and reliability, which could negatively impact our ability to sell our
products.



We have had quality problems
with our products in the past and may have similar problems in the future. We have replaced components in some products in accordance with our product warranties. We believe that our customers will demand that our products meet increasingly
stringent performance and reliability standards. If we cannot keep pace with technological developments, evolving industry standards and new communications protocols or if we fail to adequately improve product quality and meet the quality standards
of our customers, or our contract manufacturers fail to achieve the quality standards of our customers, we risk losing business, which would negatively impact our results of operations. Design problems could also damage relationships with existing
and prospective customers and could limit our ability to market our products to large wireless infrastructure manufacturers, many of which build their own, high quality radio frequency power amplifiers and have stringent quality control standards.



If we are unable to hire and retain highly
qualified technical and managerial personnel, we may not be able to sustain or grow our business.



Competition for personnel, particularly qualified engineers, is intense, and the loss of a significant number of such persons, as well as
the failure to recruit and train additional technical personnel in a timely manner, could have a material adverse effect on our business, results of operations and financial condition. The departure of any of our management and technical personnel,
the breach of their confidentiality and non-disclosure obligations to Powerwave or the failure to achieve our intellectual property objectives may also have a material adverse effect on our business.



We believe that our success depends upon the knowledge and
experience of our management and technical personnel and our ability to market our existing products and to develop new products. Our employees are employed on an at-will basis and do not have non-compete agreements. Therefore, we have had, and may
continue to have, employees leave us and go to work for competitors. The unauthorized use of our proprietary technology and processes by a competitor would diminish or eliminate our competitive or technological advantages and result in reduced
revenues.



40



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Our future success is dependent upon our ability to compete globally and manage our
multinational operations and business relationships.



There are many risks that impact our international business and multinational operations, including the following:



| |  | compliance with multiple and potentially conflicting regulations, including export requirements, tariffs, import duties and other trade barriers, as well as
health and safety requirements;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | potential labor strikes, lockouts, work slowdowns and work stoppages at U.S. and international ports;
| | - | -----------------------------------------------------------------------------------------------------



| |  | differences in intellectual property protections;
| | - | -------------------------------------------------



| |  | difficulties in staffing and managing foreign operations;
| | - | ---------------------------------------------------------



| |  | longer accounts receivable collection cycles;
| | - | ---------------------------------------------



| |  | currency fluctuations and resulting losses on currency translations;
| | - | --------------------------------------------------------------------



| |  | terrorists attacks on American companies;
| | - | -----------------------------------------



| |  | economic instability, including inflation and interest rate fluctuations, such as those previously seen in South Korea and Brazil;
| | - | ----------------------------------------------------------------------------------------------------------------------------------



| |  | competition for foreign based suppliers;
| | - | ----------------------------------------



| |  | overlapping or differing tax structures;
| | - | ----------------------------------------



| |  | cultural and language differences; and
| | - | --------------------------------------



| |  | political or civil turmoil.
| | - | ---------------------------



For the third fiscal quarter of 2003 and all of fiscal years 2002, 2001 and 2000, international revenues (excluding North American sales)
accounted for approximately 53%, 33%, 41% and 21% of our net sales, respectively. We currently expect that international revenues will continue to account for a significant percentage of our revenues in the foreseeable future. Any failure on our
part to manage these multinational business risks effectively would seriously reduce our competitiveness in the wireless infrastructure marketplace.



Future acquisitions or strategic alliances may present risks, and we may be unable to achieve the financial and strategic goals
intended at the time of any acquisition or strategic alliance.



In the past, we have acquired and made investments in other companies, products and technologies and entered into strategic alliances with other companies. We continually evaluate these types of opportunities and in
the future, we may acquire or invest in other companies, products or technologies, or we may enter into joint ventures, mergers or strategic alliances with other companies. Such transactions subject us to numerous risks, including the following:



| |  | difficulty integrating the operations, technology and personnel of the acquired company;
| | - | ----------------------------------------------------------------------------------------



| |  | inability to retain key technical and managerial personnel from the acquired company;
| | - | -------------------------------------------------------------------------------------



| |  | difficulty in maintaining controls, procedures and policies during the transition and integration process;
| | - | ----------------------------------------------------------------------------------------------------------



| |  | diversion of our managements attention from other business concerns;
| | - | ---------------------------------------------------------------------



| |  | our relationships with existing suppliers or customers could be adversely affected;
| | - | -----------------------------------------------------------------------------------



| |  | our due diligence process may fail to identify significant issues, including issues with respect to product quality, product architecture, legal and financial
contingencies, and product development; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | we may be required to sustain significant exit charges if products acquired in business combinations are unsuccessful.
| | - | ----------------------------------------------------------------------------------------------------------------------



If we are unable to effectively manage these risks as part of
any acquisition or joint venture, our business would be adversely affected.



There are significant risks related to the expansion of our manufacturing operations in Asia.



As part of our strategy, we have outsourced the majority of our manufacturing operations to contract manufacturers in China, Singapore and
Thailand to reduce our production costs. This subjects us to the risks of doing business in these countries. The Chinese legal system is relatively new and lacks transparency, which gives the Chinese central and local government authorities a higher
degree of control over our business in China than is customary in developed economies and makes the process of obtaining necessary regulatory approval in China inherently unpredictable. In addition, the protection accorded our proprietary technology
and know-how under the



41



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Chinese and Thai legal systems is not as strong as in the United States and, as a result, we may lose
valuable trade secrets and competitive advantage.



Although the Chinese government has been pursuing economic reform and a policy of welcoming foreign investments for the past two decades, it is possible that the Chinese government will change its current policies in the future, making
continued business operations in China difficult or unprofitable. Utilizing contract manufacturers and suppliers throughout the Asia region exposes our operations to the risk that our proprietary technology and ownership rights may not be protected
or enforced to the extent that they may be in the United States.



The sales cycle associated with our products is typically lengthy, often lasting from nine to eighteen months, which could cause delays in forecasted sales and cause us to incur substantial expenses before we
record any associated revenues.



Our
customers normally conduct a significant technical evaluation and qualification of our products before making purchase commitments. This qualification process involves a significant investment of time and resources from both our customers and us in
order to ensure that our product designs are fully qualified to perform as required. The qualification and evaluation process, as well as customer field trials, may take longer than initially forecasted, thereby delaying the shipment of sales
forecasted for a specific customer for a particular quarter and causing our operating results for the quarter to be less than originally forecasted. Such a sales shortfall would reduce our profitability and negatively impact our results of
operations.



Protection of our intellectual
property is limited.



We rely upon trade
secrets and patents to protect our intellectual property. We execute confidentiality and non-disclosure agreements with certain employees and our suppliers, as well as limit access to and distribution of our proprietary information. We have an
on-going program to identify and file applications for both U.S. and international patents for various aspects of our technology. We have been granted a total of 27 U.S. patents and 4 foreign patents, and we have filed applications for over 25
additional U.S. patents and over 50 additional foreign patents.



The departure of any of our management and technical personnel, the breach of their confidentiality and non-disclosure obligations to us, or the failure to achieve our intellectual property objectives could have a
material adverse effect on our business, results of operations and financial condition. We do not have non-compete agreements with our employees who are employed on an at-will basis. Therefore, we have had, and may continue to have, employees leave
us and go to work for competitors. If we are not successful in prohibiting the unauthorized use of our proprietary technology or the use of our processes by a competitor, our competitive advantage may be significantly reduced which would result in
reduced revenues.



We are at risk of
third-party claims of infringement that could harm our competitive position.



As the number of patents, copyrights and other intellectual property rights in our industry increases, and as the coverage of these rights and the functionality of the products in the market
further overlap, we believe that we may face infringement claims. Such claims, whether or not valid, could result in substantial costs and diversion of our resources. A third party claiming infringement may also obtain an injunction or other
equitable relief, which could effectively block the distribution or sale of allegedly infringing products, which would adversely affect our customer relationships and negatively impact our revenues.



The communications industry is heavily regulated. We must
obtain regulatory approvals to manufacture and sell our products, and our customers must obtain approvals to operate our products. Any failure or delay by us or any of our customers to obtain such approvals could negatively impact our ability to
sell our products.



Various governmental
agencies have adopted regulations that impose stringent radio frequency emissions standards on the communications industry. Future regulations may require that we alter the manner in which radio signals are transmitted or otherwise alter the
equipment transmitting such signals. The enactment by governments of new laws or regulations or a change in the interpretation of existing regulations could negatively impact the market for our products.



The increasing demand for wireless communications has exerted
pressure on regulatory bodies worldwide to adopt new standards for such products, generally following extensive investigation and deliberation over competing technologies. The delays inherent in this type of governmental approval process have
caused, and may continue to cause, the cancellation, postponement or rescheduling of the installation of communications systems by our customers. These types of unanticipated delays would result in delayed or cancelled customer orders.



42



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Our Common Stock price has been, and may continue to be, volatile and our shareholders
may not be able to resell shares of our stock at or above the price paid for such shares.



The price for shares of our Common Stock has exhibited high levels of volatility with significant volume and price fluctuations, which makes our Common Stock unsuitable for many investors. For
example, for the two years ended September 28, 2003, the price of our Common Stock ranged from a high of $21.30 to a low of $2.62. The fluctuations in the price of our Common Stock have occasionally been unrelated to our operating performance. These
broad fluctuations may negatively impact the market price of shares of our Common Stock. The price of our Common Stock has also been influenced by:



| |  | fluctuations in our results of operations or the operations of our competitors or customers;
| | - | --------------------------------------------------------------------------------------------



| |  | failure of our results of operations to meet the expectations of stock market analysts and investors;
| | - | -----------------------------------------------------------------------------------------------------



| |  | reductions in wireless infrastructure demand or expectations of future wireless infrastructure demand by our customers;
| | - | -----------------------------------------------------------------------------------------------------------------------



| |  | delays or postponement of wireless infrastructure deployments, including new 3G deployments;
| | - | --------------------------------------------------------------------------------------------



| |  | changes in stock market analyst recommendations regarding us, our competitors or our customers;
| | - | -----------------------------------------------------------------------------------------------



| |  | the timing and announcements of technological innovations or new products by us or our competitors; and
| | - | -------------------------------------------------------------------------------------------------------



| |  | changes in the wireless industry.
| | - | ---------------------------------



Based on the above, we expect that our stock price will continue to be extremely volatile. Therefore, we cannot guarantee that our
investors will be able to resell their Powerwave shares at or above their acquisition price.



Our shareholder rights plan and charter documents could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our shareholders.



Our shareholder rights plan and certain provisions of our
certificate of incorporation and Delaware law are intended to encourage potential acquirers to negotiate with us and allow our Board of Directors the opportunity to consider alternative proposals in the interest of maximizing shareholder value.
However, such provisions may also discourage acquisition proposals or delay or prevent a change in control, which in turn, could harm our stock price and our shareholders.



We may need additional capital in the future and such additional financing may not be available at
favorable terms.



We may need to raise
additional funds through public or private debt or equity financings in order to:



| |  | take advantage of opportunities, including more rapid international expansion or acquisitions of complementary businesses or technologies;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------



| |  | develop new products or services;
| | - | ---------------------------------



| |  | repay outstanding indebtedness; or
| | - | ----------------------------------



| |  | respond to unanticipated competitive pressures.
| | - | -----------------------------------------------



Our ability to secure additional financing or sources of funding is dependent upon numerous factors, including the current outlook of our
business, our credit rating and the market price of our common stock, all of which are directly impacted by our ability to increase revenues and generate profits. Our ability to increase revenues and generate profits is subject to numerous risks and
uncertainties and any significant decrease in our revenues or profitability could reduce our operating cash flows and erode our existing cash balances. If we are unable to secure additional financing or such financing is not available at acceptable
terms, we may not be able to take advantage of such opportunities, or otherwise respond to unanticipated competitive pressures.



Insurance costs continue to rise and coverages are becoming increasingly restrictive due to worldwide terrorist activity and accounting
irregularities. It is becoming progressively difficult to secure adequate policy limits to manage risk in a cost effective manner.



We purchase insurance to cover a wide variety of potential risks and liabilities. In the current worldwide insurance market, premiums are
rising rapidly while coverage is becoming increasingly restrictive. Our total cost of insurance increased by more than 44% during fiscal 2002 and is expected to further increase in fiscal 2003. It is also possible that certain coverages may no
longer be available or may only be available at prices that are prohibitively expensive. If we are unable to maintain our insurance coverages at their historical levels and at a reasonable cost, or



43



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if we are forced to bear an increased portion of the risks that we have traditionally insured, our
results of operations and financial condition could be adversely affected due to increased insurance costs and potential losses arising from reduced coverages.



Our business is subject to the risks of earthquakes and other natural catastrophic events, and to interruptions by man made problems
such as computer viruses or terrorism.



Our corporate headquarters and our in-house manufacturing facilities, as well as the majority of our research and development operations, are located in the State of California in regions known for seismic activity. In addition, we have
outsourced a majority of our manufacturing to contract manufacturers in Asia, another region known for seismic activity. A significant natural disaster, such as an earthquake in either of these regions, could have a material adverse effect on our
business, operating results and financial condition. In addition, despite our implementation of network security measures, our servers are vulnerable to computer viruses, break-ins, and similar disruptions from unauthorized tampering with our
computer systems. Any such event could have a material adverse effect on our business.



44



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ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



Our financial instruments include cash and cash equivalents and short-term debt. At September 28, 2003, the carrying values of our
financial instruments approximated their fair values based upon current market prices and rates.



We are exposed to a number of market risks in the ordinary course of business. These risks, which include foreign currency risk, interest rate risk and commodity price risk, arise in the normal
course of business rather than from trading. We have examined our exposures to these risks and have concluded that none of our exposures in these areas are material to fair values, cash flows or earnings. We regularly review these risks to determine
if we should enter into active strategies such as hedging to help manage our expenses. However, at the present time, we do not believe such active strategies are necessary and, therefore, do not have any hedging programs in place and are not trading
in any financial or derivative instruments.



Foreign
Currency Risk



Our international sales
expose us to foreign currency risk in the ordinary course of our business. Currently, we do not enter into derivative financial instruments. Aside from the net operating costs of our foreign operations in France, Finland, Singapore and the United
Kingdom, initial direct network operator sales in Europe and our local revenues and operating costs of our foreign operations in China, we have not to date been required to transact any significant portion of our business in foreign currencies. As a
result, we do not have any significant direct foreign currency exposure at September 28, 2003. However, we currently anticipate that a greater percentage of our sales will be made in foreign currencies as we begin selling additional products to
certain customers in their local foreign currency during fiscal 2003. This, in turn, will increase our direct foreign currency exposure in the future. See Disclosure About Foreign Currency Risk and Additional Factors That May
Affect Future ResultsOur future success is dependent upon our ability to compete globally under Item 2, Managements Discussion and Analysis of Financial Condition and Results of Operations included herein.



Interest Rate Risk



As of September 28, 2003, had approximately $130 million of
convertible subordinated notes due 2008 at a fixed annual interest rate of 1.25%. We also have a short-term investment portfolio of approximately $250 million with maturities of three months or less. These cash equivalents exposed us to interest
rate risk as short-term investment rates fell to historical lows during the first nine months of fiscal 2003. This has contributed to a significant reduction in interest income from our cash investments. Given the short-term maturities and
high-grade investment quality of our investment portfolio, we believe that we are not subject to material fluctuations in principal and the effective interest rate of our portfolio tracks closely to various short-term money market interest rate
benchmarks.



Commodity Price Risk



Our contract manufacturers require significant quantities of
RF transistors, semiconductors and various metals for use in the manufacture of our products. Therefore, we are exposed to certain commodity price risk associated with variations in the market prices for these electronic components as these prices
directly impact the price we pay our contract manufacturers to manufacture our products. We attempt to manage this risk by entering into supply agreements with our contract manufacturers and various suppliers of these components. These supply
agreements are not long-term supply agreements. If we or our contract manufacturers become subject to a significant increase in the price of one of these components, we would likely be forced to pay such higher prices and we may not be able to pass
such costs onto our customers. In addition, certain transistors and semiconductors are regularly revised or changed by their manufacturers, which may result in a requirement for us to redesign a product that utilizes such components or cease to
produce such products. In such events, our business, results of operations and financial condition could be adversely affected. Additionally, we require specialized electronic test equipment, which is utilized in both the design and manufacture of
our products. Such electronic test equipment is available from limited sources and may not be available in the time periods required for us to meet our customers demand. If required, we may be forced to pay higher prices for such equipment
and/or we may not be able to obtain the equipment in the time periods required, which would then delay our development or production of new products. Such delays and any potential additional costs could have a material adverse effect on our
business, results of operations and financial condition.



45



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ITEM 4.    CONTROLS AND PROCEDURES



As of the end of the period covered by this report, Powerwave carried out an evaluation, under the supervision and with the participation of the Companys management, including the
Companys Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Companys disclosure controls and procedures pursuant to Rule 13a-15 of the Securities and Exchange Act of 1934. Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures are effective in timely alerting them to material information related to the Company that is required
to be included in Powerwaves periodic SEC filings.



There has been no change in the Companys internal control over financial reporting during the period covered by this report that has materially affected, or is reasonable likely to materially affect, the
Companys internal control over financial reporting.



PART IIOTHER INFORMATION



ITEM 1.    LEGAL PROCEEDINGS



We are subject to various legal proceedings and threatened legal proceedings from time to time as part of our business. Powerwave is not currently party to any legal proceedings nor aware of any threatened legal
proceedings, the adverse outcome of which, individually or in the aggregate, we believe would have a material adverse effect on our business, financial condition or results of operations. However, any potential litigation, regardless of its merits,
could result in substantial costs to us and divert managements attention from our operations. Such diversions could have a material adverse impact on our business, results of operations and financial condition.



ITEM 2.    CHANGES IN SECURITIES AND USE OF PROCEEDS



On July 18, 2003, we consummated a private placement of $130 million aggregate principal amount of convertible subordinated notes. The
notes are due on July 15, 2008, have a 1.25% interest rate and are not callable for the first four years. The holders of the notes may at any time prior to the close of business on July 15, 2008 convert any outstanding notes into shares of our
Common Stock at an initial conversion price per share of $10.49. This represents a conversion rate of approximately 95.3289 shares per $1,000 principal amount of the notes, or an aggregate amount of 12,392,757 shares of Common Stock. The conversion
price is, however, subject to adjustment as described in the indenture governing the notes. A holder of notes may convert notes only in denominations of $1,000 and multiples of $1,000.



The notes were initially sold to Deutsche Bank Securities Inc. and then immediately resold to qualified
institutional buyers, as defined in Rule 144A under the Securities Act of 1933, as amended (the 1933 Act). We received net cash proceeds of approximately $126.1 million after deduction of the placement fees related to the initial sale.



The sale of the notes described above was
deemed to be exempt from registration under the 1933 Act, in reliance on Section 4(2) of the 1933 Act or Regulation D promulgated thereunder. We have reason to believe that the purchaser was familiar with or had access to information concerning our
operations and financial condition, and the purchaser represented that it was an accredited investor and that it would offer and sell the notes only in accordance with Rule 144A under the 1933 Act to persons it reasonably believed to be qualified
institutional buyers. At the time of the issuance, the notes were deemed to be restricted securities for purposes of the 1933 Act and the instruments representing such securities (and the share certificates to be issued upon exercise of the notes)
bear legends to that effect. We have agreed to file a registration statement registering the notes and the shares of underlying common stock for resale under the 1933 Act.



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



The
Companys 2003 Annual Meeting of Shareholders was held on July 16, 2003 in Santa Ana, California. A quorum was declared present for the meeting. The following matters were submitted to a vote of and approved by a majority of security holders:



| | (1) | The election of the nine nominated directors to hold office until the next annual meeting or until their successors are duly elected and qualified.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------



|Board Member       |  | For        |  | Withheld 
|------------------ |  | ---------- |  | ---------
|Daniel A. Artusi   |  | 56,054,052 |  | 149,859  
|Gregory M. Avis    |  | 53,886,182 |  | 2,317,729
|John L. Clendenin  |  | 55,997,274 |  | 206,637  
|Bruce C. Edwards   |  | 54,953,824 |  | 1,250,087
|David L. George    |  | 55,805,610 |  | 398,301  
|Eugene L. Goda     |  | 54,941,909 |  | 1,262,002
|Carl W. Neun       |  | 55,750,950 |  | 452,961  
|Safi U. Qureshey   |  | 54,939,686 |  | 1,264,225
|Andrew J. Sukawaty |  | 54,948,129 |  | 1,255,782



| | (2) | The amendment of the Companys Employee Stock Purchase Plan to increase the number of shares authorized thereunder from 1,500,000 shares to 3,000,000
shares.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------



|For        |  | Against   |  | Abstained
|---------- |  | --------- |  | ---------
|52,926,679 |  | 2,160,000 |  | 1,117,232



| | (3) | The ratification of the appointment of Deloitte & Touche LLP as independent auditors of the Company for the 2003 fiscal year.
| | --- | -----------------------------------------------------------------------------------------------------------------------------



|For        |  | Against |  | Abstained
|---------- |  | ------- |  | ---------
|55,584,251 |  | 582,355 |  | 37,305   



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|ITEM 6. |  | EXHIBITS AND REPORTS ON FORM 8-K
|------- |  | --------------------------------



(a)  Exhibits



The following exhibits are filed as
part of this report:



|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                                      
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|              | 
|4.3           |  | Indenture, dated as of July 18, 2003, by and between Powerwave Technologies, Inc. and Deutsche
Bank Trust Company Americas, as trustee (incorporated by reference to Exhibit 4.2 of the Companys Registration Statement on Form S-3 (File No. 333-107633) filed with the Securities and Exchange Commission on August 4,
2003). 
|              | 
|4.4           |  | Registration Rights Agreement, dated as of July 18, 2003, by and between Powerwave
Technologies, Inc. and Deutsche Bank Securities Inc. (incorporated by reference to Exhibit 4.3 of the Companys Registration Statement on Form S-3 (File No. 333-107633) filed with the Securities and Exchange Commission on August 4,
2003).
|              | 
|10.38         |  | Amendment No. 4 to Loan Agreement dated as of September 15, 2003, by and among the Company,
Comerica Bank-California, as Agent, and the lenders party thereto.                                                                                                                                                                   
|              | 
|10.39         |  | Change in Control Agreement dated as of August 1, 2003, between the Company and Bruce C.
Edwards.                                                                                                                                                                                                                                
|              | 
|10.40         |  | Change in Control Agreement dated as of August 1, 2003, between the Company and Ronald J.
Buschur.                                                                                                                                                                                                                               
|              | 
|10.41         |  | Change in Control Agreement dated as of August 1, 2003, between the Company and Kevin T.
Michaels.                                                                                                                                                                                                                               
|              | 
|10.42         |  | Severance Agreement dated as of August 1, 2003, between the Company and Bruce C.
Edwards.                                                                                                                                                                                                                                        
|              | 
|10.43         |  | Severance Agreement dated as of August 1, 2003, between the Company and Ronald J.
Buschur.                                                                                                                                                                                                                                       
|              | 
|10.44         |  | Severance Agreement dated as of August 1, 2003, between the Company and Kevin T.
Michaels.                                                                                                                                                                                                                                       
|              | 
|31.1          |  | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities
Exchange Act of 1934.                                                                                                                                                                                                               
|              | 
|31.2          |  | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities
Exchange Act of 1934.                                                                                                                                                                                                               
|              | 
|32.1          |  | Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, 18 U.S.C. Section 1350.***                                                                                                                                                                                               
|              | 
|32.2          |  | Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, 18 U.S.C. Section 1350.***                                                                                                                                                                                               

|*** | In accordance with Item 601(b)(32)(ii) of Regulation S-K, this exhibit shall not be deemed filed for the purposes of Section 18 of the Securities and
Exchange Act of 1934 or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



(b)  Reports on Form 8-K:



The Registrant furnished a Current Report to the SEC on Form
8-K on July 10, 2003, to report under Item 12, Results of Operations and Financial Condition, the announcement of financial results for the fiscal quarter ended June 29, 2003.



The Registrant furnished a Current Report to the SEC on Form 8-K on July 14, 2003, under Item 12, Results of
Operations and Financial Condition, to provide a transcript of a conference call and simultaneous web-cast presentation on July 10, 2003, relating to the Companys financial results for the second quarter ended June 29, 2003.



The Registrant filed a Current Report with the SEC on Form
8-K on July 14, 2003, under Item 5, Other Events and Regulation FD Disclosure, to report the Companys intention to raise approximately $130.0 million through an offering of 5-year subordinated convertible notes in a private placement under
Rule 144A of the Securities Act of 1933.



48



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The Registrant filed a Current Report with the SEC on Form 8-K on July 18, 2003, under
Item 5, Other Events and Regulation FD Disclosure, to report the pricing of a private placement of $130.0 million of 1.25% convertible subordinated notes due July 15, 2008.



The Registrant filed a Current Report with the SEC on Form 8-K on July 22, 2003, under Item 5, Other Events
and Regulation FD Disclosure, to report the closing of a private placement of $130.0 million aggregate principal amount of 1.25% convertible subordinated notes due July 15, 2008 and a stock repurchase of 3,144,654 shares of Common Stock.



The Registrant filed a Current Report with the SEC on Form
8-K on July 24, 2003, under Item 5, Other Events and Regulation FD Disclosure, to report the closing of the purchase of selected assets of Ericsson Amplifier Technologies, Inc.



Powerwave Technologies, Powerwave and the Powerwave Technologies logo are registered trademarks of Powerwave
Technologies, Inc. All other products or service names mentioned herein may be trademarks or registered trademarks of their respective owners.



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.



|Date: |  | October 27, 2003 |  |  |  | POWERWAVE TECHNOLOGIES, INC.
|----- |  | ---------------- |  |  |  | ----------------------------
|      |  |                  |  | 
|      |  |                  |  |  |  | By:                         
|      |  |                  |  |  |  |                             
|      |  |                  |  |  |  |                             



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