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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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



For the quarterly period ended June 29, 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



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POWERWAVE TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)



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|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



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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 August 1, 2003 the number of outstanding shares of Common Stock, par
value $0.0001 per share, of the Registrant was 63,060,173.



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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.
|                                                           |  |        
|                                                           |  |        
|                                                           |  |        
|                                                           |  |        
|                                                           |  |        
|                                                           |  |        
|                                                           |  | Item 2.
|                                                           |  |        
|                                                           |  | Item 3.
|                                                           |  |        
|                                                           |  | Item 4.
|                                                           | 
|PART IIOTHER INFORMATION                                  |  | 46     
|                                                           |  |        
|                                                           |  | Item 1.
|                                                           |  |        
|                                                           |  | Item 6.
|                                                           | 
|SIGNATURES                                                 |  | 47     



2



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##### Table of Contents

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, the incurrence of debt, 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 17-44. 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



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POWERWAVE TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)



|                                                                                                                                                                                |  | June 29,2003 |         |   | December 29,2002 |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | - | ---------------- | -
|                                                                                                                                                                                |  | (Unaudited)  |         |   | (See Note)       |  
|ASSETS                                                                                                                                                                          |  |              |         |   |                  |  
|                                                                                                                                                                                |  |             
|Current assets:                                                                                                                                                                 |  |              |         |   |                  |  
|Cash and cash equivalents                                                                                                                                                       |  | $            | 160,153 |   |                  | $
|Accounts receivable, net of allowance for sales returns and doubtful accounts of $2,321 and $2,505 at June 29, 2003 and December
29, 2002, respectively                         |  |              | 37,875  |   |                  |  
|Inventories                                                                                                                                                                     |  |              | 26,502  |   |                  |  
|Prepaid expenses and other current assets                                                                                                                                       |  |              | 4,476   |   |                  |  
|Deferred tax assets                                                                                                                                                             |  |              | 7,388   |   |                  |  
|                                                                                                                                                                                |  |              |         |   |                  |  
|Total current assets                                                                                                                                                            |  |              | 236,394 |   |                  |  
|                                                                                                                                                                                |  |             
|Property, plant and equipment                                                                                                                                                   |  |              | 118,798 |   |                  |  
|Less: accumulated depreciation and amortization                                                                                                                                 |  |              | (46,081 | ) |                  |  
|                                                                                                                                                                                |  |              |         |   |                  |  
|Net property, plant and equipment                                                                                                                                               |  |              | 72,717  |   |                  |  
|Goodwill                                                                                                                                                                        |  |              |        |   |                  |  
|Deferred tax assets                                                                                                                                                             |  |              | 29,824  |   |                  |  
|Other non-current assets                                                                                                                                                        |  |              | 1,729   |   |                  |  
|                                                                                                                                                                                |  |              |         |   |                  |  
|TOTAL ASSETS                                                                                                                                                                    |  | $            | 340,664 |   |                  | $
|                                                                                                                                                                                |  |              |         |   |                  |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                            |  |              |         |   |                  |  
|                                                                                                                                                                                |  |             
|Current liabilities:                                                                                                                                                            |  |              |         |   |                  |  
|Accounts payable                                                                                                                                                                |  | $            | 22,087  |   |                  | $
|Accrued expenses and other current liabilities                                                                                                                                  |  |              | 15,055  |   |                  |  
|Short-term notes payable and current portion of long-term debt                                                                                                                  |  |              | 48      |   |                  |  
|Income taxes payable                                                                                                                                                            |  |              | 2,292   |   |                  |  
|                                                                                                                                                                                |  |              |         |   |                  |  
|Total current liabilities                                                                                                                                                       |  |              | 39,482  |   |                  |  
|Other non-current liabilities                                                                                                                                                   |  |              | 85      |   |                  |  
|                                                                                                                                                                                |  |              |         |   |                  |  
|Total liabilities                                                                                                                                                               |  |              | 39,567  |   |                  |  
|                                                                                                                                                                                |  |              |         |   |                  |  
|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, 66,015 shares issued and outstanding at June 29, 2003 and 65,707
shares issued and outstanding at December 29, 2002 |  |              | 248,656 |   |                  |  
|Accumulated other comprehensive loss                                                                                                                                            |  |              | (1      | ) |                  |  
|Retained earnings                                                                                                                                                               |  |              | 52,442  |   |                  |  
|                                                                                                                                                                                |  |              |         |   |                  |  
|Total shareholders equity                                                                                                                                                      |  |              | 301,097 |   |                  |  
|                                                                                                                                                                                |  |              |         |   |                  |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                      |  | $            | 340,664 |   |                  | $
|                                                                                                                                                                                |  |              |         |   |                  |  



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



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



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POWERWAVE TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share data)



|                                          |  | Three Months Ended |         | Six Months Ended
|----------------------------------------- |  | ------------------ | ------- | ----------------
|                                          |  | June 29,2003       |         |                 
|Net sales                                 |  | $                  | 51,509  |                 
|Cost of sales                             |  |                    | 58,630  |                 
|                                          |  |                    |         |                 
|Gross profit (loss)                       |  |                    | (7,121  | )               
|                                          |  |                    |         |                 
|Operating expenses:                       |  |                    |         |                 
|Sales and marketing                       |  |                    | 2,570   |                 
|Research and development                  |  |                    | 9,814   |                 
|General and administrative                |  |                    | 3,199   |                 
|Restructuring and impairment charges      |  |                    | 2,356   |                 
|                                          |  |                    |         |                 
|Total operating expenses                  |  |                    | 17,939  |                 
|                                          |  |                    |         |                 
|Operating income (loss)                   |  |                    | (25,060 | )               
|                                          |  |                    |         |                 
|Other income, net                         |  |                    | 613     |                 
|                                          |  |                    |         |                 
|Income (loss) before income taxes         |  |                    | (24,447 | )               
|                                          |  |                    |         |                 
|Provision for (benefit from) income taxes |  |                    | (9,210  | )               
|                                          |  |                    |         |                 
|Net income (loss)                         |  | $                  | (15,237 | )               
|                                          |  |                    |         |                 
|Basic earnings (loss) per share           |  | $                  | (0.23   | )               
|                                          |  |                    |         |                 
|Diluted earnings (loss) per share         |  | $                  | (0.23   | )               
|                                          |  |                    |         |                 
|Basic weighted average common shares      |  |                    | 65,976  |                 
|                                          |  |                    |         |                 
|Diluted weighted average common shares    |  |                    | 65,976  |                 
|                                          |  |                    |         |                 



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



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POWERWAVE TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(In thousands)



|                                         |  | Three Months Ended |         | Six Months Ended
|---------------------------------------- |  | ------------------ | ------- | ----------------
|                                         |  | June 29,2003       |         |                 
|Net income (loss)                        |  | $                  | (15,237 | )               
|                                         |  |                    |         |                 
|Other comprehensive loss, net of tax:    |  |                    |         |                 
|Foreign currency translation adjustments |  |                    |        |                 
|                                         |  |                    |         |                 
|Comprehensive income (loss)              |  | $                  | (15,237 | )               
|                                         |  |                    |         |                 



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



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POWERWAVE TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)



|                                                                                                   |  | Six Months Ended |        
|-------------------------------------------------------------------------------------------------- |  | ---------------- | -------
|                                                                                                   |  | June 29,2003     |        
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                              |  |                  |        
|Net income (loss)                                                                                  |  | $                | (25,805
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |  |                  |        
|Depreciation and amortization                                                                      |  |                  | 10,108 
|Non-cash restructuring and impairment charges                                                      |  |                  | 11,143 
|Provision for sales returns and doubtful accounts                                                  |  |                  | 971    
|Provision for excess and obsolete inventories                                                      |  |                  | 1,695  
|Deferred income taxes                                                                              |  |                  | (15,196
|Compensation costs related to stock options                                                        |  |                  | 29     
|Loss (gain) on disposal of property, plant and equipment                                           |  |                  | (31    
|Changes in operating assets and liabilities:                                                       |  |                  |        
|Accounts receivable                                                                                |  |                  | 14,418 
|Inventories                                                                                        |  |                  | 1,021  
|Prepaid expenses and other current assets                                                          |  |                  | 2,562  
|Accounts payable                                                                                   |  |                  | (4,755 
|Accrued expenses and other current liabilities                                                     |  |                  | 1,532  
|Income taxes                                                                                       |  |                  | 11     
|Other non-current assets                                                                           |  |                  | 286    
|Other non-current liabilities                                                                      |  |                  | 2      
|                                                                                                   |  |                  |        
|Net cash provided by (used in) operating activities                                                |  |                  | (2,009 
|                                                                                                   |  |                 
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                              |  |                  |        
|Purchase of property, plant and equipment                                                          |  |                  | (1,773 
|Proceeds from the sale of property, plant and equipment                                            |  |                  | 388    
|                                                                                                   |  |                  |        
|Net cash used in investing activities                                                              |  |                  | (1,385 
|                                                                                                   |  |                 
|CASH FLOW FROM FINANCING ACTIVITIES:                                                               |  |                  |        
|Principal payments on long-term debt                                                               |  |                  | (30    
|Proceeds from the sale of stock under Employee Stock Purchase Plan                                 |  |                  | 892    
|Proceeds from exercise of stock options                                                            |  |                  | 156    
|                                                                                                   |  |                  |        
|Net cash provided by financing activities                                                          |  |                  | 1,018  
|                                                                                                   |  |                  |        
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                               |  |                  | (2,376 
|CASH AND CASH EQUIVALENTS, beginning of period                                                     |  |                  | 162,529
|                                                                                                   |  |                  |        
|CASH AND CASH EQUIVALENTS, end of period                                                           |  | $                | 160,153
|                                                                                                   |  |                  |        
|                                                                                                   |  |                 
|SUPPLEMENTAL CASH FLOW INFORMATION:                                                                |  |                  |        
|Cash paid (received) for:                                                                          |  |                  |        
|Interest expense                                                                                   |  | $                | 14     
|                                                                                                   |  |                  |        
|Income taxes                                                                                       |  | $                | 29     
|                                                                                                   |  |                  |        
|NON-CASH ITEMS:                                                                                    |  |                  |        
|Tax benefit related to stock options exercised                                                     |  | $                | 121    
|                                                                                                   |  |                  |        
|Tax benefit related to the issuance of Common Stock under the Employee Stock Purchase Plan         |  | $                | 43     
|                                                                                                   |  |                  |        



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



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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 six months ended June 29, 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 quarter ended June 29, 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



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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 (1) clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative discussed in paragraph 6(b) of Statement 133, (2)
clarifies when a derivative contains a financing component, (3) amends the definition of an underlying to conform it to language used in FIN 45, and (4) amends certain other existing pronouncements, which will collectively result in more consistent
reporting of contracts as either derivatives or hybrid instruments. SFAS 149 is effective for contracts and hedging relationships entered into or modified after June 30, 2003. The Company does not believe that the adoption of SFAS 149 will have a
material impact on its consolidated financial statements as 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 does not expect the adoption of SFAS 150 to 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 second quarter of 2003 was $2.59 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



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grant dates for awards under those plans consistent with the fair value method of SFAS No. 123 utilizing the Black-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 six months ended June 29, 2003 and June 30, 2002 would have approximated the pro forma amounts indicated below:



|                                                                                         |  | Three Months Ended |         |   | Six Months Ended |  
|---------------------------------------------------------------------------------------- |  | ------------------ | ------- | - | ---------------- | -
|                                                                                         |  | June 29,2003       |         |   | June 30,2002     |  
|Net income (loss):                                                                       |  |                    |         |   |                  |  
|As reported                                                                              |  | $                  | (15,237 | ) |                  | $
|Less: Additional expense per SFAS No. 123, fair value method, net of related tax effects |  |                    | (1,924  | ) |                  |  
|                                                                                         |  |                    |         |   |                  |  
|Pro forma                                                                                |  | $                  | (17,160 | ) |                  | $
|                                                                                         |  |                    |         |   |                  |  
|Basic earnings (loss) per share:                                                         |  |                    |         |   |                  |  
|As reported                                                                              |  | $                  | (0.23   | ) |                  | $
|Pro forma                                                                                |  | $                  | (0.26   | ) |                  | $
|Diluted earnings (loss) per share:                                                       |  |                    |         |   |                  |  
|As reported                                                                              |  | $                  | (0.23   | ) |                  | $
|Pro forma                                                                                |  | $                  | (0.26   | ) |                  | $



The fair value of
options granted under Powerwaves stock incentive plans during the six months ended June 29, 2003 and June 30, 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:



|                                         |  | Six Months Ended | 
|---------------------------------------- |  | ---------------- | 
|                                         |  | June 30,2003     | 
|Weighted average risk-free interest rate |  | 1.73%-1.85%      | 
|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.



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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 the financial statements
and the reported amounts of revenues and expenses during the reporting years. 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:



|                     |  | June 29, 2003 |        | December 29, 2002
|-------------------- |  | ------------- | ------ | -----------------
|Parts and components |  | $             | 8,257  |                  
|Work-in-process      |  |               | 831    |                  
|Finished goods       |  |               | 17,414 |                  
|                     |  |               |        |                  
|Total inventories    |  | $             | 26,502 |                  
|                     |  |               |        |                  



Inventories are net of
an allowance for excess and obsolete inventory of approximately $10.5 million and $9.0 million as of June 29, 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:



|                                                |  | June 29, 2003 |         |   | December 29, 2002 |  
|----------------------------------------------- |  | ------------- | ------- | - | ----------------- | -
|Machinery and equipment                         |  | $             | 53,811  |   |                   | $
|Buildings and improvements                      |  |               | 38,436  |   |                   |  
|Land                                            |  |               | 14,838  |   |                   |  
|Office furniture and equipment                  |  |               | 10,515  |   |                   |  
|Leasehold improvements                          |  |               | 953     |   |                   |  
|Construction in progress                        |  |               | 245     |   |                   |  
|                                                |  |               |         |   |                   |  
|Gross property, plant and equipment             |  |               | 118,798 |   |                   |  
|Less: Accumulated depreciation and amortization |  |               | (46,081 | ) |                   |  
|                                                |  |               |         |   |                   |  
|Total property, plant and equipment             |  | $             | 72,717  |   |                   | $
|                                                |  |               |         |   |                   |  



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. 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 9. Restructuring and Impairment Charges for additional details. The remaining $0.6 million estimated net realizable value for such assets has been reclassified in the condensed consolidated
balance sheet as assets held for sale within other non-current assets.



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|Note 5. |  | Accrued Expenses and Other Current Liabilities
|------- |  | ----------------------------------------------



Accrued expenses and other current liabilities consist of the following:



|                                                     |  | June 29, 2003 |        | December 29, 2002
|---------------------------------------------------- |  | ------------- | ------ | -----------------
|Accrued warranty costs                               |  | $             | 5,052  |                  
|Accrued payroll and employee benefits                |  |               | 3,952  |                  
|Accrued vendor cancellations costs                   |  |               | 1,115  |                  
|Other accrued expenses                               |  |               | 4,936  |                  
|                                                     |  |               |        |                  
|Total accrued expenses and other current liabilities |  | $             | 15,055 |                  
|                                                     |  |               |        |                  



A summary of the
activity that affected the Companys accrued warranty costs for the six months ended June 29, 2003 is as follows:



|Description                                              |  | Accrued Warranty Costs |       
|-------------------------------------------------------- |  | ---------------------- | ------
|Balance at December 29, 2002                             |  | $                      | 5,133 
|Reductions for warranty costs incurred                   |  |                        | (2,036
|Warranty accrual related to current year sales           |  |                        | 1,906 
|Change in estimate related to previous warranty accruals |  |                        | 49    
|                                                         |  |                        |       
|Balance at June 29, 2003                                 |  | $                      | 5,052 
|                                                         |  |                        |       



|Note 6. |  | Employee Stock Purchase Plan
|------- |  | ----------------------------



The twelfth offering under Powerwaves Employee Stock Purchase Plan (the ESPP) concluded on January 31, 2003, with 254,602 shares of the
Companys Common Stock purchased under the ESPP at a price per share of $3.50. At June 29, 2003, there were rights to purchase approximately 177,000 shares of Common Stock outstanding under the ESPPs thirteenth offering, which will
conclude on July 31, 2003. Subsequent to June 29, 2003, the shareholders of Powerwave approved an amendment to the ESPP to increase the total shares issuable thereunder from 1,500,000 shares to 3,000,000 shares.



|Note 7. |  | 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 six months ended June 29, 2003:



|                             |  | 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                      |  | 145             |   |  | $               | 3.12 - $  6.25 |                              | $ | 4.91                        |  |                             
|Exercised                    |  | (92             | ) |  | $               | 1.33 - $  6.40 |                              | $ | 2.47                        |  |                             
|Canceled                     |  | (548            | ) |  | $               | 4.58 - $73.56  |                              | $ | 13.23                       |  |                             
|                             |  |                 |   |  |                 |                |                              |   |                             |  |                             
|Balance at June 29, 2003     |  | 9,104           |   |  | $               | 0.82 - $67.08  |                              | $ | 14.44                       |  | 5,146                       
|                             |  |                 |   |  |                 |                |                              |   |                             |  |                             



At June 29, 2003, a
total of 2,029,475 shares were available for grant under all of the Companys stock option plans.



During each of the six months ended June 29, 2003 and June 30, 2002, Powerwave recorded compensation expense related to stock options of approximately
$30,000. The remaining unamortized compensation expense as of June 29, 2003 was approximately $8,000 and will be amortized through September 2003.



|Note 8. |  | Commitments and Contingencies
|------- |  | -----------------------------



Powerwave had various outstanding leases as of June 29, 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



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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 June 29,
2003 are payable as follows:



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



During its normal
course of business, Powerwave has made certain indemnities, commitments and guarantees under which it may be required to make payments in relation to certain transactions. These indemnities include intellectual property indemnities to its customers
in connection with sales of its products, indemnities to various lessors in connection with facility leases for certain claims arising from such facility or lease, and indemnities to directors and officers of the Company to the maximum extent
permitted under the laws of the State of Delaware. In addition, Powerwave has contractual commitments to various customers which could require it 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 has also issued a guarantee in the form of a standby letter of credit in the amount of $600,000 as security for contingent liabilities under certain workers compensation insurance policies. The
duration of these indemnities, commitments and guarantees varies, and in certain cases, is indefinite. The majority of these indemnities, commitments and guarantees do not provide for any limitation of the maximum potential future payments the
Company could be obligated to make. Powerwave has not recorded any liability for these indemnities, commitments and guarantees in the accompanying condensed consolidated balance sheets.



Powerwave is subject to various legal proceedings from time to time as part of its business. As of June 29, 2003, Powerwave
is 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 9. |  | 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 six months ended June
30, 2002.



During the second quarter of 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 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. This amount included cash restructuring charges of approximately
$3.6 million related primarily to severance payments made prior to June 29, 2003 in connection with a reduction of its work force of approximately 450 employees during such quarter. 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



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upon the job classification of the impacted employees or the character of the underlying assets. Approximately $7.6 million of the total $9.9 million
restructuring and impairment charges was recorded in cost of sales and approximately $2.3 million was recorded in operating expenses. The Company expects to complete its restructuring efforts prior to the end of fiscal year 2003.



|Note 10. |  | 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 using the treasury stock
method. Potential common shares of 243,439 and 200,293 have been excluded from diluted weighted average common shares for the three and six months ended June 29, 2003, as the effect would be anti-dilutive.



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



|                                       |  | Three Months Ended |         | Six Months Ended
|-------------------------------------- |  | ------------------ | ------- | ----------------
|                                       |  | June 29,2003       |         |                 
|Basic:                                 |  |                    |         |                 
|Basic weighted average common shares   |  |                    | 65,976  |                 
|Net income (loss)                      |  | $                  | (15,237 | )               
|                                       |  |                    |         |                 
|Basic earnings (loss) per share        |  | $                  | (0.23   | )               
|                                       |  |                    |         |                 
|Diluted:                               |  |                    |         |                 
|Basic weighted average common shares   |  |                    | 65,976  |                 
|Potential common shares                |  |                    |        |                 
|                                       |  |                    |         |                 
|Diluted weighted average common shares |  |                    | 65,976  |                 
|Net income (loss)                      |  | $                  | (15,237 | )               
|                                       |  |                    |         |                 
|Diluted earnings (loss) per share      |  | $                  | (0.23   | )               
|                                       |  |                    |         |                 



|Note 11. |  | Customer Concentrations
|-------- |  | -----------------------



Powerwaves product sales have historically been concentrated in a small number of customers. During the quarter ended June 29, 2003 and June 30,
2002, sales to customers that accounted for 10% or more of revenues for the quarter totaled $42.9 million and $90.5 million, respectively. Sales to Nortel Networks Corporation and related entities (Nortel) accounted for approximately 57%
and 42% of total revenues during such quarters, respectively. During the quarter ended June 29, 2003, two customers in addition to Nortel accounted for approximately 17% and 10% of total revenues during such quarter. During the quarter ended June
30, 2002, two customers in addition to Nortel accounted for approximately 27% and 11% of total revenues during such quarter.



During the six months ended June 29, 2003 and June 30, 2002, sales to customers that accounted for 10% or more of revenues for the period totaled $76.5
million and $183.9 million, respectively. Sales to Nortel accounted for approximately 54% and 39% of total revenues during such periods, respectively. During the six months ended June 29, 2003, one customer in addition to Nortel accounted for
approximately 20% of total revenues during such period. During the six months ended June 30, 2002, three customers in addition to Nortel accounted for approximately 20%, 14% and 12% of total revenues during such period.



As of June 29, 2003, approximately 84% of total accounts receivable related
to three customers that each accounted for 10% or more of Powerwaves total revenue. 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.



|Note 12. |  | 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. As Powerwave moves more of its manufacturing operations to contract manufacturers, the Company will have less direct contact with numerous suppliers which



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could potentially increase its concentration of supply with a limited number of suppliers. The inability to obtain single-sourced components of 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 13. |  | 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 |        | Six Months Ended
|------------------- |  | ------------------ | ------ | ----------------
|RF Frequency Ranges |  | June 29,2003       |        | June 30,2002    
|800-1000 MHz        |  | $                  | 25,979 |                 
|1800-2000 MHz       |  |                    | 16,784 |                 
|2000+ MHz           |  |                    | 8,746  |                 
|                    |  |                    |        |                 
|Total sales         |  | $                  | 51,509 |                 
|                    |  |                    |        |                 



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 |        | Six Months Ended
|------------------------------ |  | ------------------ | ------ | ----------------
|Geographic Area                |  | June 29,2003       |        | June 30,2002    
|North America                  |  | $                  | 22,392 |                 
|Asia                           |  |                    | 12,157 |                 
|Europe and other international |  |                    | 16,960 |                 
|                               |  |                    |        |                 
|Total sales                    |  | $                  | 51,509 |                 
|                               |  |                    |        |                 



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
$9.4 million and $29.6 million during the quarters ended June 29, 2003 and June 30, 2002, respectively. Sales to Canada were $29.7 million and $60.6 million during the six months ended June 29, 2003 and June 30, 2002, respectively. Sales to Finland
were $8.6 million and $11.8 million during the quarters ended June 29, 2003 and June 30, 2002, respectively. Sales to Finland were $20.2 million and $29.8 million during the six months ended June 29, 2003 and June 30, 2002, respectively.



The majority of Powerwaves assets are located in the United States,
in the State of California. Total accounts receivable as of June 29, 2003 include 26% from customers based in Canada, 23% from customers based in the United States, 17% from customers based in France, 16% from customers based in China and 13% from
customers based in Finland.



|Note 14. |  | 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 the three and six months ended June 29, 2003 and had no outstanding accounts receivable as of June 29, 2003. During the three and six months ended June 30, 2002, the Company had $0.8 million and $2.2 million
in sales to Metawave, respectively.



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|Note 15. |  | Subsequent Events
|-------- |  | -----------------



On July 10, 2003, Powerwave 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 dated as of June 12, 2003. Under the asset purchase agreement, Powerwave purchased selected assets of AMT, including certain inventories, equipment and
real estate. 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 to Ericsson AB. The cash purchase price of the acquisition of $9,820,400 was paid on July 10, 2003.



On July 18, 2003, Powerwave completed the private placement of $130.0 million aggregate principal amount of 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%. These notes are not callable during the first four years.
Powerwave used a portion of the proceeds of the offering to fund the purchase 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 placement fees. The remainder of the proceeds are available for possible future acquisitions and for general corporate purposes. As the Company
currently has no specific arrangements with respect to acquisitions, the Company intends to invest the net proceeds in short-term money market instruments, including time deposits, commercial paper, auction rate securities and money market funds
with maturities of three months or less, pending specific application.



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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 have a material effect on 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 significant amount 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 every reasonable effort to ensure the accuracy of our forecasts
of future product demand, any significant



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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 has been 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. 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 market;We have experienced, and will continue to experience, significant fluctuations in sales and operating results from quarter to quarter;We rely upon a few customers for a significant amount of
our revenues; andOur average sales prices have declined



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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 adverse effect on our consolidated results of operations or
financial position. All restructuring charges recognized during the quarter ended June 29, 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 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



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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 (1) clarifies under what circumstances a contract with an initial net investment
meets the characteristic of a derivative discussed in paragraph 6(b) of Statement 133, (2) clarifies when a derivative contains a financing component, (3) amends the definition of an underlying to conform it to language used in FIN 45, and (4)
amends certain other existing pronouncements, which will collectively result in more consistent reporting of contracts as either derivatives or hybrid instruments. SFAS 149 is effective for contracts and hedging relationships entered into or
modified after June 30, 2003. We do not believe that the adoption of SFAS 149 will have a material impact on our consolidated financial statements as 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. SFAS 150 is to be implemented by reporting the
cumulative effect of a change in accounting principle. We do not expect the adoption of SFAS 150 to 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 six months ended June 29, 2003 and
June 30, 2002:



|                                          |  | Three Months Ended |    |  | Six Months Ended |  
|----------------------------------------- |  | ------------------ | -- |  | ---------------- | -
|                                          |  | June 29,2003       |    |  | June 30,2002     |  
|Net sales                                 |  | 100.0              | %  |  | 100.0            | %
|Cost of sales                             |  | 113.8              |    |  | 81.0             |  
|                                          |  |                    |    |  |                  |  
|Gross profit                              |  | (13.8              | )  |  | 19.0             |  
|Operating expenses:                       |  |                    |    |  |                  |  
|Sales and marketing                       |  | 5.0                |    |  | 3.0              |  
|Research and development                  |  | 19.1               |    |  | 7.9              |  
|General and administrative                |  | 6.2                |    |  | 3.2              |  
|Restructuring and impairment charges      |  | 4.6                |    |  |                 |  
|                                          |  |                    |    |  |                  |  
|Total operating expenses                  |  | 34.9               |    |  | 14.1             |  
|                                          |  |                    |    |  |                  |  
|Operating income (loss)                   |  | (48.7              | )  |  | 4.9              |  
|Other income, net                         |  | 1.2                |    |  | 0.6              |  
|                                          |  |                    |    |  |                  |  
|Income (loss) before income taxes         |  | (47.5              | )  |  | 5.5              |  
|Provision for (benefit from) income taxes |  | (17.9              | )  |  | 1.6              |  
|                                          |  |                    |    |  |                  |  
|Net income (loss)                         |  | (29.6              | )% |  | 3.9              | %
|                                          |  |                    |    |  |                  |  



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 six months ended June 30, 2002.



During the second quarter 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 for the second quarter ended June 29, 2003. These charges included
cash restructuring charges of approximately $3.6 million related primarily to severance payments made during the quarter in connection with a reduction of our work force of approximately 450 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 $9.9 million restructuring and impairment charges recorded during the second quarter, approximately $7.6 million was recorded within cost of sales and approximately $2.3 million was recorded
within operating expenses. We currently expect to incur additional restructuring charges in the range of $1.0 million to $3.0 million during the second half of fiscal year 2003 as we complete the execution of the remainder of our restructuring plan.



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Three months ended June 29, 2003 and June 30, 2002



Net Sales



Our sales are derived primarily from the sale of RF power amplifiers for use in wireless communications networks. Sales decreased by 55% to $51.5 million,
for the quarter ended June 29, 2003, from $113.4 million, for the quarter ended June 30, 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 original equipment manufacturer (OEM) and direct network operator markets. We currently anticipate that the slowdown in worldwide
wireless communications infrastructure spending will continue to negatively impact our revenues for at least the next few quarters. For the quarter ended June 29, 2003, total sales of products for networks in the 800-1000 MHz range accounted for
approximately 50% of sales, or $26.0 million, compared to approximately 58% of sales, or $65.3 million, for the quarter ended June 30, 2002. Sales of products for networks in the 1800-2000 MHz range accounted for approximately 33% of sales, or $16.8
million, for the second quarter of fiscal 2003, compared to approximately 32% of sales, or $36.5 million, for the second quarter of fiscal 2002. For the quarter ended June 29, 2003, sales of products for use in networks over 2000 MHz, which largely
consist of 3G products, accounted for approximately 17% of sales, or $8.7 million, compared to 10% of sales, or $11.6 million for the quarter ended June 30, 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 43% of sales, or $22.4 million, for the quarter ended June 29, 2003, compared to approximately 69% of sales, or $78.2 million, for the quarter ended June 30, 2002. Total international
sales (excluding North American sales) accounted for approximately 57% of sales, or $29.1 million, for the second quarter of fiscal 2003, compared to approximately 31% of sales, or $35.2 million, for the second quarter of fiscal 2002. Total Asian
sales accounted for approximately 24% of sales, or $12.1 million, for the quarter ended June 29, 2003, compared to 10% of sales, or $10.9 million, for the quarter ended June 30, 2002. Total European and other international sales accounted for
approximately 33% of sales, or $17.0 million, for the second quarter of fiscal 2003, compared to 21%, or $24.3 million, for the second quarter of fiscal 2002. See Additional Factors That May Affect Future ResultsWe rely upon a few
customers for a significant amount of our revenues;We have experienced, and will continue to experience, significant fluctuations in sales and operating results from quarter to quarter; andThere are many risks associated with
international operations



For the quarter ended
June 29, 2003, total sales to Nortel accounted for approximately 57% of sales and sales to AT&T Wireless Services (AT&T Wireless) and Nokia Networks (Nokia) each accounted for 10% or more of sales for such quarter.
For the quarter ended June 30, 2002, total sales to Nortel accounted for approximately 42% of sales and sales to Cingular Wireless and Nokia each 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 OEMs, such as LM Ericsson Telephone Company (Ericsson), Lucent Technologies, Inc.
(Lucent), Motorola Inc. (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. During the first six months of fiscal 2003, several major OEMs made announcements that they were further lowering their expectations for wireless infrastructure demand for 2003 due to their
revised expectations of additional capital spending reductions by major wireless network operators. 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 these forecasted reductions in overall market demand continue to result in a significant reduction in the future demand for our products by 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There are many risks
associated with international operations



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



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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 upon a few customers for a significant amount of our revenues;We have experienced,
and will continue to experience, significant fluctuations in sales and operating results from quarter to quarter; andThere are many risks associated with international operations



Gross Profit



Cost of sales consists primarily of materials, assembly and test labor,
overhead and warranty costs. Gross profit margins for the second quarter of fiscal 2003 and fiscal 2002 were (13.8)% and 19.0%, respectively. The significant reduction in our gross profit margins during the second quarter of fiscal 2003 as compared
to the second quarter of fiscal 2002 was due to several factors, including approximately $7.6 million of restructuring and impairment charges included in cost of sales for the second quarter of 2003. Additionally, the second 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 reviewed as a percentage of revenues.
Notwithstanding our restructuring and associated cost reduction efforts, we currently anticipate that we will continue to experience under-absorption of our manufacturing overhead expenses and excess labor costs due to our reduced sales levels,
which will continue to have a negative impact on our gross margins. In addition, we expect that our gross margins will continue to be negatively impacted by additional restructuring charges related to further work force reductions as we execute the
remainder of our restructuring plan during the second half of fiscal 2003. See Additional Factors That May Affect Future ResultsWe rely upon a few customers for a significant amount 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 subjects us to various 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 accelerated
efforts 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 subjects us to various 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 decreased by 24% to $2.6 million for the quarter ended June 29, 2003, from $3.4 million for the quarter ended June 30, 2002. As a percentage of sales, sales and marketing expenses were 5.0% and 3.0% for the
second fiscal quarters ended 2003 and 2002, respectively. The decrease in the amount of our sales and marketing expenses was primarily attributable to lower sales commissions related to lower revenues during the second quarter of fiscal 2003.



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



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of capital equipment. Research and development expenses increased by 10% to $9.8 million for the quarter ended June 29, 2003, from $8.9 million for the
quarter ended June 30, 2002. As a percentage of sales, research and development expenses were 19.1% and 7.9% for the second fiscal quarters ended 2003 and 2002, respectively. The increase in research and development expenses was primarily
attributable to material costs associated with a large number of prototype and pre-production product development builds during the second 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 decreased by 14% to $3.2 million for the quarter ended June 29, 2003, from $3.7 million for the quarter ended June 30, 2002. As a percentage of sales, general
and administrative expenses were 6.2% and 3.2% for the second fiscal quarters ended 2003 and 2002, respectively. The decrease in the amount of our general and administrative expenses was primarily attributable to lower personnel costs during the
second quarter of fiscal 2003.



Restructuring and impairment
charges amounted to $2.3 million for the second fiscal quarter of 2003 compared to no such charges during the second fiscal quarter of 2002. These charges related primarily to severance payments in connection with a reduction to our work force and
the write-down of excess equipment and certain customer related intangibles. 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
June 29, 2003, from $0.7 million during the quarter ended June 30, 2002. The decrease was primarily due to lower short-term interest rates.



Provision (Benefit) for Income Taxes



We recorded a tax benefit at a rate of 37.7% during the quarter ended June 29, 2003 as compared to a tax provision of 30.0% for the quarter ended June 30,
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.



Six months ended June 29, 2003 and June 30, 2002



Net Sales



Sales decreased by 52% to $103.7 million, for the six months ended June 29,
2003, from $217.5 million, for the six months ended June 30, 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 six months ended June 29, 2003, total sales of products for networks in the 800-1000 MHz range accounted for
approximately 57% of sales, or $59.1 million, compared to approximately 60% of sales, or $130.7 million, for the six months ended June 30, 2002. Sales of products for networks in the 1800-2000 MHz range accounted for approximately 23% of sales, or
$23.7 million, for the first six months of fiscal 2003, compared to approximately 26% of sales, or $56.9 million, for the first six months of fiscal 2002. For the six months ended June 29, 2003, sales of products for use in networks over 2000 MHz,
which largely consist of 3G products, accounted for approximately 20% of sales, or $20.9 million, compared to 14% of sales, or $29.9 million for the six months ended June 30, 2002.



Sales to customers in North America accounted for approximately 53% of sales, or $54.9 million, for the six months ended
June 29, 2003, compared to approximately 73% of sales, or $158.1 million, for the six months ended June 30, 2002. Total international sales (excluding North American sales) accounted for approximately 47% of sales, or $48.8 million, for the first
six months of fiscal 2003, compared to approximately 27% of sales, or $59.4 million, for the first six months of fiscal 2002. Total Asian sales accounted for approximately 15% of sales, or $15.2 million, for the six months ended June 29, 2003,
compared to 6% of sales, or $12.5 million, for the six months ended June 30, 2002. Total European and other international sales accounted for approximately 32% of sales, or $33.6 million, for the first six months of fiscal 2003, compared to 21%, or
$46.9 million, for the first six months of fiscal 2002. See Additional Factors That May Affect Future ResultsWe rely upon a few customers for a significant amount of our revenues;We have experienced, and will continue to
experience, significant fluctuations in sales and operating results from quarter to quarter; andThere are many risks associated with international operations



For the six months ended June 29, 2003, total sales to Nortel accounted for approximately 54% of sales and sales to Nokia
accounted for 10% or more of sales for such period. For the six months ended June 30, 2002, total



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sales to Nortel accounted for approximately 39% of sales and sales to Cingular Wireless, Lucent and Nokia each accounted for 10% or more of sales for such
period.



Gross Profit



Gross profit margins for the first six months of fiscal 2003 and fiscal 2002
were (3.2)% and 18.5%, respectively. The reduction in our gross profit margins during the first six months of fiscal 2003 as compared to the first six months of fiscal 2002 is due to the significant reduction in demand which resulted in lower
revenue and lower absorption of our manufacturing overhead expenses and increased labor costs when reviewed as a percentage of revenues. In addition, approximately $7.6 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 significant amount 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 subjects us to various risks Also see Restructuring and Impairment Charges.



Operating Expenses



Sales and marketing expenses decreased by 21% to $5.5 million for the six
months ended June 29, 2003, from $6.9 million for the six months ended June 30, 2002. As a percentage of sales, sales and marketing expenses were 5.3% and 3.2% for the first six 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 half of fiscal 2003.



Research and development expenses increased by 14% to $19.8 million for the six months ended June 29, 2003, from $17.3 million for the six months ended
June 30, 2002. As a percentage of sales, research and development expenses were 19.1% and 7.9% for the first six months ended 2003 and 2002, respectively. The increase in research and development expenses was primarily attributable to material costs
associated with a large number of prototype and pre-production product development builds during the first six months of fiscal 2003.



General and administrative expenses decreased by 11% to $6.5 million for the six months ended June 29, 2003, from $7.3 million for the six months ended
June 30, 2002. As a percentage of sales, general and administrative expenses were 6.3% and 3.4% for the first six months ended 2003 and 2002, respectively. The decrease in actual general and administrative expenses was primarily attributable to
lower personnel costs during the first six months of fiscal 2003.



Restructuring and impairment charges amounted to $7.2 million for the first six months of 2003 compared to no such charges during the first six months of 2002. These charges include $4.8 million of goodwill impairment charges in the first
quarter of 2003 and $2.3 million of restructuring and impairment charges in the second quarter of 2003 in connection with a reduction to our work force and the write-down of excess equipment and certain customer related intangibles. See
Restructuring and Impairment Charges.



Other
Income



Other income remained relatively constant at $1.4
million for the six months ended June 29, 2003 and June 30, 2002.



Provision (Benefit) for Income Taxes



We
recorded a tax benefit at a rate of 37.0% during the six months ended June 29, 2003 as compared to a tax provision of 30.0% for the six months ended June 30, 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.



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 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 June 29, 2003, we had working capital of $196.9 million, including $160.2 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,



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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 six months ended June 29, 2003 and June 30, 2002:



|                                                     |  | Six Months Ended(in thousands) |       
|---------------------------------------------------- |  | ------------------------------ | ------
|                                                     |  | June 29, 2003                  |       
|Net cash provided by (used in):                      |  |                                |       
|Operating activities                                 |  | $                              | (2,009
|Investing activities                                 |  |                                | (1,385
|Financing activities                                 |  |                                | 1,018 
|                                                     |  |                                |       
|Net increase (decrease) in cash and cash equivalents |  | $                              | (2,376
|                                                     |  |                                |       



Net cash provided by
(used in) operations in the first six months of fiscal 2003 decreased by $36.2 million as compared to the first six 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 restructuring charges. During the six months ended June 29, 2003, our net accounts receivable decreased to $37.9 million from $53.3 million at December 29, 2002, consistent with our lower sales volume
during the first half of fiscal 2003 as compared to the fourth quarter of fiscal 2002. See Additional Factors That May Affect Future ResultsWe rely upon a few customers for a significant amount of our revenues Our net
inventories decreased to $26.5 million during the six months ended June 29, 2003, from $29.9 million at December 29, 2002. During the six months ended June 29, 2003, our accounts payable decreased to $22.1 million from $26.8 million at December 29,
2002, consistent with our decrease in inventory on-hand and reduced material purchases associated with our lower revenues.



Net cash used in investing activities largely reflects our capital spending requirements. The decrease in net cash used in investing activities for the
first six months of fiscal 2003 compared to the first six months of fiscal 2002 was primarily attributable to a decrease in capital expenditures for test equipment. Total capital expenditures during the first six months of fiscal 2003 and 2002 were
approximately $1.8 million and $2.7 million, respectively. The majority of the capital spending during the first six 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 capital spending on property and equipment to be in the range of $3.0 million to $5.0 million, and we plan to fund these expenditures from our existing cash balances.



The decrease in net cash provided by financing activities in
the second quarter of fiscal 2003 as compared to the second quarter of fiscal 2002 primarily represents reductions in proceeds from the issuance of Common Stock under our employee stock option programs and our Employee Stock Purchase Plan
(ESPP). The amount of cash provided by employee stock option exercises and ESPP purchases is subject to various factors beyond our control, including the market price for our Common Stock and an individuals timing decisions
regarding the exercise of such options and ESPP participation. Therefore, we cannot be assured that this will continue to be a source of cash for Powerwave on an on-going basis. During first six months of fiscal 2003, the majority of proceeds from
financing activities were from the issuance of Common Stock under our Employee Stock Purchase Plan.



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 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



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declined;Our success is tied to the growth of the wireless services market; andWe have experienced, and will continue to experience,
significant fluctuations in sales and operating results from quarter to quarter



Financing Activities



Our $20 million revolving credit agreement with Comerica Bank-California expired on May 31, 2003. We decided to delay the renewal of this credit facility as we evaluated other long-term financing alternatives. We currently anticipate
negotiating the reinstatement of our credit agreement with Comerica Bank-California during our fiscal quarter ending September 28, 2003, however we cannot guarantee that we will be able to reinstate this credit agreement on terms acceptable to us.



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 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 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
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



On July 18, 2003, subsequent to the end of the quarter, we completed a
private placement of $130.0 million aggregate principal amount of subordinated convertible notes and raised approximately $101.0 million in net proceeds. See Note 15. Subsequent Events in our condensed consolidated financial statements
under Part I, Item 1, Financial Statements included herein.



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:



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, Suzhou, China and various sales offices in the United States, and Europe. 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.



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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.



Guarantees Under Letters of Credit



We have issued standby letters of credit from time to time as a security for certain liabilities. At June 29, 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 June 29, 2003, expected future cash payments related to contractual obligations and commercial commitments were as
follows:



|                                                         |  | Amounts Due by Period(in thousands)
|-------------------------------------------------------- |  | -----------------------------------
|                                                         |  | 1 Yearand Less                     
|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.



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During the six months ended June 29, 2003, we granted options to purchase a total of 145,300 shares of
Common Stock to employees. After deducting 547,487 shares for options forfeited, the result was net option forfeitures of 402,187. Net option forfeitures during the six-month period represented 0.6% of our total outstanding common shares of
66,015,289 as of June 29, 2003. The following table summarizes the net stock option grants to our employees, directors and executive officers during the three most recent fiscal periods:



|                                                                                                 |  | Six MonthsEndedJune 29, 2003 |    |  | Fiscal YearEndedDecember 29,2002 |   |  | Fiscal YearEndedDecember 30,2001 |  
|------------------------------------------------------------------------------------------------ |  | ---------------------------- | -- |  | -------------------------------- | - |  | -------------------------------- | -
|Net grants (forfeitures) during the period as a % of total outstanding common shares             |  | (0.6                         | )% |  | 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                |  | 20.5                         | %  |  | 19.5                             | % |  | 17.6                             | %



At June 29, 2003, a
total of 2,029,475 options were available for grant under all of our option plans and a total of 277,964 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 six months ended June 29, 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                      |  | 145,300         |   |  | $               | 3.12 - $  6.25 |                              | $ | 4.91                        |  |                             
|Exercised                    |  | (92,095         | ) |  | $               | 1.33 - $  6.40 |                              | $ | 2.47                        |  |                             
|Canceled                     |  | (547,487        | ) |  | $               | 4.58 - $73.56  |                              | $ | 13.23                       |  |                             
|                             |  |                 |   |  |                 |                |                              |   |                             |  |                             
|Balance at June 29, 2003     |  | 9,104,440       |   |  |                 | $0.82 - $67.08 |                              | $ | 14.44                       |  | 5,145,778                   
|                             |  |                 |   |  |                 |                |                              |   |                             |  |                             



The following table
summarizes outstanding stock options that are in-the-money and out-of the-money as of June 29, 2003. For purposes of this table, in-the-money stock options are those options with an exercise price less than $6.15 per share,
the closing price of Powerwave Common Stock on June 27, 2003, the last trading day of the second fiscal quarter, and out-of-the-money stock options are stock options with an exercise price greater than or equal to the $6.15 per share closing price.



|                          |  | Exercisable |  | Unexercisable          |       |       
|------------------------- |  | ----------- |  | ---------------------- | ----- | ------
|                          |  | Shares      |  | Wtd. Avg.ExercisePrice |       | Shares
|In-the-Money              |  | 1,731,589   |  | $                      | 3.84  |       
|Out-of-the-Money          |  | 3,414,189   |  | $                      | 22.26 |       
|                          |  |             |  |                        |       |       
|Total Options Outstanding |  | 5,145,778   |  | $                      | 16.07 |       
|                          |  |             |  |                        |       |       



There were no grants
of options to any of our executive officers or directors during the six months ended June 29, 2003.



The following table sets forth certain information concerning the exercise of options by each of our executive officers during the six months ended June
29, 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 June 29, 2003. Also reported are the values
for the in-the-money options which represent the positive



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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.



|Name              |  | SharesAcquiredonExercise |             | ValueRealized |               | Number of SecuritiesUnderlying UnexercisedOptions at June 29, 2003 |             | Value of UnexercisedIn-the-Money Optionsat June 29, 2003(1)
|----------------- |  | ------------------------ | ----------- | ------------- | ------------- | ------------------------------------------------------------------ | ----------- | -----------------------------------------------------------
|                  |  |                          | Exercisable |               | Unexercisable |                                                                    | Exercisable |                                                            
|Bruce C. Edwards  |  |                         |             | $             |              |                                                                    | 733,333     |                                                            
|Ronald J. Buschur |  |                         |             | $             |              |                                                                    | 220,833     |                                                            
|Kevin T. Michaels |  |                         |             | $             |              |                                                                    | 221,541     |                                                            

---

|(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 $6.15, the Companys closing Common Stock price reported by Nasdaq on June 27,
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 June 29, 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     |  | 9,104,440                                                                                         |  | $                                                                        | 14.44 |                                                                                                                                        
|Not Approved by shareholders |  |                                                                                                  |  |                                                                          |      |                                                                                                                                        
|                             |  |                                                                                                   |  |                                                                          |       |                                                                                                                                        
|Total                        |  | 9,104,440                                                                                         |  | $                                                                        | 14.44 |                                                                                                                                        
|                             |  |                                                                                                   |  |                                                                          |       |                                                                                                                                        



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 47% of our net sales for the first six 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



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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.



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There are many risks associated with international operations



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 future impact these events 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.



Disclosure About Severe Acute Respiratory Syndrome



We have not experienced any direct impact from the Severe Acute Respiratory
Syndrome (SARS) epidemic which has infected large parts of Asia, including China, Hong Kong and Singapore. We have taken initial steps to limit our employees travel to known highly infected areas. The contract manufacturers that we
use are located in Asia and some of their manufacturing facilities are located close to areas that are being impacted by SARS. While the disease currently appears to be under control, any future breakout of SARS could negatively impact our ability
to transfer production to contract manufacturers located in Asia. Such inability to utilize contract manufacturers could have a material adverse effect on our business and results of operations.



Additional Factors That May Affect Our Future Results



Our future operating results may be impacted by a number of factors that
could cause our actual results to differ materially from those stated in this document and should be reviewed in their entirety when analyzing our business. These factors include the following:



| |  |  | the ability to add new customers to reduce our dependence on any one customer;
| | - |  | ------------------------------------------------------------------------------



| |  |  | the ability to maintain our existing customers;
| | - |  | -----------------------------------------------



| |  |  | the ability to timely develop and produce commercially viable products at competitive prices;
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | industry specific factors, including the current slowdown in the demand for wireless communications and RF power amplifiers;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to efficiently and cost effectively complete our restructuring plan to outsource the majority of our production to contract manufacturers;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the impact of any reduction in demand for our products;
| | - |  | -------------------------------------------------------



| |  |  | the availability and cost of components;
| | - |  | ----------------------------------------



| |  |  | the ability to manage expense levels given reductions in demand;
| | - |  | ----------------------------------------------------------------



| |  |  | the ability to increase demand for our products from major wireless infrastructure original equipment manufacturers, or OEMs;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------



| |  |  | the ability to design and produce products which meet the quality standards and price targets of both our existing and potential customers;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the ability to transition production of our products to contract manufacturers;
| | - |  | -------------------------------------------------------------------------------



| |  |  | the ability to effectively manage contract manufacturers that produce our products;
| | - |  | -----------------------------------------------------------------------------------



| |  |  | the ability to ramp-up production of new products in both a timely and cost effective manner;
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | the ability to accurately anticipate customer demand;
| | - |  | -----------------------------------------------------



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| |  |  | the ability to finance our activities and maintain our financial liquidity;
| | - |  | ---------------------------------------------------------------------------



| |  |  | the ability of our products to operate and be compatible with various OEMs base station equipment;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | the ability to manage future product repairs; and
| | - |  | -------------------------------------------------



| |  |  | worldwide and regional economic, political and health factors, including the current worldwide economic recession, the war in Iraq, tensions in the Middle East and North Korea, and
the SARS epidemic in Asia.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We rely upon a few
customers for a significant amount 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. We believe that our future success depends upon our ability to broaden our customer base and maintain relationships with major wireless OEMs, such as Ericsson, LG
Information & Communications, Ltd. (LGIC), Lucent, Motorola, Nokia, Nortel and Samsung Electronics Co. Ltd. (Samsung), as well as major operators of wireless networks, such as ALLTEL Corporation, AT&T Wireless,
Cingular Wireless and Verizon Wireless. Our dependence on a small number of major customers exposes us to numerous risks, including:



| |  |  | slowdowns or delays in deployment of wireless networks that reduce customer demand for our products;
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | changes in customer forecasts and demand;
| | - |  | -----------------------------------------



| |  |  | customers leveraging their buying power to change the terms of pricing, payment and product delivery schedules;
| | - |  | ---------------------------------------------------------------------------------------------------------------



| |  |  | direct competition should a customer decide to manufacture or increase its current level of RF power amplifier manufacturing; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



| |  |  | concentration of accounts receivable credit risk.
| | - |  | -------------------------------------------------



For the six months ended June 29, 2003, our largest customer, Nortel, accounted for approximately 54% of our net sales, or $56.2 million. For fiscal 2002,
Nortel accounted for approximately 49% of our revenues. For the six months ended June 29, 2003, Nokia accounted for 10% or more of our net sales. During the first six months of fiscal 2003, a number of major OEMs 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 six 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 business, results of operations and financial condition will be negatively impacted. In addition,
several of our major OEM customers continue to experience poor financial performance that has resulted in downgrades of their credit worthiness by outside credit rating agencies and significant reductions in their common stock price and overall
market value. While we perform ongoing credit evaluations and have not experienced any significant payment delays from these customers, further reductions in their financial liquidity could result in future payment delays and/or the declaration of
bankruptcy causing the non-payment of their accounts receivable, which in turn, would have a material adverse effect on our business, results of operations, financial condition and liquidity.



There are several examples of 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. If these customers reduce their demand for our products, our business would be adversely affected.



We have experienced significant reductions in network operator
demand. In addition, we have experienced significant delays in demand for 3G W-CDMA, based products due to what we believe is 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 these various reductions in demand for our
products will have a material adverse effect on our business, results of operations and financial condition in the future.



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We believe that continued purchases of our products by OEMs is dependent upon many factors, including the
OEMs view of utilizing third party suppliers of RF power amplifiers. During the third quarter of 2001, Lucent announced that it had sold its internal power amplifier group to a new private entity called Celiant Corporation, which was
subsequently acquired during the second quarter of 2002 by Andrew Corporation, a competitor of ours. Any shift in demand by an OEM away from utilizing third party suppliers of RF amplifiers, or in purchasing their RF amplifiers from third party
suppliers other than us, could have a negative impact on our business, results of operations and financial condition.



Since OEM purchasers are influenced by their current view of wireless infrastructure deployments, orders for our products could also be significantly
reduced due to delays in such deployments. A number of factors may cause delays in wireless infrastructure deployments, including the following factors:



| |  |  | economic slowdowns or political turmoil in the wireless operators operating region;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | the inability of wireless network operators to fund infrastructure deployment plans;
| | - |  | ------------------------------------------------------------------------------------



| |  |  | reductions in spending on TDMA networks due to planned conversions to GSM or other protocol based networks;
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | decisions to delay or eliminate spending on 3G W-CDMA based networks due to the high projected capital cost of building such networks and market concerns regarding the inoperability
of such network protocols;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the desire of wireless network operators to reduce capital spending in order to preserve cash;
| | - |  | ----------------------------------------------------------------------------------------------



| |  |  | delays in government approvals required for system deployment;
| | - |  | --------------------------------------------------------------



| |  |  | reduced subscriber demand for wireless services;
| | - |  | ------------------------------------------------



| |  |  | high prices for new spectrum licenses;
| | - |  | --------------------------------------



| |  |  | increased competition and bidding between OEMs for infrastructure contracts; and
| | - |  | --------------------------------------------------------------------------------



| |  |  | delays in the development and delivery of telephone handsets and base station equipment that are compatible with new wireless protocols.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



In addition, from time to time, OEMs may purchase products from us in large
quantities over a short period of time, which may cause demand for our products to change rapidly. Due to these and other uncertainties associated with wireless infrastructure deployments and OEMs purchasing strategies, we may experience
significant fluctuations in demand from our OEM customers. Such fluctuations could cause a significant increase in demand that could exceed our production capacity, or the production capacity of our contract manufacturers, and could negatively
impact our ability to meet customers demands as well as potentially impact product quality. Alternatively, such fluctuations could cause a significant reduction in revenues, which could have a material adverse effect on our business, results
of operations and financial condition. We cannot guarantee that a major customer will not reduce, delay or eliminate purchases from us, which could also have a material effect on our business, results of operations and financial condition.



We have experienced, and will continue to experience,
significant fluctuations in sales and operating results from quarter to quarter. Our quarterly results can fluctuate due to a number of factors, including:



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



| |  |  | variations in manufacturing costs, capacities and efficiencies;
| | - |  | ---------------------------------------------------------------



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



| |  |  | capacity and production constraints, including constraints associated with contract manufacturers and single-source component suppliers;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in a network operators transmission protocol;
| | - |  | ------------------------------------------------------



| |  |  | delays in qualification of new products or redesigns by our customers;
| | - |  | ----------------------------------------------------------------------



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



| |  |  | changes in the mix of products having differing gross margins;
| | - |  | --------------------------------------------------------------



| |  |  | competitive factors, including pricing, availability and demand for competing amplification products;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | cancellations or reductions of customer orders and shipments due to economic slowdowns in the customers operating regions;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



| |  |  | cancellations or rescheduling of customer orders and shipments caused by changes in demand or deployment schedules by the customer;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------



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| |  |  | warranty expenses;
| | - |  | ------------------



| |  |  | the availability and cost of components;
| | - |  | ----------------------------------------



| |  |  | the timing, availability and sale of new products by us or our competitors;
| | - |  | ---------------------------------------------------------------------------



| |  |  | changes in average sales prices;
| | - |  | --------------------------------



| |  |  | long sales cycles associated with our products;
| | - |  | -----------------------------------------------



| |  |  | variations in product development and other operating expenses; and
| | - |  | -------------------------------------------------------------------



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



On occasion, we have 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. We cannot guarantee that such orders will actually be shipped or that such
orders will not be cancelled in the future. 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 likely have
a material and adverse effect on our business, results of operations and financial condition.



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. We cannot guarantee that our results of operations will not be similarly adversely affected in the future. In spite of these limitations, we, along with our contract
manufacturers, maintain significant finished goods, work-in-progress and raw materials inventory to meet estimated order forecasts. If customers purchase less than the forecasted amounts or cancel or delay existing purchase orders, we could have
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, we may not have the inventory or manufacturing capacity to fill
their orders. Either situation could have a material adverse effect on our business, results of operations, financial condition and future business with such customers.



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. Fierce competition among third-party suppliers has also increased the downward price pressure on our products. Since wireless infrastructure manufacturers frequently negotiate supply 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 market, and if there is a slower than expected increase in the size of this market, future sales of our products could be negatively impacted.



Almost all of our revenues come from the sale of RF power amplifiers for
wireless communications networks. Our future success depends to a considerable extent upon the continued growth and increased availability of wireless communications services. Wireless communications services may not grow and create demand for our
products. In addition, as experienced during fiscal 2002 and the first six months of fiscal 2003, wireless network operators may decide to continue to reduce or delay capital spending on wireless networks in order to preserve their operating cash
and improve their balance sheets, which would have an adverse effect on our business, results of operations and financial condition.



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We believe that growth in the use of wireless communications services depends, in part, on lowering the
cost per subscriber by reducing the costs of the infrastructure capital equipment and thereby enabling reductions in wireless service pricing. Although FCC regulations require local phone companies to reduce the rates charged to wireless carriers
for connection to their wireline networks, wireless service rates will probably remain higher than rates charged by traditional wireline companies. Alternatively, if wireless service rates fall too far, wireless network operators may not be able to
maintain profitable operations and, therefore, may be forced to further reduce future spending on wireless infrastructure, which in turn, would have an adverse effect on our business, results of operations and financial condition.



The expansion of wireless communications services depends on developed
countries, such as the United States, continuing to allow deployment of new networks and upgrades to existing networks, and on less developed countries deploying wireless communications networks. Our performance could be negatively impacted by any
of the following risks:



| |  |  | failure of local governments or foreign countries to allow construction of new wireless communications systems;
| | - |  | ---------------------------------------------------------------------------------------------------------------



| |  |  | termination or delays by local governments or foreign countries of existing construction of wireless communications systems;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



| |  |  | imposition of moratoriums by local governments or foreign countries on building new base stations for existing wireless communications systems; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | disfavor of wireless communications systems by foreign authorities due to environmental concerns, political unrest, economic downturns, favorable prices for other communications
services or delays in implementing wireless communications systems.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Our reliance on contract manufacturers to produce our products subjects us to various risks which could adversely affect our business, results of operations and financial condition.



In the fourth quarter of fiscal 2002, we announced that we were utilizing
Celestica Corporation (Celestica) to supply both subassemblies and complete product builds from one of its facilities in China. This was the first time that we had outsourced a complete product build to a contract manufacturer. We
announced in the second quarter of 2003 that we were accelerating our efforts to outsource a significantly higher percentage 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:



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



| |  |  | manage, motivate and maintain positive employee relations with our remaining U.S. work force;
| | - |  | ---------------------------------------------------------------------------------------------



| |  |  | 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 timeframe;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



If we are unable to successfully transition selected products to offshore contract manufacturers, our supply chain may be
disrupted and the cost, quality and availability of our products could be negatively impacted. Any delays in the ramp-up of our production lines in Asia, or any delays in the qualification by our customers of the Asia 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, as well as potential financial
penalties payable by us to our customers if they incur excess



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costs due solely to delays by Powerwave. Additionally, if any delays occur, we may be required to spend additional sums to expedite products or production
schedules, which could create additional expenses for Powerwave. Any such loss of revenue or additional unanticipated expenses could have a material adverse effect on our business, results of operations and financial condition.



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. If our contract manufacturers are unable
to timely respond to changes in market 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 sudden decreases in demand, we may be liable for excess
or obsolete inventory or cancellation charges resulting from contractual purchase commitments with our contract manufacturers. For example, pursuant to our agreement with Celestica, we provide rolling forecasts of our requirements for planning
purposes. A portion of the rolling forecast 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
Celestica 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. If we are unable to manage the costs, product quality or performance of our contract manufacturers, our business, results of operations and financial condition could be adversely affected. See
Contractual Obligations and CommitmentsPurchase Commitments with Contract Manufacturers.



We depend on single sources or limited sources for key components and products, and a failure by any of these sources to provide components or products
of sufficient quality and quantity, on a timely basis, would cause us to delay product shipments, which could result in delayed or lost revenues, potential financial penalties for late deliveries, and customer dissatisfaction.



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 due to the unavailability of single-sourced or limited-sourced components such that we do not meet the agreed upon delivery dates of our customers,
such delays could result in lost revenues due to customer cancellations, as well as potential financial penalties payable to our customers if they incur excess costs due solely to delays by Powerwave. Any such loss of revenue or financial penalties
could have a material adverse effect on our business, results of operations and financial condition.



Similarly, if we are unable to obtain cargo space or secure delivery of single-sourced or limited-sourced 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, 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 could have a material adverse effect on our business, results of operations and financial condition.



Our reliance on certain single-sourced and limited-sourced components and products also exposes us to quality control issues
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. Such a requirement could have a material adverse effect on our business, results of operations and financial condition. In addition, if we cannot obtain comparable replacements or effectively retune or redesign our products,
there could be a material adverse effect on our business, results of operations and financial condition.



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As a result of our reliance on certain single-sourced and limited-sourced customized components and
products, an abrupt reduction in customer demand could result in excess inventories of such components or products due to the nature of the volume purchasing agreements that we utilize to obtain cost reductions. If we or our contract manufacturers
are unable to utilize such components or products in a timely manner, and are unable to sell such components or products due to their customized nature, the resulting negative impact on our liquidity and resulting increased inventory levels could
have a material adverse effect on our business, results of operations and financial condition. See Contractual Obligations and CommitmentsPurchase Commitments with Contract Manufacturers; andOther Purchase Commitments.



Many wireless infrastructure manufacturers have internal RF
power amplifier production and/or design capabilities and if these manufacturers begin offering their own RF power amplifiers, demand for our products would be reduced and our business, results of operations and financial condition would be
adversely affected.



Many of the leading wireless
infrastructure equipment manufacturers internally design and/or manufacture their own RF power amplifiers. We believe that our existing customers continuously evaluate whether to manufacture their own RF power amplifiers or utilize contract
manufacturers to produce their own internal designs. Certain of our customers regularly produce or design RF 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 RF power amplifiers, such customers could reduce or eliminate their purchases of our products. We cannot guarantee that our current customers will continue to rely or expand their reliance on us as an
external source of supply for their RF power amplifiers.



Wireless infrastructure equipment manufacturers with internal manufacturing capabilities could also sell RF power amplifiers externally to other manufacturers, thereby competing directly with us. For example, during the third quarter of
2001, Lucent announced that it had sold its internal power amplifier group to a new private entity called Celiant Corporation, which was subsequently acquired during the second quarter of 2002 by Andrew Corporation, a competitor of ours. Even if we
are successful in selling our products to OEM customers, we believe that such customers will demand price and other concessions based on their ability to manufacture and/or design RF power amplifiers internally. If, for any reason, our major
customers decide to produce their RF 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 business, results of
operations and financial condition could be adversely affected.



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 could 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.
| | - |  | -----------------------------------



While we believe that we currently compete favorably with respect to these characteristics, this may change in the future. If we fail to address our
competitive challenges, 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 RF power amplifier manufacturing operations and RF 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



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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 RF power amplifier market, our business, results of operations and financial
condition could be adversely affected.



Our future success
depends largely upon the rate at which wireless infrastructure manufacturers incorporate our products into their systems. A substantial portion of the present worldwide production of RF power amplifiers is captive within the internal manufacturing
operations of leading wireless infrastructure manufacturers such as Ericsson, Motorola, Nokia and Samsung. These companies regularly evaluate whether to manufacture their own RF power amplifiers, outsource their designs to contract suppliers,
purchase from other third party suppliers or purchase from us. In addition, various companies could also compete directly with us by selling their RF power amplifiers to other manufacturers and operators, including our customers. If we are not
successful in increasing the use of our products by the leading wireless infrastructure manufacturers, our business, results of operations and financial condition could be adversely affected.



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 RF 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. In spite of our efforts, 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 able to be manufactured cost effectively in sufficient volumes. As such, we cannot guarantee the success of our research and development efforts.



We also continue to improve our existing cellular, PCS and 3G lines of RF
power amplifier products. Any delays in the shipment of these products may cause customer dissatisfaction and result in a delay or loss of product revenues. In addition, it is possible that a significant number of development projects will not
result in manufacturable new products or product improvements. If we fail to develop new products or improve existing products in a timely manner, there could be a material adverse effect on our business, results of operations and financial
condition.



We may fail to develop products that are
sufficiently manufacturable or are of adequate quality and reliability, 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, if we or our contract manufacturers are unable to attract additional trained technicians, if we or our contract manufacturers lose a number of trained technicians, or if we or our contract
manufacturers cannot train or maintain an adequate number of trained technicians, our business, results of operations and financial condition could be adversely affected.



While we believe that our overall relationships with our customers are good and that they consider our products to be of
good quality, 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 also believe that our customers will
demand that our products meet increasingly stringent performance and reliability standards. However, we cannot provide any assurance that our product designs will remain successful or that they will keep pace with technological developments,
evolving industry standards and new communications protocols. In addition, we may fail to adequately improve product quality and meet the quality standards of our customers or our contract manufacturers may fail to achieve the quality standards of
our customers. 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 RF
power amplifiers and have stringent quality control standards.



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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, results of operations and financial condition.



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. While we believe that
we have adequately protected our proprietary technology and that we have taken all legal measures to safeguard it, we will continue to pursue all legal measures available to prohibit the unauthorized use of our proprietary technology. In spite of
our efforts, the use of our proprietary technology and processes by a competitor could have a material adverse effect on our business, results of operations and financial condition.



There are many risks associated with international 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;
| | - |  | ----------------------



| |  |  | 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 first six months of 2003 and all of fiscal years 2002, 2001 and 2000, international revenues (excluding North American sales) accounted for
approximately 47%, 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.



We have traditionally invoiced most of our international sales in U.S.
Dollars. Accordingly, we do not currently engage in foreign currency hedging transactions. However, as we continue to expand our international operations, we are increasingly being paid in foreign currencies and, therefore, have become exposed to
possible losses from foreign currency transactions. In December 2001, we acquired Toracomm Limited, a company located in Bristol, United Kingdom. Due to this acquisition, we incur foreign currency expenses that expose us to additional foreign
currency transactions, and the resulting gains and losses from such transactions are included in our operating results. In October 2002, we started to use a contract manufacturer in China. Our operations within China also expose us to foreign
exchange and currency risk, as well as political risk, with respect to the products produced and sold in China.



Since we sell our products in many countries, the price of our products in those countries rises and our sales into those countries may fall when the U.S.
Dollar strengthens and becomes more expensive relative to the local currency of our foreign customers, as demonstrated by our experience in South Korea during 1998. In addition, as we sell our products into foreign countries, our products can become
subject to tariffs and import duties which raise the overall price of our products such that our products may no longer be price competitive with those from locally based suppliers. If any of the above risks actually occur, our business, results of
operations and financial condition could be adversely affected.



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There are significant risks in expanding our manufacturing operations in Asia



As part of our strategy, we are shifting a majority of our manufacturing
operations to contract manufacturers in China, Singapore and Thailand to reduce our production costs. This will subject a greater portion of our operations to the risks of doing business in China, Singapore and Thailand. 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 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, there can be no assurance that the Chinese government will not 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. If we are unable to protect our rights while operating within Asia, there may be a negative impact on our business, results of operations and financial condition.



Our ability to compete effectively and manage future growth depends on our
ability to:



| |  |  | effectively transition a majority of our production to outsourced contract manufacturers;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | manage production and inventory levels, including those of our contract manufacturers, to meet product demand and new product introductions;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | reduce product costs;
| | - |  | ---------------------



| |  |  | manage and improve production quality;
| | - |  | --------------------------------------



| |  |  | manage and improve the performance of our suppliers and contract manufacturers while reducing our cost of materials;
| | - |  | --------------------------------------------------------------------------------------------------------------------



| |  |  | efficiently manage and satisfy our service and warranty obligations, including latent defect extended warranty obligations;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



| |  |  | expand both the range of customers and the geographic scope of our customer base;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | effectively manage, develop and retain our technical and managerial work force; and
| | - |  | -----------------------------------------------------------------------------------



| |  |  | improve financial and management controls, reporting systems and procedures.
| | - |  | ----------------------------------------------------------------------------



If we are unable to effectively manage growth, our business, results of operations and financial condition could be adversely affected.



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 earn the associated revenues.



Our customers normally conduct significant technical evaluations of our products and our competitors products before
making purchase commitments. Our OEM customers typically require extensive technical qualification of our products before they are integrated into any of the OEMs products. This qualification process involves a significant investment of time
and resources from the OEMs and us in order to ensure that our product designs are fully qualified to perform with each OEMs equipment. Individual wireless network operators can also subject our products to field and evaluation trials, which
can last anywhere from one to nine months, before making a purchase. The qualification and evaluation process, as well as customer field trials, may delay the shipment of sales forecasted for a specific customer for a particular quarter and our
operating results for the quarter could be negatively impacted.



Protection of our intellectual property is limited and we are at risk of third-party claims of infringement that could harm our competitive position.



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 2 foreign patents, and we have filed applications for over 25 additional U.S. patents and over 50 additional foreign patents. All of these efforts, along with the
knowledge and experience of our management and technical personnel, strengthen our ability to market our existing products and to develop new products. The departure of any of our



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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. There can be no assurance that our pending patent applications will issue or that a third party will not violate, or attempt to
invalidate, our intellectual property rights, possibly forcing us to expend substantial legal fees.



Certain of our customers and other wireless communications infrastructure equipment manufacturers may decide to protect their intellectual property by
deciding not to purchase RF power amplifiers from external sources. The appearance of a close working relationship with a particular customer may adversely affect our ability to establish or maintain a relationship with, or sell products to,
competitors of that particular customer. The failure of our major customers to purchase products from us due to our relationship with other customers 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. While we believe that we have adequately protected our proprietary technology and that we have taken
all legal measures to safeguard it, we may not be successful in prohibiting the unauthorized use of our proprietary technology or the use of our processes by a competitor. Any such unauthorized use of our proprietary technology or processes could
have a material adverse effect on our business, results of operations and financial condition.



Our ability to compete successfully and achieve future revenue growth will depend, in part, on our ability to protect our proprietary technology and operate without infringing the rights of others. We may fail to do
so. In addition, the laws of certain countries in which our products are or may be sold may not protect our products and intellectual property rights to the same extent as the laws of the United States.



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, along with other companies in our industry, may face more frequent 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. Although we may seek licenses from third parties covering intellectual property that we are allegedly infringing, we cannot guarantee that any such licenses could be obtained on acceptable terms, if at all.



Actual or alleged defects in our products may create liability to those
claiming injury.



Any of the following could have a
material adverse effect on our business, results of operations and financial condition:



| |  |  | a determination or allegation that systems or devices relying on or incorporating our products create a health risk, causing us to be named as a defendant, and, possibly held
responsible for any liabilities, in a product liability lawsuit;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | delays or prohibitions on the installation of wireless communications networks due to alleged health or environmental risks; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | our inability to maintain insurance at an acceptable cost or to otherwise protect against potential product liability lawsuits.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------



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.



The FCC has adopted regulations that impose
stringent RF emissions standards on the communications industry. These regulations may require that we alter the manner in which radio signals are transmitted or otherwise alter the equipment transmitting such signals. We are also subject to
regulatory requirements in international markets where prominent local competitors may have the ability to influence regulations in situations where we do not. 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. Deregulation of international communications industries, along with RF spectrum allocations made by the FCC, has increased the potential demand for our products. We cannot
guarantee that the trend toward deregulation and current regulatory developments favorable to the promotion of new and expanded wireless services will continue or that other future regulatory changes will have a positive impact on us.



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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. In the past, the delays inherent in this 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 delays could have a material adverse effect on our business, results of operations and financial condition.



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. The stock market has also experienced significant price and volume fluctuations from time to time. The fluctuations in the stock market are often unrelated to the operating performance of particular companies,
and the market prices for securities of technology companies have been especially volatile. These broad market fluctuations may negatively impact the market price of shares of our Common Stock. The price of our Common Stock may also be influenced
by:



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



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



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



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



| |  |  | changes in the political or economic outlook of the markets into which we sell our products;
| | - |  | --------------------------------------------------------------------------------------------



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



| |  |  | changes in the wireless communications industry; and
| | - |  | ----------------------------------------------------



| |  |  | general market conditions.
| | - |  | --------------------------



Based on the above, we expect that our stock price will continue to be 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.



While we believe we have adequate working capital to meet our expected cash
requirements for the immediate future, we may need to raise additional funds in the future through public or private debt or equity financings in order to:



| |  |  | take advantage of unanticipated 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 in the future 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. No assurances can be given that we will be able to generate positive operating cash flows or
maintain and/or grow our existing cash



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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 unanticipated opportunities, develop new products or services or otherwise respond to unanticipated competitive pressures. In such case, our business, results of operations and financial condition could be adversely
affected.



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 may subject us to numerous risks, including the following:



| |  |  | we may have difficulty assimilating the operations and personnel of the acquired company;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | we may have difficulty effectively integrating the acquired technologies or products with our current products and technologies;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ongoing business may be disrupted by transition and/or integration issues;
| | - |  | ------------------------------------------------------------------------------



| |  |  | we may be unable to retain key technical and managerial personnel from the acquired company;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | we may be unable to achieve the financial and strategic goals for the acquired and combined businesses;
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | we may have 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 relationships with employees could be impaired;
| | - |  | ---------------------------------------------------



| |  |  | 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, our business, results of
operations and financial condition could be adversely affected.



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 potentially double again 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 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 manmade 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 are in the process of outsourcing our manufacturing to Celestica, which has a plant
located in China, 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, results of operations and financial condition. The terrorist attacks in New York and



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Washington D.C. on September 11, 2001 disrupted commerce throughout the world and intensified the uncertainty of the U.S. and other economies. The continued
threat of terrorism and heightened security and military action in response to this threat, or any future acts of terrorism, may cause further disruptions to these economies and create further uncertainties. To the extent that such disruptions or
uncertainties result in delays or cancellations of customer orders, or the manufacture or shipment of our products, our business, results of operations and financial condition could be adversely affected.



Our major facilities are located in the State of California which has
previously experienced an electricity shortage, and we are not able to guarantee that we, or any of our suppliers located in California, will not experience any significant interruptions in electrical service to our or their facilities in the
future.



The two largest investor-owned electric utility
companies in California, Pacific Gas & Electric and Southern California Edison, have experienced electricity generation shortages due to the collapse of Californias deregulation strategy. Pacific Gas & Electric previously declared
voluntary bankruptcy in order to restructure its outstanding obligations. The prior inability of these companies to purchase electricity resulted in rolling blackouts in certain parts of the state. Our Southern California operation is
wholly-dependent on Southern California Edison and our Northern California engineering center is wholly-dependent upon Pacific Gas & Electric. As of June 29, 2003, we had not experienced any significant interruptions in electrical service to our
facilities. However, we currently do not have backup power generators or alternate sources of power to support our needs in the event of a blackout, and our current insurance does not provide coverage for any damages that our customers or we may
suffer as a result of interruptions of power supply. The loss of electrical service would cause a temporary shutdown of our operations resulting in lost production and may require us to recalibrate our production equipment, resulting in potentially
significant unanticipated costs. In addition, many of our suppliers are located in California and could be similarly affected. Frequent and continuing shutdowns of our operations and those of our suppliers could cause us to be unable to manufacture
the products required by our customers in a timely manner. Shipments to our customers could be delayed, resulting in the delay or loss of product revenues. Such delay or loss of product revenues could have an adverse effect on our business, results
of operations and financial condition.



Furthermore, the
deregulation of the energy industry instituted in 1996 by the California government has caused power prices to increase. Under deregulation, utilities were encouraged to sell their plants, which traditionally had produced most of Californias
power, to independent energy companies that were expected to compete aggressively on price. Instead, due in part to a shortage of supply, wholesale prices have skyrocketed over the past few years. As a result, we have incurred significant increases
in our electricity costs that are negatively impacting our results of operations. If wholesale prices continue to increase and these increases are passed on to end users, the operating expenses associated with our facilities will increase, which
could further adversely effect our results of operations.



As
we proceed with outsourcing more of our production to contract manufacturers located outside of California, we expect that our risk of power failures will diminish. However, it is possible that our contract manufacturers could be subjected to power
shortages due to other unanticipated reasons. Any such shortage could have an adverse impact on our business and results of operations.



We are at risk of litigation, which could result in substantial costs to us and adversely affect our operations.



We are not currently party to any legal proceedings or threatened
proceedings, the adverse outcome of which, individually or in the aggregate, we believe would have a material adverse effect on our business, results of operations and financial condition. However, any potential litigation, regardless of its merits,
could result in substantial costs to us and divert our attention from our operations. Such diversion could have a material adverse effect on our business, results of operations and financial condition.



Changes in laws, regulations and financial accounting standards may affect
our reported results of operations.



The recently enacted
Sarbanes-Oxley Act of 2002 and related regulations may result in changes in accounting standards or accepted practices within our industry and could add significant new costs to being a public company. New pronouncements and varying interpretations
of pronouncements have occurred in the past and are likely to occur in the future as a result of recent Congressional and regulatory actions. New laws, regulations, and accounting standards, as well as potential changes to currently accepted
accounting practices in the technology industry, including the expensing of stock options, could adversely affect our reported financial results and negatively impact our stock price. Additional unanticipated expenses incurred to comply with new
requirements could also negatively impact our results of operations.



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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 June 29, 2003, the carrying values of our financial instruments
approximated their fair values based upon current market prices and rates.



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 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 June 29, 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There are many risks associated with international operations under Item 2, Managements Discussion and Analysis of Financial Condition and Results of
Operations included herein.



We are exposed to a number
of market risks in the ordinary course of business. These risks, which include interest rate risk, foreign currency exchange 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.



As of June 29, 2003, we did not have any material debt outstanding. As a
result, we did not have significant interest rate risk from a liability perspective as of June 29, 2003. For a description of debt incurred after June 29, 2003, see Note 15. Subsequent Events in our condensed consolidated financial
statements under Part I, Item 1, Financial Statements included herein. However, we do have a significant amount of cash and short-term investments with maturities of three months or less. This cash portfolio exposes us to interest rate
risk as short-term investment rates fell to historical lows in 2002 and during the first half 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.



We 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. We attempt to
manage this risk by entering into supply agreements with various suppliers of these components. These supply agreements are not long-term supply agreements. If we 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.



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|ITEM 4. |  | CONTROLS AND PROCEDURES
|------- |  | -----------------------



(a) Evaluation of disclosure 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-14 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.



(b) Changes in
internal controls



There have been no significant
changes in the Companys internal controls or in other factors that could significantly effect these internal controls subsequent to the date of our most recent evaluation.



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



|(a) |  | Exhibits
|--- |  | --------



The following exhibits are filed as part of this report:



|ExhibitNumber |  | Description                                                                                                                       
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------
|              | 
|10.37         |  | Repair Services Agreement between the Company and VM Services, Inc. dated June 26, 2003.**                                        
|              | 
|31.1          |  | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section
1350.   
|              | 
|31.2          |  | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section
1350.   
|              | 
|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.***

---

|** |  | Registrant has sought confidential treatment pursuant to Rule 24b-2 of the Exchange Act for a portion of the referenced exhibit.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------

|*** |  | 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.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|(b) |  | Reports on Form 8-K:
|--- |  | --------------------



The Registrant furnished a Current Report to the SEC on Form 8-K on March 31, 2003, to report under Item 12, Results of Operations and Financial
Condition, the announcement of preliminary financial results for the fiscal quarter ended March 30, 2003.



The Registrant furnished a Current Report to the SEC on Form 8-K on April 10, 2003, to report under Item 12, Results of Operations and Financial
Condition, the announcement of financial results for the fiscal quarter ended March 30, 2003.



The Registrant furnished a Current Report to the SEC on Form 8-K on April 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 April 10, 2003, relating to the Companys financial results for the first quarter ended March 30, 2003.



The Registrant filed a Current Report with the SEC on Form 8-K on June 16, 2003, to report under Item 5, Other Events and Regulation FD Disclosure, an
asset purchase agreement between the Company and Ericsson Amplifier Technologies, Inc., Microwave Power Devices, Inc. and Ericsson AB.



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: |  | August 1, 2003 |  |  |  |     |  | POWERWAVE TECHNOLOGIES, INC                               
|----- |  | -------------- |  |  |  | --- |  | ----------------------------------------------------------
|      |  |                |  | 
|      |  |                |  |  |  | By: |  | /s/ KEVIN T. MICHAELS                                     
|      |  |                |  |  |  |     |  | Kevin T. Michaels                                         
|      |  |                |  |  |  |     |  | Senior Vice President, Finance and Chief Financial Officer



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