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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

OR

Commission File Number 000-21507

POWERWAVE TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

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

(Address of principal executive offices, zip code)

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

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

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

As of May 6, 2003 the number of outstanding shares of Common Stock, par value $0.0001 per share, of the Registrant was 65,968,329.

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POWERWAVE TECHNOLOGIES, INC.

INDEX

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CAUTIONARY STATEMENT RELATED TO FORWARD LOOKING STATEMENTS

This Quarterly Report on Form 10-Q includes certain 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, trends in average selling prices and gross margins, the transfer of certain manufacturing operations to contract manufacturers, the timing of and demand for 3G products, restructuring charges, and the level of expected capital and research and development expenditures. Such forward-looking statements are based on the beliefs of, estimates made by, and information currently available to Powerwave Technologies Inc.’s (“Powerwave” or the “Company) management and are subject to certain risks, uncertainties and assumptions. Any statements contained herein (including without limitation statements to the effect that the Company 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 should be construed as 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 14-39. Because of these and other factors that may effect 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. The Company undertakes 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 From 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)

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)

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)

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)

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 manufactures 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 months ended March 30, 2003 are not necessarily indicative of the results to be expected for the entire fiscal year ending December 28, 2003 (“fiscal year 2003.”) For further information on additional factors that may affect future results, please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under Item 2 in this report on Form 10-Q and to the Consolidated Financial Statements and Notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2002.

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.

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

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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 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.

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 first quarter of 2003 was $3.30 per share and for fiscal year 2002 was $7.07 per share. Had compensation cost for the Company’s stock option plans and its stock purchase plans been determined based on the estimated fair value at the grant dates for awards under those plans consistent with the fair value method of SFAS No. 123 utilizing the Black-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 quarters ended March 30, 2003 and March 31, 2002 would have approximated the pro forma amounts indicated below:

The fair value of options granted under Powerwave’s stock incentive plans during the first quarter of 2003 and fiscal year 2002 was estimated on the date of grant using the Black-Scholes option-pricing model utilizing the multiple option approach using the following weighted-average assumptions:

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Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimates, management does not believe that the existing models provide 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 the Company’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. Local currency transactions of international subsidiaries which have the U.S. Dollar as the functional currency are remeasured into U.S. Dollars using current rates of exchange for monetary assets and liabilities and 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 stockholders’ equity. Translation adjustments have not historically had a significant impact on the Company’s financial results.

Use of Estimates

The preparation of the condensed consolidated financial statements, in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of 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 year amounts have been reclassified to conform to the current quarter presentation.

Note 3. Inventories

Net inventories consist of the following:

Inventories are net of an allowance for excess and obsolete inventory of approximately $10.0 million and $9.0 million as of March 30, 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.

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Note 4. Property, Plant and Equipment

Net property, plant and equipment consist of the following:

Note 5. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following:

A summary of the activity that affected the Company’s accrued warranty costs is as follows:

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 March 30, 2003, there were rights to purchase approximately 87,000 shares of Common Stock outstanding under the ESPP’s thirteenth offering, which will conclude on July 31, 2003.

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 three months ended March 30, 2003:

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At March 30, 2003, a total of 1,707,494 shares were available for grant under all of the Company’s stock option plans.

During each of the three months ended March 30, 2003 and March 31, 2002, Powerwave recorded compensation expense related to stock options of approximately $15,000. The remaining unamortized compensation expense as of March 30, 2003 was approximately $23,000 and will be amortized through September 2003.

Note 8. Commitments and Contingencies

Powerwave had various outstanding leases as of March 30, 2003, the majority of which relate to real estate operating leases, including 115,000 square feet of warehouse space in Santa Ana, California, 31,500 square feet of engineering and office space in El Dorado Hills, California, and 8,100 square feet of engineering and office space in Bristol, United Kingdom.

Future minimum lease payments required under all operating leases at March 30, 2003 are payable as follows:

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 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 March 30, 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.

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Note 9. Goodwill Impairment Charge

As a result of the significant economic downturn effecting demand in the wireless infrastructure industry during the quarter ended March 30, 2003, Powerwave determined that it was necessary to test its previously recorded goodwill for impairment. 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 charge of $4.9 million during the first quarter of fiscal 2003. The Company did not record any similar goodwill impairment charge during the quarter ended March 31, 2002.

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 157,146 have been excluded from diluted weighted average common shares for the three months ended March 30, 2003, as the effect would be anti-dilutive.

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

Note 11. Customer Concentrations

Powerwave’s product sales have historically been concentrated in a small number of customers. During the quarters ended March 30, 2003 and March 31, 2002, sales to customers that accounted for 10% or more of revenues for the quarter totaled $44.0 million and $88.8 million, respectively. Sales to Nortel Networks Corporation and related entities (“Nortel”) accounted for approximately 52% and 36% of total revenues during such quarters, respectively. During the quarter ended March 30, 2003, two customers in addition to Nortel accounted for approximately 23% and 10% of total revenues. During the quarter ended March 31, 2002, three customers in addition to Nortel accounted for approximately 20%, 17% and 12% of total revenues. The top three customers as of March 30, 2003 accounted for approximately 85% of the Company’s accounts receivable as of such quarter. 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 sources as well as finished RF amplifiers from contract manufacturers. As Powerwave moves more of its manufacturing operations to contract manufacturers, the Company will have less direct contact with numerous suppliers which could potentially increase its concentration of supply with a limited number of suppliers. The inability to obtain single-sourced components of

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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 currently 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:

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

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 $20.3 million and $31.0 million during the quarters ended March 30, 2003 and March 31, 2002, respectively. Sales to Finland during the quarters ended March 31, 2002 and March 31, 2002 were $11.7 million and $18.1 million, respectively.

The majority of Powerwave’s assets are located in the United States, in the State of California. Total accounts receivable as of March 30, 2003 include 46% from customers based in Canada, 20% from customers based in the United States, 18% from customers based in Finland and 10% from customers based in France.

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 quarter ended March 30, 2003 and had no outstanding accounts receivable as of such quarter end. During the quarter ended March 31, 2002, the Company had $1.4 million in sales to Metawave.

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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.”

Significant 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 significant accounting policies which we believe are the most critical to aid in 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 on 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. As a result of this impairment charge, the recorded value of goodwill at March 30, 2003 is zero. See “Impairment and Restructuring Charges” and “Additional Factors That May Affect Future Results—Our Common Stock price has been, and my continue to be, volatile…”

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 significantly vary 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. Such an impairment charge could have a material adverse impact on our future reported operating results. 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…”

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 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 warranty costs have historically been within our expectations and the provisions

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established, we cannot guarantee that we will continue to experience the same warranty return rates or repair costs that we have in the past. A significant increase in product return rates, or a significant increase in the costs to repair 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.

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 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

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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.

Results of Operations

The following table summarizes Powerwave’s results of operations as a percentage of net sales for the three months ended March 30, 2003 and March 31, 2002:

Impairment and Restructuring Charges

As a result of the significant economic downturn effecting demand in the wireless infrastructure industry during the quarter ended March 30, 2003, we determined that it was necessary to test our previously recorded goodwill for impairment. 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 was concluded that the entire amount of our recorded goodwill had been impaired and, therefore, recorded a non-cash charge of $4.9 million during the first quarter of fiscal 2003. We did not record any similar goodwill impairment charge during the quarter ended March 31, 2002.

In addition, we have recently announced that we are accelerating our efforts to outsource a significantly higher percentage of our production to contract manufacturers in an effort to further reduce our manufacturing labor and overhead costs. To this point, we have added a second outsourced contract manufacturing location in Asia that we anticipate will allow us to accomplish this transition in a faster time frame over the remainder of this fiscal year. In connection with this transition, we expect to incur certain non-recurring restructuring costs during the remainder of fiscal 2003, the specific amounts and timing of which have yet to be determined. The restructuring charges will include, among other items, expenses related to severance and retention bonus payments to impacted employees, freight costs related to the transfer of inventory and equipment to such contract manufacturers, and write-downs to the value of property and equipment that may be identified as excess to our on-going requirements.

Three months ended March 30, 2003 and March 31, 2002

Net Sales

Our sales are derived primarily from the sale of RF power amplifiers for use in wireless communications networks. Sales decreased by 50% to $52.2 million, for the quarter ended March 30, 2003, from $104.1 million, for the quarter ended March 31, 2002. We believe that this reduction in demand was due in large part to the significant

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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 negatively impact our revenues for at least the next few quarters. For the quarter ended March 30, 2003, total sales of products for networks in the 800-1000 MHz range accounted for approximately 63% of sales, or $33.1 million, compared to approximately 63% of sales, or $65.5 million, for the quarter ended March 31, 2002. Sales of products for networks in the 1800-2000 MHz range accounted for approximately 13% of sales, or $6.9 million, for the first quarter of fiscal 2003, compared to approximately 20% of sales, or $20.4 million, for the first quarter of fiscal 2002. For the quarter ended March 30, 2003, sales of products for use in networks over 2000 MHz, which largely consist of 3G products, accounted for approximately 24% of sales, or $12.2 million, compared to 17% of sales, or $18.2 million for the quarter ended March 31, 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 the majority of our sales, comprising approximately 62% of sales, or $32.5 million, for the quarter ended March 30, 2003, compared to approximately 77% of sales, or $79.8 million, for the quarter ended March 31, 2002. Total international sales (excluding North American sales) accounted for approximately 38% of sales, or $19.7 million, for the first quarter of fiscal 2003, compared to approximately 23% of sales, or $24.3 million, for the first quarter of fiscal 2002. Total Asian sales accounted for approximately 6% of sales, or $3.1 million, for the quarter ended March 30, 2003, compared to 1% of sales, or $1.6 million, for the quarter ended March 31, 2002. Total European and other international sales accounted for approximately 32% of sales, or $16.6 million, for the first quarter of fiscal 2003, compared to 22%, or $22.7 million, for the first 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 March 30, 2003, total sales to Nortel accounted for approximately 52% of sales and sales to ALLTEL Corporation and Nokia Networks (“Nokia”) each accounted for 10% or more of sales for such quarter. For the quarter ended March 31, 2002, total sales to Nortel accounted for approximately 36% of sales and sales to Cingular Wireless, Lucent Technologies, Inc. (“Lucent”) 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, 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 quarter 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 vertically integrated. Due to the possible uncertainties associated with wireless infrastructure deployments and OEM demand, we have experienced and expect to continue to experience significant fluctuations in demand from our OEM and network operator customers. Such fluctuations have caused and may continue to cause significant reductions in our revenues and/or operating income, which has harmed and may continue to harm our business, financial condition and results of operations. See “Additional Factors That May Affect Future Results—We rely

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upon a few customers for a 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 first quarter of fiscal 2003 and fiscal 2002 were 7.3% and 18.0%, respectively. The reduction in our gross profit margins during the first quarter of fiscal 2003 as compared to the first quarter of fiscal 2002 is primarily due to the significant unanticipated 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 response to this reduction in demand, we have recently announced that we are accelerating our efforts to transfer a significantly higher percentage of our production to outsourced contract manufacturers in an effort to further reduce our manufacturing labor and overhead costs. 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...” The transfer of additional production to outsourced contract manufacturers will result in additional workforce reductions during the remainder of 2003. See “Impairment and Restructuring Charges.” Notwithstanding these cost reduction efforts, we currently anticipate that due to the reduced sales levels, we will continue to experience under-absorption of our manufacturing overhead expenses and excess labor costs which will have a negative impact on our gross margins.

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…”

While we continue to strive for manufacturing and engineering cost reductions to offset pricing pressures on our products as evidenced by our recent announcement that we have accelerated our efforts to outsource a higher percentage of our production to contract manufacturers, 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 18% to $2.9 million for the quarter ended March 30, 2003, from $3.5 million for the quarter ended March 31, 2002. As a percentage of sales, sales and marketing expenses were 5.6% and 3.4% for the first fiscal quarters ended 2003 and 2002, respectively. The decrease in sales and marketing expenses was primarily attributable to lower sales commissions related to the 50% reduction in our revenues during the first 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 of capital equipment. Research and development expenses increased by 19% to $10.0 million for the quarter ended March 30, 2003, from $8.4 million for the quarter ended March 31, 2002. As a percentage of sales, research and development expenses were 19.1% and 8.0% for the first 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 first quarter of fiscal 2003.

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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 7% to $3.3 million for the quarter ended March 30, 2003, from $3.6 million for the quarter ended March 31, 2002. As a percentage of sales, general and administrative expenses were 6.4% and 3.5% for the first fiscal quarters ended 2003 and 2002, respectively. The decrease in general and administrative expenses was primarily attributable to lower personnel costs during the first quarter of fiscal 2003.

Other Income

Other income consists primarily of interest income, net of any interest expense. Other income increased slightly to $0.8 million for the quarter ended March 30, 2003, from $0.7 million during the quarter ended March 31, 2002. The increase was due to larger average cash balances offset by significantly lower short-term interest rates.

Provision (Benefit) for Income Taxes

We recorded a tax benefit at a rate of 36.0% during the quarter ended March 30, 2003 as compared to a tax provision of 30.0% for the quarter ended March 31, 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 March 30, 2003, we had working capital of $212.1 million, including $164.2 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, 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 three months ended March 30, 2003 and March 31, 2002:

Net cash provided by operations in the first quarter of fiscal 2003 decreased by $13.3 million as compared to the first quarter of fiscal 2002. This decrease was due to several factors, the majority of which was related to our significantly lower revenues and operating loss. During the quarter ended March 30, 2003, our net accounts receivable decreased to $42.5 million from $53.3 million at December 29, 2002, consistent with our lower sales volume during the first quarter 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 increased to $32.1 million during the quarter ended March 30, 2003, from $29.9 million at December 29, 2002, due to our lower sales volume during the quarter. During the quarter ended March 30, 2003, our accounts payable increased to $28.5 million from $26.8 million at December 29, 2002, consistent with our increase in inventory on-hand.

Net cash used in investing activities largely reflects our capital spending requirements. The decrease in net cash used in investing activities for the first quarter of fiscal 2003 compared to the first quarter of fiscal 2002 was primarily attributable to a decrease in capital expenditures for test equipment. Total capital expenditures during the first quarter of fiscal 2003 and 2002 were approximately $0.7 million and $1.0 million, respectively. The majority

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of the capital spending during the first quarter 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 first quarter of fiscal 2003 as compared to the first 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 the first quarter 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 operations for at least the next twelve months. Our principal source of liquidity consists of our existing cash balances. We regularly review our cash funding requirements and attempt to meet those requirements through a combination of cash on hand and cash provided by operations. Our ability to increase revenues and generate profits is subject to numerous risks and uncertainties and any significant further decrease in our revenues or profitability would reduce our operating cash flows and erode our existing cash balances. During the first quarter of fiscal 2003, several major OEMs 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 continue to be able to generate positive operating cash flows or maintain and/or grow our existing cash balances. See “Additional Factors That May Affect Future Results—We rely upon a few customers for significant amount of our revenues…;—The wireless communications infrastructure equipment industry is extremely competitive…; —Our average sales prices have declined…;—Our success is tied to the growth of the wireless services market…; and—We have experienced, and will continue to experience, significant fluctuations in sales and operating results from quarter to quarter…”

Financing Activities

Effective May 31, 2002, we renewed our $20 million revolving credit agreement with Comerica Bank-California for a period of one year. The credit facility provides for an unsecured revolving line of credit up to a maximum principal amount outstanding at any one time of $20 million (the “Revolving Commitment Amount”). We are required to pay a commitment fee of 0.25% per annum on the unused portion of the Revolving Commitment Amount, payable quarterly in arrears. The revolving credit facility allows for borrowings based either upon the bank’s prime rate (4.25% at March 30, 2003) or the bank’s LIBOR rate plus an applicable LIBOR margin of 1.25% or 1.50%, based upon our debt leverage ratio. The revolving credit facility contains certain standard affirmative and negative covenants, including limitations on future indebtedness, restricted payments, transactions with affiliates, liens, dividends, mergers, transfers of assets and leverage ratios. At March 30, 2003, we were in compliance with all covenants contained in the revolving credit facility. There were no amounts outstanding and the full $20 million of the Revolving Commitment Amount was available to us as of March 30, 2003. The revolving credit facility terminates on May 31, 2003. There can be no guarantee that we will be able to renew this credit facility with 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…”

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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 that were in excess of our requirements and we have previously recognized charges and expenses related to such excess material. If we are unable to adequately manage our contract manufacturers and adjust such commitments for changes in demand, we may incur additional inventory expenses related to excess and obsolete inventory. Such expenses could have a material adverse effect on our business, financial condition and results of operations.

Other Purchase Commitments

We also incur various purchase obligations with other vendors and suppliers for the purchase of inventory, as well as other goods and services, in the normal course of business. These obligations are generally evidenced by purchase orders with delivery dates from four to six weeks from the purchase 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 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 March 30, 2003, total outstanding letters of credit approximated $0.3 million and related to contingent liabilities under our workers compensation insurance policies.

As of March 30, 2003, expected future cash payments related to contractual obligations and commercial commitments were as follows:

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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 Form 10-K/A dated April 3, 2003 for further information concerning the policies and procedures of the Company and the Compensation Committee regarding the use of stock options.

During the three months ended March 30, 2003, we granted options to purchase a total of 58,000 shares of Common Stock to employees. After deducting 138,206 shares for options forfeited, the result was net option forfeitures of 80,206. Net option forfeitures during the three-month period represented 0.1% of our total outstanding common shares of 65,968,329 as of March 30, 2003. The following table summarizes the net stock option grants to our employees, directors and executive officers during the three most recent fiscal periods:

At March 30, 2003, a total of 1,707,494 options were available for grant under all of our option plans and a total of 286,599 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

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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 three months ended March 30, 2003:

The following table summarizes outstanding stock options that are “in-the-money” and “out-of the-money” as of March 30, 2003. For purposes of this table, in-the-money stock options are those options with an exercise price less than $3.55 per share, the closing price of Powerwave Common Stock on March 28, 2003, the last trading day of the first fiscal quarter, and out-of-the-money stock options are stock options with an exercise price greater than or equal to the $3.55 per share closing price.