INTERWAVE COMMUNICATIONS INTERNATIONAL LTD - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarter ended September 30, 2004

OR

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

For the transition period from to

Commission File Number 000-1095478

INTERWAVE COMMUNICATIONS INTERNATIONAL LTD.

(Exact name of registrant as specified in its charter)

BERMUDA		98-0155633
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

CLARENDON HOUSE, 2 CHURCH STREET P.O. BOX HM 1022 HAMILTON HM DX, BERMUDA		NOT APPLICABLE
(Address of principal executive offices)		(Zip code)

(441) 295-5950
(Registrant’s telephone number including area code)

NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last report.)

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, and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý

As of November 1, 2004, 9,407,805 common shares, par value $0.01 per share, of the registrant were outstanding.

INTERWAVE COMMUNICATIONS INTERNATIONAL LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)

	September 30, 2004			June 30, 2004
	(unaudited)
ASSETS
Current assets:
Cash	$	2,072		$	5,350
Restricted cash, current portion	184			382
Trade receivables, net of allowance of $1,117 and $968 as of September 30, 2004 and June 30, 2004, respectively	7,356			8,210
Trade receivables from related parties	362			593
Inventories, net	8,935			7,989
Prepaid expenses and other current assets	2,626			2,634
Total current assets	21,535			25,158
Restricted cash, long term portion	199			199
Property and equipment, net	2,604			2,747
Purchased technology, net	2,346			2,620
Patents and other intangibles, net	3,124			3,387
Other assets	63			113
Total assets	$	29,871		$	34,224
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Short-term borrowings	$	7,073		$	3,588
Current portion of notes and capital leases payable	145			308
Accounts payable	6,264			6,933
Accrued expenses	3,156			3,283
Accrued compensation	1,718			2,034
Income taxes payable	72			172
Accrued restructuring	1,018			1,416
Deferred revenue	317			283
Deferred revenue from related parties	—			95
Advance customer deposits	3,940			4,093
Total current liabilities	23,703			22,205
Other long term liabilities	1,000			1,000
Total liabilities	24,703			23,205
Shareholders’ equity:
Common shares, $0.01 par value; 20,000,000 shares authorized; 9,261,236 and 9,164,605 shares issued and outstanding as of September 30, 2004 and June 30, 2004, respectively	92			91
Additional paid-in capital	345,128			344,863
Receivables from shareholders	—			(185		)
Accumulated other comprehensive loss	(116		)	(116		)
Accumulated deficit	(339,936		)	(333,634		)
Total shareholders’ equity	5,168			11,019
Total liabilities and shareholders’ equity	$	29,871		$	34,224

See Notes to Condensed Consolidated Financial Statements

INTERWAVE COMMUNICATIONS INTERNATIONAL LTD. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

	Three Months Ended September 30,
	2004			2003
	(unaudited)
Product revenues	$	3,868		$	9.954
Service revenues	264			761
Total revenues (inclusive of related party revenues of $55, and $37 for 2004 and 2003 respectively)	4,132			$	10,715
Product cost of revenues	2,932			4,713
Service cost of revenues	1,193			1,027
Amortization of intangible assets	537			457
Total cost of revenues	4,662			6,197
Gross profit (loss)	(530		)	4,518
Operating expenses:
Research and development	2,270			2,235
Selling, general and administrative	3,305			5,518
Restructuring charges	—			58
Total operating expenses	5,575			7,811
Loss from operations	(6,105		)	(3,293		)
Interest income	3			6
Interest expense	(245		)	(46		)
Other expense, net	(48		)	(79		)
Loss before income taxes	(6,395		)	(3,412		)
Income tax benefit (expense)	93			(11		)
Net loss	$	(6,302	)	$	(3,423	)
Basic and diluted net loss per share	$	(0.69	)	$	(0.51	)
Shares used in computing basic and diluted net loss per share	9,197			6,772

See Notes to Condensed Consolidated Financial Statements

INTERWAVE COMMUNICATIONS INTERNATIONAL LTD AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

	Three Months Ended September 30,
	2004				2003
	(unaudited)
Cash flows from operating activities:
Net loss	$	(6,302		)	$	(3,423	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization	970				1,064
Compensation expense related to issuance of stock option and stock grants	7				129
Inventory valuation and purchase commitment charges (recoveries)	(350			)	(244		)
Provision for bad debt	162				361
Changes in operating assets and liabilities:
Trade receivables	936				446
Inventories	(596			)	1,203
Prepaid expenses and other assets	8				—
Accounts payable	(669			)	2,175
Accrued and other liabilities	(956			)	1,831
Deferred revenue and other	(214			)	(160		)
Other assets	50				(264		)
Net cash provided by (used in) operating activities	(6,954			)	3,118
Cash flows from investing activities:
Sale of investments	—				80
Purchases of property and equipment	(290			)	—
Decrease in restricted cash	198
Net cash provided by (used in) investing activities	(92			)	80
Cash flows from financing activities:
Payment of shareholder receivable	185				—
Proceeds from short-term borrowings, net	3,485				—
Principal payments on notes payable and capital lease obligations	(163			)	(1,180		)
Proceeds from issuance of common shares and other	261				—
Net cash provided by (used in) financing activities	3,768				(1,180		)
Net increase (decrease) in cash and cash equivalents	(3,278			)	2,018
Cash and cash equivalents at beginning of period	5,350				4,371
Cash and cash equivalents at end of the period	$		2,072		$	6,389

See Notes to Condensed Consolidated Financial Statements

INTERWAVE COMMUNICATIONS INTERNATIONAL LTD. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION

The accompanying interim condensed consolidated financial statements are unaudited, but in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) necessary to fairly state the Company’s consolidated financial position, results of operations, and cash flows as of and for the dates and periods presented. The condensed consolidated financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X of the rules and regulations of the Securities and Exchange Commission (“SEC”).

These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2004 filed with the Securities and Exchange Commission. The results of operations for the three-month period ended September 30, 2004 are not necessarily indicative of results for the entire fiscal year ending June 30, 2005 or any other period.

The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. The condensed consolidated financial statements contemplate the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has had recurring net losses, including net losses of $6.3 million and $3.4 million for the three-month periods ended September 30, 2004 and 2003, respectively, and the Company also had net cash used in operations of $7.0 million for the three-month period ended September 30, 2004. The Company's management is currently attempting to execute plans intended to increase revenues and margins, and to reduce spending. The Company may seek to raise additional financing through the issuance of debt or equity or through other means such as customer prepayments, asset sales or secured borrowings. If additional funds are raised through the issuance of preferred equity or debt securities or secured borrowings, these securities could have rights, preferences and privileges senior or otherwise superior to that of the Company's common shares, and the terms of any debt could impose restrictions on the Company's operations. The sale of additional equity or convertible debt securities could result in additional dilution to the Company's shareholders and such securities may have rights, preferences and privileges senior or otherwise superior to those held by existing shareholders. If the Company cannot raise funds on terms favorable to it, or raise funds at all, the Company may not be able to develop or enhance our products, take advantage of future opportunities or respond to competitive pressures or unanticipated requirements. If the Company is unable to raise additional funds, the Company may be required to reduce the scope of its planned operations, which could harm its business, or the Company may even need to cease operations.

The preparation of 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, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

2. STOCK BASED COMPENSATION

The Company accounts for its stock option plans and its Employee Stock Purchase Plan in accordance with the provisions of Accounting Principles Board Opinion 25, “Accounting for Stock Issued to Employees,” (“APB 25”), and related interpretations whereby the difference between the exercise price and the fair value at the date of grant is recognized as compensation expense. Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” (“SFAS No. 123”), established a fair value based method of accounting for stock-based plans. Companies that elect to account for stock-based compensation plans in accordance with APB 25 are required to disclose the pro forma net loss that would have resulted from the use of the fair value based method under SFAS No. 123.

Under SFAS No. 123, the Company is required to disclose the pro forma effects on net loss and net loss per share as if the Company had elected to use the fair value approach to account for all of its employee stock-based compensation plans. Had compensation cost for the Company’s plans been determined consistently with the fair value approach described in SFAS No. 123, the Company’s pro forma net loss and pro forma net loss per share for the three months ended September 30, 2004 and 2003 would have been changed as indicated below (in thousands, except per share amounts):

	Three Months Ended September 30,
	2004			2003
Net loss	$	(6,302	)	$	(3,423	)
Less: Stock-based employee compensation expense using the fair value based method, net of tax effect	(286		)	(181		)
Pro forma net loss	$	(6,588	)	$	(3,604	)

Net loss per share:
As reported	$	(0.69	)	$	(0.51	)

Pro forma	$	(0.72	)	$	(0.53	)

The fair value of options granted was estimated on the date of grant using the Black-Scholes option-pricing model with weighted-average assumptions used for grants in 2004 and 2003, which are presented below. Assumptions related to the Employee Share Purchase Plan are not presented as the related compensation expense amounts are insignificant.

	Three Months Ended September 30,
	2004		2003
Weighted average risk-free rate	3.00	%	1.00	%
Expected life (years)	3.44		3.40
Volatility	186	%	72	%
Dividend yield	—		—

During the three-month periods ended September 30, 2004 and 2003, the Company granted options with a weighted-average fair value of approximately $5.01 and $2.52, respectively.

3. COMPREHENSIVE LOSS

Comprehensive loss includes all changes in equity (net assets) during a period from non-owner sources. Accumulated other comprehensive loss, as presented on the accompanying condensed consolidated balance sheets, consists of the cumulative foreign currency translation adjustment.

The components of the Company’s total comprehensive loss were (in thousands):

	Three Months Ended September 30,
	2004			2003
	(unaudited)
Net loss	$	(6,302	)	$	(3,423	)
Foreign currency translation adjustments	—			66
Total comprehensive loss	$	(6,302	)	$	(3,357	)

4. BASIC AND DILUTED NET LOSS PER SHARE

Basic and diluted net loss per share is calculated in accordance with Statement of Financial Accounting Standards No. 128, “Earnings Per Share.” The denominator used in the computation of basic net loss per share is the weighted-average number of common shares outstanding for the respective periods. Diluted net loss per share would give effect to the dilutive effect of potential common shares, such as stock options and warrants. Warrants to purchase 0.3 million and 0.7 million shares of common stock and options to purchase 1.4 million and 1.2 million shares of common stock were outstanding at September 30, 2004 and 2003, respectively, but were not included in the computation of diluted net loss per share as the effect would be anti-dilutive.

5. RESTRICTED CASH

The Company maintains stand-by letters of credit in the amount of $0.4 million as collateral on the leased facility in Mountain View and customer guarantees, which are restricted for use. As of September 30, 2004, $0.2 million and $0.2 million are classified as short-term and long-term, respectively, on the accompanying consolidated balance sheets.

6. INVENTORIES, NET

Inventories consisted of the following (in thousands):

	September 30, 2004		June 30, 2004
	(unaudited)
Work in process	$	6,934	$	5,460
Finished goods	1,316		1,332
Inventory held at subcontractors	685		1,197
Total	$	8,935	$	7,989

7. RESTRUCTURING CHARGES

The Company’s restructuring accrual is summarized as follows (in thousands):

For the three-month period ended September 30, 2004	Restructuring Accrual as of June 30, 2004		Additions/ Reversals	Payments			Restructuring Accrual as of September 30, 2004
Future lease payments related to abandoned facilities	$	1,350	$	$	(356	)	$	994
Workforce reduction	66			(42		)	24
Total	$	1,416	$	$	(398	)	$	1,018

The remaining restructuring accrual for future lease payments related to abandoned facilities is expected to be paid out through calendar year 2006.

8. ACCRUED WARRANTY AND RELATED COSTS

The Company offers a basic limited parts and labor warranty on its hardware products. The basic warranty period for hardware products is typically one year from the date of shipment to the end user. The Company provides currently for the estimated costs that may be incurred under its basic limited product warranties at the time related revenue is recognized. Factors in determining appropriate accruals for product warranty obligations include the size of the installed base of products subject to warranty protection, historical warranty claim rates, and knowledge of specific product failures that are outside of the Company’s typical experience. The Company assesses the adequacy of its warranty liability at least quarterly and adjusts the amounts as necessary based on actual experience and changes in future expectations.

The following table reconciles changes in the Company’s accrued warranty which is included in accrued expenses and related costs for the three-month periods ended September 30, 2004 and 2003, respectively:

	Three Months Ended September 30,
	2004		2003
	(unaudited)
Beginning accrued warranty and related costs	$	201	$	569
Cost of warranty claims	—		—
Ending accrued warranty and related costs	$	201	$	569

9. LINES OF CREDIT

The Company has a revolving line of credit in the amount of $2.5 million from Silicon Valley Bank at an interest rate of 1.5% monthly available against certain domestic gross accounts receivable outstanding. The agreement provides for automatic one-year renewal unless terminated by written notice of either party. The line of credit is available through June 30, 2005. As of September 30, 2004 and June 30, 2004, $0.7 million and $2.1 million, respectively, was outstanding on the line of credit. Repayment is required when a specific receivable is 90 days past due unless replenished by a more current receivable.

In June 2004, the Company obtained a revolving line of credit up to $1.5 million from Partners for Growth, or PFG, at a monthly interest rate of 1.5% and which was not to exceed the lower of the dollar credit limit or an amount equal to sum of 80% of the Company’s eligible current domestic and foreign accounts receivable, 100% of the Company’s eligible supported letters of credit, 75% of the Company’s eligible purchase orders and 50% of the Company’s eligible inventory, respectively. The line of credit was accompanied by warrants to purchase 57,000 common shares of the Company. The warrants have an exercise price of $3.60 per share. The Company recorded $0.2 million to prepaid expense for the deemed fair value of the warrants. The value of the warrant will be expensed ratably over the term of the line of credit. The line of credit is available through June 3, 2005. In September 2004, an additional $2.0 million was made available by Partners for Growth, or PFG, to the Company with principal to be repaid equal to borrowings in excess of $575 thousand from Silicon Valley Bank through September 30, 2004 and repaid in full by October 31, 2004. In September 2004, the Company borrowed the additional $2.0 million available under the line of credit, and repaid the additional $2.0 million in borrowings on November 2, 2004.

Concurrent with the signing of an agreement to amalgamate with a wholly-owned subsidiary of Alvarion in late July 2004, Alvarion provided a $3 million loan facility and lent the full amount available under the loan facility to us. In October 2004, concurrent with an amendment to the amalgamation agreement, Alvarion made available an additional $5.0 million which was lent to the Company in October and November 2004. Borrowings under the loan facility bear interest at 6% per annum and are to be collateralized by a third priority security interest subordinate to our currently outstanding debt to financial institutions. Upon completion of the amalgamation, all principal and accrued interest outstanding under the loan facility will be cancelled. In the event that the amalgamation is not completed, or in the event that the amalgamation agreement is terminated prior to completion of the amalgamation, all principal and accrued interest outstanding under the loan facility will be due and payable on the earlier of the lapse of six months following the grant of the additional loan (see Note 13 Subsequent Events) by Alvarion to us under the loan facility or 30 days following completion of any other acquisition transaction with us.

The borrowing agreements with Silicon Valley Bank, PFG and Alvarion pledge substantially all of the Company’s assets including certain of its intellectual property in favor of the lenders.

10. TRANSACTIONS WITH SHAREHOLDERS, MAJOR CUSTOMERS AND CONCENTRATION OF RISK

The Company is engaged in business transactions with shareholders or major customers resulting in the following revenue (in thousands):

	Three Months Ended September 30,
	2004		2003
	(unaudited)
Revenue:
United Nations	$	919	$	—
SafariCom	469		34
Commercial Facilitators Limited	—		4,880
Halabcha General Trading	—		1,265
Hutchinson Telecommuncations Group**	50		37
Total	$	1,438	$	6,182

** Related party of the Company

These customers accounted for the following percentages of revenues comprising greater than 10% of revenue:

	Three Months Ended September 30,
	2004		2003
	(unaudited)
Revenue:
United Nations	22	%	*
SafariCom	11	%	*
Commercial Facilitators Limited	*		46
Halabcha General Trading	*		12	%

* Less than 10%

Financial instruments which potentially subject the Company to a concentration of credit risk principally consist of trade receivables. The Company performs ongoing credit evaluations of its customers and generally does not require additional collateral (other than security interest in the equipment) on trade receivables.

The following table summarizes information relating to the Company’s significant customers with trade receivable balances greater than 10% as a percentage of trade receivables (including trade receivables from related parties), net of allowance:

	As of
	September 30, 2004		September 30, 2003
	(unaudited)
Trade Receivables:
Outremer	19	%	14	%
Safari.com	17		14
Datatel	12		10
United Nations	—		10
Hutchinson Telecommunications Group *	4		6
UT Starcom *	1		1
Eastern Communications Co. Ltd *	—		—

* Less than 10%; related party of the Company

11. COMMITMENTS

The Company generally commits to purchase products from its two contract manufacturers to be delivered within the most recent 60 days covered by forecasts with cancellation fees. As of September 30, 2004, the Company had committed to make purchases totaling $1.0 million from these manufacturers in the next 60 days. In addition, in specific instances, the Company may agree to assume liability for limited quantities of specialized components with lead times beyond this 60-day period. There are currently no associated losses related to the purchase commitments.

As of September 30, 2004 and June 30, 2004, the Company has established an accrual for purchase commitments of $127 thousand and $37 thousand, respectively, for excess inventory component commitments to key component vendors that it believes may not be realizable during future normal ongoing operations.

12. SEGMENT INFORMATION

The Company operates in a single segment. The Company’s cellular products, such as GSM infrastructure equipment and software, support an entire wireless network within a single, compact enclosure.

Due to the nature of the Company’s business, shipments are frequently made to a systems integrator located in the United States or in another country, only to be repackaged and shipped to a different country for actual installation. Geographic revenue information for the three-month periods ended September 30, 2004 and 2003 is based on the location of the Company’s customers. Long-lived assets include property, plant and equipment and intangible assets. Property, plant and equipment information is based on the physical location of the asset at the end of each period presented.

The following table sets forth the Company’s total revenues and property, plant and equipment information for geographic areas (in thousands):

	Three months ended September 30,
	2004		2003
	(unaudited)
Net Revenues:
United States	$	2,583	$	543
North America (other than United States)	229		93
Latin America	18		24
Europe, Middle East and Africa	832		8,432
Asia Pacific	470		1,623
Total	$	4,132	$	10,715

	As of September 30, 2004		As of June 30, 2004
	(unaudited)
Property, Plant and Equipment:
United States	$	1,855	$	1,866
Latin America	30		—-
Europe, Middle East and Africa	321		445
Asia Pacific	398		436
Total	$	2,604	$	2,747

All intangible assets are located in the United States.

13. SUBSEQUENT EVENTS

In October 2004, concurrent with an amendment to the amalgamation agreement, Alvarion made available an additional $5.0 million under the loan facility, which was lent to the Company in October and November 2004. Borrowings under the loan facility bear interest at 6% per annum and are to be collateralized by a third priority security interest subordinate to our currently outstanding debt to financial institutions. Upon completion of the amalgamation, all principal and accrued interest outstanding under the loan facility will be cancelled. In the event that the amalgamation is not completed, or in the event that the amalgamation agreement is terminated prior to completion of the amalgamation, all principal and accrued interest outstanding under the loan facility will be due and payable on the earlier of the lapse of six months following the grant of the additional loan by Alvarion to us under the loan facility or 30 days following completion of any other acquisition transaction with us.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included elsewhere in this report on Form 10-Q. This report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1993, as amended. The words “expects,” “anticipates,” “believes,” “intends,” “plans” and similar expressions identify forward-looking statements. In addition, any statements which refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. We undertake no obligation to publicly disclose any revisions to these forward-looking statements to reflect events or circumstances occurring subsequent to filing this Form 10-Q with the Securities and Exchange Commission. These forward-looking statements are subject to risks and uncertainties, including, without limitation, those discussed below in “Risk Factors.” Accordingly, our future results may differ materially from historical results or from those discussed or implied by these forward-looking statements. Our fiscal year ends on the actual calendar month end of June 30.

OVERVIEW

Interwave Communications International Ltd. is a global provider of scaleable wireless infrastructure networks that offer a cost effective solution to extend coverage and connectivity to hard-to-reach areas. We were incorporated in June 1994 and recorded our first product sale in May 1997. Our systems support wireless voice and data transmission for both mobile and fixed applications.

We offer a complete line of compact GSM and CDMA systems. We have pioneered what we believe is the only commercially available system that provides all of the infrastructure equipment and software necessary to support an entire wireless network within a single, compact enclosure. Our networks may be deployed in communities with a few thousand subscribers and may be scaled to grow to more than a hundred thousand subscribers. Our products provide wireless network operators with a simple, easy-to-support and maintain network that is software configurable to various network architectures. We added the CDMA 2000 product line after acquiring the assets of GBase Communications in September 2002.

Deployments of our community networks began in 1998, primarily in China and Africa, to add capacity and coverage to existing systems. Trials of our wireless office systems commenced in 1999 in both Europe and Asia. Prior to May 1997, we had no sales and our operations consisted primarily of various start-up activities, such as research and development, recruiting personnel, conducting customer field trials and raising capital. We generated net revenues of $4.1 million and $10.7 million for the quarter ended September 30, 2004 and 2003, respectively. We incurred net losses of $6.3 million and $3.4 million for the quarters ended September 30, 2004 and 2003, respectively. As of September 30, 2004, we had an accumulated deficit of $339.9 million. We have obtained and may require additional capital to fund our operations during the remainder of fiscal 2005 and beyond. Additional concerns are discussed more fully in the “Operations” and “Liquidity and Capital Resources” sections and in the “Risk Factors” section.

On July 27, 2004, we and Alvarion Ltd. announced that the two companies entered into a definitive agreement for Alvarion to acquire us. The parties subsequently amended the amalgamation agreement on August 25, 2004 and October 16, 2004. Under the amended agreement, Alvarion and Interwave agreed to reduce the purchase price in the amalgamation from $5.75 per share to $4.18 per share. In addition, the parties agreed that Alvarion would provide us with $5 million in additional interim financing. For additional information on the amalgamation and the amended amalgamation agreement, please refer to our definitive proxy statement filed with the Securities and Exchange Commission on November 8, 2004 and additional concerns which are discussed more fully in the “Risk Factors” section.

Although the downturn in the global economic environment and in the telecommunications industry in particular, which began in early 2001, continued throughout the first quarter of fiscal 2005, we believe that our industry began to show some signs of stability and recovery in certain markets. Competition remained intense as larger communications equipment providers began to either consolidate or more aggressively pursue markets that addressed smaller subscriber bases such as ours. We believe that upgrades to our GSM product offering, including the addition of a new high-capacity switch, a new operating and maintenance center and a new radio base station, have increased commercial functionality of our CDMA offering and expanded value-added services.

We operate in one business segment—wireless infrastructure networks consisting of GSM and CDMA systems. We generate net revenues from sales of our systems and, in connection with our direct sales activity, from installation, maintenance contracts and support of those systems.

We generate revenues through sales by our direct sales force to wireless service providers, sales to system integrators that either sell our systems on a stand-alone basis or integrate them with their systems and sales to communications equipment providers. The components of sales by channel in percentage of revenues are as follows:

	Three Months Ended September 30,
	2004		2003
Wireless service providers	69	%	88	%
System integrators	30	%	10	%
Communication equipment providers	1	%	2	%

Net revenues outside North America represented approximately 32% and 94% of total net revenues for the three months ended September 30, 2004 and 2003, respectively. We have derived and expect to continue to derive a majority of our revenues from products installed outside the United States by both non-U.S. and U.S. based communications equipment providers, systems integrators and wireless service providers. We believe that the majority of products we sell in the United States are ultimately installed outside the United States by both non-U.S. and U.S. based wireless service providers, systems integrators and communications equipment providers, exposing our revenue stream to risks from economic uncertainties, currency fluctuations, political instability and uncertain cultural and regulatory environments and other risks associated with global operations. All of our revenues are currently denominated in U.S. dollars, which may reduce our exposure to fluctuations in revenues attributable to changes in currency exchange rates. In the future, business conditions may require us to sell our products in other currencies. In addition, we face risks inherent in conducting global business. These risks include extended collection time for receivables, the potential loss of security interest, political instability, and reduced ability to enforce obligations and reduced protection for our intellectual property.

Of the revenue for the three-month period ended September 30, 2004, 68% was derived from sales in North America, 20% was derived from sales in Europe, the Middle East and Africa, 11% was derived from sales in Asia Pacific and 0.4% was derived from sales in Latin America. Of the revenue for the three month period ended September 30, 2003, 6% was derived from sales in North America, 78% was derived from sales in Europe, the Middle East and Africa, 15 % was derived from sales in Asia Pacific, and 0.2% was derived from sales in Latin America. We plan to market into countries where wireless telephone services are necessary for continued economic survival, offering solutions at prices for overall network deployment that are targeted to allow network operators to break even on their operations within one year. We plan to make further inroads into regions in Russia, Latin America, the former Soviet states, and parts of Asia.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

In preparing our condensed consolidated financial statements, we make assumptions, judgments and estimates that can have a significant impact on our total revenue and net income, as well as on the value of certain assets and liabilities on our condensed consolidated balance sheet. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. We believe that the assumptions, judgments and estimates involved in the accounting for revenue recognition, accounts receivable valuation, inventory valuation, and restructuring charges have the greatest potential impact on our condensed consolidated financial statements, so we consider these to be our critical accounting policies. These policies, and our procedures related to these policies, are described in detail below.

Revenue Recognition

We recognize revenue in accordance with the Securities and Exchange Commission, or SEC, Staff Accounting Bulletin No. 101 (“SAB 101”) “Revenue Recognition in Financial Statements,” Staff Accounting Bulletin No. 104, “Revenue Recognition” (“SAB 104”) and Emerging Issues Task Force No. 00-21 (“EITF 00-21,”) “Revenue Arrangements with Multiple Deliverables.”

EITF 00-21 addresses certain aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. Specifically, EITF 00-21 addresses whether an arrangement contains more than one unit of accounting and the measurement and allocation to the separate units of accounting in the arrangement. SAB 104 revises or rescinds portions of the interpretive guidance related to revenue recognition included in Topic 13 of the codification of the staff accounting bulletins. We assessed the impact of SAB 104 and concluded that the adoption of SAB 104 did not have a material effect on our consolidated financial statements.

Accordingly, equipment revenue is recognized when all of the following have occurred: persuasive evidence of an arrangement exists, the product has been shipped, title and all of the benefits and risks of ownership including risk of loss have passed to the customer, we have the right to invoice the customer, collection of the receivable is reasonably assured, and we have fulfilled all pre-sale contractual obligations to the customer. Revenue from extended warranty coverage and customer support is recognized ratably over the period of the service contract. Trial sales made directly to wireless service providers are not recognized as revenue until the trial is successfully completed. Trials conducted by communications service providers and systems integrators are normally shipped from their inventory and do not result in any incremental revenue to us. Although our products contain a software component, the software is not sold separately and we do not provide software upgrades to our customers.

Accounts Receivable Valuation

We evaluate the collectibility of our trade receivables based on a combination of factors. When we become aware of a specific customer’s inability to meet its financial obligations to us, such as in the case of bankruptcy filings or deterioration in the customer’s operating results or financial position, we estimate a specific allowance for bad debt to reduce the related receivable to the amount we reasonably believe is collectible. We also record allowances for doubtful accounts for all other customers based on a variety of factors, including the length of time the receivables are past due and historical collection experience. If circumstances related to specific customers change, our estimates of the recoverability of receivables are also likely to change.

Inventory Valuation

We perform a detailed assessment of inventory at each balance sheet date, which includes a review of, among other factors, demand requirements, product lifecycle and product development plans, quality issues, excess inventory and obsolescence. Based on this analysis, we estimate adjustments, when appropriate, to reflect inventory at net realizable value.

Restructuring Charges

Our Board of Directors approved a plan to reduce our workforce, consolidate facilities, and restructure certain business functions to streamline the organization for cost reduction primarily due to the severe downturn in the economic environment in the telecommunications industry. Restructuring charges are recorded in the consolidated statement of operations as a separate line item. Please refer to Notes to the Condensed Consolidated Financial Statements for further discussion of our restructuring activities.

RESULTS OF OPERATIONS

The following table sets forth for the periods indicated our results of operations expressed as a percentage of revenues:

	Three Months Ended September 30,
	2004		2003
	(unaudited)
Net revenues	100.0	%	100.0	%
Cost of revenues	112.8		57.8
Gross margin	(12.8	)	42.2
Operating expenses:
Research and development	54.9		20.9
Selling, general and administrative	80.0		51.5
Restructuring charges	—		0.5
Total operating expenses	134.9		72.9
Loss from operations	(147.7	)	(30.7	)
Interest income (expense), net	(5.9	)	(0.4	)
Other expense, net	(1.2	)	(0.7	)
Income tax benefit (expense)	2.3		(0.1	)
Net loss	(152.5	)%	(31.9	)%

THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003

REVENUES

Revenues decreased 61%, or $6.6 million, from $10.7 million in the first quarter of fiscal 2004 to $4.1 million in the first quarter of fiscal 2005. This decrease is due to longer internal capital expenditure approval cycles for some of our customers and to factors related to our pending amalgamation with Alvarion.

INTEREST INCOME

Interest income decreased 50%, or $3 thousand, from $6 thousand in the first fiscal quarter of 2004 to $3 thousand in the first fiscal quarter of 2005. This decrease was due to reduced cash levels as a result of the continued use of funds.

INTEREST EXPENSE

Interest expense was $245 thousand and $46 thousand in the first fiscal quarters of 2005 and 2004, respectively. This expense was primarily associated with our short-term borrowings and equipment loans and lease balances outstanding during each period.

LIQUIDITY AND CAPITAL RESOURCES

Operating Activities. For the three month period ended September 30, 2004, net cash used in operating activities of $7.0 million was primarily attributable to net losses from operations, increases in inventory levels, and decreases in accounts payable, accrued liabilities and deferred revenue, partially offset by non-cash depreciation and amortization, as well as by a decrease in accounts receivable. For the three month period ended September 30, 2003, net cash provided by operating activities of $3.1 million was primarily attributable to net losses from operations offset by increases in accounts payable and accrued liabilities, non-cash depreciation and amortization as well as decreases in trade receivables and inventory.

Investing Activities. For the three month period ended September 30, 2004, net cash used in investing activities of $0.1 million was primarily related to purchases of property and equipment of $0.3 million partially offset by a decrease in restricted cash of $0.2 million. For the three month period ended September 30, 2003, net cash provided by investing activities of $0.1 million consisted primarily of the sale of short-term investments, partially offset by purchases of property and equipment. We expect that capital expenditures will remain nominal due to our continued cost-cutting efforts and conservation of cash resources.

Financing Activities. For the three month period ended September 30, 2004, net cash provided by financing activities of $3.8 million consisted of our receiving $3.0 million in borrowings from Alvarion and $2 million in borrowings from Partners for Growth, offset by $1.6 million in principal payments to Silicon Valley Bank. For the three month period ended September 30, 2003, net cash used in financing activities of $1.2 million consisted of principal payments to Silicon Valley Bank.

Commitments. We lease all of our facilities under operating leases that expire at various dates through calendar 2006. As of September 30, 2004, we had $1.3 million in future operating lease commitments for the remainder of fiscal 2005. In May 2003, we relocated our principal administrative, manufacturing and engineering facilities from our former facility in Menlo Park, California to our main 34,500 square foot facility in Mountain View, California, which is also used for planning, procurement, final assembly, system testing, and quality control. We commenced a three-year lease on our Mountain View facility in May 2003. In the future we expect to continue to finance the acquisition of computer and network equipment through additional equipment financing arrangements. Our significant cash commitments for the next few years are summarized as follows:

	Payments Due By Period
	Total		Less Than 1 Year			1-3 Years			3-5 Years			More Than 5 Years
	(in thousands)

Operating lease commitments	$	2,079	$		1,338	$	741		$	—		$	—
Capital lease commitments	145		145			—			—			—
Qualcomm license scheduled payments	661		661			—			—			—
Purchase commitments	2,026		2,026			—			—			—
Short-term borrowings	7,073		7,073			—			—			—
Income taxes payable	72		72			—			—			—
Other long-term liabilities	1,000		—			—			—			1,000
Total	$	13,056	$	11,315		$		741	$		—	$		1,000

We have a revolving line of credit in the amount of $2.5 million from Silicon Valley Bank at an interest rate of 1.5% monthly available against certain domestic gross accounts receivable outstanding. The agreement provides for automatic one-year renewal unless terminated by written notice of either party. The line of credit is available through June 30, 2005. As of September 30, 2004 and June 30, 2004, $0.7 million and $2.1 million, respectively, were outstanding on the line of credit. Repayment is required when a specific receivable is 90 days past due unless replenished by a more current receivable.

In June 2004, we obtained a revolving line of credit up to $1.5 million from Partners for Growth, or PFG, at a monthly interest rate of 1.5% and which was not to exceed the lower of the dollar credit limit or an amount equal to sum of 80% of our eligible current domestic and foreign accounts receivable, 100% of our eligible supported letters of credit, 75% of our eligible purchase orders and 50% of our eligible inventory, respectively. The line of credit was accompanied by warrants to purchase 57,000 common shares. The warrants have an exercise price of $3.60 per share. We recorded $0.2 million to prepaid expense for the deemed fair value of the warrants. The value of the warrant will be expensed ratably over the term of the line of credit. The line of credit is available through June 3, 2005. As of June 30, 2004, $1.5 million was outstanding on the line of credit. In September 2004, an additional $2.0 million was made available by PFG to us with principal to be repaid equal to borrowings in excess of $575 thousand from Silicon Valley Bank through September 30, 2004 and repaid in full by October 31, 2004. In September 2004, we borrowed the additional $2.0 million available under the line of credit, and repaid the additional $2.0 million on November 2, 2004.

Concurrent with the signing of an agreement to amalgamate with a wholly-owned subsidiary of Alvarion in late July 2004, Alvarion provided a $3 million loan facility and lent the full amount available under the loan facility to us. In October 2004, concurrent with an amendment to the amalgamation agreement, Alvarion made available an additional $5 million under the loan facility, which was lent to us in October and November 2004. Borrowings under the loan facility bear interest at 6% per annum and are to be collateralized by a third priority security interest subordinate to our currently outstanding debt to financial institutions. Upon completion of the amalgamation, all principal and accrued interest outstanding under the loan facility will be cancelled. In the event that the amalgamation is not completed, or in the event that the amalgamation agreement is terminated prior to completion of the amalgamation, all principal and accrued interest outstanding under the loan facility will be due and payable on the earlier of the lapse of six months following the grant of the additional loan by Alvarion to us under the loan facility or 30 days following completion of any other acquisition transaction with us.

As of September 30, 2004, we had no transactions, relationships, or other arrangements with an unconsolidated entity that is reasonably likely to materially affect liquidity, the availability of capital resources, or requirements for capital resources.

Summary of Liquidity. We may require additional financing to fund our operations for the remainder of fiscal 2005 and beyond and this financing may not be available.

We may require additional capital to fund our operations during the remainder of fiscal 2005 and beyond. We have had recurring net losses in the past three fiscal years and the first fiscal quarter of 2005. Our management is currently attempting to execute plans intended to increase revenues and margins, and to reduce spending.

If our proposed amalgamation with Alvarion is not completed, we may seek to raise additional financing through the issuance of debt or equity or through other means such as customer prepayments, asset sales or secured borrowings. If additional funds are raised through the issuance of preferred equity or debt securities or secured borrowings, these securities could have rights, preferences and privileges senior or otherwise superior to that of our common shares, and the terms of any debt could impose restrictions on our operations. The sale of additional equity or convertible debt securities could result in additional dilution to our shareholders and such securities may have rights, preferences and privileges senior or otherwise superior to those held by existing shareholders. If we cannot raise funds on terms favorable to us, or raise funds at all, we may not be able to develop or enhance our products, take advantage of future opportunities or respond to competitive pressures or unanticipated requirements. If we are unable to raise additional funds, we may be required to reduce the scope of our planned operations, which could harm our business, or we may even need to cease operations.

RISK FACTORS

Our proposed transaction with Alvarion Ltd. may adversely affect our results of operations and the amalgamation may not be completed on a timely basis or at all.

On July 27, 2004, we and Alvarion Ltd. announced that the two companies have entered into a definitive agreement for Alvarion to acquire us for $5.75 per share, subject to, among other conditions, regulatory approval and our shareholders’ affirmative vote. The parties subsequently amended the amalgamation agreement on August 25, 2004 and October 16, 2004. Under the amended amalgamation agreement, Alvarion and Interwave agreed to reduce the purchase price in the amalgamation from $5.75 per share to $4.18 per share. In addition, the parties agreed that Alvarion would provide additional interim financing to Interwave. For additional information on the amalgamation and the amended amalgamation agreement, please refer to our definitive proxy statement filed with the Securities and Exchange Commission on November 8, 2004.

In response to our proposed transaction with Alvarion, our customers may defer purchasing decisions or elect to switch to other suppliers due to uncertainty about the direction of our product offerings following the amalgamation and our willingness to support and service existing products. Uncertainty surrounding the proposed transaction also may have an adverse effect on employee morale and retention, and result in the diversion of management attention and resources.

The current market price of our common shares may reflect a market assumption that the amalgamation will be completed. If the amalgamation is not completed, the price of our shares may decline. Also, our business may be harmed to the extent that customers, suppliers or others believe that we cannot effectively compete in the marketplace without the amalgamation or there is customer and employee uncertainty surrounding the future direction of our product and service offerings and strategy on a stand-alone basis. We also will be required to pay significant costs incurred in connection with the amalgamation, including legal, accounting and financial advisory fees, whether or not the amalgamation is completed. Moreover, under specified circumstances, we may be required to pay Alvarion a termination fee of approximately $1.96 million in connection with the termination of the amalgamation agreement.

We may require additional financing to fund our operations for the remainder of fiscal 2005 and beyond.

We may require additional capital to fund our operations during the remainder of fiscal 2005 and beyond. We have had recurring net losses in the past three fiscal years and the first quarter of the fiscal year to end June 30, 2005. Our management is currently attempting to execute plans intended to increase revenues and margins, and to reduce spending.

If additional funds are raised through the issuance of preferred equity or debt securities or secured borrowings, these securities could have rights, preferences and privileges senior or otherwise superior to that of our common shares, and the terms of any debt could impose restrictions on our operations. The sale of additional equity or convertible debt securities could result in additional dilution to our shareholders and such securities may have rights, preferences and privileges senior or otherwise superior to those held by existing shareholders. If we cannot raise funds on terms favorable to us, or raise funds at all, we may not be able to develop or enhance our products, take advantage of future opportunities or respond to competitive pressures or unanticipated requirements. If we are unable to raise additional funds, we may be required to reduce the scope of our planned operations, which could harm our business, or we may even need to cease operations.

We are exposed to general economic conditions, which could have a material adverse impact on our business, operating results and financial condition.

Continued weakness in the telecommunications equipment industry or further deterioration to the business or financial condition of our customers in this industry could have a material adverse impact on our business, operating results and financial condition. If the economic conditions in the United States and in the other international markets we serve worsen, we may experience a material adverse impact on our business, operating results and financial condition.

Because we have a limited operating history, we cannot be sure that we can successfully execute our business strategy.

We did not record revenue from our first product sale until May 1997 and we have a limited history of generating significant revenues. Some of our products are new and are being tested by customers for incorporation into live networks. Therefore, you have limited historical financial data and operating results with which to evaluate our business and our prospects. You must consider our prospects in light of the early stage of our business in a new and rapidly evolving market. Our limited operating history may make it difficult for you to assess, based on historical information, whether we can successfully execute our business strategy. If we are unable to successfully execute our business strategy, we would be unable to achieve cash-flow breakeven, profitability or to build a sustainable business.

We have a history of losses, expect future losses and may never achieve or sustain profitability.

As of September 30, 2004, we had an accumulated deficit of $339.9 million. We incurred a net loss of approximately $6.3 million for the fiscal quarter ended September 30, 2004. We may continue to incur net losses and these losses may be substantial. Furthermore, we expect to generate significant negative cash flow in the near future. To achieve and sustain profitability and positive cash flow, we will need to generate substantially higher revenues. Our ability to generate future revenues, generate cash flow and achieve profitability will depend on a number of factors, many of which are beyond our control. These factors include:

• the rate of market acceptance of compact mobile wireless systems;

• our ability to compete successfully against much larger GSM and CDMA2000 communications equipment providers;

• our ability to expand our customer base;

• our ability to control costs and reduce expenses;

• our ability to efficiently manufacture our products ourselves and through outsourcing arrangements;

• our ability to absorb overhead costs through higher manufacturing volume;

• our ability to develop third generation (3G) wireless products, including CDMA2000 products;

• our ability to achieve compatibility and interoperability of our GSM and CDMA2000 products with existing networks and other vendor’s equipment and industry standards; and

• our ability to generate cash flow from operations.

Due to these factors, as well as other factors described in this “Risk Factors” section, we may be unable to achieve or maintain profitability. If we are unable to achieve or maintain profitability, or if we are unable to achieve cash-flow breakeven, we will be unable to build a sustainable business. In this event, our share price and the value of your investment would likely decline.

Our quarterly operating results are likely to fluctuate significantly and may fail to meet the expectations of securities analysts and investors, which may cause our share price to decline.

Our quarterly operating results have fluctuated significantly in the past and are likely to do so in the future. If our operating results do not meet the expectations of securities analysts and investors, our share price is likely to decline. The factors that could cause our quarterly results to fluctuate include:

• any delay in the introduction of new products or product enhancements;

• the size and timing of customer orders and our product shipments, which have typically consisted of a relatively small number of wireless network systems at the end of each quarter;

• the mix of products sold, because our various products generate different gross margins;

• any delay in shipments caused by component shortages or other manufacturing problems, extended product testing of complex products or regulatory issues;

• the timing of orders from and shipments to major customers, including possible cancellation of orders;

• the loss of a major customer;

• reductions in the selling prices of our products;

• cost pressures from shortages of skilled technical employees, increased product development and engineering expenditures and other factors;

• customer responses to announcements of new products and product enhancements by competitors and the entry of new competitors into our market;

• economic and political conditions in the markets where we sell our products;

• the level of capital equipment spending by our customers, including telecommunications service providers and Internet service providers; and

• macroeconomic conditions, including recessionary conditions in the telecommunications industry worldwide.

Due to these and other factors, our results of operations could fluctuate substantially in the future, and quarterly comparisons may not be reliable indicators of future performance. In addition, because many of our expenses for personnel, facilities and equipment are relatively fixed in nature, if revenues fail to meet our expectations, we may not be able to reduce expenses correspondingly. As a result, we would experience greater than expected net losses and net cash outflow. If we experience greater than expected net losses and net cash outflow, our share price and the value of your investment would likely decline.

Our quarterly revenue may be affected by the purchasing and financing process of our customers, particularly in the purchasing of complete network systems.

The sales cycle for our network systems may last from nine months to one year or more and the purchasing process for many customers is complex. Customers often require assistance in network planning, equipment specification, business plan preparation and financing presentations. Customers also may require a number of approvals, including the approval of licensing authorities, a technical team, a management group and a board of directors, as well as the approval of financing for the purchase. In addition, prior to submitting an order, some customers for our complete network systems require public hearings and a public decision approval process. The timing and outcome of our customers’ purchasing and financing processes may be difficult to determine and may affect our ability to forecast sales. If we fail to close the sale for one or more complete network systems in any fiscal quarter, or if a customer fails to obtain the required approvals or fails to obtain financing, then our revenues and operating results would be adversely affected.

Our stock price has been volatile since our initial public offering, which may make it more difficult for you to resell shares at prices you find attractive.

Our stock price could fluctuate due to the following factors, among others:

• failure to complete the proposed amalgamation transaction with Alvarion;

• the limited trading volume of our common shares on the Nasdaq National Market;

• announcements of operating results and business conditions by us or our competitors;

• announcements by us or our competitors relating to new customers, new products or technological innovation;

• economic developments and market trends in the telecommunications industry as a whole;

• changes in financial estimates and recommendations by securities analysts;

• political and economic developments in countries where we have business or where our customers are located;

• delisting from the Nasdaq National Market; and

• general market conditions.

In addition, the stock market has experienced extreme volatility, and a steep decline, with volatility that may be unrelated to the operating performance of companies and a decline related to recessionary conditions in telecommunications markets. These broad market and industry fluctuations and conditions may adversely affect the price of our stock, regardless of our operating performance.

Our stock has been subject to delisting from the Nasdaq National Market due to past maintenance standard deficiencies and may be subject to delisting in the future due to potential, new maintenance standard deficiencies.

In order to maintain a listing on the Nasdaq National Market, listed issuers must, among other requirements, maintain a $1 per share minimum bid price and shareholder equity of at least $10 million. On separate occasions during calendar 2003, Nasdaq notified Interwave that it no longer met the minimum bid price requirement and the minimum shareholder equity requirement. Interwave subsequently cured these maintenance standard deficiencies and Nasdaq closed its inquiries in both matters.

On March 8, 2004, Nasdaq notified us that we did not meet the requirements of Marketplace Rule 4310(c)(14) because our Form 10-Q/A for the quarter ended December 31, 2003, was filed with the SEC on February 17, 2004 prior to having our independent auditors complete their review of such quarterly report. As a result, our trading symbol on the Nasdaq National Market was changed from “IWAV” to “IWAVE” on March 10, 2004. Our independent auditors have since completed their review of such quarterly report and on April 13, 2004, Nasdaq notified us that we had regained compliance with Marketplace Rule 4310(c)(14). On April 14, 2004, our trading symbol no longer carried the “E” designation and reverted back to “IWAV.”

As a matter of standard procedure, the Nasdaq National Market Staff typically evaluates compliance with its continued listing requirements on a quarterly basis concurrent with the filing of financial statements with the SEC. If we are unable to maintain compliance with the listing requirements of the Nasdaq National Market in the future, we may be subject to delisting from the Nasdaq National Market and forced to transfer the listing of our common shares to the Nasdaq SmallCap Market in order to take advantage of that market’s lengthier grace periods and more lenient requirements.

If we are forced to transfer the listing of our common shares to the Nasdaq SmallCap Market, it could seriously limit the liquidity of our common shares and impair our potential to raise future capital through the sale of our common shares, which could have a material adverse effect on our business. The transfer of our listing to the Nasdaq SmallCap Market could also reduce the ability of holders of our common shares to purchase or sell shares as quickly and as inexpensively as they have done historically, and may have an adverse effect on the trading price of our common shares. The transfer could also adversely affect our relationships with vendors and customers.

We extend credit to many of our customers in connection with the sale of our products.

We frequently enter into financing arrangements in connection with the sale of our products to wireless service providers. These financing arrangements may include extended payment terms, and, on occasion, lines of credit that cover not only equipment financing but also the working capital needs of our wireless service provider customers. We cannot assure you that these wireless service providers will be able to repay loans to us on time, or at all. If these loans are not repaid on a timely basis, our operating results would be adversely affected.

We must manage our growth successfully in order to achieve our desired results.

As a result of prior acquisitions and international expansion, many of our 158 worldwide employees are based outside of our Mountain View facility. If we are unable to effectively manage our geographically dispersed group of employees, our business will be adversely affected.

As part of our business strategy, we have completed several acquisitions. During fiscal year 2003, we acquired substantially all of the assets of GBase Communications. Acquisition transactions are accompanied by a number of difficulties, including:

• the difficulty of assimilating the operations and personnel of acquired companies;

• the potential disruption of our ongoing business and the distraction of our management;

• the difficulty of incorporating acquired technology into our products and unanticipated expenses related to such integration;

• the correct assessment of the relative percentages of in-process research and development expense that can be immediately written off as compared to the amount which must be amortized over the appropriate life of the asset;

• the potential underestimation of the costs and resources required to complete development of new products in an acquired company;

• the impairment of assets in the telecommunications business with unfavorable market conditions, particularly for broadband wireless access products;

• the failure to successfully develop an acquired in-process technology resulting in the impairment of amounts currently capitalized as intangible assets;

• maintaining customer, supplier and other favorable relationships of acquired operations;

• the potential unforeseen liabilities associated with acquired operations;

• negative cash flow from acquired operations; and

• the additional fixed costs associated with acquired operations.

We may not be successful in addressing these difficulties or any other problems encountered in connection with such acquisitions.

We rely on a small number of customers for most of our revenues, and a decrease in revenues from these customers could seriously harm our business.

A small number of customers account for a significant portion of our revenues. Net revenues from significant customers as a percentage of our total revenues are as follows:

	Three Months Ended September 30,
	2004		2003
Revenues
United Nations	22	%	—
SafariCom	11	%	—
Commercial Facilitators, Ltd	—		45	%
Halabcha General Trading	—		12	%

Five customers accounted for approximately 51% of our net revenues during the first three months of fiscal 2005 and twelve customers accounted for approximately 86% of our net revenues during the first three months of fiscal 2005.

We expect that the majority of our revenues will continue to depend on sales to a small number of customers. If any key customers experience a downturn in their business or shift their purchases to our competitors, our revenues and operating results would decline.

We depend primarily on two contract manufacturers to manufacture most of our products.

We depend primarily on two contract manufacturers to manufacture most of our GSM and CDMA2000 products. We do not have long-term supply contracts with our contract manufacturers, and these manufacturers are not obligated to supply us with products for any specific period, in any specific quantity or at any specific price, except as may be provided in a particular purchase order. None of our products are manufactured by more than one supplier and this may not change for the foreseeable future.

There are risks associated with our dependence on two contract manufacturers, including the contract manufacturers’ control of capacity allocation, labor relations, production quality and other aspects of the manufacturing process. If we are unable to obtain our products from these manufacturers on schedule, revenues from the sale of products may be delayed or lost, and our reputation, relationship with customers and our business could be harmed. In addition, in the event that the contract manufacturers must be replaced, the disruption to our business and the expense associated with obtaining and qualifying new contract manufacturers could be substantial. If problems with our contract manufacturers cause us to miss customer delivery schedules or result in unforeseen product quality problems, we may lose customers. As a result, our revenues and our future growth prospects would likely decline.

Because some of our key components come from a single source, or require long lead times, we could experience unexpected interruptions, which could cause our operating results to suffer.

A number of our suppliers are sole sources for key components for our products. These key components are complex, difficult to manufacture and require long lead times. In the event of a reduction or interruption of supply, or a degradation in quality, as many as six months could be required before we would begin receiving adequate supplies from other suppliers. Supply interruptions could delay product shipments, causing our revenues and operating results to decline.

If we fail to accurately estimate product demand, we may incur expenses for excess inventory or be unable to meet customer requirements.

Our customers typically give us firm purchase orders with short lead times before requested shipment. However, our contract manufacturers require commitments from us so that they can allocate capacity and be assured of having adequate components and supplies from third parties. Failure to accurately estimate product demand could cause us to incur expenses related to excess inventory or prevent us from meeting customer requirements.

Our products are complex and may have errors or defects that are detected only after deployment in complex networks.

Our products are highly complex and are designed to be deployed in complex networks. Although our products are tested during manufacturing and prior to deployment, they can only be fully tested when deployed in networks with high-call volume. Consequently, our customers may discover errors after the products have been fully deployed. If we are unable to fix errors or other problems that may be identified in full deployment, we could experience:

• costs associated with the remediation of any problems;

• loss of or delay in revenues;

• loss of customers;

• failure to achieve market acceptance and loss of market share;

• diversion of deployment resources;

• diversion of research and development resources to fix errors in the field;

• increased service and warranty costs;

• legal actions or demands for compensation by our customers; and

• increased insurance costs.

In addition, our products often are integrated with other network components. There may be incompatibilities between these components and our products that could significantly harm the service provider or its subscribers. Product problems in the field could require us to incur costs or divert resources to remedy the problems and subject us to liability for damages caused by the problems or delay in research and development projects because of the diversion of resources. These problems could also harm our reputation and competitive position in the industry.

We may experience difficulties in the introduction of new or enhanced products, such as CDMA2000 or other 3G products that could result in significant, unexpected expenses or delays in the launch of new or enhanced products.

The development of new or enhanced products is a complex and uncertain process. We may experience design, manufacturing, marketing and other difficulties that could delay or prevent our development, introduction or marketing of new products or product enhancements. We must also effectively manage the transition from old products to new or enhanced products. In September 2002, we acquired the assets of a third generation, or 3G, product development company, GBase Communications. We cannot assure you that we will be able to develop, introduce or manage this or any other new product or product enhancements in a timely manner or at all. Failure to develop new products or product enhancements in a timely manner would substantially decrease market acceptance and sales of our products.

Failure to comply with regulations affecting the telecommunications industry could seriously harm our business and results of operations.

Our failure to comply with government regulations relating to the telecommunications industry in countries where our products are deployed and failure to comply with any changes to those regulations could seriously harm our business and results of operations. We have not completed all activities necessary to comply with existing regulations and requirements in some of the countries in which we intend to sell our products. Compliance with the regulations of numerous countries could be costly and require delays in deployments.

Our failure to comply with evolving industry standards could delay our introduction of new products.

An international consortium of standards bodies has established the specifications for the third generation, or 3G, wireless standard, and is working to establish the specifications of this future wireless standard and its interoperability with existing standards. Any failure of our products to comply with 3G or future standards, including Qualcomm’s standards for CDMA, could delay their introduction and require costly and time consuming engineering changes. After a future standard is adopted, any delays in our introduction of next generation products could impair our ability to grow revenues in the future.

Our market opportunity could be significantly diminished in the event that GSM or any subsequent GSM-based standards do not continue to be or are not widely adopted or if CDMA2000 is not widely adopted.

Our current products are designed to utilize only GSM, an international standard for voice and data communications. There are other competing standards including, CDMA, and TDMA. We offer CDMA2000 products, beginning with 1XRTT products. In the event that GSM or any GSM-based standards do not continue to be or are not broadly adopted, or in the event that CDMA2000 products are not widely adopted, our market opportunity could be significantly limited, which would seriously harm our business.

Our sales cycle is typically long and unpredictable, making it difficult to plan our business.

Our long sales cycle requires us to invest resources in a possible transaction that may not be recovered if we do not successfully conclude the transaction. Factors that affect the length of our sales cycle include:

• time required for testing and evaluation of our products and third-party products before they are deployed in a network;

• time to design the network;

• size of the deployment;

• complexity of the customer’s network environment;

• time for approval of the transaction with the customer’s internal procedures;

• time for the customer’s internal financing process; and

• the degree of system configuration necessary to deploy our products.

In addition, the emerging and evolving nature of the market for the systems we sell, and current economic conditions, may lead prospective customers to postpone their purchasing decisions. Our long and unpredictable sales cycle can result in delayed revenues, difficulty in matching revenues with expenses and increased expenditures, which together may contribute to declines in our results of operations and our share price.

Intense competition in the wireless market could prevent us from increasing or sustaining revenues or achieving or sustaining profitability.

The wireless market is rapidly evolving and is highly competitive. We cannot assure you that we will have the financial resources, technical expertise or marketing, manufacturing, distribution and support capabilities to compete successfully in the future. We expect that competition in each of our markets will increase in the future.

In the community network market, we compete against wireless local loop networks, which are wireless communication systems that connect users to the public telephone network using radio signals as a substitute for traditional telephone connections. In the wireless office network market, the primary competing standard for our systems is the digital European cordless telephone standard known as DECT.

We currently compete against communications equipment providers such as Alcatel, Ericsson, Lucent, Motorola, Nokia, Nortel, Siemens, Huawei and ZTE in the GSM, CDMA, TDMA, DECT and wireless local loop markets. All of the major communications equipment providers have broad product lines that include at least partial solutions that address our target markets.

The wireless market is rapidly evolving and highly competitive. We believe that our business is affected by the following competitive factors:

• intense price competition;

• the availability of substitute products;

• ease of installation;

• technical support and service;

• sales and distribution capability;

• breadth of product line;

• conformity to industry standards; and

• implementation of additional product features and enhancements.

In addition, we are seeking to sell our products in emerging markets, many of which have less reliable traditional telephone infrastructures than developed countries. If these countries improve the reliability and service of their traditional telephone networks, the demand for our products in these markets could diminish and our future revenue growth could decline.

Many of our competitors and potential competitors have substantially greater name recognition and greater technical, financial and sales and marketing resources than we have. Such competitors may undertake more extensive marketing campaigns, adopt more aggressive pricing policies and devote substantially more resources to developing new products than we can. Trends toward increased consolidation in the telecommunications industry may increase the size and resources of some of our current competitors and could affect some of our current relationships. Pricing trends in the telecommunications markets and intense pricing pressure may cause our competitors to cut prices to very low price points in an effort to win business.

Increased competition is likely to result in price reductions, shorter product life cycles, reduced gross margins, longer sales cycles and loss of market share, any of which would seriously harm our business. We cannot assure you that we will be able to compete successfully against current or future competitors. Competitive pressures we face may cause our revenues, prices, or growth to decline and may therefore seriously harm our business and results of operations.

If we are unable to manage our global operations effectively, our business would be seriously harmed.

Substantially all of our GSM revenue to date has been derived from systems intended for installation outside of the United States. In addition to regulatory issues, our operations are subject to the following risks and uncertainties:

• legal uncertainties regarding liability, tariffs and other trade barriers;

• greater difficulty in trade receivable collection, obtaining confirmed letters of credit, and longer collection periods;

• costs of staffing and managing operations in several countries;

• language skills and communications with our customers;

• difficulties in protecting intellectual property rights;

• changes in currency exchange rates which may make our U.S. dollar-denominated products less competitive in global markets;

• the impact of recession in the global economy;

• local unfavorable economic conditions; and

• political and economic instability.

If we fail to improve our operational systems and controls to manage future growth, our business could be seriously harmed.

We plan to continue to expand our operations significantly to pursue existing and potential market opportunities including the market for 3G products. This growth and new technology places significant demands on our management and our operational resources. In order to manage growth effectively, we must implement and improve our operational systems, procedures and controls on a timely basis. We must strictly control costs and manage our business to achieve cash-flow breakeven in order to achieve our goals while pursuing market opportunities.

Our future success depends on the continued service of our management team and our ability to hire, retain or maintain sufficient key personnel.

Our business is highly dependent on our ability to attract, retain and motivate qualified technical and management personnel. Competition has been and may continue to be intense for qualified personnel in our industry and in Northern California, where most of our engineering personnel are located, and we may not be successful in attracting and retaining these personnel. Skilled management and technical personnel are essential to our business and to the

development of our 3G products. Our personnel resources are limited because we have reduced the number of our employees in order to reduce our expenses. We do not have non-compete agreements with most of our key employees. We currently do not maintain key person life insurance on any of our key executives. Our success also depends upon the continuing contributions of our key management and our research, product development, sales and marketing and manufacturing personnel. These employees may voluntarily terminate their employment with us at any time. The search for a replacement for any of our key personnel could be time consuming, and could distract our management team from the day-to-day operations of our business.

Our intellectual property and proprietary rights may be insufficient to protect our competitive position.

We cannot assure you that the protection offered by our U.S. patents will be sufficient or that any of our pending U.S. or foreign patent applications will result in the issuance of patents. In addition, competitors in the United States and other countries, many of whom have substantially greater resources, may apply for and obtain patents that will prevent or interfere with our ability to make and sell our products in the United States or abroad. We have 32 issued and 8 pending U.S. patents. We have filed many of these patents internationally. We have a total of 43 issued and 19 patents pending worldwide. Unauthorized parties may attempt to design around our patents, copy or otherwise obtain and use our products. We cannot be certain that the steps we have taken will prevent unauthorized use of our technology, particularly in countries where the laws may not protect our proprietary rights as fully as in the United States. Failure to protect our proprietary rights could harm our competitive position and therefore cause our revenues and operating results to decline.

Claims that we infringe third-party intellectual property rights could result in significant expenses and restrictions on our ability to sell our products in particular markets.

From time to time, third parties may assert patent, copyright, trademark and other intellectual property rights to technologies that are important to our business. Any claims could result in costly litigation, divert the efforts of our technical and management personnel, cause product shipment delays, require us to enter into royalty or licensing agreements or prevent us from making or selling certain products. Any of these could seriously harm our operating results. Royalty or licensing agreements, if available, may not be available on commercially reasonable terms, if at all. In addition, in some of our sales agreements, we agree to indemnify our customers for any expenses or liabilities resulting from claimed infringements of patents, trademarks or copyrights of third parties. Costs associated with these indemnification obligations could be significant and could cause our operating results and stock price to decline.

We may not be able to license necessary third-party technology or it may be expensive to do so.

From time to time, we may be required to license technology from third parties to develop new products or product enhancements. We have licensed software for use in our products from Qualcomm, Inc., Lucent Technologies, TCSI Inc., Trillium Digital Systems Inc., Hughes Software Systems, Component Plus and Wind River Associates. We cannot assure you that third-party licenses will be available to us on commercially reasonable terms, if at all. The inability to obtain any third-party license required to develop new products and product enhancements could require us to obtain substitute technology of lower quality or performance standards or at greater cost which could seriously harm our competitive position, revenues and growth prospects.

There are a number of general GSM and CDMA patents held by different companies, which may impact our GSM and CDMA technology. If any of our products infringe on any of these patents and we are unable to negotiate license agreements, then we may be required to redesign a portion of our product line.

Control by our existing shareholders could discourage the potential acquisition of our business.

As of November 1, 2004, our executive officers, directors and 5% or greater shareholders and their affiliates owned approximately 4.4 million of our outstanding common shares or approximately 38.6% of our outstanding common shares. Acting together, these shareholders may be able to control all matters requiring approval by our shareholders, including the election of directors.

This concentration of ownership could have the effect of delaying or preventing a change in control of our business or otherwise discouraging a potential acquirer from attempting to obtain control of us, which could prevent our shareholders from realizing a premium over the market price for their common shares.

Anti-takeover provisions in our Bye-Laws and our Shareholder Rights Plan could impede an attempt to replace or remove our directors or to initiate a change of control, which could diminish the value of our common shares.

Our Bye-Laws and Shareholder Rights Plan contain provisions that may entrench directors and make it more difficult for shareholders to replace directors even if the shareholders consider it beneficial to do so or delay or prevent a change of control that a shareholder might consider favorable. Even in the absence of an attempt to effect a change in management or a takeover attempt, these provisions may adversely affect the prevailing market price of our common shares if they are viewed as discouraging takeover attempts in the future.

Our Bye-Laws contain the following provisions that could have such an effect:

• election of our directors is staggered, meaning that the members of only one of three classes of our directors are selected each year; and

• shareholders have limited ability to remove directors.

Our Shareholder Rights Plan contains provisions which might cause substantial dilution to a person who attempts to acquire us on terms not approved by our Board of Directors. In connection with our agreement to be acquired by Alvarion, our Board of Directors amended the Shareholder Rights Plan so that our acquisition by Alvarion would not trigger the Shareholder Rights Plan.

Our Bye-Laws restrict shareholders from bringing legal action against our officers and directors and indemnify our officers and directors.

Our Bye-Laws contain a broad waiver by our shareholders of any claim or right of action, both individually and on our behalf, against any of our officers or directors. The waiver applies to any action taken by an officer or director, or the failure of an officer or director to take any action, in the performance of his or her duties, except with respect to any matter involving any fraud, dishonesty or breach of fiduciary duty on the part of the officer or director, and any claim arising under United States federal securities laws. This waiver limits the right of shareholders to assert claims against our officers and directors unless the act or failure to act involves fraud, dishonesty or breach of fiduciary duty or a claim arising under United States federal securities laws.

In addition, our Bye-Laws provide for a broad indemnification of our officers or directors against all claims, damages and actions that they may incur or sustain in the performance of his or her duties, except with respect to any matter involving any fraud or dishonesty.

Our operations based in Bermuda may be subject to United States taxation, which could significantly harm our business and operating results.

Except for our U.S. subsidiaries, we do not consider ourselves to be engaged in a trade or business in the United States. Our U.S. subsidiaries are subject to U.S. taxation on their worldwide income, and dividends from our U.S. subsidiaries are subject to U.S. withholding tax. We and our non-U.S. subsidiaries would, however, be subject to U.S. federal income tax on income related to the conduct of a trade or business in the United States. If we were

determined to be subject to U.S. taxation, our financial results would be significantly harmed. We cannot assure you that the Internal Revenue Service will not contend that our Bermuda-based operations are engaged in a U.S. trade or business and, therefore, are subject to U.S. income taxation.

We may become subject to taxes in Bermuda after March 28, 2016, which may have a material adverse effect on our results of operations and your investment.

The Bermuda Minister of Finance, under the Exempted Undertakings Tax Protection Act 1966, as amended, of Bermuda, has given us an assurance that if any legislation is enacted in Bermuda that would impose tax computed on profits or income, or computed on any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, then the imposition of any such tax will not be applicable to us or any of our operations, shares, debentures or other obligations until March 28, 2016. Given the limited duration of the Minister of Finance’s assurance we cannot be certain that we will not be subject to any Bermuda tax after March 28, 2016.

We are a Bermuda company and it may be difficult for you to enforce judgments against us or our directors and executive officers.

We are a Bermuda exempted company. As a result, the rights of holders of our common shares will be governed by Bermuda law and our memorandum of association and bye-laws. The rights of shareholders under Bermuda law may differ from the rights of shareholders of companies incorporated in other jurisdictions. It may be difficult for investors to effect service of process on our directors or officers in the United States or to enforce in the United States judgments obtained in U.S. courts against us or those persons based on the civil liability provisions of the U.S. securities laws. Uncertainty exists as to whether courts in Bermuda will enforce judgments obtained in other jurisdictions, including the United States, against us or our directors or officers under the securities laws of those jurisdictions or entertain actions in Bermuda against us or our directors or officers under the securities laws of other jurisdictions.

Because we do not intend to pay any cash dividends on our common shares, holders of our common shares will not be able to receive a return on their shares unless they sell them.

We have never paid or declared any cash dividends on our common shares or other securities and intend to retain any future earnings to finance the development and expansion of our business. We do not anticipate paying any cash dividend on our common shares in the foreseeable future.

Our operations could be significantly hindered by the occurrence of a natural disaster or other catastrophic event.

Our operations are susceptible to outages due to fire, floods, power loss, telecommunications failures, break-ins and similar events. In addition, the majority of our network infrastructure is located in Northern California, an area susceptible to earthquakes. 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. In addition, we are vulnerable to coordinated attempts to overload our systems with data, resulting in denial or reduction of service to some or all of our employees for a period of time. Any such event could have a material adverse effect on our business, operating results, and financial condition.

Terrorist acts and acts of declared or undeclared war may seriously harm our business and revenues, costs and expenses and financial condition.

Terrorist acts or acts of declared or undeclared war may cause damage or disruption to Interwave, our employees, facilities, partners, suppliers, distributors, or customers, which could significantly impact our revenues, costs, expenses, cash flow and financial condition. The potential for future terrorist attacks, the national and international responses to terrorist attacks, and other acts of declared or undeclared war or hostility have created many economic and political uncertainties, which could adversely affect our business and results of operations in ways that cannot presently be predicted. Additionally, we are predominantly uninsured for losses and interruptions caused by terrorist acts and acts of declared or undeclared war.

We have recorded impairment losses in the past and any future impairment of long-lived assets could have a material adverse impact on our financial conditions and results of operations.

Our long-lived assets include intangible assets as a result of our purchasing of assets or businesses. Any further impairment losses recorded in the future caused by the continuing deterioration of the industry we operate in could have a material adverse impact on our financial condition and results of operations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Exchange

Our financial market risk includes risks associated with international operations and related foreign currencies, as we anticipate that international sales will continue to account for a significant portion of our consolidated revenue. While our international sales are in U.S. dollars and are therefore not subject to foreign currency exchange risk, expenses of our international operations are denominated in each country’s local currency and are affected by foreign currency exchange rate fluctuations. We do not engage in any hedging activity in connection with our international business or foreign currency risk.

Through September 30, 2004, we have not experienced any significant negative impact on our operations as a result of fluctuations in foreign currency exchange rates. Moreover, based on our overall currency rate exposures, a near-term 10% appreciation or depreciation of the values of the relevant foreign currencies from the values as of September 30, 2004 would have a $1.0 million impact on the balance sheet, but would have no material impact on our results of operations and cash flows over the next twelve months.

Interest Rates

Cash balances in foreign currencies overseas are operating balances and are only invested in short term deposits of the local operating bank.

Our exposure to market risk for changes in interest rates relates primarily to outstanding debt obligations. We do not use derivative financial instruments for speculative or trading purposes.

A hypothetical 10% change in interest rates from those as of September30, 2004 would not have a material effect on our financial position, results of operations and cash flows over the next twelve months.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures. Our management evaluated, with the participation of our Chief Executive Officer and our Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this quarterly report on Form 10-Q. Based on their evaluation as of the end of the period covered by this quarterly report on Form 10-Q, and subject to and except for the discussion below, Interwave’s Chief Executive Officer and Chief Financial Officer have concluded that Interwave’s disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), are effective to ensure that information required to be disclosed by Interwave in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission’s rules and forms. In connection with the evaluation described above, we identified no change in our internal control over financial reporting that occurred during or subsequent to our fiscal quarter ended September 30, 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting, other than the matter noted in the next paragraph.

In connection with its audit for the year ended June 30, 2004, Burr, Pilger & Mayer LLP identified a material weakness in our internal controls over financial reporting. The identified weakness was that there was not proper review of the manual process of aggregating journal entries and adjusting the consolidated financial statements. Therefore, the originally published financial statements furnished in a report on Form 8-K did not include a necessary accrual as of June 30, 2004, since corrected by amendment. We immediately implemented corrective action, including increased manual and system tracking of all entries, and increased detailed review to ensure all entries are included in the financial statements prior to the release of such financial statements. We believe this matter has been adequately addressed by the corrective action summarized above.

Changes in internal control over financial reporting. There was no change in our internal control over financial reporting that occurred during the quarter ended September 30, 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II: OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On November 21, 2001, Interwave and various of its officers and directors were named as defendants in Middleton v. interWAVE Communications International Ltd., et al., Case No. 01-CV-10598, a purported securities class action lawsuit filed in United States District Court, Southern District of New York. On April 19, 2002, plaintiffs filed an amended complaint. The amended complaint asserts that the prospectus from Interwave’s January 28, 2000 initial public offering, or IPO, failed to disclose certain alleged improper actions by various underwriters for the offering in the allocation of IPO shares. The amended complaint alleges claims against certain underwriters, Interwave and its officers and directors under the Securities Act of 1933 and the Securities Exchange Act of 1934. Similar complaints have been filed concerning more than 300 other IPOs and these cases have been coordinated as In re Initial Public Offering Securities Litigation, 21 MC 92.

On July 15, 2002, the issuers filed an omnibus motion to dismiss for failure to comply with applicable pleading standards. On October 8, 2002, the Court entered an Order of Dismissal as to all of the individual defendants in the IPO litigation, without prejudice. On February 19, 2003, the Court denied the motion to dismiss against Interwave.

A stipulation of settlement for the claims against the issuer defendants, including Interwave, has been submitted to the Court for preliminary approval. Under the stipulation of settlement, the plaintiffs will dismiss and release all claims against participating defendants in exchange for a contingent payment guaranty by the insurance companies collectively responsible for insuring the issuers in all the related cases, and the assignment or surrender to the plaintiffs of certain claims the issuer defendants may have against the underwriters. Under the guaranty, the insurers will be required to pay the amount, if any, by which $1.0 billion exceeds the aggregate amount ultimately collected by the plaintiffs from the underwriter defendants in all the cases. There is no guarantee that the settlement will become effective, as it is subject to a number of conditions, including Court approval. If the settlement does not occur, and litigation against Interwave continues, Interwave believes it has meritorious defenses and intends to defend the action vigorously; provided, however, such legal proceedings may be time consuming and expensive and the outcome could be adverse to Interwave. An adverse outcome could have a material adverse effect on Interwave’s financial position, on its business and results of operations.

Interwave may from time to time become a party to various legal proceedings arising in the ordinary course of business.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

On September 30, 2004, we held a special meeting of our shareholders. The matters voted on at the meeting were to consider and vote upon a proposal to approve the Agreement and Plan of Amalgamation, dated as of July 27, 2004, among Alvarion Ltd., an Israeli company, Alvarion Mobile Inc., a Delaware corporation and a wholly owned subsidiary of Alvarion, and Interwave Communications International Ltd., the amalgamation and the transactions contemplated thereby and to transact such other business as may properly come before the special meeting or any adjournment or postponement thereof. The votes cast were:

		Votes For		Against		Abstain
Adopt Agreement and Plan of Amalgamation		6,046,505		72,891		9,468

On October 16, 2004, Alvarion and Interwave amended the agreement and plan of amalgamation, dated as of July 27, 2004. Accordingly, Interwave intends to hold a special meeting of shareholders to consider and vote on the amended agreement and plan of amalgamation. For additional information on the amalgamation and the amended amalgamation agreement, please refer to our definitive proxy statement filed with the Securities and Exchange Commission on November 8, 2004.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

EXHIBIT NUMBER		EXHIBIT DESCRIPTION

3.2 (1)		Amended and Restated Bye-Laws of the Registrant

3.3 (1)		Memorandum of Association

4.2 (2)		Preferred Share Rights Agreement dated December 2, 2003

10.39 (3)		Amendment to Loan Agreement between Partners for Growth and Interwave Communications, Inc. and our ancillary agreements between Partners for Growth and the Registrant and Interwave Advanced Communications, Inc. and Silicon Valley Bank, each, dated September 10, 2004.

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended

32.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(1) Incorporated by reference to the same numbered exhibits filed with Registrant’s Registration Statement on Form F-1 (File No. 333-92967), as amended on January 28, 2000.

(2) Incorporated by reference to the same numbered exhibit filed with the Registrant’s report on Form 8-K on December 18, 2003.

(3) Incorporated by reference to the same numbered exhibit filed with the Registrant's annual report on Form 10-K on October 13, 2004.

(b) Reports on Form 8-K

On July 28, 2004, the Registrant filed a report on Form 8-K pursuant to Item 5 “Other Events” and Item 7 “Financial Statements and Exhibits,” announcing the signing of a definitive agreement to amalgamate with Alvarion Mobile, Inc., a wholly owned subsidiary of Alvarion, Ltd.

On July 29, 2004, the Registrant filed a report on Form 8-K pursuant to Item 5 “Other Events” and Item 7 “Financial Statements and Exhibits,” whereby the Agreement and Plan of Amalgamation by and among Alvarion Ltd., Alvarion Mobile Inc. and the Registrant dated July 27, 2004 and the Voting Agreement by and among Alvarion Ltd. and other persons identified therein dated as of July 27, 2004, were filed as exhibits.

On August 18, 2004, the Registrant furnished a report on Form 8-K pursuant to Item 12 “Disclosure of Results of Operations and Financial Condition,” announcing its financial results for the fourth fiscal quarter ended June 30, 2004.

On August 30, 2004, the Registrant furnished a report on Form 8-K/A pursuant to Item 2.02 “Disclosure of Results of Operations and Financial Condition,” and Item 9.01 “Financial Statements and Exhibits,” amending its financial results for the fourth fiscal quarter ended June 30, 2004.

On September 22, 2004, the Registrant filed a report on Form 8-K pursuant to Item 1.01 “Entry into a Material Definitive Agreement,” announcing the amendment of the Loan and Security Agreement with Partners for Growth, LLP whereby the amount of the borrowings available under the loan was increased by $2.0 million to $3.5 million pursuant to certain terms contained in the amendment.

INTERWAVE COMMUNICATIONS INTERNATIONAL LTD.

EXHIBIT INDEX

EXHIBIT NUMBER		EXHIBIT DESCRIPTION

3.2 (1)		Amended and Restated Bye-Laws of the Registrant

3.3 (1)		Memorandum of Association

4.2 (2)		Preferred Share Rights Agreement dated December 2, 2003

10.39 (3)		Amendment to Loan Agreement between Partners for Growth and Interwave Communications, Inc. and our ancillary agreements between Partners for Growth and the Registrant and Interwave Advanced Communications, Inc. and Silicon Valley Bank, each, dated September 10, 2004.

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934, as amended

32.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(1) Incorporated by reference to the same numbered exhibits filed with Registrant’s Registration Statement on Form F-1 (File No. 333-92967), as amended on January 28, 2000.

(2) Incorporated by reference to the same numbered exhibit filed with the Registrant’s report on Form 8-K on December 18, 2003.

(3) Incorporated by reference to the same numbered exhibit filed with the Registrant's annual report on Form 10-K on October 13, 2004.

PART I—FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of September 30, 2004 and June 30, 2004
Condensed Consolidated Statements of Operations for the three-month periods ended September 30, 2004 and 2003
Condensed Consolidated Statements of Cash Flows for the three-month periods ended September 30, 2004 and 2003
Notes to Condensed Consolidated Financial Statements
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4 Controls and Procedures

*PART II—OTHER INFORMATION*
Item 1. Legal Proceedings
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults upon Senior Securities
Item 4 Submission of Matters to a Vote of Security Holders
Item 5 Other Information
Item 6 Exhibits and Reports on Form 8-K
Signature

Date: November 15, 2004	Interwave Communications International Ltd.

	By:	/s/ ERWIN F. LEICHTLE
		Erwin F. Leichtle
		President and Chief Executive Officer
		(Principal Executive Officer)


	By:	/s/ CAL R. HOAGLAND
		Cal R. Hoagland
		Senior Vice President and Chief Financial Officer
		(Principal Financial and Accounting Officer)