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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended June 29, 2003

OR

For the transition period from              to             

Commission File Number 000-21507

POWERWAVE TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

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

(Address of principal executive offices, zip code)

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

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

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

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

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POWERWAVE TECHNOLOGIES, INC.

INDEX

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CAUTIONARY STATEMENT RELATED TO FORWARD LOOKING STATEMENTS

This Quarterly Report on Form 10-Q includes forward-looking statements as defined within Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, relating to revenue, revenue composition, demand and pricing trends, future expense levels, competition in our industry, trends in average selling prices and gross margins, the transfer of certain manufacturing operations to contract manufacturers, product and infrastructure development, market demand and acceptance, the timing of and demand for 3G products, customer relationships, employee relations, plans and predictions for acquired companies and assets, future acquisition plans, restructuring charges, the incurrence of debt, the level of expected capital and research and development expenditures. Such forward-looking statements are based on the beliefs of, estimates made by, and information currently available to Powerwave Technologies, Inc.’s (“Powerwave” or the “Company”) management and are subject to certain risks, uncertainties and assumptions. Any other statements contained herein (including without limitation statements to the effect that Powerwave or management “estimates,” “expects,” “anticipates,” “plans,” “believes,” “projects,” “continues,” “may,” “will,” “could,” or “would” or statements concerning “potential” or “opportunity” or variations thereof or comparable terminology or the negative thereof) that are not statements of historical fact are also forward-looking statements. The actual results of Powerwave may vary materially from those expected or anticipated in these forward-looking statements. The realization of such forward-looking statements may be impacted by certain important unanticipated factors, including those discussed in “Additional Factors That May Affect Our Future Results” under Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” at pages 17-44. Because of these and other factors that may affect Powerwave’s operating results, past performance should not be considered as an indicator of future performance, and investors should not use historical results to anticipate results or trends in future periods. We undertake no obligation to publicly release the results of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Readers should carefully review the risk factors described in this and other documents that Powerwave files from time to time with the Securities and Exchange Commission (“SEC”), including subsequent Current Reports on Form 8-K, Quarterly Reports on Form 10-Q and Annual Reports on Form 10-K.

HOW TO OBTAIN POWERWAVE SEC FILINGS

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

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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POWERWAVE TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

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

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

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POWERWAVE TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share data)

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

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POWERWAVE TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(In thousands)

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

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POWERWAVE TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

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

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POWERWAVE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Tabular amounts in thousands, except per share data)

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

Basis of Presentation

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

The results of operations for the three and six months ended June 29, 2003 are not necessarily indicative of the results to be expected for the entire fiscal year ending December 28, 2003 (“fiscal year 2003.”)

New Accounting Pronouncements

In June 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities (“SFAS 146”), which addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes Emerging Issues Task Force (“EITF”) Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF Issue 94-3, a liability for an exit cost as defined in EITF Issue 94-3 was recognized at the date of an entity’s commitment to an exit plan. SFAS 146 also establishes that the liability should initially be measured and recorded at fair value. The Company adopted the provisions of SFAS 146 effective January 1, 2003 and such adoption did not have a material impact on the consolidated financial statements. All restructuring charges recognized during the quarter ended June 29, 2003 have been recorded in accordance with the requirements of SFAS 146.

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

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

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

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

In April 2003, FASB issued Statement of Financial Accounting Standards No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities (“SFAS 149”). SFAS 149 (1) clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative discussed in paragraph 6(b) of Statement 133, (2) clarifies when a derivative contains a financing component, (3) amends the definition of an underlying to conform it to language used in FIN 45, and (4) amends certain other existing pronouncements, which will collectively result in more consistent reporting of contracts as either derivatives or hybrid instruments. SFAS 149 is effective for contracts and hedging relationships entered into or modified after June 30, 2003. The Company does not believe that the adoption of SFAS 149 will have a material impact on its consolidated financial statements as the Company has not entered into any derivative or hedging transactions.

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

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

Stock-Based Compensation

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

The Black-Scholes option valuation model prescribed by SFAS No. 123 was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Option valuation methods require the input of highly subjective assumptions including the expected stock price volatility. Using the Black-Scholes option valuation model, the estimated weighted average fair value of options granted during the second quarter of 2003 was $2.59 per share and for fiscal year 2002 was $7.07 per share. Had compensation cost for the Company’s stock option plans and its stock purchase plans been determined based on the estimated fair value at the

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grant dates for awards under those plans consistent with the fair value method of SFAS No. 123 utilizing the Black-Scholes option-pricing model and an incremental tax rate of 40%, the Company’s net income (loss) and basic and diluted earnings (loss) per share for the three and six months ended June 29, 2003 and June 30, 2002 would have approximated the pro forma amounts indicated below:

The fair value of options granted under Powerwave’s stock incentive plans during the six months ended June 29, 2003 and June 30, 2002 were estimated on the date of grant using the Black-Scholes option-pricing model utilizing the multiple option approach using the following weighted-average assumptions:

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

Foreign Currency Translation

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

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Use of Estimates

The preparation of the condensed consolidated financial statements, in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting years. Actual results could differ from those estimates.

Reclassifications

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

Net inventories consist of the following:

Inventories are net of an allowance for excess and obsolete inventory of approximately $10.5 million and $9.0 million as of June 29, 2003 and December 29, 2002, respectively. Powerwave regularly reviews inventory quantities on hand and records an allowance for excess and obsolete inventory based primarily on sales backlog, forecasted product demand and production requirements for the next twelve months.

Net property, plant and equipment consist of the following:

During the quarter ended June 29, 2003, Powerwave determined that certain of its equipment had become excess to its production requirements as a result of its restructuring efforts and, therefore, was no longer useful to the Company. This equipment was physically segregated from the Company’s remaining active equipment for sale and disposition. The difference between the estimated net selling price for such equipment and its net book value resulted in an impairment charge of approximately $3.2 million for the quarter ended June 29, 2003. See “Note 9. Restructuring and Impairment Charges” for additional details. The remaining $0.6 million estimated net realizable value for such assets has been reclassified in the condensed consolidated balance sheet as “assets held for sale” within other non-current assets.

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Accrued expenses and other current liabilities consist of the following:

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

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

The following is a summary of stock option transactions under Powerwave’s stock option plans, including the 1995 Stock Option Plan, the 1996 Stock Incentive Plan, the 1996 Director Stock Option Plan, the 2000 Stock Option Plan and the 2002 Stock Option Plan, for the six months ended June 29, 2003:

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

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

Powerwave had various outstanding leases as of June 29, 2003, the majority of which relate to real estate operating leases, including 115,000 square feet of warehouse space in Santa Ana, California, 31,500 square feet of

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engineering and office space in El Dorado Hills, California, and 8,100 square feet of engineering and office space in Bristol, United Kingdom.

Future minimum lease payments required under all operating leases at June 29, 2003 are payable as follows:

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

Powerwave is subject to various legal proceedings from time to time as part of its business. As of June 29, 2003, Powerwave is not currently party to any legal proceedings or threatened legal proceedings, the adverse outcome of which, individually or in the aggregate, it believes would have a material adverse effect on its business, financial condition and results of operations.

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

During the second quarter of 2003, Powerwave accelerated the restructuring of its manufacturing operations to outsource the majority of its production to contract manufacturers located in Asia in order to further reduce the Company’s operating cost structure and enable it to be more competitive. Additionally, the Company accelerated the timing of technology transitions and new product introductions due to its transition to outsourced manufacturing and the continued economic downturn that has significantly impacted demand in the wireless infrastructure industry. As a result, the Company recorded approximately $9.9 million of restructuring and impairment charges during the second quarter ended June 29, 2003. This amount included cash restructuring charges of approximately $3.6 million related primarily to severance payments made prior to June 29, 2003 in connection with a reduction of its work force of approximately 450 employees during such quarter. The remaining non-cash impairment charges of approximately $6.3 million related to a $3.2 million write-down of excess manufacturing and test equipment that is being held for sale and a $3.1 million write-down of certain product/technology and customer related intangibles, the value of which was impaired by the technology and product transitions that were implemented during the quarter. These restructuring and impairment charges were recorded in cost of sales or operating expenses based

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

In accordance with SFAS No. 128, Earnings Per Share (“SFAS 128”), basic earnings (loss) per share is based upon the weighted average number of common shares outstanding. Diluted earnings (loss) per share is based upon the weighted average number of common and potential common shares for each period presented. Potential common shares include stock options using the treasury stock method. Potential common shares of 243,439 and 200,293 have been excluded from diluted weighted average common shares for the three and six months ended June 29, 2003, as the effect would be anti-dilutive.

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

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

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

As of June 29, 2003, approximately 84% of total accounts receivable related to three customers that each accounted for 10% or more of Powerwave’s total revenue. The loss of, or reduction in, sales to any of these customers could have a material adverse effect on the Company’s business, financial condition and results of operations.

Certain of Powerwave’s products utilize components that are available in the short-term only from a single or a limited number of sources. In addition, in order to take advantage of volume pricing discounts, the Company purchases certain customized components for its RF power amplifiers from single-source suppliers as well as finished RF amplifiers from single-source contract manufacturers. As Powerwave moves more of its manufacturing operations to contract manufacturers, the Company will have less direct contact with numerous suppliers which

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could potentially increase its concentration of supply with a limited number of suppliers. The inability to obtain single-sourced components of finished RF amplifiers in the amounts needed on a timely basis or at commercially reasonable prices could result in delays in product introductions, interruption in product shipments or increases in product costs, which could have a material adverse effect on the Company’s business, financial condition and results of operations until alternative sources could be developed at a reasonable cost.

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

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

North American sales include sales to the United States, Canada and Mexico. Asian sales include sales to China, South Korea and other locations in Asia. Europe and Other International sales include sales to Europe and all other foreign countries. Sales to Canada were $9.4 million and $29.6 million during the quarters ended June 29, 2003 and June 30, 2002, respectively. Sales to Canada were $29.7 million and $60.6 million during the six months ended June 29, 2003 and June 30, 2002, respectively. Sales to Finland were $8.6 million and $11.8 million during the quarters ended June 29, 2003 and June 30, 2002, respectively. Sales to Finland were $20.2 million and $29.8 million during the six months ended June 29, 2003 and June 30, 2002, respectively.

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

During fiscal 2000, 2001 and until August 2002, the President and CEO of the Company, Bruce C. Edwards, was a member of the Board of Directors of Metawave Communications Corporation (“Metawave”), a supplier of “smart” antennas to the wireless communications market and a customer of the Company. Mr. Edwards resigned from his Board position with Metawave effective August 20, 2002. Powerwave had no sales to Metawave during the three and six months ended June 29, 2003 and had no outstanding accounts receivable as of June 29, 2003. During the three and six months ended June 30, 2002, the Company had $0.8 million and $2.2 million in sales to Metawave, respectively.

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On July 10, 2003, Powerwave completed the acquisition of certain assets and liabilities of Ericsson Amplifier Technologies, Inc. (“AMT”) pursuant to an asset purchase agreement with AMT, Microwave Power Devices, Inc. and Ericsson AB dated as of June 12, 2003. Under the asset purchase agreement, Powerwave purchased selected assets of AMT, including certain inventories, equipment and real estate. The Company also assumed certain warranty obligations of AMT and made offers of employment to a limited number of employees of AMT as part of the purchase. In connection with the asset purchase, the Company also entered into an agreement to become a supplier of certain 2.1 GHz W-CDMA RF power amplifiers to Ericsson AB. The cash purchase price of the acquisition of $9,820,400 was paid on July 10, 2003.

On July 18, 2003, Powerwave completed the private placement of $130.0 million aggregate principal amount of convertible subordinated notes due July 2008. The notes are convertible into the Common Stock of Powerwave at a conversion price of $10.49 per share and accrue interest at an annual rate of 1.25%. These notes are not callable during the first four years. Powerwave used a portion of the proceeds of the offering to fund the purchase of $25.0 million of the Company’s Common Stock (3,144,654 shares) simultaneously with the issuance of the notes. The Company received net cash proceeds of approximately $101.0 million after the deduction of the amount used for the Common Stock repurchase and placement fees. The remainder of the proceeds are available for possible future acquisitions and for general corporate purposes. As the Company currently has no specific arrangements with respect to acquisitions, the Company intends to invest the net proceeds in short-term money market instruments, including time deposits, commercial paper, auction rate securities and money market funds with maturities of three months or less, pending specific application.

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

Critical Accounting Policies

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

Revenue Recognition

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

Accounts Receivable

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

Inventories

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

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unanticipated changes in demand or technological developments could have a material effect on the value of our inventory and our reported operating results. See “Additional Factors That May Affect Future Results—We have experienced, and will continue to experience, significant fluctuations in sales and operating results from quarter to quarter…; and—The wireless communications infrastructure equipment industry is extremely competitive and is characterized by rapid technological change…”

Deferred Taxes

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

Goodwill and Long Lived Assets

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

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

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Warranties

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

Stock-Based Compensation

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

New Accounting Pronouncements

In June 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities (“SFAS 146”), which addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes Emerging Issues Task Force (“EITF”) Issue 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF Issue 94-3, a liability for an exit cost as defined in EITF Issue 94-3 was recognized at the date of an entity’s commitment to an exit plan. SFAS 146 also establishes that the liability should initially be measured and recorded at fair value. We adopted the provisions of SFAS 146 effective January 1, 2003 and such adoption did not have a material adverse effect on our consolidated results of operations or financial position. All restructuring charges recognized during the quarter ended June 29, 2003 have been recorded in accordance with the requirements of SFAS 146.

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

In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure (“SFAS 148”). SFAS 148 amends SFAS 123 to provide alternative methods for voluntary transition to the fair value method of accounting for stock-based employee compensation prescribed by SFAS 123. SFAS 148 also requires disclosure of the effects of an entity’s accounting policy with respect to stock-based employee compensation on reported net income (loss) and earnings (loss) per

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share in annual and interim financials statements. We adopted the disclosure provisions of SFAS 148 effective December 30, 2002 and have included the additional required disclosures in “Note 2. Summary of Significant Accounting Policies—Stock-Based Compensation” within the “Notes to Condensed Consolidated Financial Statements” under Item 1, “Financial Statements.” Such adoption did not have a material adverse effect on our consolidated results of operations or financial position.

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

In April 2003, FASB issued Statement of Financial Accounting Standards No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities (“SFAS 149”). SFAS 149 (1) clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative discussed in paragraph 6(b) of Statement 133, (2) clarifies when a derivative contains a financing component, (3) amends the definition of an underlying to conform it to language used in FIN 45, and (4) amends certain other existing pronouncements, which will collectively result in more consistent reporting of contracts as either derivatives or hybrid instruments. SFAS 149 is effective for contracts and hedging relationships entered into or modified after June 30, 2003. We do not believe that the adoption of SFAS 149 will have a material impact on our consolidated financial statements as we have not entered into any derivative or hedging transactions.

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

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

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Results of Operations

The following table summarizes Powerwave’s results of operations as a percentage of net sales for the three and six months ended June 29, 2003 and June 30, 2002:

Restructuring and Impairment Charges

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

During the second quarter of 2003, we accelerated the restructuring of our manufacturing operations to outsource the majority of our production to contract manufacturers located in Asia in an effort to further reduce our operating cost structure and enable us to be more competitive. In addition, we also accelerated the timing of technology transitions and new product introductions due to our transition to outsourced manufacturing and the continued economic downturn that has significantly impacted demand in the wireless infrastructure industry. As a result, we recorded approximately $9.9 million of restructuring and impairment charges for the second quarter ended June 29, 2003. These charges included cash restructuring charges of approximately $3.6 million related primarily to severance payments made during the quarter in connection with a reduction of our work force of approximately 450 employees. The remaining non-cash impairment charges of approximately $6.3 million related to a $3.2 million write-down of excess manufacturing and test equipment that is being held for sale and a $3.1 million write-down of certain product/technology and customer related intangibles, the value of which was impaired by the technology and product transitions that occurred during the quarter. These restructuring and impairment charges have been recorded in cost of sales or operating expenses based upon the job classification of the impacted employees or the character of the underlying assets. Of the total $9.9 million restructuring and impairment charges recorded during the second quarter, approximately $7.6 million was recorded within cost of sales and approximately $2.3 million was recorded within operating expenses. We currently expect to incur additional restructuring charges in the range of $1.0 million to $3.0 million during the second half of fiscal year 2003 as we complete the execution of the remainder of our restructuring plan.

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

Net Sales

Our sales are derived primarily from the sale of RF power amplifiers for use in wireless communications networks. Sales decreased by 55% to $51.5 million, for the quarter ended June 29, 2003, from $113.4 million, for the quarter ended June 30, 2002. This reduction in demand was due to the significant economic downturn that has impacted the wireless communications industry and resulted in curtailed wireless infrastructure spending. We have experienced lower demand across all of our products in both the original equipment manufacturer (“OEM”) and direct network operator markets. We currently anticipate that the slowdown in worldwide wireless communications infrastructure spending will continue to negatively impact our revenues for at least the next few quarters. For the quarter ended June 29, 2003, total sales of products for networks in the 800-1000 MHz range accounted for approximately 50% of sales, or $26.0 million, compared to approximately 58% of sales, or $65.3 million, for the quarter ended June 30, 2002. Sales of products for networks in the 1800-2000 MHz range accounted for approximately 33% of sales, or $16.8 million, for the second quarter of fiscal 2003, compared to approximately 32% of sales, or $36.5 million, for the second quarter of fiscal 2002. For the quarter ended June 29, 2003, sales of products for use in networks over 2000 MHz, which largely consist of 3G products, accounted for approximately 17% of sales, or $8.7 million, compared to 10% of sales, or $11.6 million for the quarter ended June 30, 2002.

We track the geographic location of our sales based upon the location of our customers to which our products are shipped. Since many of our customers purchase products from us at central locations and then reship the product with other base station equipment to locations throughout the world, we are unable to identify the final installation location of our products. Sales to customers in North America accounted for approximately 43% of sales, or $22.4 million, for the quarter ended June 29, 2003, compared to approximately 69% of sales, or $78.2 million, for the quarter ended June 30, 2002. Total international sales (excluding North American sales) accounted for approximately 57% of sales, or $29.1 million, for the second quarter of fiscal 2003, compared to approximately 31% of sales, or $35.2 million, for the second quarter of fiscal 2002. Total Asian sales accounted for approximately 24% of sales, or $12.1 million, for the quarter ended June 29, 2003, compared to 10% of sales, or $10.9 million, for the quarter ended June 30, 2002. Total European and other international sales accounted for approximately 33% of sales, or $17.0 million, for the second quarter of fiscal 2003, compared to 21%, or $24.3 million, for the second quarter of fiscal 2002. See “Additional Factors That May Affect Future Results—We rely upon a few customers for a significant amount of our revenues…;—We have experienced, and will continue to experience, significant fluctuations in sales and operating results from quarter to quarter…; and—There are many risks associated with international operations…”

For the quarter ended June 29, 2003, total sales to Nortel accounted for approximately 57% of sales and sales to AT&T Wireless Services (“AT&T Wireless”) and Nokia Networks (“Nokia”) each accounted for 10% or more of sales for such quarter. For the quarter ended June 30, 2002, total sales to Nortel accounted for approximately 42% of sales and sales to Cingular Wireless and Nokia each accounted for 10% or more of sales for such quarter.

We cannot guarantee that we will continue to be successful in attracting new customers or retaining or increasing business with our existing customers. In addition, we believe that a significant portion of our business with OEMs, such as LM Ericsson Telephone Company (“Ericsson”), Lucent Technologies, Inc. (“Lucent”), Motorola Inc. (“Motorola”), Nokia and Nortel, is dependent upon the deployment schedules of wireless network operators who are purchasing wireless infrastructure equipment from such OEMs and on such OEMs’ strategy concerning the outsourcing of RF power amplifiers. During the first six months of fiscal 2003, several major OEMs made announcements that they were further lowering their expectations for wireless infrastructure demand for 2003 due to their revised expectations of additional capital spending reductions by major wireless network operators. Reduced demand for our products negatively impacted our revenues and operating results during the second half of fiscal 2002 and continues to do so in fiscal 2003. If these forecasted reductions in overall market demand continue to result in a significant reduction in the future demand for our products by customers, our business, financial condition and results of operations will be negatively impacted. See “Additional Factors That May Affect Future Results—We have experienced, and will continue to experience, significant fluctuations in sales and operating results from quarter to quarter…; and—There are many risks associated with international operations…”

A number of factors have caused delays and may cause future delays in new wireless infrastructure and upgrade deployment schedules for both North American and international deployments, including deployments in the United States, Europe, Asia, South America and other areas. In addition, a number of factors may cause OEMs to alter their outsourcing strategy concerning RF power amplifiers, which could cause such OEMs to reduce or eliminate their demand for external supplies of RF power amplifiers or shift their demand to alternative suppliers or internal suppliers. Such factors include lower perceived internal manufacturing costs and competitive reasons to remain

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vertically integrated. Due to the possible uncertainties associated with wireless infrastructure deployments and OEM demand, we have experienced and expect to continue to experience significant fluctuations in demand from our OEM and network operator customers. Such fluctuations have caused and may continue to cause significant reductions in our revenues and/or operating income, which has harmed and may continue to harm our business, financial condition and results of operations. See “Additional Factors That May Affect Future Results—We rely upon a few customers for a significant amount of our revenues…;—We have experienced, and will continue to experience, significant fluctuations in sales and operating results from quarter to quarter…; and—There are many risks associated with international operations…”

Gross Profit

Cost of sales consists primarily of materials, assembly and test labor, overhead and warranty costs. Gross profit margins for the second quarter of fiscal 2003 and fiscal 2002 were (13.8)% and 19.0%, respectively. The significant reduction in our gross profit margins during the second quarter of fiscal 2003 as compared to the second quarter of fiscal 2002 was due to several factors, including approximately $7.6 million of restructuring and impairment charges included in cost of sales for the second quarter of 2003. Additionally, the second quarter of 2003 was impacted by the continued reduction in demand for wireless infrastructure which resulted in lower revenue and lower absorption of our manufacturing overhead expenses and increased labor costs when reviewed as a percentage of revenues. Notwithstanding our restructuring and associated cost reduction efforts, we currently anticipate that we will continue to experience under-absorption of our manufacturing overhead expenses and excess labor costs due to our reduced sales levels, which will continue to have a negative impact on our gross margins. In addition, we expect that our gross margins will continue to be negatively impacted by additional restructuring charges related to further work force reductions as we execute the remainder of our restructuring plan during the second half of fiscal 2003. See “Additional Factors That May Affect Future Results—We rely upon a few customers for a significant amount of our revenues…;—We have experienced, and will continue to experience, significant results in sales and operating results from quarter to quarter…; and—Our reliance on contract manufacturers to produce our products subjects us to various risks…” Also see “Restructuring and Impairment Charges.”

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

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

Operating Expenses

Sales and marketing expenses consist primarily of sales salaries and commissions, travel expenses, charges for customer demonstration units and trade show expenses. Sales and marketing expenses decreased by 24% to $2.6 million for the quarter ended June 29, 2003, from $3.4 million for the quarter ended June 30, 2002. As a percentage of sales, sales and marketing expenses were 5.0% and 3.0% for the second fiscal quarters ended 2003 and 2002, respectively. The decrease in the amount of our sales and marketing expenses was primarily attributable to lower sales commissions related to lower revenues during the second quarter of fiscal 2003.

Research and development expenses consist primarily of ongoing RF power amplifier design and development expenses as well as design expenses associated with reducing the cost and improving the manufacturability of existing RF power amplifiers. Current programs include cellular, PCS and next generation 2.5G and 3G products. Research and development expenses can fluctuate dramatically from period to period depending on numerous factors including new product introduction schedules, prototype developments, hiring patterns and the depreciation

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

General and administrative expenses consist primarily of salaries and other expenses for management, finance, information systems, facilities maintenance and human resources. General and administrative expenses decreased by 14% to $3.2 million for the quarter ended June 29, 2003, from $3.7 million for the quarter ended June 30, 2002. As a percentage of sales, general and administrative expenses were 6.2% and 3.2% for the second fiscal quarters ended 2003 and 2002, respectively. The decrease in the amount of our general and administrative expenses was primarily attributable to lower personnel costs during the second quarter of fiscal 2003.

Restructuring and impairment charges amounted to $2.3 million for the second fiscal quarter of 2003 compared to no such charges during the second fiscal quarter of 2002. These charges related primarily to severance payments in connection with a reduction to our work force and the write-down of excess equipment and certain customer related intangibles. See “Restructuring and Impairment Charges.”

Other Income

Other income consists primarily of interest income, net of any interest expense. Other income decreased slightly to $0.6 million for the quarter ended June 29, 2003, from $0.7 million during the quarter ended June 30, 2002. The decrease was primarily due to lower short-term interest rates.

Provision (Benefit) for Income Taxes

We recorded a tax benefit at a rate of 37.7% during the quarter ended June 29, 2003 as compared to a tax provision of 30.0% for the quarter ended June 30, 2002. Our effective tax rate differs from the U.S. federal statutory tax rate of 35% primarily due to the impact of state taxes on domestic operations and foreign taxes on non-U.S. operations.

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

Net Sales

Sales decreased by 52% to $103.7 million, for the six months ended June 29, 2003, from $217.5 million, for the six months ended June 30, 2002. This reduction in demand was due to the significant economic downturn that has impacted the wireless communications industry and resulted in curtailed wireless infrastructure spending. We have experienced lower demand across all of our products in both the OEM and direct network operator markets. For the six months ended June 29, 2003, total sales of products for networks in the 800-1000 MHz range accounted for approximately 57% of sales, or $59.1 million, compared to approximately 60% of sales, or $130.7 million, for the six months ended June 30, 2002. Sales of products for networks in the 1800-2000 MHz range accounted for approximately 23% of sales, or $23.7 million, for the first six months of fiscal 2003, compared to approximately 26% of sales, or $56.9 million, for the first six months of fiscal 2002. For the six months ended June 29, 2003, sales of products for use in networks over 2000 MHz, which largely consist of 3G products, accounted for approximately 20% of sales, or $20.9 million, compared to 14% of sales, or $29.9 million for the six months ended June 30, 2002.

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

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

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

Gross Profit

Gross profit margins for the first six months of fiscal 2003 and fiscal 2002 were (3.2)% and 18.5%, respectively. The reduction in our gross profit margins during the first six months of fiscal 2003 as compared to the first six months of fiscal 2002 is due to the significant reduction in demand which resulted in lower revenue and lower absorption of our manufacturing overhead expenses and increased labor costs when reviewed as a percentage of revenues. In addition, approximately $7.6 million of restructuring and impairment charges were recorded as a result of the outsourcing of our manufacturing operations, new product introductions that accelerated the timing of technology transitions and the continued economic downturn that has significantly reduced demand in the wireless infrastructure industry. See “Additional Factors That May Affect Future Results—We rely upon a few customers for a significant amount of our revenues…;—We have experienced, and will continue to experience, significant results in sales and operating results from quarter to quarter…; and—Our reliance on contract manufacturers to produce our products subjects us to various risks…” Also see “Restructuring and Impairment Charges.”

Operating Expenses

Sales and marketing expenses decreased by 21% to $5.5 million for the six months ended June 29, 2003, from $6.9 million for the six months ended June 30, 2002. As a percentage of sales, sales and marketing expenses were 5.3% and 3.2% for the first six months ended 2003 and 2002, respectively. The decrease in actual sales and marketing expenses was primarily attributable to lower sales commissions related to the reduction in our revenues during the first half of fiscal 2003.

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

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

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

Other Income

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

Provision (Benefit) for Income Taxes

We recorded a tax benefit at a rate of 37.0% during the six months ended June 29, 2003 as compared to a tax provision of 30.0% for the six months ended June 30, 2002. Our effective tax rate differs from the U.S. federal statutory tax rate of 35% primarily due to the impact of state taxes on domestic operations and foreign taxes on non-U.S. operations.

Liquidity and Capital Resources

We have historically financed our operations through a combination of cash on hand, cash provided from operations, equipment lease financings, available borrowings under bank lines of credit and both private and public equity offerings. Our principal sources of liquidity consist of existing cash balances and funds expected to be generated from future operations. As of June 29, 2003, we had working capital of $196.9 million, including $160.2 million in cash and cash equivalents, as compared to working capital of $218.5 million at December 29, 2002, which included $162.5 million in cash and cash equivalents. We currently invest our excess cash in short-term,

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investment-grade, money-market instruments with maturities of three months or less. We typically hold such investments until maturity and then reinvest the proceeds in similar money market instruments. We believe that all of our cash investments would be readily available to us should the need arise.

Cash Flows

The following table summarizes Powerwave’s cash flows for the six months ended June 29, 2003 and June 30, 2002: