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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

For the quarterly period ended April 4, 2004

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 April 28, 2004 the number of outstanding shares of Common Stock, par value $0.0001 per share, of the Registrant was 63,487,910.

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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 pending acquisitions, acquired companies and assets, future acquisition plans, restructuring charges and the level of expected capital and research and development expenditures. Such forward-looking statements are based on the beliefs of, estimates made by, and information currently available to Powerwave Technologies, Inc.’s (“Powerwave” or the “Company”) management and are subject to certain risks, uncertainties and assumptions. Any other statements contained herein (including without limitation statements to the effect that Powerwave or management “estimates,” “expects,” “anticipates,” “plans,” “believes,” “projects,” “continues,” “may,” “will,” “could,” or “would” or statements concerning “potential” or “opportunity” or variations thereof or comparable terminology or the negative thereof) that are not statements of historical fact are also forward-looking statements. The actual results of Powerwave may vary materially from those expected or anticipated in these forward-looking statements. The realization of such forward-looking statements may be impacted by certain important unanticipated factors, including those discussed in “Additional Factors That May Affect Our Future Results” under Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” at pages 16-37. 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, 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 as soon as reasonably practicable after filing such material with the SEC.

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PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (Unaudited)

POWERWAVE TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

Note: December 28, 2003 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 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.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED

(Unaudited)

(In thousands)

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

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POWERWAVE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Tabular amounts in thousands, except per share data)

Note 1. Nature of Operations

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

Note 2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements of Powerwave have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include certain footnotes and financial presentations normally required under accounting principles generally accepted in the United States of America for complete financial reporting. The interim financial information is unaudited, but reflects all normal adjustments and accruals, which are, in the opinion of management, considered necessary to provide a fair presentation for the interim periods presented. The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 28, 2003.

The results of operations for the quarter ended April 4, 2004 are not necessarily indicative of the results to be expected for the entire fiscal year ending January 2, 2005 (“fiscal 2004.”)

Reclassifications

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

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 periods. Actual results could differ from those estimates.

Stock-Based Compensation

Pursuant to Statement of Financial Accounting Standards No. 123, Accounting for Stock Based Compensation (“SFAS 123”), the Company 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 Opinion No. 25, Accounting for Stock Issued to Employees, and its related interpretations to account for its stock option and purchase plans. 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 grant date.

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The Black-Scholes option valuation model prescribed by SFAS 123 was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Option valuation methods require the input of highly subjective assumptions including the expected stock price volatility. Using the Black-Scholes option valuation model, the estimated weighted average fair value of options granted during the first quarter of fiscal years 2004 and 2003 were $3.97 per share and $3.30 per share, respectively. Had compensation cost for the Company’s stock option plans and its stock purchase plans been determined based on the estimated fair value at the grant dates for awards under those plans consistent with the fair value method of SFAS No. 123 utilizing the Black-Scholes option-pricing model, the Company’s net loss and basic and diluted loss per share for the quarters ended April 4, 2004 and March 30, 2003 would have approximated the pro forma amounts indicated below:

The fair value of options granted under the Company’s stock incentive plans during the first quarters of fiscal 2004 and 2003 was estimated on the date of grant using the Black-Scholes option-pricing model utilizing the multiple option approach using the following weighted-average assumptions:

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 models provide a reliable single measure of the fair value of its employee stock options. Therefore, the Company believes that the pro forma net expense per SFAS 123 calculated above is not a reliable measure of the costs of the Company’s stock option plans.

Foreign Currency Translation

In accordance with Statement of Financial Accounting Standards No. 52, Foreign Currency Translation (“SFAS 52”), Powerwave’s international operations use their respective local currencies 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. Assets and liabilities of the Company’s international subsidiaries are translated at current rates of exchange in effect at the balance sheet date. The resulting translation gains and losses for such subsidiaries are included within accumulated other comprehensive loss as a separate component of shareholders’ equity. Realized gains and losses from foreign currency transactions are reported in other income, net, and have historically been insignificant.

Note 3. Inventories

Net inventories consist of the following:

Inventories are net of an allowance for excess and obsolete inventory of approximately $4.5 million and $8.6 million as of April 4, 2004 and December 28, 2003, respectively. During the three months ended April 4, 2004, the Company disposed of approximately $3.9 million of fully reserved excess and obsolete inventory. Powerwave regularly reviews inventory quantities on hand and records an allowance for excess and obsolete inventory based primarily on sales backlog, forecasted product demand and production requirements for the next twelve months.

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Note 4. Property, Plant and Equipment

Net property, plant and equipment consist of the following:

Note 5. Other Non-Current Assets

Other non-current assets consist of the following:

Note 6. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following:

Note 7. Goodwill Impairment Charge

As a result of the significant economic downturn effecting demand in the wireless infrastructure industry during the quarter ended March 30, 2003, Powerwave determined that it was necessary to test its previously recorded goodwill for impairment. Since Powerwave operates in a single business segment as a single reporting unit, the determination of whether any potential impairment of goodwill exists is based on a comparison of the fair value of the entire Company to the accounting value of its net assets. In estimating the fair value of the entire Company, Powerwave reviewed the average and closing stock prices for its Common Stock, valuations based on multiples of sales, EBITDA and EBIT, as well as other factors. Based on a comparison of these valuations to the accounting value of the underlying assets and liabilities, the Company concluded that the entire amount of its recorded goodwill had been impaired and, therefore, recorded a non-cash charge of $4.9 million during the first quarter of fiscal 2003.

Note 8. Financing Arrangements and Long-Term Debt

On July 18, 2003, Powerwave completed the private placement of $130.0 million aggregate principal amount of 1.25% convertible subordinated notes due July 2008. The notes are convertible into the Common Stock of Powerwave at a conversion price of $10.49 per share and accrue interest at an annual rate of 1.25% with interest payable semi-annually on January 15 and July 15. The notes are general unsecured obligations of the Company and are subordinate in right of payment to all of the Company’s existing and future senior indebtedness. In addition, the indenture for the notes does not restrict the Company from incurring senior debt or other indebtedness and does not impose any financial covenants on the Company. The notes are callable by the Company beginning July 22, 2007.

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Powerwave used a portion of the proceeds of the offering to fund the repurchase of $25.0 million of the Company’s Common Stock (3,144,654 shares) simultaneously with the issuance of the notes. The Company received net cash proceeds of approximately $100.9 million after the deduction of the amount used for the Common Stock repurchase and debt issuance costs.

The Company maintains an unsecured revolving credit agreement with Comerica Bank-California. This credit facility provides for a revolving line of credit up to a maximum principal amount outstanding at any one time of $20.0 million (the “Revolving Commitment Amount”) and expires on May 31, 2004. The Company is required to pay a commitment fee of 0.25% per annum on the unused portion of the Revolving Commitment Amount. The commitment fee is payable quarterly in arrears. The revolving credit facility allows for borrowings based either upon the bank’s prime rate (4.00% at April 4, 2004) or the bank’s LIBOR rate plus an applicable LIBOR margin of 1.25% or 1.50%, based upon the Company’s debt leverage ratio. The revolving credit facility contains certain standard affirmative and negative covenants, including limitations on future indebtedness, restricted payments, transactions with affiliates, liens, dividends, mergers, transfers of assets and leverage ratios. At April 4, 2004, the Company was in compliance with all covenants contained in the revolving credit facility. There were no amounts outstanding and the full $20.0 million of the Revolving Commitment Amount was available to the Company at April 4, 2004.

Note 9. Employee Stock Purchase Plan

The previous offering under Powerwave’s Employee Stock Purchase Plan (the “ESPP”) concluded on January 30, 2004, with 139,117 shares of the Company’s Common Stock purchased under the ESPP at a price per share of $6.49. At April 4, 2004, there were rights to purchase approximately 47,000 shares of Common Stock outstanding under the ESPP’s current offering, which will conclude on July 30, 2004.

Note 10. Stock Option Plans

The following is a summary of stock option transactions under Powerwave’s stock option plans, including the 1995 Stock Option Plan, the 1996 Stock Incentive Plan, the 1996 Director Stock Option Plan, the 2000 Stock Option Plan and the 2002 Stock Option Plan, for the quarter ended April 4, 2004:

At April 4, 2004, a total of 2,002,102 shares were available for grant under all of the Company’s stock option plans.

Note 11. Commitments and Contingencies

Powerwave had various outstanding leases as of April 4, 2004, the majority of which relate to real estate operating leases, including 115,000 square feet of warehouse space in Santa Ana, California, 31,500 square feet of engineering and office space in El Dorado Hills, California, and 8,100 square feet of engineering and office space in Bristol, United Kingdom.

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Future minimum lease payments required under all operating leases at April 4, 2004 are payable as follows:

Total rent expense was $0.5 million during the each of the quarters ended April 4, 2004 and March 30, 2003, respectively.

Powerwave is subject to various legal proceedings from time to time as part of its business. As of April 4, 2004, Powerwave was not currently party to any legal proceedings or threatened legal proceedings, the adverse outcome of which, individually or in the aggregate, it believes would have a material adverse effect on its business, financial condition or results of operations.

Note 12. Contractual Guarantees and Indemnities

The Company establishes reserves for future product warranty costs that are expected to be incurred pursuant to specific warranty provisions with its customers. The Company also has contractual requirements with various customers that could require the Company to incur costs to repair an epidemic defect with respect to its products outside of the normal warranty period if such defect were to occur. The Company’s warranty reserves are generally established at the time of sale and updated throughout the warranty period based upon numerous factors including historical warranty return rates and expenses over various warranty periods. The Company also accrues additional warranty liabilities for significant and unusual product performance issues at the time such issues are identified and the associated warranty related costs can be reasonably estimated. A summary of the activity that affected the Company’s accrued warranty costs for the quarters ended April 4, 2004 and March 30, 2003 are as follows:

During its normal course of business, the Company makes certain contractual guarantees and indemnities pursuant to which the Company may be required to make future payments under specific circumstances. Powerwave has not recorded any liability for these contractual guarantees and indemnities in the accompanying consolidated financial statements. A description of significant contractual guarantees and indemnities existing as of April 4, 2004 is included below:

Intellectual Property Indemnities

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

Director and Officer Indemnities and Contractual Guarantees

The Company has entered into indemnification agreements with its directors and executive officers which require the Company to indemnify such individuals to the fullest extent permitted by Delaware law. The Company’s indemnification obligations under such agreements are not limited in amount or duration. Certain costs

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incurred in connection with such indemnifications may be recovered under certain circumstances under various insurance policies. Given that the amount of any potential liabilities related to such indemnities cannot be determined until a lawsuit has been filed against a director or executive officer, the Company is unable to determine the maximum amount of losses that it could incur relating to such indemnifications. Historically, any amounts payable pursuant to such director and officer indemnifications have not had a material negative effect on the Company’s business, financial condition or results of operations. The Company maintains directors and officers insurance as well which may provide a source of recovery to the Company in the event of an indemnification claim.

The Company has also entered into severance and change in control agreements with certain of its executives. These agreements provide for the payment of specific compensation benefits to such executives upon the termination of their employment with Powerwave.

General Contractual Indemnities/Products Liability

During the normal course of business, the Company enters into contracts with customers where it has agreed to indemnify the other party for personal injury or property damage caused by the Company’s products. The Company’s indemnification obligations under such agreements are not limited in duration and are generally not limited in amount. Historically, any amounts payable pursuant to such contractual indemnities have not had a material negative effect on the Company’s business, financial condition or results of operations. The Company maintains product liability insurance as well as errors and omissions insurance which may provide a source of recovery to the Company in the event of an indemnification claim.

Workers Compensation Insurance Guarantees

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

Note 13. Earnings (Loss) Per Share

In accordance with SFAS No. 128, Earnings Per Share (“SFAS 128”), basic earnings (loss) per share is based upon the weighted average number of common shares outstanding. Diluted earnings (loss) per share is based upon the weighted average number of common and potential common shares for each period presented. Potential common shares include stock options under the treasury stock method and convertible subordinated debt under the if-converted method. Potential common shares of 13,523,651 and 157,146 related to the Company’s convertible debt and stock option programs, as applicable, have been excluded from diluted weighted average common shares for the quarters ended April 4, 2004 and March 30, 2003, respectively, as the effect would be anti-dilutive.

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

Note 14. Customer Concentrations

Powerwave’s product sales have historically been concentrated in a small number of customers. During the quarters ended April 4, 2004 and March 30, 2003, sales to customers that accounted for 10% or more of revenues for the quarter totaled $41.6 million and $44.0 million, respectively. Sales to Nortel Networks Corporation and related entities (“Nortel”) accounted for approximately 54% and 52% of revenues during such quarters, respectively. During the quarter ended April 4, 2004, one customer in addition to Nortel accounted for approximately 12% of revenue. During the quarter ended March 30, 2003, two customers in addition to Nortel accounted for approximately 23% and 10% of revenues.

As of April 4, 2004, approximately 66% of total accounts receivable related to the two customers that each accounted for 10% or more of Powerwave’s net sales during the first quarter of 2004. The loss of, or reduction in, sales to any of these customers could have a material adverse effect on the Company’s business, financial condition and results of operations.

Note 15. Supplier Concentrations

Certain of Powerwave’s products, as well as components utilized in such products, 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 radio frequency power amplifiers from single-source suppliers as well as finished radio frequency amplifiers from single-source contract manufacturers. The inability to obtain single-source components or finished radio frequency amplifiers in the amounts needed on a timely basis or at commercially reasonable prices could result in delays in product introductions, interruption in product shipments or increases in product costs, which could have a material adverse effect on the Company’s business, financial condition and results of operations until alternative sources could be developed at a reasonable cost.

Note 16. Segments and Geographic Data

Powerwave operates in a single business segment as a designer, manufacturer and seller of radio frequency power amplifiers for wireless telecommunications equipment. Net sales are derived primarily from the sale of radio frequency power amplifiers for use in wireless communications networks. The Company reviews its revenues based upon the radio 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 radio frequency ranges. The following schedule presents an analysis of Powerwave’s net sales based upon radio frequency range:

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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. European and other international sales include sales to Europe and all other foreign countries. Sales to Canada were $11.1 million and $20.3 million, during the quarters ended April 4, 2004 and March 30, 2003, respectively. Sales to Finland were $7.6 million and $11.7 million during the quarters ended April 4, 2004 and March 30, 2003, respectively. Sales to France were $10.9 million and $4.5 million during the quarters ended April 4, 2004 and March 30, 2003, respectively.

The majority of Powerwave’s assets are located in the United States, in the State of California. Total accounts receivable as of April 4, 2004 include 27% from customers based in Canada, 23% from customers based in the United States, 18% from customers based in France and 14% from customers based in China.

Note 17. Pending Acquisition

On December 1, 2003, Powerwave and LGP Allgon Holding AB, a company organized under the laws of Sweden (“LGP Allgon”) announced that they had agreed to combine their businesses in a strategic transaction. Under the terms of the pending acquisition, Powerwave commenced an exchange offer on April 2, 2004 to acquire all of the outstanding shares of LGP Allgon, in exchange for newly-issued shares of Powerwave Common Stock. In the exchange offer, LGP Allgon shareholders can elect to exchange each of their LGP Allgon shares for 1.1 shares of Powerwave Common Stock. Based on Powerwave’s closing price on the Nasdaq National Market on November 28, 2003 (the last trading day before the announcement of the transaction), the transaction valued LGP Allgon shares at Swedish kronor (“SEK”) 61.87 ($8.1950 at the currency exchange rate of 7.55 SEK per USD as of November 28, 2003) per share. In addition, LGP Allgon shareholders have been offered the opportunity, under a cash alternative, to elect to exchange all or a specified number of their LGP Allgon shares to be acquired by Powerwave for a fixed price of SEK 61.87 in cash per LGP Allgon share. The cash alternative is subject to an aggregate maximum $125.0 million. The exchange offer is scheduled to close on or about April 30, 2004. One of the conditions to the completion of the transaction, which may be waived by Powerwave, is Powerwave’s acquisition of more than 90% of LGP Allgon’s stock in the exchange offer and through the exercise of options granted to Powerwave by certain shareholders of LGP Allgon, representing approximately 19% of the outstanding LGP Allgon shares. Depending on the form of consideration elected and the number of LGP Allgon shares tendered into the exchange offer, LGP Allgon shareholders will own between 37% and 46% of Powerwave’s outstanding shares of Common Stock upon completion of the transaction. Powerwave’s shareholders approved the issuance of Powerwave stock necessary to complete the exchange offer and the amendment to Powerwave’s Certificate of Incorporation to increase its authorized shares of Common Stock at a Special Meeting of shareholders on April 27, 2004.

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

The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto included under Item 1, “Financial Statements”. 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” included herein.

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Introduction and Overview

Powerwave’s business model is based upon the design, manufacture and sale of radio frequency power amplifiers for use in wireless communication networks. Our products are utilized in major wireless networks throughout the world which support voice and data communications by use of cell phones and other wireless communication devices. Wireless network operators generally use our products within each base station of a wireless network. We sell our products to both original equipment manufacturers, who incorporate our products into their proprietary base stations (which they then sell to network operators), and directly to individual wireless network operators for deployment into their existing networks.

During the last few years, the market for network equipment in the wireless communications market has been characterized by a severe downturn coupled with reduced investment in infrastructure equipment combined with slower than expected deployment of next generation equipment. Financial difficulties have also contributed to the wireless network operators’ reduced capital spending as they have been forced to consolidate in order to improve profitability and strengthen their balance sheets.

Currently, the majority of the wireless network operators offer wireless voice and data services on what are commonly referred to as 2 or 2.5G networks. These networks utilize common transmission protocols including Code Division Multiple Access or CDMA, Time Division Multiple Access or TDMA, and Global System for Mobile or GSM, all of which define different standards for transmitting voice and data within wireless networks. Within these transmission protocols, there are various improvements available to increase the speed of data transmission or to increase the amount of voice capacity in the network. These types of improvements are generally referred to as 2.5G and include upgrades to GSM such as General Packet Radio Service or GPRS and Enhanced Data Rates for Global Evolution or EDGE. For CDMA networks, various upgrades are referred to as CDMA 1x and CDMA2000.

The next generation of wireless voice and data transmission protocols is referred to as 3G. The next generation provides significantly higher data rate transmissions, with significant additional voice capacity and the ability to transmit high capacity information, such as video and web access. The major transmission protocol is known as Wideband Code Division Multiple Access or WCDMA. This protocol is being utilized in the next generation of GSM networks, which are referred to as Universal Mobile Telecommunication Systems or UMTS.

Our business is solely dependent upon the worldwide demand for wireless communications and the resulting requirements for infrastructure by wireless network operators to support this demand. During the last three years, demand for this type of infrastructure product has fluctuated dramatically and there has been a significant slowdown in capital spending by wireless network operators. This has had a significant negative impact on overall demand for wireless infrastructure products, including radio frequency power amplifiers, and therefore, directly reduced demand for our products and increased price competition within our industry. These two factors have led to the reduction in our revenues and contributed to the operating losses reported in our financial results.

We believe that we have maintained our overall market share within the radio frequency power amplifier market during this difficult industry period. We continue to invest in research and development of radio frequency power amplifier technology and we believe that we have one of our industry’s leading product lines in terms of performance and features. We believe that our proprietary design technology is a further differentiator for our products.

During 2003, we focused on restructuring the Company to lower our operating cost structure while ensuring that we maintain our operating flexibility to support future growth in the industry. For 2004, we are striving to continue our focus on cost savings while we expand our market opportunities through our proposed acquisition of LGP Allgon. We measure our success by monitoring our net sales and gross margins, with a short-term goal of maintaining a positive operating cash flow while striving to achieve long-term operating profits. We believe that there continues to be excellent growth opportunities within the wireless communications infrastructure marketplace from a long-term perspective. We continue to focus on positioning Powerwave to benefit from these long-term opportunities.

Critical Accounting Policies and Estimates

We prepare our condensed consolidated financial statements 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

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assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the periods presented. Any future changes to these estimates and assumptions could cause a material change to our reported amounts of revenue, expenses, assets and liabilities. The critical accounting policies which we believe are the most significant for purposes of fully understanding and evaluating our reported financial results include the following:

Revenue Recognition

We recognize 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 product 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 receivable, our liquidity and our future operating results.

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 on order and record a provision for excess and obsolete inventory and/or vendor cancellation charges related to purchase commitments 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 the past three fiscal years, 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 gross profit 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 unanticipated changes in demand or technological developments could have a material effect on the value of our inventory and our reported operating results.

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. We regularly review our deferred tax assets for recoverability and establish a valuation allowance based on historical taxable income, projected future taxable income, and the expected timing of the reversals of existing temporary differences. During 2003 and for the first fiscal quarter of 2004, we operated at a loss. If we continue to 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

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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. To determine the fair value of the entire Company, we review the market value of our outstanding Common Stock based upon the average and closing stock prices, valuations based on multiples of sales, EBITDA and EBIT, as well as other valuation metrics. If the fair value of the Company is less than the accounting value of our net assets, goodwill is deemed impaired and an impairment loss is recorded to the extent that the carrying value of goodwill is less than the difference between the fair value of the entire Company and the fair value of all other assets and liabilities.

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 is deemed impaired and an impairment loss is recognized to the extent the carrying value exceeded the estimated fair market value of the asset.

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 during the period in which such returns or additional costs materialize.

Stock-Based Compensation

We account 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 standard organizations are adopted, such as the Financial Accounting Standards Board Proposed Statement of Financial Accounting Standard, “Share-Based Payment, an amendment of FASB Statements No. 123 and 95”, 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.

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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 months ended April 4, 2004 and March 30, 2003:

Three Months ended April 4, 2004 and March 30, 2003

Net Sales

Our sales are derived primarily from the sale of radio frequency power amplifiers for use in wireless communications networks. Sales increased by 21% to $63.2 million, for the quarter ended April 4, 2004, from $52.2 million, for the quarter ended March 30, 2003. This increase is primarily due to a modest rebound in wireless infrastructure spending as we believe wireless network operators have begun to take steps to improve their wireless networks’ coverage and capacity. In addition, pursuant to our fiscal year policy, the quarter ended April 4, 2004 consisted of 14 weeks and the quarter ended March 30, 2003 consisted of 13 weeks. The following table presents an analysis of our net sales based upon radio frequency range:

The decrease in sales in the 800-1000 MHz range during the first quarter of 2004 as compared to the same period in fiscal 2003 is attributable to reduced demand, particularly for products in the TDMA transmission protocol, which is primarily in the cellular band in the North American market. The growth in net sales during the first quarter of 2004 of products in the 1800-2000 MHz range, or PCS band, is attributable to increased deployment activity worldwide as compared to the prior year. A significant portion of this increase is due to increased deployment activity in the PCS band that is associated with the switch by several TDMA network operators to GSM service as well as the expansion of CDMA network operator coverages in the North American market. The decrease during the same period for the 2000+ MHz range resulted primarily from sales price reductions of the products sold for the 3G marketplace. Since wireless network operators continue to operate networks in all three frequency ranges and infrastructure spending in any particular frequency range depends on individual network coverage and capacity needs during a quarter, we do not believe that our revenue fluctuations for any single frequency range are necessarily indicative of a predictable trend for our future revenues by frequency band.

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. The following table presents an analysis of our net sales based upon the geographic area to which a product was shipped:

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North American revenues remained relatively flat in the first quarter of fiscal 2004 as compared to the first quarter of 2003. In the North American marketplace, reduced demand for TDMA products was offset by increased demand for both GSM and CDMA based products. Sales in Asia increased due to increased demand for GSM and CDMA products in both China and South Korea. We also experienced some initial demand for operator-direct sales in Asia, which contributed to the increase in Asian sales during the first quarter of 2004. Increased sales in Europe and other international areas resulted from increased shipments of GSM products, offset by reduced revenues for 3G products. Since regional wireless network infrastructure spending is dependent on individual network coverage and capacity demands during a quarter, we do not believe that our revenue fluctuations for any geographic region are necessarily indicative of a predictable trend for our future revenues by geographic location.

For the quarter ended April 4, 2004, 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 quarter ended March 30, 2003, total sales to Nortel accounted for approximately 52% of sales and sales to ALLTEL and Nokia each accounted for 10% or more of sales. Our business is dependent upon a limited number of customers and we cannot guarantee that we will continue to be successful in attracting new customers or retaining or increasing business with our existing customers. Reduced demand for our products has negatively impacted our revenues and operating results. If reductions in overall market demand continue to result in a significant reduction in the future demand for our products by our customers, our business, financial condition and results of operations will be negatively impacted.

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 original equipment manufacturers to alter their outsourcing strategy concerning radio frequency power amplifiers, which could cause such original equipment manufacturers to reduce or eliminate their demand for external supplies of radio frequency power amplifiers or shift their demand to alternative suppliers or internal suppliers. Such factors include lower perceived internal manufacturing costs and competitive reasons to remain vertically integrated. Due to the possible uncertainties associated with wireless infrastructure deployments and original equipment manufacturer demand, we have experienced and expect to continue to experience significant fluctuations in demand from our original equipment manufacturer and network operator customers. Such fluctuations have caused and may continue to cause significant reductions in our revenues and/or operating results, which has adversely impacted and may continue to adversely impact our business, financial condition and results of operations.

Cost of Sales and Gross Profit

Our cost of sales includes both variable and fixed cost components and consists primarily of materials, assembly and test labor, overhead, which includes equipment and facility depreciation, transportation costs and warranty costs. Components of our fixed cost structure include test equipment and facility depreciation, purchasing and procurement expenses and quality assurance costs. Given the fixed nature of such costs, the absorption of our production overhead costs into inventory decreases and the amount of production overhead variances expensed to cost of sales increases as production volumes decline since we have fewer units to absorb our overhead costs against. Conversely, the absorption of our production overhead costs into inventory increases and the amount of production overhead variances expensed to cost of sales decreases as production volumes increase since we have more units to absorb our overhead costs against. As a result, our gross profit margins generally decrease as revenue and production volumes decline due to lower sales volume and higher amounts of production overhead variances expensed to cost of sales; and our gross profit margins generally increase as our revenue and production volumes increase due to higher sales volume and lower amounts of production overhead variances expensed to cost of sales.

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The following table presents an analysis of our gross profit:

Our gross profit margins during the first quarter of fiscal 2004 as compared to the same period of fiscal 2003 were favorably impacted by the 21% increase in net sales, which resulted in higher absorption of our manufacturing overhead expenses and decreased labor costs when viewed as a percentage of sales. In addition, the first quarter of 2004 benefited from the cost reductions realized from our decision in fiscal 2003 to outsource the majority of production of our products to contract manufacturers located in Asia.

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 and the pressures of our customers to continually lower product costs, 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 and customer demands. During fiscal 2003, the average sales price of our products declined between 5% and 24% from fiscal 2002. We currently expect that pricing pressures will remain strong in our industry. 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 affect our business, financial condition and results of operations.

We continue to strive for manufacturing and engineering cost reductions to offset pricing pressures on our products, as evidenced by our decision during 2003 to outsource the majority 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 Our Future Results—Our average sales prices have declined…; and —Our reliance on contract manufacturers exposes us to risks…”

Operating Expenses

The following table presents a breakdown of our operating expenses by functional category and as a percentage of net sales:

Sales and marketing expenses consist primarily of sales salaries and commissions, travel expenses, charges for customer demonstration units and trade show expenses. Sales and marketing expenses increased by $0.6 million, or 22%, during the quarter ended April 4, 2004 as compared to the quarter ended March 30, 2003. The increase results primarily from a $0.4 million increase in sales commissions and personnel costs due to our increase in sales.

Research and development expenses consist primarily of ongoing radio frequency power amplifier design and development expenses as well as design expenses associated with reducing the cost and improving the manufacturability of existing radio frequency power amplifiers. Current programs include cellular, PCS and next generation 2.5G and 3G products, as well as alternatives to feed-forward technology techniques. Research and development expenses can fluctuate dramatically from period to period depending on numerous factors including new product introduction schedules, prototype developments and hiring patterns. Research and development expenses decreased by $0.7 million, or 7%, during the quarter ended April 4, 2004 as compared to the quarter ended

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March 30, 2003. This decrease is primarily due to a $0.9 million decrease in material costs associated with a large number of prototype and pre-production product development builds during the first quarter of fiscal 2003 that did not similarly occur in the first quarter of 2004, offset by a slight increase in personnel costs.

General and administrative expenses consist primarily of salaries and other expenses for management, finance, information systems, facilities and human resources. General and administrative expenses increased $0.3 million, or 8%, during the quarter ended April 4, 2004 as compared to the quarter ended March 30, 2003 due to an increase in personnel costs.

During the quarter ended March 30, 2003, we incurred an impairment charge of $4.9 million incurred related to our write-down of goodwill. 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 market value of Powerwave based upon 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 incurred no such charge during the quarter ended April 4, 2004.

Non-operating Income and Expenses

The following table presents an analysis of the differences between our operating loss and net loss:

Other Income, net

Other income consists primarily of interest income, net of any interest expense. Other income decreased to $0.4 million during the quarter ended April 4, 2004, from $0.8 million during the quarter ended March 30, 2003 primarily due to the interest expense associated with our 1.25% subordinated convertible notes issued in July 2003.

Benefit from Income Taxes

We recorded a tax benefit at a rate of 38.5% during the quarter ended April 4, 2004 as compared to a tax benefit of 36.0% for the quarter ended March 30, 2003. 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.

Net Loss

The net loss for the quarter ended April 4, 2004 is $3.3 million compared to a net loss of $10.6 million for the quarter ended March 30, 2003. The net loss for the first quarter of fiscal 2004 was less than the net loss for the first quarter of 2003 primarily due to the increase in sales combined with higher gross profit margins and the $4.9 million goodwill impairment charge recorded in the first quarter of fiscal 2003.

Liquidity and Capital Resources

We have historically financed our operations through a combination of cash on hand, cash provided from operations, equipment lease financings, available borrowings under bank lines of credit, private debt placements and both private and public equity offerings. Our principal sources of liquidity consist of existing cash balances and funds expected to be generated from future operations. As of April 4, 2004, we had working capital of $276.4 million, including $250.4 million in cash and cash equivalents, as compared to working capital of $280.2 million at December 28, 2003, which included $260.5 million in cash and cash equivalents. We currently invest our excess cash in short-term, investment-grade, money-market instruments with maturities of three months or less. We typically hold such investments until maturity and then reinvest the proceeds in similar money market instruments. We believe that all of our cash investments would be readily available to us should the need arise.

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Cash Flows

The following table summarizes Powerwave’s cash flows for the quarters ended April 4, 2004 and March 30, 2003:

Net cash used in operations during the quarter ended April 4, 2004 was $10.5 million as compared to net cash provided by operations of $1.3 million during the quarter ended March 30, 2003. This use of cash in operations during the first quarter of 2004 primarily related to the reduction in our outstanding accounts payable of $11.7 million when compared to our December 28, 2003 balance. During the quarter ended April 4, 2004, our net accounts receivable decreased to $51.2 million from $56.3 million at December 28, 2003, primarily due to lower revenues in the first quarter of 2004 when compared to the fourth quarter of 2003. Our net inventories increased by $2.1 million to $17.3 million at April 4, 2004, from $15.2 million at December 28, 2003.

Net cash used in investing activities reflects our capital spending. Total capital expenditures during the quarters ended April 4, 2004 and March 30, 2003 were approximately $1.2 million and $0.7 million, respectively. The majority of the capital spending during such quarters was for computer hardware and test equipment utilized in our manufacturing and research and development areas. We expect our future annual capital spending requirements to range between $5 million and $10 million per year, consisting primarily of radio frequency test equipment, computer hardware and computer software.

The $0.4 million increase in net cash provided by financing activities in the first quarter of fiscal 2004 as compared to the first quarter of fiscal 2003 represents increases in proceeds from the issuance of our Common Stock under our employee stock option programs and our Employee Stock Purchase Plan.

We currently believe that our existing cash balances and funds expected to be generated from operations will provide us with sufficient funds to finance our current operations for at least the next twelve months as well as any potential cash outlays related to the acquisition of LGP Allgon. Our principal source of liquidity consists of our existing cash balances. We regularly review our cash funding requirements and attempt to meet those requirements through a combination of cash on hand and cash provided by operations. Our ability to increase revenues and generate profits is subject to numerous risks and uncertainties and any significant further decrease in our revenues or profitability would reduce our operating cash flows and erode our existing cash balances. No assurances can be given that we will be able to generate positive operating cash flows in the future or maintain and/or grow our existing cash balances.

Financing Activities

We maintain a $20.0 million revolving credit agreement with Comerica Bank-California. This credit facility provides for an unsecured revolving line of credit up to a maximum principal amount outstanding at any one time of $20.0 million (the “Revolving Commitment Amount”) and expires on May 31, 2004. We are required to pay a commitment fee of 0.25% per annum on the unused portion of the Revolving Commitment Amount, payable quarterly in arrears. The revolving credit facility allows for borrowings based either upon the bank’s prime rate (4.00% at April 4, 2004) or the bank’s LIBOR rate plus an applicable LIBOR margin of 1.25% or 1.50%, based upon our debt leverage ratio. The revolving credit facility contains certain standard affirmative and negative covenants, including limitations on future indebtedness, restricted payments, transactions with affiliates, liens, dividends, mergers, transfers of assets and leverage ratios. At April 4, 2004, we were in full compliance with all covenants contained in the revolving credit facility. There were no amounts outstanding and the full $20.0 million of the Revolving Commitment Amount was available to us as of April 4, 2004.

On occasion, we have previously utilized both operating and capital lease financing for certain equipment purchases used in our manufacturing and research and development operations and may selectively continue to do

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so in the future. We may require additional funds in the future to support our working capital requirements or for other purposes such as acquisitions, and we may seek to raise such additional funds through the sale of public or private equity and/or debt financings, as well as from other sources. Our ability to maintain existing financing arrangements and to secure additional financing or sources of funding is dependent upon our financial performance, credit rating and the market price for our Common Stock, which are both directly impacted by our ability to grow revenues and generate profits. We can make no guarantees that we will be able to obtain additional financing or secure new financing arrangements in the future. If our operating performance was to deteriorate and our cash balances were to be significantly reduced, we would likely encounter a more difficult environment in terms of raising additional funding to support our business.

Contractual Obligations and Commercial Commitments

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

Long-Term Debt