<PAGE>
 
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                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549
 
                               ----------------
 
                                   FORM 10-K
 
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
   SECURITIES EXCHANGE ACT OF 1934
 
   For the fiscal year ended January 3, 1999
 
                                      OR
 
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
   SECURITIES EXCHANGE ACT OF 1934
 
   For the transition period from              to
 
                       Commission File Number 000-21507
 
                               ----------------
 
                         POWERWAVE TECHNOLOGIES, INC.
            (Exact name of registrant as specified in its charter)
 

                Delaware                           11-2723423
    (State or other jurisdiction of   (I.R.S. Employer Identification No.) 
    in corporation or organization)         
              
 
                               2026 McGaw Avenue
                           Irvine, California 92614
              (Address of principal executive offices, zip code)
 
                                (949) 757-0530
             (Registrant's telephone number, including area code)
 
                               ----------------
 
          Securities registered pursuant to Section 12(b) of the Act:
 
                                     None
 
          Securities registered pursuant to Section 12(g) of the Act:
 
                             Title of each class:
                        Common Stock, Par Value $.0001
 
                               ----------------
 
  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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [X]
 
  As of February 16, 1999, the aggregate market value of the voting stock of
the Registrant held by non-affiliates of the Registrant was $348,250,809
computed using the closing price of $23.625 per share of Common Stock on
February 16, 1999, as reported by Nasdaq, based on the assumption that
directors and officers and more than 10% shareholders are affiliates. As of
February 16, 1999, the number of outstanding shares of Common Stock, par value
$.0001 per share, of the Registrant was 17,461,391.
 
  Information required by Part III is incorporated by reference to portions of
the Registrant's Proxy Statement for the 1998 Annual Meeting of Shareholders,
which will be filed with the Securities and Exchange Commission within 120
days after the close of the 1998 fiscal year.
 
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<PAGE>
 
  This Annual Report on Form 10-K contains certain forward-looking statements
that are based on the beliefs of, and estimates made by and information
currently available to, the Company's management. Such statements are subject
to certain risks uncertainties and assumptions. Actual results may vary from
those expected or anticipated in these forward looking statements, including
those set forth below and elsewhere in this Annual Report on 10-K. See
"Additional Factors That May Affect Future Results," under Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
 
                                    PART I
 
ITEM 1. BUSINESS
 
General
 
  Powerwave Technologies, Inc. ("Powerwave" or the "Company") was incorporated
in Delaware in January 1985 under the name Milcom International, Inc. and
changed its name to Powerwave Technologies, Inc. in June 1996. Powerwave
designs, manufactures and markets ultra-linear radio frequency ("RF") power
amplifiers for use in the wireless communications market. The Company's RF
power amplifiers, which are key components of wireless communications
networks, increase the signal strength of wireless transmissions from the base
station to a handset while reducing interference, or "noise." Less noise
enables wireless service providers to deliver clearer call connections.
Stronger signals reduce the number of interrupted or dropped calls.
 
  Powerwave manufactures both single and multi-carrier RF power amplifiers for
a variety of frequency ranges and transmission protocols. Single carrier RF
power amplifiers typically amplify a specific call channel. Multi-carrier RF
power amplifiers are capable of amplifying several call channels at one time
and integrate the functions of several RF power amplifiers and cavity filters
within a single unit. The Company's products are currently being utilized in
both cellular and personal communications services ("PCS") base stations in
digital and analog-based networks. The Company's products support a wide range
of digital and analog transmission protocols including CDMA, TDMA, GSM, AMPS
and TACS. The Company also produces RF power amplifiers for the wireless local
loop ("WLL") market, which refers to wireless products designed for fixed, or
non-mobile applications which provide and/or replace traditional wireline
telephone systems. In addition, the Company produces RF power amplifiers for
the land mobile radio ("LMR") market (also known as specialized mobile radio
or "SMR"), which is characterized as a two-way radio market with devices
commonly utilized by police and emergency personnel and the business dispatch
marketplace.
 
  Powerwave was formed in 1985 to develop a line of high-power RF power
amplifiers suitable for use with VHF/UHF, AM/FM transceivers. In addition, the
Company offered products for use in the LMR industry. For the next several
years, the Company continued product development in the land mobile radio
industry, broadening its product offerings and selling to a diversified
customer base. During this time, the Company became active in the air-to-
ground market providing RF power amplifiers for both ground based transmission
stations and for installation in airplanes for on-board telephone
communications. In late 1994, Powerwave developed a multi-carrier linear RF
power amplifier which could be utilized in the transmission of radio signals
for cellular base stations. In 1995, the Company began supplying multi-carrier
linear RF power amplifiers for installation in base stations utilized in the
deployment of two digital cellular networks utilizing CDMA technology in South
Korea. These South Korean digital cellular networks began operating during
1996 with two independent service providers offering nationwide coverage. In
1996, Powerwave began development of a single carrier RF power amplifier for
use in PCS network base stations. At this same time, Powerwave focused on
diversifying its customer base and expanding its geographic focus. During
1997, the Company began supplying single carrier RF power amplifiers for use
in the deployment of three new digital PCS networks utilizing CDMA technology
in South Korea. These new South Korean PCS networks began operating on
October 1, 1997, with three independent service providers offering limited
coverage within South Korea. The Company's customers in South Korea include
Hyundai Electronics Industries Co. ("Hyundai"), LG Information &
Communications, Ltd. ("LGIC") and Samsung Electronics Co. Ltd. ("Samsung").
 
                                       1
<PAGE>
 
  While the Company continued its efforts to diversify its customer base,
during the beginning of 1998, Powerwave's South Korean-based customers began
to postpone, reschedule and cancel existing orders with Powerwave as a result
of the Asian economic crisis. These actions negatively impacted the Company's
results of operations and financial condition in fiscal 1998. The results of
the Company's customer diversification efforts and the impact of the Asian
economic crisis are reflected in the decreasing percentage of the Company's
business associated with its South Korean customers. While the Company's
customer base significantly expanded during fiscal 1998 and the Company is
continuing its efforts to expand its customer base, the Company expects that a
limited number of customers will continue to represent a substantial portion
of the Company's net sales for the foreseeable future. The Company believes
that its future success depends upon its ability to broaden its customer base.
For the fiscal year ended January 3, 1999, the Company's four largest
customers in alphabetical order were BellSouth Cellular Corp. and related
entities ("BellSouth"), LGIC, Northern Telecom Limited and related entities
("Nortel") and Samsung, each of which accounted for more than 10% of the
Company's net sales, and in the aggregate accounted for approximately 69% of
the Company's total net sales. See "Additional Factors That May Affect Future
Results--Customer Concentration; --Reliance Upon South Korean Market and
Growth of Wireless Services Market; and --Risks of Doing Business in
International Markets" under Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
 
  A limited number of large original equipment manufacturers ("OEMs") account
for a majority of RF power amplifier purchasers in the wireless equipment
market, and the Company's future success will be dependent upon its ability to
establish and maintain relationships with these types of customers. There can
be no assurance that a major customer will not reduce, delay or eliminate its
purchases from the Company, which could have a material adverse effect on the
Company's business, results of operations and financial condition. See
"Additional Factors That May Affect Future Results--Customer Concentration"
under Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
 
  The Company is attempting to expand its customer base as it pursues
additional opportunities within the wireless infrastructure equipment market.
The Company has experienced, and expects to continue to experience, declining
average sales prices for both its multi-carrier and single carrier amplifier
products. Wireless infrastructure equipment manufacturers have come under
increasing price pressure from wireless service providers, which in turn has
resulted in downward pricing pressure on the Company's products. In addition,
reduction in demand from the Asian market has increased competition to sell
products in the remaining markets, thereby further increasing pricing
pressures in the global market. Consequently, the Company believes that in
order to maintain or improve its existing gross margins in the near term, it
must achieve manufacturing cost reductions, and in the long term it must
develop new products that incorporate advanced features that generate higher
gross margins. See "Additional Factors That May Affect Future Results--
Customer Concentration; --Consolidation and Integration of the HP
Manufacturing Facility; --Reliance Upon South Korean Market and Growth of
Wireless Services Market; --Declining Average Sales Prices; and --Risks of
Doing Business in International Markets" under Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
 
Significant Business Developments in Fiscal 1998
 
  During the fourth quarter of 1997, Asian countries, including South Korea,
began to experience weaknesses in their currency, banking and equity markets.
The deteriorating economic and currency conditions throughout Asia in December
1997 led South Korea, along with several other countries, to request economic
support from the International Monetary Fund. During this time, the Company's
South Korean customers continued to order and take delivery of products from
the Company and continued to make timely payments to the Company. During the
first quarter of 1998, economic and currency conditions in Asia and South
Korea continued to negatively impact overall market conditions within South
Korea, causing the Company's South Korean customers to either postpone,
reschedule or cancel orders with the Company. The delay and cancellation of
orders by the Company's South Korean customers and the delay of the deployment
of the South Korean digital wireless networks had a material adverse effect on
the Company's business, results of operations and financial condition.
 
                                       2
<PAGE>
 
  The HP Acquisition. On August 31, 1998, the Company announced that it had
signed a definitive agreement to acquire Hewlett-Packard Company's ("HP") RF
power amplifier business and its manufacturing and research and development
facility in Folsom, California and its production equipment and manufacturing
lines located in Malaysia, for approximately $59 million (the "HP
Acquisition"). This business was part of HP's Wireless Infrastructure Division
and is focused on the design and manufacture of RF power amplifiers for
wireless communications, including cellular, PCS and WLL. Since the
acquisition date, the Company has transferred the Malaysian production
equipment and manufacturing lines to its Irvine, California facility. The
Company is also in the process of transferring the Folsom facility
manufacturing lines to its Irvine facility and expects to complete the closure
of the Folsom manufacturing facility in the second half of 1999. The Company
also intends to maintain a research and development location in the Folsom
area. The Company has begun the process of marketing the Folsom manufacturing
facility for sale to third parties.
 
  The HP Acquisition included certain assets, liabilities, operations and
business related to the design, manufacture and marketing of RF power
amplifiers for use in wireless communications. Powerwave purchased all
intellectual property rights to the products as well as in-process research
and development activities. The Company also assumed certain existing orders
for the products acquired. The products acquired cover a broad range of
wireless transmission protocols, including CDMA, TDMA and GSM. Powerwave
completed the purchase on October 9, 1998 for a total purchase price of
approximately $65.9 million, of which approximately $57.4 million was paid to
HP in cash, approximately $1.1 million in acquisition costs and the balance
related to assumed liabilities. Powerwave financed the acquisition utilizing
borrowings of $25 million under a new $35 million secured credit facility,
which was dated as of September 30, 1998. The Company utilized its existing
cash balances for the remainder of the cash purchase price paid. This
acquisition was accounted for in the fourth quarter of fiscal 1998.
 
  The HP Acquisition was accounted for as a purchase and, accordingly, the
total purchase price was allocated to the assets acquired and liabilities
assumed at their estimated fair values in accordance with Accounting
Principles Board Opinion No. 16. The purchase price was allocated to tangible
assets acquired of approximately $34.7 million, developed technology of $11.5
million, in-process research and development of $12.4 million, other
intangible assets of $2.7 million and goodwill of approximately $4.6 million.
The Company's financial statements for the year ended January 3, 1999 include
a charge of $12.4 million for the write-off of acquired in-process research
and development expenses associated with the HP Acquisition. The in-process
research and development expenses arose from new product projects that were
under development at the date of the acquisition and expected to eventually
lead to new products but had not yet established technological feasibility and
for which no future alternative use was identified. The valuation of the in-
process research and development projects was based upon the discounted
expected future net cash flows of the products over the products expected
life, reflecting the estimated stage of completion of the projects and an
estimate of the costs to complete the projects.
 
  On December 23, 1998, the Company announced that its founder and Chairman,
Alfonso G. Cordero, would retire as Chairman of the Board of Directors and an
employee of the Company effective January 3, 1999. Mr. Cordero became Chairman
Emeritus of the Board of Directors and will continue as a non-employee
director of the Company. The Company also announced that existing director,
John L. Clendenin, would become non-executive Chairman of the Board of
Directors effective January 4, 1999.
 
Industry Segments and Geographic Information
 
  The Company operates in one industry segment: the design, manufacture and
marketing of RF power amplifiers for use in wireless communications networks.
The Company currently markets its products through independent sales
representatives as well as its own internal sales force. For the purposes of
Statement of Financial Accounting Standards ("SFAS") No. 131, Disclosures
About Segments of an Enterprise and Related Information, the Company has
provided a breakdown of its business utilizing the management approach in
Note 12 of the "Notes to Consolidated Financial Statements" under Item 8,
"Financial Statements and Supplementary Data." Utilizing the management
approach, the Company has broken down its business based
 
                                       3
<PAGE>
 
upon the RF frequency in which the product is utilized in, i.e. cellular, PCS,
LMR, WLL and other. A summary of the Company's sales by geographic region is
incorporated herein by reference from Note 12 of the "Notes to Consolidated
Financial Statements" under Item 8, "Financial Statements and Supplementary
Data."
 
Business Strategy
 
  The Company's strategy is to become the leading supplier of high performance
RF power amplifiers used in digital and analog wireless networks worldwide and
includes the following key elements: (i) provide leading technology to the RF
power amplifier industry through research and development that continues to
improve its products technical performance, to raise its productivity and to
lower costs; (ii) leverage its position as a leading supplier of both single
carrier and multi-carrier RF power amplifiers to increase its market share and
expand its relationships with its existing customers; (iii) continue to expand
its customer base of wireless network OEMs and leading wireless network
operators; and (iv) maintain its focus on the quality, reliability and
manufacturability of its RF power amplifier products.
 
  Powerwave's focus on RF power amplifier technology and the experience it has
gained through the implementation of its products in both analog and digital
wireless networks has enabled the Company to develop substantial expertise in
both multi-carrier and single carrier RF power amplifier technology. Powerwave
intends to continue to dedicate significant resources to the research and
development of new methods to improve RF power amplifier performance,
including additional methods to reduce noise and increase power in the
RF amplification process. The Company believes that its existing product
lines, including the product lines acquired from HP, will enable the Company
to continue to expand its customer base by offering a broad range of products
to meet the diverse requirements of OEMs and leading wireless network
operators. The Company also intends to leverage its comprehensive product
lines to expand its relationship with its existing customers and to add new
customers. The Company has developed the ability to manufacture both multi-
carrier and single carrier RF power amplifiers in a standard, repeatable
manner, which allows for increased production levels. Powerwave also believes
it is able to respond quickly and cost-effectively to new transmission
protocols and design specifications by obtaining components from numerous
leading technology companies. The Company also believes that its focus on the
manufacturability of its RF power amplifier designs should allow it to
increase its manufacturing productivity while reducing its product costs. The
Company believes that its ability to offer a broad range of products
represents a competitive advantage over other third-party manufacturers of RF
power amplifiers.
 
  If the Company's outstanding customer orders were to be significantly
reduced, the resulting loss of volume purchasing could adversely effect the
Company's cost competitive advantage, which would negatively affect the
Company's gross profit margins, business, results of operations and financial
condition. See "Additional Factors That May Affect Future Results--Declining
Average Sales Prices and --No Assurance of Product Manufacturability, Quality
or Reliability; and --Consolidation and Integration of the HP Manufacturing
Facility" under Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
 
Markets
 
  Powerwave sells its RF power amplifier products into various segments of the
wireless communications market. The Company's primary focus is on the cellular
and PCS markets and during 1998 the Company derived approximately 77% of its
revenues from the cellular market and approximately 20% from the PCS market.
The following describes the primary segments of the wireless communications
market to which the Company sells its products:
 
  Cellular and PCS. Cellular networks utilize a number of base stations with
high power antennas to serve a geographical region. Each region is broken down
into a number of smaller geographical areas, or "cells." Each cell has its own
base station which uses wireless technology to receive subscribers calls and
transmit those calls through the wireline public switched telephone network
("PSTN"). Cellular networks operate within the 800 and 900 MHz bandwidths of
the radio spectrum. PCS networks operate in a substantially similar manner as
 
                                       4
<PAGE>
 
cellular networks, except that PCS networks operate at 1800 and 1900 MHz
bandwidths and utilize only digital transmission protocols. Transmissions at
the higher frequencies utilized by PCS networks have shorter transmission
waves as compared to cellular frequency transmissions, which limits the
distances PCS transmissions can travel without significant degradation. Lower
frequency signals penetrate into buildings and other obstacles better than
higher frequency signals. Therefore, PCS networks operating at the higher
frequency ranges should require smaller operating cells and more base stations
than existing cellular networks to cover the same total geographic region.
Additionally, due to the smaller geographical cell size utilized in PCS
networks, PCS base stations may operate at lower power levels as compared to
existing cellular networks.
 
  In analog cellular networks, each base station is allocated a certain number
of frequency channels, each of which can carry only one call at a time. As
such, a base station utilizing traditional amplification technology cannot
transmit or receive more calls than it has available channels at any given
time. Originally, cellular base stations in analog networks used single
carrier power amplifiers for each frequency channel allocated to the cell.
Many analog cellular networks are now beginning to utilize a process known as
adaptive channel allocation in order to increase network capacity. In adaptive
channel allocation, which is optimized with multi-carrier RF power amplifiers,
unused channels in cells are temporarily reallocated to augment more heavily
utilized adjacent cells. The signals are amplified simultaneously through a
multi-carrier RF power amplifier which allows for the simultaneous
amplification of all channels within a base station. Multi-carrier RF power
amplifiers require significantly higher linearity than do single carrier
designs, but do not require separate, high-maintenance, tunable cavity
filters. By eliminating the need for separate cavity filters for each channel,
multi-carrier RF power amplifiers reduce overall deployment and maintenance
costs associated with base stations. While adaptive channel allocation using
multi-carrier linear amplifiers has increased the capacity of analog networks,
many service providers still require additional capacity to serve the
increased flow of transmissions through their networks. This has led many
service providers to begin to move from analog networks to digital networks.
 
  In digital networks, calls are segmented and transmitted across the entire
bandwidth of allocated spectrum, rather than in single channels of that
spectrum. The calls are then reassembled when received at the base station or
cellular phone. While using the entire bandwidth of allocated spectrum results
in greater system capacity, there is a greater likelihood that even minimal
background noise will result in interrupted or dropped calls. Accordingly,
ultra-linear amplification is even more critical in digital networks than in
their analog counterparts. Powerwave provides ultra-linear multi-carrier RF
power amplifiers which are located in base stations and work to increase the
signal strength of outgoing transmissions. Powerwave's single carrier and
multi-carrier RF power amplifiers work in base stations with a variety of
other sophisticated electronic equipment, including receivers, radios and
oscillators.
 
  Wireless Local Loop. The WLL market refers to wireless products designed for
fixed, or non-mobile applications which provide and/or replace traditional
wireline telephone systems. Proposed advantages of WLL over traditional
telephone systems include rapid, cost-effective deployment, reduced
operational and maintenance costs, low initial investment costs and hardware
which is capable of providing enhanced services. This infrastructure market is
targeted for both developing countries and established telecommunications
markets.
 
  Land Mobile Radio. Powerwave has been manufacturing RF power amplifiers for
the LMR market since 1985. LMR is commonly associated with two-way
communication devices used by police and emergency personnel and the business
dispatch marketplace. While the domestic market has remained relatively static
in the past few years, the Company believes there may be opportunities in
certain parts of the international market, where the installation of more
expensive cellular and PCS systems is not cost-justified. In addition, various
companies continue to design new products which utilize the frequencies
traditionally allocated to the LMR market in an attempt to compete with both
cellular and PCS system operators. There can be no assurance that such
companies will achieve commercial success or, even if they are successful,
whether Powerwave will be able to sell RF power amplifiers into such new
markets.
 
                                       5
<PAGE>
 
Products
 
  Powerwave designs and manufactures both single and multi-carrier RF power
amplifiers which are sold into the cellular and PCS markets. The Company also
designs and manufactures single carrier RF power amplifiers which are sold
into the WLL and LMR markets.
 
  Cellular Series. Powerwave offers both single and multi-carrier power
amplifiers for use in cellular networks, including ultra-linear multi-carrier
RF power amplifiers for CDMA, TDMA and GSM digital cellular systems positioned
between 800-960 MHz, as well as analog systems utilizing AMPS and TACS
protocols. Powerwave's ultra-linear multi-carrier RF power amplifiers utilize
a single feedforward loop, which allows greater operating efficiency and
requires less electrical current than competing multi-loop designs. The
Company's RF power amplifiers employ a microprocessor based feedforward loop
design which results in improved tracking between the pilot tone and the
actual signal and reduces interference. Powerwave's multi-carrier design also
utilizes an actively switched output combiner (3 or 4 way), which allows any
number of RF power amplifiers to be "hot-swapped", or interchanged, without a
significant loss of power. This design also allows for true cold standby
switching of a standby RF power amplifier, thereby providing network operators
with a backup redundancy solution for even greater reliability. These RF power
amplifiers are designed to be installed in racks of three or four RF power
amplifiers. Smart combiner paralleling units allow for both higher power as
well as system redundancy, which is the ability of the system to remain
operational in the event of the failure of one or more of the paralleled RF
power amplifiers. All Cellular Series multi-carrier RF power amplifiers
provide remote status/fault monitoring capabilities.
 
  Powerwave offers various versions of its Cellular Series multi-carrier RF
power amplifiers providing 25, 40, 50, 60, 90 or 100 Watts (W) average power
with maximum distortion of up to -65dBc. Up to 4 units can be combined in
parallel utilizing the Company's fully redundant smart combiner racks for
various effective average power ratings.
 
  In the Cellular Series, Powerwave also offers single carrier RF power
amplifiers for GSM, CDMA and TDMA operating systems. Products are available in
a wide range of RF output levels. These products are available from complete
stand-alone units to highly integrated RF power amplifiers for tower-top
applications.
 
  PCS Series. The PCS Series offers both single and multi-carrier RF power
amplifiers for use in PCS networks that operate in the international DCS-1800
frequency of 1.8 gigahertz (GHz) and the United States PCS band at 1.9GHz.
Typical system applications include CDMA, TDMA, and GSM protocols with output
power ranging from 5W to 100W. The PCS Series of multi-carrier RF power
amplifiers offers similar power combining, system redundancy, and remote
status/fault monitoring capabilities as the Company's Cellular Series of
multi-carrier RF power amplifiers. The PCS Series of single carrier RF power
amplifiers are available in a wide variety of configurations ranging from
complete stand-alone units to highly integrated RF power amplifiers for tower-
top applications.
 
  WLL Series. The WLL Series is the Company's wireless local loop series of RF
power amplifiers offering a reliable means of transmitting wide band signals
at various power levels. They can be used to enhance capacity and coverage
area of current wireless base stations or can be fully integrated into new
wireless local loop site deployment.
 
  LMR Series. The LMR Series is the Company's standard single carrier analog
amplification product for LMR, paging, repeater and trunking applications.
These amplifiers operate in discreet bands within the 30 MHz to 960 MHz
frequency range with input powers ranging from 10 milliwatts to 30W and
produce output powers ranging from 30W to 250W. These RF power amplifiers have
been designed for simple installation and maintenance and are fully modular
for serviceability in the field. The Company also provides broadband RF power
amplifiers for both digital and analog applications which can be used as
building blocks in larger amplification systems or used as stand-alone RF
power amplifiers.
 
                                       6
<PAGE>
 
  The Company's multi-carrier RF power amplifiers range in price from $5,000
to $15,000 per RF power amplifier, based upon the specification requirements.
The Company's single carrier RF power amplifiers range in price from $650 to
$5,000 per RF power amplifier depending upon product type and specifications.
The Company also sells racks and cabinets to install and combine multiple RF
power amplifiers, ranging in price from $1,000 to $5,000, depending upon
specifications.
 
Customers
 
  The Company sells its products to customers worldwide, including a variety
of wireless OEMs, including LM Ericsson Telephone Company ("Ericsson"),
Hyundai, LGIC, Lucent Technologies, Inc. ("Lucent"), Metawave Communications
Corporation ("Metawave"), Nokia Telecommunications Inc. ("Nokia"), Nortel and
Samsung. The Company also sells it products to operators of wireless networks,
such as AT&T Wireless Services and BellSouth. As part of the HP acquisition,
the Company significantly increased its sales to Nortel and added Lucent as a
customer.
 
  During fiscal 1998, BellSouth, LGIC, Nortel and Samsung accounted for
approximately 69% of total sales. Each of these customers individually
accounted for more than 10% of the Company's net sales for fiscal 1998.
Additionally, during the fourth quarter of 1998, total sales to Nortel
accounted for approximately 52% of revenues for that quarter. The loss of any
one of these customers, or a significant loss, reduction or rescheduling of
orders from any of these customers, would have a material adverse effect on
the Company's business, results of operations and financial condition. See
"Additional Factors That May Affect Future Results--Customer Concentration; --
Reliance Upon South Korean Market and Growth of Wireless Services Market"
under Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
 
Marketing and Distribution, International Sales
 
  Powerwave sells its products through a highly technical direct sales force
and through independent sales representatives. Direct sales personnel are
assigned to geographic territories and, in addition to sales responsibilities,
manage networks of independent sales representatives. The Company utilizes a
network of independent sales representatives selected for their familiarity
with potential customers of the Company and knowledge of the wireless
infrastructure equipment market. Both the direct sales personnel and
independent sales representatives generate product sales, provide product and
customer service, and provide customer feedback for product development. In
addition, the sales personnel and independent sales representatives receive
support from the Company's marketing, product support and customer service
departments.
 
  The Company's marketing efforts are focused on establishing and developing
long-term relationships with potential customers. Sales cycles for certain of
the Company's products, particularly its base station RF power amplifiers, are
lengthy, typically ranging from six to eighteen months. The Company's
customers typically conduct significant technical evaluations of the Company's
products before making purchase commitments. In addition, as is customary in
the industry, sales are made through standard purchase orders which can be
subject to cancellation, postponement or other types of delays. While certain
customers provide the Company with forecasted needs, they are not bound by
such forecasts.
 
  International sales (excluding North American sales) of the Company's
products amounted to approximately 41%, 84% and 77% of net sales for the years
ended January 3, 1999, December 28, 1997 and December 29, 1996, respectively.
Foreign sales of some of the Company's products may be subject to national
security and export regulations and may require the Company to obtain a permit
or license. In recent years, the Company has not experienced any material
difficulty in obtaining required permits or licenses. Foreign sales also
subject the Company to risks related to political upheaval and economic
downturns in foreign nations and regions, such as the economic downturn in the
South Korean markets and Brazilian markets during 1998. In addition, the
Company's foreign customers typically pay for the Company's products with U.S.
Dollars. As such, a strengthening of the U.S. Dollar as compared to a foreign
customer's local currency effectively increases the cost of the
Company's products for that customer, thereby making the Company's products
less attractive to such customers.
 
                                       7
<PAGE>
 
See "Additional Factors That May Affect Future Results--Risks of Doing
Business in International Markets" under Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
 
Service and Warranty
 
  The Company's warranties vary by product type and typically cover defects in
materials and workmanship. Warranty obligations and other maintenance services
for the Company's products are performed by the Company at its facilities in
California and Seoul, South Korea. The Company currently has service employees
located in South Korea and utilizes its South Korean sales representative
location to provide service support for the Asian region.
 
Product Development
 
  Powerwave invests significant resources in the research and development of
new methods to improve amplifier performance, including reduced noise and
increased power in the RF amplification process. The Company's development
efforts also seek to reduce the cost and increase the manufacturing efficiency
of both new and existing products. With the completion of the HP Acquisition
during the fourth quarter of fiscal 1998, the Company added 35 people to its
research and development staff. The Company is also continuing to pursue
various development efforts which were in-process at the time of the
acquisition. The Company's research and development staff consisted of 106
people as of January 3, 1999. Expenditures for research and development
amounted to approximately $13.5 million in 1998, $11.5 million in 1997 and
$5.8 million in 1996. See "Additional Factors That May Affect Future Results--
Rapid Technological Change; --Dependence on New Products" under Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
 
Competition
 
  The wireless communications infrastructure equipment industry is extremely
competitive and is characterized by rapid technological change, new product
development and rapid product obsolescence, evolving industry standards and
significant price erosion over the life of a product. The Company's products
compete on the basis of the following key characteristics: performance,
functionality, reliability, pricing, quality, designs that can be efficiently
manufactured in large volumes, time-to-market delivery capabilities and
compliance with industry standards. While the Company believes that it
competes favorably with respect to the foregoing characteristics, there can be
no assurance that it will be able to continue to do so.
 
  The Company's current competitors include AML Communications, Inc., M/A-COM,
Inc. (a subsidiary of AMP, Inc.), Microwave Power Devices, Inc. and Spectrian
Corporation, in addition to the amplifier manufacturing operations captive
within certain of the leading wireless infrastructure OEMs such as Ericsson,
Lucent, Motorola Corporation ("Motorola"), Nokia and Samsung. Some competitors
have significantly greater financial, technical, manufacturing, sales,
marketing and other resources than the Company and have achieved greater name
recognition for their existing products and technologies than has the Company.
There can be no assurance that the Company will be able to successfully
increase its market penetration or its overall share of the amplifier
marketplace. The Company's results of operations could be adversely impacted
if it is unable to effectively increase its share of the amplifier
marketplace.
 
  The Company's success depends in part upon the rate at which wireless
infrastructure OEMs incorporate the Company's products into their systems. The
Company believes that a substantial portion of the present worldwide
production of RF power amplifiers is captive within the internal manufacturing
operations of a small number of leading wireless infrastructure manufacturers
such as Ericsson, Lucent, Motorola, Nokia and Samsung. These companies
regularly evaluate whether to manufacture their own RF power amplifiers rather
than purchase them from third-party vendors such as the Company. These
companies could also directly compete with the Company by selling their RF
Power Amplifiers to other manufacturers and operators, including the Company's
customers. These companies may enter into joint ventures or strategic
relationships with the Company's competitors. The Company's results of
operations, net sales and profitability could be adversely
 
                                       8
<PAGE>
 
impacted if certain OEMs were to actively market RF power amplifier products
in direct competition with the Company or manufacture RF power amplifiers
internally or enter into joint ventures or other strategic relationships with
the Company's competitors. If the Company is not successful in increasing the
use of its products by the leading wireless infrastructure OEMs, there would
be a material adverse effect on the Company's business, financial condition
and results of operations. See "Additional Factors That May Affect Future
Results--Internal Production Capabilities of OEMs; --Competition" under
Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
 
  The Company has experienced significant price competition and expects price
competition in the sale of RF power amplifiers to increase. No assurance can
be given that the Company's competitors will not develop new technologies or
enhancements to existing products or introduce new products that will offer
superior price or performance features. The Company expects its competitors to
offer new and existing products at prices necessary to gain or retain market
share. Certain of the Company's competitors have substantial financial
resources, which may enable them to withstand sustained price competition or a
market downturn better than the Company. There can be no assurance that the
Company will be able to compete successfully in the pricing of its products,
or otherwise, in the future. See "Additional Factors That May Affect Future
Results--Declining Average Sales Prices" under Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
 
Backlog
 
  The Company's backlog of orders was approximately $73.7 million on January
3, 1999, compared to approximately $45.9 million on December 28, 1997. The
Company includes in its backlog all the accepted product purchase orders with
respect to which a delivery schedule has been specified for product shipment
within six months. Product orders in the Company's backlog are frequently
subject to changes in delivery schedules or to cancellation at the option of
the purchaser without significant penalty. The Company regularly reviews its
backlog of orders to ensure that it adequately reflects product orders
expected to be shipped within a six-month period. The Company makes
adjustments as customer delivery schedules change and in response to changes
in the Company's production schedule. Accordingly, the Company stresses that
although useful for scheduling production, backlog as of any particular date
may not be a reliable indicator of sales for any future period.
 
Manufacturing and Suppliers
 
  The Company's headquarters and its main manufacturing facility are located
in Irvine, California. As part of the HP Acquisition, the Company acquired an
additional manufacturing and research and development facility located in
Folsom, California and HP's production equipment and manufacturing lines
located in Malaysia. Since the HP Acquisition, the Company closed the
Malaysian manufacturing operations and relocated the production equipment to
the Company's Irvine facility. The Company has initiated the process of
transferring the existing manufacturing in the Folsom facility to its Irvine
facility. The Company anticipates that the transfer should be completed in the
second half of fiscal 1999. The Company's manufacturing process involves the
assembly of numerous individual components and precise fine-tuning by
production technicians. The parts and materials used by the Company consist
primarily of printed circuit boards, specialized subassemblies, fabricated
housings, relays, and small electric circuit components, such as integrated
circuits, semiconductors, resistors and capacitors.
 
  The Company currently procures, and expects to continue to procure, certain
components from single source manufacturers due to unique component designs as
well as certain quality and performance requirements. In addition, in order to
take advantage of volume pricing discounts, the Company purchases certain
customized components from single sources. Also, as part of the HP
Acquisition, the Company currently sources certain components directly from
HP, under a one-year supply agreement. The Company is attempting to replace
such HP components with components sourced from different suppliers. If the
Company is unable to re-source such components or such new components do not
perform properly, such inability to re-source such components could have an
adverse affect on the Company's business, financial condition, and results of
operations. In addition, the Company has experienced, and may in the future
experience, shortages of single-source components. In such event, the Company
may have to make adjustments to both product designs and production schedules
which could result
 
                                       9
<PAGE>
 
in delays in production and delivery of products. Such delays could have an
adverse effect on the Company's operating results and financial condition. See
"Additional Factors That May Affect Future Results--Dependence on Single
Sources for Key Components; and --Consolidation and Integration of the HP
Manufacturing Facility" under Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
 
  The Company has received ISO 9001 certification, a uniform worldwide
quality-control standard, on its headquarters and manufacturing facility
located in Irvine, California. The Folsom facility acquired in the HP
Acquisition is not ISO certified. Numerous customers and potential customers
throughout the world, particularly in Europe, require that their suppliers be
ISO certified. In addition, many such customers require that their suppliers
purchase components only from subcontractors that are ISO certified.
 
Intellectual Property
 
  The Company relies upon trade secrets to protect its intellectual property.
The Company executes confidentiality and non-disclosure agreements with its
employees and limits access to and distribution of its proprietary
information. During 1998, the Company was granted its first U.S. patent for an
aspect of its multi-carrier technology. The Company has applied for several
additional U.S. and international patents for various aspects of its
proprietary technology. These efforts allow the Company to rely upon the
knowledge and experience of its management and technical personnel and its
ability to market its existing products and to develop new products. The
departure of any of the Company's management and technical personnel, the
breach of their confidentiality and non-disclosure obligations to the Company
or the failure to achieve the Company's intellectual property objectives may
have a material adverse effect on the Company's business, financial condition
and results of operations. The Company believes that its success depends upon
the knowledge and experience of its management and technical personnel and its
ability to market its existing products and to develop new products.
 
  The Company's ability to compete successfully and achieve future revenue
growth will depend, in part, on its ability to protect its proprietary
technology and operate without infringing upon the rights of others. There can
be no assurance that these measures will successfully protect the Company's
intellectual property or that the Company's intellectual property or
proprietary technology will not otherwise become known or be independently
developed by competitors. In addition, the laws of certain countries in which
the Company's products are or may be sold may not protect the Company's
products and intellectual property rights to the same extent as the laws of
the United States. The inability of the Company to protect its intellectual
property and proprietary technology could have a material adverse effect on
its business, financial condition and results of operations. As the number of
patents, copyrights and other intellectual property rights in the Company's
industry increases, and as the coverage of these rights and the functionality
of the products in the market further overlap, the Company believes that
companies in its industry may face more frequent infringement claims. The
Company may in the future be notified that it is infringing upon certain
patent or other intellectual property rights of others. Although there are no
pending or threatened intellectual property lawsuits against the Company,
there can be no assurance that such litigation or infringement claims will not
occur in the future. Such litigation or claims could result in substantial
costs and diversion of resources and could have a material adverse effect on
the Company's business, results of operations and financial condition. A third
party claiming infringement may also be able to obtain an injunction or other
equitable relief, which could effectively block the ability of the Company or
its customers to distribute, sell or import allegedly infringing products. If
it appears necessary or desirable, the Company may seek licenses from third
parties covering intellectual property that the Company is allegedly
infringing. No assurance can be given, however, that any such licenses could
be obtained on terms acceptable to the Company, if at all. The failure to
obtain the necessary licenses or other rights could have a material adverse
effect on the Company's business, financial condition and results of
operations.
 
Employees
 
  As of January 3, 1999, the Company had 461 full and part-time employees,
including 106 in research and development, 24 in sales and marketing and 40 in
corporate and administration. None of the Company's employees are represented
by a union. The Company believes that its relations with its employees are
good.
 
                                      10
<PAGE>
 
ITEM 2. PROPERTIES
 
  The Company's Irvine, California headquarters and manufacturing facility
occupy a 105,000 square foot building under a lease expiring in 2006. The
Company believes that its current facilities provide adequate expansion
capabilities for its operations.
 
  As part of the HP Acquisition, the Company acquired HP's manufacturing and
research and development facility located in Folsom, California. The facility
is approximately 88,000 square feet. The Company has begun the process of
transferring its manufacturing lines to its Irvine facility and has begun the
process of marketing the Folsom manufacturing facility for sale to third
parties. The Company plans to maintain a research and development facility in
the Folsom area.
 
ITEM 3. LEGAL PROCEEDINGS
 
  The Company may be subject, from time to time, to various legal proceedings
relating to claims arising out of its operations in the ordinary course of its
business. On July 16, 1998, a lawsuit was filed in the United States District
Court for the Central District of California, Southern Division, by a
shareholder of the Company, against the Company and certain of its present and
former directors and officers. A similar suit was filed on July 29, 1998. The
shareholder in each suit purports to represent a class consisting of all
persons who purchased Common Stock of the Company between June 4, 1997 and
January 16, 1998. These lawsuits allege, among other things, that the
defendants violated federal securities laws by making alleged
misrepresentations which the plaintiffs claim were designed to artificially
inflate the Company's stock price and enable the individual defendants to sell
their stock at artificially inflated prices. The Company, its directors and
officers deny the allegations of wrongdoing in the complaints and intend to
vigorously defend against the claims made in the lawsuits. The ultimate
outcome of these suits or any potential loss is not presently determinable.
 
  The Company is not currently a party to any other legal proceedings, the
adverse outcome of which, individually or in the aggregate, management
believes would have a material adverse effect on the business, financial
condition or results of operations of the Company.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
  No matters were submitted to a vote of security holders during the fourth
quarter of 1998.
 
                                      11
<PAGE>
 
                                    PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
  (a) Powerwave's Common Stock is quoted on the Nasdaq National Market System
under the symbol PWAV. Set forth below are the high and low sales prices as
reported by Nasdaq for the Company's Common Stock for the periods indicated.
 
<TABLE>
<CAPTION>
                                                                 High      Low
                                                               --------- -------
   <S>                                                         <C>       <C>
   Fiscal Year 1996
     December 6, 1996 through December 29, 1996............... $16 1/4   $11
   Fiscal Year 1997
     First Quarter Ended March 30, 1997....................... $25       $14
     Second Quarter Ended June 29, 1997....................... $23 7/8   $14 1/2
     Third Quarter Ended September 28, 1997................... $45 1/4   $21 3/8
     Fourth Quarter Ended December 28, 1997................... $49       $13 1/8
   Fiscal Year 1998
     First Quarter Ended March 29, 1998....................... $20       $ 9 1/8
     Second Quarter Ended June 28, 1998....................... $22 15/16 $13 1/8
     Third Quarter Ended September 27, 1998................... $19       $ 6 3/8
     Fourth Quarter Ended January 3, 1999..................... $20       $ 5 5/8
</TABLE>
 
  There were approximately 78 security holders of record as of February 5,
1999. The Company believes there are approximately 10,000 shareholders of the
Company's Common Stock held in street name. The Company has not paid any
dividends to date and does not anticipate paying any dividends on the Common
Stock in the foreseeable future. The Company anticipates that all future
earnings will be retained to finance future growth. The Company's bank credit
agreement currently restricts the Company from paying cash dividends without
the prior written consent of the bank.
 
  (b) From time to time during fiscal 1998, the Company issued an aggregate
total of 228,563 shares of Common Stock to officers, directors and employees
upon the exercise of stock options granted prior to fiscal 1998 under the
Company's 1995 Stock Option Plan (the "1995 Plan") and 1996 Stock Incentive
Plan (the "1996 Plan") at prices ranging from $2.47 to $16.25 per share. The
Company received aggregate proceeds of approximately $664,000 from these
exercises.
 
  From time to time during fiscal 1998, the Company issued an aggregate total
of 1,724,050 nonqualified stock options to purchase Common Stock pursuant to
the Company's 1995 Plan, 1996 Plan and 1996 Director Stock Option Plan to
officers, directors and employees of the Company, of which no options were
exercised. Of this total, 49,950 options were granted pursuant to the 1995
Plan, 1,594,100 options were granted pursuant to the 1996 Plan, and 80,000
options were granted pursuant to the 1996 Director Stock Option. Exemption
from the registration provisions of the Securities Act of 1933 (the "Act") is
claimed, among other exemptions, with respect to the grant of options referred
to above, on the basis that the grant of options did not involve a "sale" of
securities and, therefore, registration thereof was not required and, with
respect to the exercise of options referred to above, on the basis that such
transactions met the requirements of Rule 701 as promulgated under Section
3(b) of the Act.
 
  During fiscal 1998 the Company utilized approximately $2.8 million of the
net proceeds from its December 6, 1996 IPO for capital expenditures. The
Company also utilized $3.7 million of the proceeds to repurchase shares of its
Common Stock in open market transactions. The net proceeds from the Company's
secondary Common Stock offering on June 30, 1997 of $20.6 million were used in
the Company's October 9, 1998 purchase of Hewlett-Packard Company's radio
frequency power amplifier business and its manufacturing facility in Folsom,
California.
 
                                      12
<PAGE>
 
ITEM 6. SELECTED FINANCIAL DATA
 
  The Company's consolidated statements of operations for the fiscal years
ended January 3, 1999, December 28, 1997, and December 29, 1996 and
consolidated balance sheets as of January 3, 1999 and December 28, 1997
included herein have been audited by Deloitte & Touche LLP, independent
auditors. The information set forth below is not necessarily indicative of the
results of future operations and should be read in conjunction with the
consolidated financial statements and notes thereto appearing elsewhere in
this Annual Report on Form 10-K.
 
 
<TABLE>
<CAPTION>
                                                                      Years Ended
                                             --------------------------------------------------------------
                                             January 3, December 28, December 29, December 31, December 31,
                                                1999        1997         1996         1995         1994
                                             ---------- ------------ ------------ ------------ ------------
                                                         (in thousands, except per share date)
<S>                                          <C>        <C>          <C>          <C>          <C>
Consolidated Statements of Operations Data:
Net sales..................................   $100,231    $119,709     $60,331      $36,044      $22,861
Operating income (loss)....................     (7,001)     23,257      12,435        7,564        4,875
Net income (loss)..........................   $ (2,966)   $ 16,191     $ 7,622      $ 4,480      $ 2,946
Basic earnings (loss) per share (1)........   $   (.17)   $    .95     $   .67      $   .50          --
Diluted earnings (loss) per share (2)......   $   (.17)   $    .92     $   .52      $   .31          --
Basic weighted average common shares (1)...     17,178      16,958      11,460        8,999          --
Diluted weighted average common shares (2).     17,178      17,436      14,606       14,475          --
 
Consolidated Balance Sheet Data:
Cash and cash equivalents..................   $ 13,307    $ 67,433     $32,386      $ 5,861      $ 3,030
Working capital............................     35,210      67,512      33,243        9,640        3,486
Total assets...............................    131,985     101,683      46,932       16,463        9,551
Long-term debt.............................     17,621         659         520          138          176
Series A Convertible Preferred Stock.......        --          --          --        14,498          --
Total shareholders' equity (deficit).......   $ 71,070    $ 75,480     $36,843      $(3,878)     $ 4,142
</TABLE>
--------
(1)  The 1995 shares outstanding for basic earnings per share only includes
     the weighted average common shares outstanding for the year. The 1996
     shares outstanding for basic earnings per share includes the weighted
     average common shares outstanding for the year and the conversion of
     3,375,900 shares of Series A Convertible Preferred Stock into 5,063,850
     shares of common stock for the period from December 6, 1996 to December
     29, 1996. Giving effect to the IPO, conversion of the Series A
     Convertible Preferred Stock into shares of common stock for all of 1996
     and 1995 would have resulted in basic earnings per share of $0.54 and
     $0.32 and weighted average shares outstanding of 14,181,179 and
     14,062,497, respectively.
 
(2)  1995 and 1996 shares outstanding give effect to the conversion of
     3,375,900 shares of Series A Convertible Preferred Stock into 5,063,850
     shares of Common Stock and the reversal of accrued dividends payable
     thereon which occurred upon the completion of the Company's initial
     public offering of Common Stock on December 6, 1996. See Note 1 of the
     Notes to the Consolidated Financial Statements.
 
                                      13
<PAGE>
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
       RESULTS OF OPERATIONS.
 
  The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto.
 
Results of Operations
 
  The following table summarizes the Company's results of operations as a
percentage of net sales for the fiscal years ended January 3, 1999, December
28, 1997 and December 29, 1996.
 
<TABLE>
<CAPTION>
                                                As a Percentage of Net Sales
                                            ------------------------------------
                                                     Fiscal Years Ended
                                            ------------------------------------
                                            January 3, December 28, December 29,
                                               1999        1997         1996
                                            ---------- ------------ ------------
<S>                                         <C>        <C>          <C>
Net sales..................................   100.0%      100.0%       100.0%
Cost of sales..............................    65.9        59.3         57.6
                                              -----       -----        -----
Gross profit...............................    34.1        40.7         42.4
Operating expenses:
  Sales and marketing......................     9.5         7.6          7.2
  Research and development.................    13.4         9.6          9.6
  General and administrative...............     5.8         4.1          5.0
  In-process research and development......    12.4         --           --
                                              -----       -----        -----
Total operating expenses...................    41.1        21.3         21.8
                                              -----       -----        -----
Operating income (loss)....................    (7.0)       19.4         20.6
Other income...............................     2.3         2.2          0.8
                                              -----       -----        -----
Income (loss) before income taxes..........    (4.7)       21.6         21.4
Provision (benefit) for income taxes.......    (1.7)        8.1          8.8
                                              -----       -----        -----
Net income (loss)..........................    (3.0)%      13.5%        12.6%
                                              =====       =====        =====
</TABLE>
 
Years ended January 3, 1999 and December 28, 1997
 
 Net Sales
 
  The Company's net sales are derived primarily from the sale of RF power
amplifiers for use in wireless communications networks. Sales decreased by
16.3% to $100.2 million for the year ended January 3, 1999 from $119.7 million
for the year ended December 28, 1997. The decrease in revenue was primarily
attributable to decreased sales of the Company's PCS products, as well as
reduced sales of its LMR RF power amplifiers. The decrease in PCS sales was
mainly due to the continuing economic crisis in South Korea, which has
significantly reduced South Korean wireless service operators' demand for the
Company's PCS and cellular products beginning in the first quarter of 1998.
For the year ended January 3, 1999, total sales to customers in South Korea
decreased by 69.6% to $30.2 million from $99.3 million for the year ended
December 28, 1997. Partially offsetting the sharp decline in sales to South
Korea, non-Korean based sales increased by 243% to $70.1 million for the year
ended January 3, 1999 from $20.4 million for the prior year.
 
  During the fourth quarter of 1998, the Company completed the HP Acquisition
and recognized revenues from the sales of the products acquired, which
contributed to the significant increase in non-Korean based sales. For the
year ended January 3, 1999, total sales of cellular products (including both
single and multi-carrier RF power amplifiers and racks) accounted for
approximately 77% of revenues or $77.3 million, compared to approximately 61%
or $73.1 million for the year ended December 28, 1997. Sales of RF power
amplifiers and associated products for PCS networks (consisting mainly of
single carrier RF power amplifiers) accounted for approximately 19% of
revenues or $18.8 million for 1998, compared to approximately 34% or
$40.4 million for 1997. Sales of LMR RF power amplifiers accounted for
approximately 3% of revenues or $3.1 million for the
 
                                      14
<PAGE>
 
year ended January 3, 1999, compared to approximately 5% of revenues or $6.2
million for the year ended December 28, 1997. For 1998, sales of WLL RF power
amplifiers and other products accounted for $1.0 million or approximately 1%
of sales, compared to $32,000 or less than 1% of sales for 1997.
 
  For 1997 and the first nine months of 1998, the majority of the Company's
single carrier PCS RF power amplifiers were being utilized in the deployment
of the new PCS networks being built in South Korea, and a majority of the
Company's cellular multi-carrier RF power amplifiers sold during 1997 were
also being utilized in the deployment of the digital cellular CDMA networks in
South Korea. During 1998, the percentage of the Company's RF power amplifiers
sold for use in cellular systems of wireless network operators located in both
North America and other international markets outside of Asia increased by
approximately 243% to $70.1 million, compared to $20.4 million for all of
1997. Due to the economic and financial crisis that has impacted South Korea,
and Asia in general, the deployments of both the digital cellular CDMA
networks and the PCS networks in South Korea have been significantly delayed
during 1998. Given the continuing unstable economic environment within South
Korea, and Asia in general, the Company is unable to estimate the level of
future deployments of these networks or when such deployments can be expected
to be completed. The reduction and stoppage of these deployments during 1998
did have an adverse effect on the Company's revenues and business with its
South Korean customers and its results of operations. The continued delay or
cancellation of these deployments could have an adverse effect on the
Company's business, financial condition and results of operations. For
additional information see "Additional Factors That May Affect Future
Results--Customer Concentration; --Reliance upon South Korean Market and
Growth of Wireless Services Market and Risks of Doing Business in
International Markets."
 
  Total international sales (excluding North American sales), accounted for
approximately 41% of revenues or $41.2 million for the year ended January 3,
1999, compared with approximately 84% or $101.0 million for the year ended
December 28, 1997. Total sales to customers in South Korea accounted for
approximately 30% of revenues or $30.2 million for the year ended January 3,
1999 compared to approximately 83% of revenues or $99.3 million for fiscal
year 1997. The decrease in sales to customers in South Korea is a result of
the ongoing economic crisis in South Korea, and Asia in general, which has
reduced South Korean wireless service operators' demand for the Company's
products. During fiscal 1998, the Company has experienced postponement,
rescheduling and cancellation of orders from its South Korean customers. At
this time, the Company is unable to predict when, if ever, its South Korean
customers will take delivery of their postponed and rescheduled orders. Due to
these issues and the overall economic crisis in Asia, the Company currently
anticipates that its percentage of revenues from South Korean sales will
continue to decline. See "Additional Factors That May Affect Future Results--
Customer Concentration; --Reliance upon South Korean Market and Growth of
Wireless Services Market and Risks of Doing Business in International
Markets."
 
  Sales to customers in countries outside of South Korea, primarily in North
America, increased approximately 243% to $70.1 million for the year ended
January 3, 1999 from $20.4 million for fiscal year 1997. For fiscal 1998,
sales to four customers (in alphabetical order) BellSouth, LGIC, Nortel and
Samsung each accounted for more than 10% of the Company's sales, collectively
accounting for $68.7 million or approximately 69% of revenues for the year.
This compares to 1997 total sales to South Korean customers of $99.3 million
or approximately 83% of revenues with Hyundai, LGIC and Samsung each
accounting for more than 9% of revenues for the year. During fiscal 1997, no
non-Korean customer accounted for more than 6% of revenues. As part of the HP
Acquisition, the Company significantly increased its sales to Nortel and added
Lucent as a customer. For the fourth quarter of 1998, total sales to Nortel
accounted for approximately 52% of revenues and sales to Lucent accounted for
over 10% of revenues for the quarter. There can be no assurance that the
Company will continue to be successful in attracting new customers or
retaining or increasing business with existing customers. In addition, the
Company believes that a significant portion of its business with OEMs, such as
Ericsson, Lucent and Nortel, is dependent upon the deployment schedules of
wireless network operators who are purchasing infrastructure equipment from
such OEMs and on such OEMs strategy concerning the outsourcing of RF power
amplifiers. A number of factors may cause delays in wireless infrastructure
deployment schedules for both North American and international deployments,
including deployments in Brazil, Asia, South America and other areas. Such
factors include economic or political problems in the wireless operator's
operating region,
 
                                      15
<PAGE>
 
delays in government approvals required for system deployment, and reduced
subscriber demand for wireless services. Due to the possible uncertainties
associated with wireless infrastructure deployments, the Company has
experienced and expects to continue to experience significant fluctuations in
demand from its OEM customers. Such fluctuations could cause a significant
reduction in revenues which could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Additional Factors That May Affect Future Results--Customer Concentration; --
Risks of Doing Business in International Markets; --Consolidation and
Integration of the HP Manufacturing Facility; and --Fluctuations in Quarterly
Results."
 
 Gross Profit
 
  Cost of sales consists primarily of raw materials, assembly and test labor,
overhead and warranty costs. Gross profit margins for fiscal 1998 and 1997
were 34.1% and 40.7%, respectively. The decrease in gross margins during 1998
was a result of several factors, including increased labor and overhead costs
associated with the significant reduction in sales to the Company's South
Korean customers which impacted the Company's total revenues during the first
three quarters and the increased labor and overhead costs associated with
operating the Folsom manufacturing facility which the Company acquired in
October 1998 as part of the HP Acquisition. The Company anticipates that, in
the near-term, it will continue to experience significant labor and overhead
costs due to its plans to transfer production from the Folsom manufacturing
facility to the Company's Irvine facility. The Company currently anticipates
that the production activities will be fully transferred in the second half of
fiscal 1999. These costs are currently anticipated to have a negative impact
on the Company's future gross margins. In addition, the Company has
significantly increased its sales of lower margin single carrier RF power
amplifiers as a result of the HP Acquisition. The Company currently expects
that the sale of single carrier RF power amplifier products will continue to
account for a significant portion of its business and that such products will
have a negative impact on the Company's future gross margins. While the
Company continues to strive for manufacturing and engineering cost reductions
to offset pricing pressures on its products, there can be no assurance that
these cost reduction or redesign efforts will keep pace with price declines
and cost increases. If the Company is unable to obtain cost reductions through
its manufacturing and or engineering efforts, its gross margins and
profitability will continue to be adversely affected. For a discussion of the
effects of declining average sales prices on the Company's business, see
"Additional Factors That May Affect Future Results--Declining Average Sales
Prices."
 
  As part of the HP Acquisition, the Company completed an allocation of the
purchase price of the acquisition to both the tangible and intangible assets
and liabilities acquired in the acquisition. The purchase price allocation is
included in the Company's financial statements for the fourth quarter ended
January 3, 1999, and includes an allocation of $11.5 million to developed
technology acquired and $0.2 million to workforce. These amounts were
capitalized and will be amortized on a straight-line basis over five and ten
years, respectively, and included in cost of sales. See Note 16 of the Notes
to Consolidated Financial Statements for more information concerning the
purchase price allocation associated with the HP Acquisition.
 
  As an additional part of the HP Acquisition, the Company assumed certain
specific liabilities from HP related to the acquired business, including
certain warranty obligations. During the fourth quarter of 1998, the Company
incurred approximately $0.2 million of warranty expenses which were offset
against specific liabilities assumed in the acquisition.
 
  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. In addition, with
expected slowdowns in demand for wireless infrastructure equipment from the
Asian markets, pricing competition among suppliers to the remaining world
markets is expected to intensify. Due to these competitive pressures, the
Company expects that the average sales prices of its products will continue to
decrease. The Company has introduced new products at lower sales prices. These
lower sales prices have impacted the average sales prices of the Company's
products. Future pricing actions by the Company and its competitors may also
adversely impact the Company's gross profit margins and profitability, which
could also result in decreased liquidity and adversely affect the Company's
 
                                      16
<PAGE>
 
business, financial condition and results of operations. For a discussion of
the impact of new products on the Company's business, see "Additional Factors
That May Affect Future Results--Rapid Technological Change; --Dependence on
New Products; and --Consolidation and Integration of the HP Manufacturing
Facility."
 
 Operating Expenses
 
  Sales and marketing expenses consist primarily of sales commissions,
salaries, other expenses for sales and marketing personnel, travel expenses,
charges for customer demonstration units, reserves for credit losses and trade
show expenses. Sales and marketing expenses increased by 5.3% to $9.5 million
for the year ended January 3, 1999 from $9.1 million for the year ended
December 28, 1997. As a percentage of sales, sales and marketing expenses were
9.5% and 7.6% for the years ended January 3, 1999 and December 28, 1997,
respectively. The increase in sales and marketing expenses was primarily
attributable to increases in sales commission costs and increased staffing
levels. In addition, as part of the purchase price allocation of the HP
Acquisition, an allocation of $2.0 million reflecting the value of the
customer list and $0.5 million reflecting the value of the non-compete
agreement with HP was capitalized on the Company's balance sheet. The customer
list and non-compete agreement are amortized over three and four years,
respectively, and included in sales and marketing expenses.
 
  Research and development expenses include ongoing RF power amplifier design
and development expenses, as well as those design expenses associated with
reducing the cost and improving the manufacturability of existing RF power
amplifiers. Current programs include PCS, cellular and wireless local loop
products. Research and development expenses increased by 17.3% to $13.5
million for the year ended January 3, 1999 from $11.5 million for the year
ended December 28, 1997. Research and development expenses as a percentage of
sales for the years ended January 3, 1999 and December 28, 1997 were 13.4% and
9.6%, respectively. The increase in actual research and development expenses
was primarily due to increased staffing and associated engineering costs at
the Company's Irvine, California facility, related to continued new product
development and existing product enhancement efforts. In addition, as part of
the HP Acquisition, the Company added 35 additional engineers who are located
in the Folsom facility. The Company anticipates that it will continue
operating at a higher expense level for research and development because it
intends to continue to emphasize investment in research and development
programs in future periods and continue to pursue several existing programs
acquired as part of the HP Acquisition.
 
  General and administrative expenses consist primarily of salaries and other
expenses for management, finance, facilities maintenance and human resources.
General and administrative expenses increased by 18.0% to $5.8 million for the
year ended January 3, 1999 from $4.9 million for the year ended December 28,
1997. General and administrative expenses as a percentage of sales for the
years ended January 3, 1999 and December 28, 1997 were 5.8% and 4.1%,
respectively. The increase in general and administrative expenses is primarily
attributable to increased staffing costs. In addition, as part of the HP
Acquisition, the Company began incurring additional administration and
facilities costs related to the Folsom facility. Also, as part of the purchase
price allocation of the HP Acquisition, an allocation of approximately $4.6
million, reflecting the value of goodwill acquired, was capitalized on the
Company's balance sheet. This amount is amortized over ten years and included
in general and administrative expenses.
 
  As part of the purchase price allocation of the HP Acquisition, the
Company's financial statements for the year ended January 3, 1999 include the
one-time charge of $12.4 million for the write-off of acquired in-process
research and development expenses associated with the HP Acquisition. The in-
process research and development expenses arose from new product projects that
were under development at the date of the acquisition and expected to
eventually lead to new products but had not yet established technological
feasibility and for which no future alternative use was identified. The
valuation of the in-process research and development projects was based upon
the discounted expected future net cash flows of the products over the
products expected life, reflecting the estimated stage of completion of the
projects and the estimate of the costs to complete the projects.
 
  New product development projects underway at HP at the time of the
acquisition included, among others, single carrier CDMA technology, ultra-
linear technology for use in multi-carrier RF power amplifiers and
 
                                      17
<PAGE>
 
advanced linear power module technology for use in next generation wireless
communications. The Company estimated that these projects were approximately
75% complete at the date of the acquisition and estimated that the cost to
complete these projects will aggregate approximately $2.5 million and will be
incurred over a two- year period. The Company incurred approximately $0.2
million of research and development expenses related to these projects during
the fourth quarter of 1998, which was less than originally planned due to
personnel constraints. However, the activity related to these projects is
expected to increase over the next several quarters.
 
  Uncertainties that could impede the progress of converting a development
project to a developed technology include the availability of financial
resources to complete the project, failure of the technology to function
properly, continued economic feasibility of developed technologies, customer
acceptance, customer demand and customer qualification of such new technology,
and general competitive conditions in the industry. There can be no assurance
that the in-process research and development projects will be successfully
completed and commercially introduced.
 
  As an additional part of the HP Acquisition, the Company assumed certain
specific liabilities related to the acquired business, including certain
retention bonuses for contracted HP employees. During the fourth quarter of
1998, the Company paid insignificant amounts for these retention bonuses.
These retention bonuses will be paid over the period of the Folsom
manufacturing facility closure, which is expected to be completed in the
second half of 1999.
 
  As part of the purchase price allocation, the Company recorded liabilities
related to moving and relocation costs associated with the planned closure of
the Folsom manufacturing facility. During the fourth quarter of 1998, the
Company paid insignificant amounts related to these moving and relocation
costs. The Company currently expects to complete the closure of the Folsom
manufacturing facility in the second half of 1999.
 
 Other Income
 
  The Company earned other income, net, of $2.3 million in 1998 compared to
$2.6 million for 1997. Other income consists primarily of interest income, net
of any interest expense. As part of the HP Acquisition, the Company borrowed
$25.0 million under a secured credit facility. For the fourth quarter of 1998,
the Company had interest expense of approximately $0.5 million, which resulted
in total net other expense of approximately $0.1 million for the quarter.
 
 Provision (Benefit) for Income Taxes
 
  The Company's effective tax rate was 36.5% and 37.4% for the years ended
January 3, 1999 and December 28, 1997, respectively. The decrease in the
Company's effective tax rate was due to tax benefits from international sales
and research and development tax credits.
 
Years Ended December 28, 1997 and December 29, 1996
 
 Net Sales
 
  Sales increased by 98.4% to $119.7 million for the year ended December 28,
1997 from $60.3 million for the year ended December 29, 1996. The growth in
revenues was primarily attributable to shipments of the Company's new single
carrier PCS RF power amplifier products (which began volume shipments in the
second quarter of fiscal 1997), as well as increased sales of the Company's
cellular multi-carrier RF power amplifiers. For 1997, the Company's PCS RF
power amplifiers were being utilized in the deployment of the new PCS networks
being built in South Korea and a majority of the Company's cellular RF power
amplifiers sold during the year were being utilized in the continued
deployment of the digital cellular CDMA networks in South Korea. Fiscal 1996
saw continued growth in the demand for cellular RF power amplifiers by the
Company's South Korean customers as they continued deployment of the digital
cellular CDMA networks in South Korea.
 
                                      18
<PAGE>
 
  For the year ended December 28, 1997, total sales of cellular products
(consisting primarily of multi-carrier RF power amplifiers and racks)
accounted for approximately 61% of revenues or $73.1 million, compared to
approximately 80% or $48.0 million for fiscal 1996. Sales of RF power
amplifiers and associated products for PCS networks (consisting primarily of
single-carrier RF power amplifiers) accounted for approximately 34% of
revenues or $40.4 million in 1997 compared to approximately 1% or $0.7 million
for 1996. LMR and paging RF power amplifiers accounted for approximately 5% of
revenues or $6.2 million for 1997, compared to approximately 11% or $6.5
million for 1996. Air-to-ground RF power amplifiers accounted for no revenues
during 1997 compared to approximately 9% of revenues or $5.2 million for 1996.
 
  Total international sales, primarily to three customers in South Korea,
accounted for approximately 86% of revenues for 1997, compared with
approximately 77% for 1996. Total sales to customers in South Korea for 1997
accounted for approximately 83% of revenues or $99.3 million, which was a 117%
increase over 1996 South Korean sales of $45.8 million or approximately 76% of
1996 total sales. This growth in 1997 South Korean revenues was largely due to
the ramp-up of products for deployment in the new PCS networks in South Korea
which began deployment during 1997. Breaking down the total sales to South
Korea for 1997, approximately 60% of South Korean sales or $59.4 million were
for cellular products, with the remaining 40% or $39.8 million for PCS
products. As a comparison, for 1996 total sales of PCS products to South Korea
accounted for approximately 1% of South Korean sales or $0.5 million, with the
remaining 99% or $45.0 million attributable to the sale of cellular products.
 
 Gross Profit
 
  Gross profit margins for 1997 and 1996 were 40.7% and 42.4%, respectively.
The decrease in gross margins was primarily attributable to the introduction
and volume shipments of the new PCS products which had lower prices and gross
margins.
 
 Operating Expenses
 
  Sales and marketing expenses increased by 107.4% to $9.1 million for the
year ended December 28, 1997 from $4.4 million for the year ended December 29,
1996. Sales and marketing expenses as a percentage of sales for the years
ended December 28, 1997 and December 29, 1996 were 7.6% and 7.2%,
respectively. The increase in sales and marketing expenses during 1997 was
primarily attributable to increases in the sales and marketing staff and
increased sales commissions related to increased product sales.
 
  Research and development expenses increased by 99.0% to $11.5 million for
the year ended December 28, 1997 from $5.8 million for the year ended December
29, 1996. Research and development expenses as a percentage of sales were 9.6%
in 1997 and 1996. The increase in actual research and development expenses
during 1997 was primarily attributable to increased staffing and associated
engineering costs related to continued new product development.
 
  General and administrative expenses increased by 63.5% to $4.9 million for
the year ended December 28, 1997 from $3.0 million for the year ended December
29, 1996. General and administrative expenses as a percentage of sales for the
years ended December 28, 1997 and December 29, 1996 were 4.1% and 5.0%,
respectively. The increase in actual general and administrative expenses
during 1997 was primarily attributable to increased staffing costs associated
with supporting the Company's increased revenues and personnel.
 
 Other Income
 
  The Company earned other income of $2.6 million in 1997, compared to $0.5
million for 1996. Other income consists primarily of interest income, net of
any interest expense. The increase in net interest income was attributable to
the larger cash balances the Company maintained during 1997, compared to the
cash balances maintained during 1996. The larger cash balances were due to the
Company's initial public offering in December 1996 and its secondary Common
Stock offering in June 1997, as well as cash flow generated from operations.
The larger cash balances were invested in short-term, investment grade money-
market instruments.
 
                                      19
<PAGE>
 
 Provision for Income Taxes
 
  The Company's effective tax rate was 37.4 % and 41.0% for the years ending
December 28, 1997 and December 29, 1996, respectively. The decrease in the
Company's effective tax rate was due to tax benefits from increased
international sales.
 
Liquidity and Capital Resources
 
  The Company has historically financed its operations primarily through a
combination of cash on hand, cash provided from operations, equipment lease
financings, available borrowings under its bank line of credit and both
private and public equity offerings. As of January 3, 1999, the Company had
working capital of $35.2 million, including $13.3 million in cash and cash
equivalents as compared with working capital of $67.5 million at December 28,
1997, which included $67.4 million in cash and cash equivalents. The Company
utilized approximately $33 million of its cash in payment of the purchase
price of the HP Acquisition. Net accounts receivable increased to $31.2
million at January 3, 1999 from $12.0 million at December 28, 1997. During
1998, the Company sold a significantly larger percentage of its products to
non-Korean customers. These customers typically pay on longer payment terms
than the Company's South Korean customers have historically paid. In addition,
due to the Asian economic crisis, the Company has provided extended payment
terms to its Korean customers. During the fourth quarter of 1998, the Company
significantly increased its sales, especially to non-Korean customers. This
increase, coupled with typically longer payment terms than the Company
experienced in 1997, accounts for a significant portion of the increase in
accounts receivable. Net inventory increased to $28.6 million at January 3,
1999, from $8.8 million at December 28, 1997. The increase in net inventory is
primarily due to the inclusion of the inventory purchased in the HP
Acquisition, which totaled $16.5 million at October 9, 1998. The Company
currently anticipates that its inventory levels will remain high while it
operates two manufacturing facilities. The Company believes that it will be
able to increase its inventory turn rate once it completes consolidation of
its manufacturing facilities.
 
  Cash used in operations was approximately $8.7 million in 1998, compared
with cash provided by operations of $22.8 million and $11.2 million in 1997
and 1996, respectively. The negative cash flow from operations during 1998 was
primarily a result of an increase in accounts receivable and inventories, a
decrease in accrued expenses and other liabilities, offset by an increase in
accounts payable. The increase in cash generated from operations from 1997,
compared to 1996, was primarily a result of increased profitability, as well
as improved inventory and working capital management associated with the
Company's increased revenue base.
 
  Capital expenditures were approximately $4.9 million and $6.9 million in
1998 and 1997, respectively, of which approximately $0.8 million was financed
through capital leases in 1997 and none in 1998. The majority of capital
spending during both periods represents spending on electronic test equipment
utilized in the Company's manufacturing and research and development areas.
During the fourth quarter of 1998, the Company began making leasehold
improvements to its Irvine, California manufacturing facility to increase its
capacity. The Company anticipates that these improvements will be completed by
the end of the second quarter of 1999 and that the total cost of these
improvements will be approximately $2.0 million.
 
  On April 28, 1998 the Company purchased $2.5 million of 13.75% Senior
Secured Bridge Notes due April 28, 2000 (the "Notes") from Metawave, a
supplier of "smart" antennas to the wireless communications market and a
customer of the Company, in a private offering. The total amount raised in the
offering was $29.0 million. The Notes initially accrue interest at a rate of
13.75% per annum and interest is payable semi-annually. The Notes contain
provisions to increase the rate of interest during the life of the Notes if
the Notes are not repaid prior to maturity. The Notes are secured by certain
assets of Metawave and mature on April 28, 2000. The interest rate on the
notes at January 3, 1999 was 13.75% per annum. For 1998, Metawave accounted
for approximately 8% of the Company's revenues.
 
  Net cash provided by financing activities was $20.6 million for 1998,
compared with $19.2 million for 1997. The majority of cash provided by
financing activities for 1998 was from the $25.0 million bank borrowing to
 
                                      20
<PAGE>
 
finance the HP Acquisition, offset by the repurchase of 300,000 shares of the
Company's Common Stock at a total cost of $3.7 million. As of January 3, 1999,
the Company had repurchased a total of 810,000 shares of its Common Stock at a
total cost of approximately $12.5 million, under a stock repurchase program.
The Company is authorized to repurchase up to one million shares of its Common
Stock. The majority of the cash provided by financing activities for 1997
resulted from the sale of 1,000,000 shares of Common Stock in the Company's
secondary offering. Net proceeds received by the Company were approximately
$20.6 million. In addition, the Company received net proceeds of $3.9 million
from the sale of 360,000 shares of Common Stock in January 1997, which was
associated with the Company's December 1996 initial public offering of Common
Stock. These proceeds were offset by the repurchase of 510,000 shares of the
Company's Common Stock at a total cost of $8.8 million.
 
  On August 21, 1997, the Company entered into a $10.0 million unsecured
revolving credit agreement. The Company was required to pay a commitment fee
equal to 0.1% per annum on the average daily unused portion of the facility.
The commitment fee was payable quarterly in arrears. The agreement was never
utilized by the Company and was terminated on September 30, 1998.
 
  On August 31, 1998, the Company signed a definitive agreement with HP to
acquire HP's RF power amplifier business and its manufacturing and research
and development facility in Folsom, California. The HP Acquisition included
certain assets, liabilities, operations and the business related to the
design, manufacture and marketing of RF power amplifiers for use in wireless
communications. On October 9, 1998, the Company completed the HP Acquisition,
and the cash price paid to HP was approximately $57.4 million. The Company
also incurred acquisition costs of approximately $1.1 million and assumed
liabilities of $7.3 million. The Company financed the acquisition utilizing
$25.0 million of a new $35.0 million secured credit agreement. The Company
utilized its existing cash balances for the remainder of the cash purchase
price paid.
 
  On September 30, 1998, in connection with the HP Acquisition, the Company
entered into a $35.0 million credit agreement secured by a pledge of all of
the Company's assets with two commercial banks. The credit agreement consists
of three credit facilities; an $18.0 million term loan (the "Term Loan"), a
$7.0 million purpose loan associated with the Folsom manufacturing and
research and development facility (the "Purpose Loan") and a $10.0 million
revolving credit agreement (the "Revolving Credit Facility"). The Company is
required to pay a commitment fee ranging from 0.25% to 0.50% per annum on the
average daily unused portion of the Revolving Credit Facility. The rate of the
commitment fee is based upon a debt leverage ratio for the Company. At January
3, 1999, the commitment fee rate was 0.375% per annum. The Commitment fee is
payable quarterly in arrears. Each of the credit facilities allows for
borrowings based either upon the bank's prime rate (7.75% at January 3, 1999)
plus a margin of 0.0% or 0.25% per annum, based upon a debt leverage ratio for
the Company, or the bank's LIBOR rate plus a margin of 1.50% to 2.25% per
annum, based upon a debt leverage ratio for the Company, all at the Company's
option. The credit agreement contains customary affirmative covenants covering
certain financial ratios, negative covenants including limitations on future
indebtedness, restricted payments, transactions with affiliates, liens,
restrictions on the payment of dividends without the banks' prior consent,
mergers, transfers of assets and conditions of borrowing. The Company was in
compliance with all covenants contained in the credit agreement at January 3,
1999, and the full $10.0 million of the Revolving Credit Facility, which is
based upon a percentage of certain accounts receivable, was available to the
Company. The Term Loan is a three-year loan with equal monthly principal
repayments of $500,000 payable on the last business day of each month, with
the final principal payment due on September 30, 2001. At January 3, 1999,
there was $16.5 million outstanding under the Term Loan at a weighted average
interest rate of 7.12% per annum. The Purpose Loan is payable in full upon the
earlier of (i) January 5, 2000 or (ii) 10 days following the close of escrow
for the sale of the Company's Folsom manufacturing facility. At January 3,
1999, there was $7.0 million outstanding under the Purpose Loan at an interest
rate of 7.098% per annum. As of January 3, 1999, no amounts have been drawn
under the Revolving Credit Facility.
 
  As part of the HP Acquisition, the Company acquired HP's manufacturing and
research and development facility in Folsom, California. Of the total purchase
price paid in the HP Acquisition, a net value of $8.1 million was allocated to
land, land improvements and buildings. The Company has begun the process of
transferring
 
                                      21
<PAGE>
 
production from the Folsom manufacturing facility to the Company's Irvine
facility and expects to complete this transfer in the second half of 1999. The
Company is currently seeking buyers for the Folsom facility, but is unable to
determine at this time whether a sale will be completed by the end of fiscal
1999. As a result, the Company has included $8.1 million in long-term assets
as assets held for sale.
 
  The Company had cash and cash equivalents of $13.3 million at January 3,
1999, compared with $67.4 million at December 28, 1997. The Company regularly
reviews its cash funding requirements and attempts to meet those requirements
through a combination of cash on hand, cash provided by operations, available
borrowings under any credit facilities, financing through equipment lease
transactions, and possible future public or private debt and/or equity
offerings. The Company invests its excess cash in short-term, investment-grade
money market instruments.
 
  The Company currently believes that its existing cash balances, funds
available under its secured Revolving Credit Facility and funds expected to be
generated from operations will provide the Company with sufficient funds to
finance its operations for at least the next 12 months. In the past, the
Company utilized both operating and capital lease financing for certain
equipment used in its manufacturing and research and development operations
and expects to continue to selectively do so in the future. The Company may in
the future require additional funds to support its working capital
requirements or for other purposes, and may seek to raise such additional
funds through the sale of public or private equity and/or debt financings or
from other sources. No assurance can be given that additional financing will
be available in the future or that if available, such financing will be
obtainable on terms favorable to the Company or its shareholders when the
Company may require it.
 
Disclosure About Foreign Currency Risk
 
  Historically, a majority of the Company's revenues have been derived from
international sources, with the Company's customers in South Korea accounting
for the significant majority of such revenues. With the reduction in sales to
customers in South Korea, the Company is pursuing new customers in various
domestic and international locations where new deployments or upgrades to
existing wireless communication networks are planned. Such international
locations include Europe and South America, where there has been instability
in several of the region's currencies, including the Brazilian Real. Although
the Company currently invoices all of its customers in U.S. Dollars, changes
in the value of the U.S. Dollar versus the local currency in which the
Company's products are sold, along with the economic and political conditions
of such foreign countries, could adversely affect the Company's business,
financial condition and results of operations. In addition, the weakening of
an international customer's local currency and banking market may negatively
impact such customer's ability to meet their payment obligations to the
Company. Although the Company currently believes that its international
customers have the ability to meet all of their obligations to the Company,
there can be no assurance that they will continue to be able meet such
obligations. The Company regularly monitors the credit worthiness of its
international customers and makes credit decisions based on both prior sales
experience with such customers as well as current financial performance and
overall economic conditions. The Company may decide in the future to offer
certain foreign customers extended payment terms and/or sell certain products
or services in the local currency of such customers.
 
  Certain countries in Asia, including South Korea, continue to experience
weaknesses in their currencies, banking systems and equity markets. These
weaknesses have adversely affected South Korean wireless service operators'
demand for the Company's products. In addition, Brazil has recently
experienced significant weakness in its currency and equity markets. Such
weaknesses could negatively impact demand for wireless services and thereby
reduce demand for the Company's products in Brazil. Such a reduction in demand
for the Company's products could have a negative impact on the Company's
future sales and gross margins. The Company's foreign customers currently pay
for the Company's products with U.S. Dollars. The recent strengthening of the
U.S. Dollar as compared to the Brazilian Real or the South Korean Won, has
effectively increased the cost of the Company's products by as much as 100% or
more for its Brazilian and South Korean customers. The significant increase in
the local currency based cost of such products makes them less attractive to
such customers. Accordingly, changes in exchange rates, and in particular a
strengthening of the U.S. Dollar, may
 
                                      22
<PAGE>
 
negatively impact the Company's future sales and gross margins. For further
discussion of the risks associated with the Company's international sales, see
"Additional Factors That May Affect Future Results--Risks of Doing Business in
International Markets."
 
Quantitative and Qualitative Disclosures About Market Risk
 
  The Company's financial instruments include cash and long-term debt. At
January 3, 1999, the carrying values of the Company's financial instruments
approximated their fair values based on current market prices and rates.
 
  It is the Company's policy not to enter into derivative financial
instruments. The Company does not currently have any significant foreign
currency exposure since it does not transact business in foreign currencies.
Due to this, the Company does not have significant overall currency exposure
at January 3, 1999.
 
European Monetary Union
 
  Within Europe, the European Economic and Monetary Union (the "EMU")
introduced a new currency, the euro, on January 1, 1999. The new currency is
in response to the EMU's policy of economic convergence to harmonize trade
policy, eliminate business costs associated with currency exchange and to
promote the free flow of capital, goods and services.
 
  On January 1, 1999, the participating countries adopted the euro as their
local currency, initially available for currency trading on currency exchanges
and non-cash transactions such as banking. The existing local currencies, or
legacy currencies, will remain legal tender through January 1, 2002. Beginning
on January 1, 2002, euro-denominated bills and coins will be issued for cash
transactions. For a period of up to six months from this date, both legacy
currencies and the euro will be legal tender. On or before July 1, 2002, the
participating countries will withdraw all legacy currencies and exclusively
use the euro.
 
  The Company's transactions are recorded in U.S. Dollars and the Company does
not currently anticipate future transactions being recorded in the euro. Based
on the lack of transactions recorded in the euro, the Company does not believe
that the euro will have a material effect on the financial position, results
of operations or cash flows of the Company. In addition, the Company has not
incurred and does not expect to incur any significant costs from the continued
implementation of the euro, including any currency risk, which could
materially affect the Company's business, financial condition and results of
operations.
 
  The Company has not experienced any significant operational disruptions to
date and does not currently expect the continued implementation of the euro to
cause any significant operational disruptions.
 
Year 2000 Compliance
 
  In the next year, many companies will face a potentially serious information
systems (computer) problem because many software applications and operational
programs written in the past may not properly recognize calendar dates
beginning in the Year 2000. This problem could force computers or machines
which utilize date dependent software to either shut down or provide incorrect
data or information. The Company has examined its computer and information
systems and contacted its software and hardware providers to determine whether
the Company's software applications and computer and information systems are
compliant with the Year 2000. The Company has completed an upgrade to its
computer operating system and the Company has been assured by its software and
hardware providers that its computer systems are fully compliant with the Year
2000. The Company has also performed its own internal tests of its software
and hardware to confirm that they are Year 2000 compliant. It is not possible
to quantify the aggregate cost to the Company of such upgrades since they were
part of the software and hardware providers normal upgrades to the Company's
systems. The costs for upgrading the Company's information systems have been
funded through the Company's operating cash flows, and the Company estimates
that it has spent approximately $200,000 over the last two years for upgrades
of its information systems and services associated with such upgrades.
 
                                      23
<PAGE>
 
  While the Company believes that its information systems are fully Year 2000
compliant, the Company intends to continue to review its information systems
for any possible problems, as well as monitor its key suppliers and customers
for any impact that the Year 2000 may have on their information systems which
could then impact the Company. The Company has contacted all of its key
suppliers and has been assured that such suppliers will not be impacted by the
Year 2000. During the remainder of 1999, the Company intends to contact all of
its significant customers to request verification that such customers are Year
2000 compliant. Embedded software sold with the Company's products is not date
dependent and therefore is Year 2000 compliant. In addition, the equipment
utilized by the Company in its manufacturing process is not date dependent.
During the remainder of 1999, the Company intends to conduct tests on its
manufacturing equipment to ensure that there are not any Year 2000 issues with
such equipment.
 
  The Company does not believe that there will be significant issues or costs
associated with its products related to Year 2000 compliance; however, there
can be no assurance that such products do not contain undetected errors or
defects associated with Year 2000 date functions or that there exists
heretofore undetected aspects of the Company's manufacturing process which
could be impacted by the Year 2000. Although the Company is not currently
aware of any material operational issues or costs associated with preparing
its products, manufacturing processes or internal information systems for the
Year 2000, there can be no assurance that the Company will not experience
unanticipated negative consequences and/or material costs caused by undetected
errors or defects in the technology used in its products, manufacturing
processes or internal information systems, which are comprised predominantly
of third party software and hardware. The Company does not currently
anticipate that the Year 2000 programming issue will have a material impact on
its business, financial condition or results of operations.
 
  Should the Company not be completely successful in mitigating internal and
external Year 2000 risks, the result could be a system failure or
miscalculations causing disruptions of operations, including among other
things, a temporary inability to process transactions, manufacture products,
send invoices or engage in similar normal business activities at the Company
or its vendors and suppliers. The Company believes that under a worse case
scenario, it could continue the majority of its normal business activities on
a manual basis. The Company does not currently have a contingency plan with
respect to potential Year 2000 failures of its suppliers or customers.
 
  The Company has evaluated the information systems, equipment and software
included in the HP Acquisition for its Year 2000 compliance. The Company has
completed a transition of the computer information and operating systems to
the Company's existing systems so that the Folsom facility is now operating on
a Year 2000 compliant system. The Company is disposing of any computer
equipment acquired in the HP Acquisition which is not Year 2000 compliant. The
Company is upgrading the telephone system at the Folsom facility to a new Year
2000 compliant system. This is scheduled to be completed by the end of the
first quarter of 1999. The Company estimates that its costs for upgrading its
Folsom operations to be Year 2000 complaint are approximately $100,000.
 
New Accounting Pronouncements
 
  In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"), which the Company is required to adopt effective in
its fiscal year 2000. SFAS 133 will require the Company to record all
derivatives on the balance sheet at fair value. The Company does not currently
engage in hedging activities and will continue to evaluate the effects of
adopting SFAS No. 133. The Company will adopt SFAS No. 133 in its fiscal
year 2000.
 
Additional Factors That May Affect Future Results
 
  Future operating results may be impacted by a number of factors that could
cause actual results to differ materially from those stated herein, which
reflect management's current expectations. These factors include worldwide and
regional economic and political conditions, industry specific factors, the
Company's ability to
 
                                      24
<PAGE>
 
add new customers to reduce its dependence on existing customers, the
Company's ability to consolidate the acquired HP operating facilities, the
Company's ability to achieve re-qualification from customers of the products
previously manufactured by HP, the Company's ability to finance its activities
and maintain its financial liquidity, the Company's ability to timely develop
and produce commercially viable products at competitive prices, the Company's
ability to produce products which meet the quality standards of both existing
and potential new customers, the ability of the Company's products to operate
and be compatible with various OEMs' base station equipment, the availability
and cost of components, the Company's ability to manage expense levels, and
the Company's ability to accurately anticipate customer demand.
 
 Customer Concentration
 
  A small number of customers account for a substantial majority of the
Company's net sales. Although the Company is attempting to expand its customer
base, the Company expects that a limited number of customers will continue to
represent a substantial portion of the Company's net sales for the foreseeable
future. The Company believes that its future success depends upon its ability
to broaden its customer base. For the year ended January 3, 1999, four of the
Company's customers, BellSouth, LGIC, Nortel and Samsung accounted for
approximately 69% or $68.7 million of the Company's net revenues, with each
customer accounting for more than 10% of revenues for 1998. The risks
associated with the Company's dependence on a limited number of customers was
magnified in 1998 due to the customer's geographic concentration in South
Korea which experienced an economic and financial crisis during 1998. The
Company's South Korean customers, including Hyundai, LGIC, Samsung and SK
Global Co., Ltd. ("SK Global") accounted for $30.2 million or approximately
30% of total net sales for 1998, which was down significantly from 1997 when
net sales to three South Korean customers (Hyundai, LGIC and Samsung)
accounted for $99.3 million or approximately 83% of net sales. If the Company
is unable to continue to replace the revenues of its South Korean based
customers with those from other non-Asian based customers, such failure will
have a material adverse effect on the Company's business, results of
operations and financial condition. While the Company has had some success in
replacing its lost South Korean business during 1998, there can be no
assurance that the Company will continue to be successful in attracting and
retaining new customers. As part of the Company's efforts to expand its
customer base, and reflecting the significant reduction in the Company's South
Korean revenues, the Company had two non-Korean customers each accounting for
more than 10% of revenues for 1998. These customers are, in alphabetical
order, BellSouth and Nortel. There can be no assurance that these customers
will continue to purchase the same quantities of product from the Company or
that they will increase their purchases from the Company. If any of these
customers significantly reduce their purchases from the Company, such
reduction could have a material adverse effect on the Company's business,
results of operations and financial condition.
 
  A limited number of large OEMs account for a majority of RF power amplifier
purchasers in the wireless infrastructure market, and the Company's success is
dependent upon its ability to establish and maintain relationships with these
types of customers. The Company believes that a significant portion of its
business with OEMs, such as Ericsson, Hyundai, LGIC, Lucent, Metawave, Nokia,
Nortel and Samsung, is dependent upon the deployment schedules of wireless
network operators who are purchasing infrastructure equipment from such OEMs.
Therefore, continued purchases of the Company's products by such OEMs is
dependent upon the OEMs current view of the deployment and could be
significantly reduced due to any delays of such deployments. A number of
factors may cause delays in wireless infrastructure deployments, including
such factors as economic or political problems in the wireless operator's
operating region; delays in government approvals required for system
deployment; and reduced subscriber demand for wireless services. In addition,
from time to time OEMs may also purchase products on a large quantity basis
over a short period of time which may cause demand for the Company's products
to fluctuate significantly. Due to the possible uncertainties associated with
wireless infrastructure deployments and OEMs purchasing strategies, the
Company may experience significant fluctuations in demand from its OEM
customers. Such fluctuations could cause a significant reduction in revenues
which could have a material adverse effect on the Company's business, results
of operations and financial condition. There can be no assurance that a major
customer will not reduce, delay or eliminate its purchases from the Company,
which could have a material adverse effect on the Company's business, results
of
 
                                      25
<PAGE>
 
operations and financial condition. In addition, major customers also have
significant leverage and may attempt to change the terms, including pricing,
payment and product delivery schedules, upon which the Company and such
customers do business, thereby adversely affecting the Company's business,
results of operations and financial condition. Further, one or more of these
customers may determine to manufacture RF power amplifiers internally, thus
reducing or eliminating its purchases from the Company and possibly becoming a
direct competitor of the Company. See "--Internal RF power Amplifier
Production Capabilities of OEMs." As a result, the Company's success will
depend upon its ability to expand its customer base and, in particular, to
successfully market its products to OEMs for wireless networks and have its
products chosen over any internally designed or manufactured products.
 
 Consolidation and Integration of the HP Manufacturing Facility
 
  In October 1998, Powerwave completed the purchase of HP's RF power amplifier
business for a total purchase price of approximately $65.9 million. As part of
the HP Acquisition, the Company acquired HP's manufacturing and research and
development facility located in Folsom, California. In addition, the Company
acquired production equipment and manufacturing lines located in Malaysia.
These manufacturing lines had recently been transferred by HP to an HP
facility in Malaysia. Upon completion of the HP Acquisition, the Company
assumed responsibility for the Folsom manufacturing and research and
development facility as well as HP began the process of transferring back to
the Company the Malaysian manufacturing lines. During the diligence process of
determining to complete the HP Acquisition, the Company made the strategic
decision that it would consolidate the HP Folsom facility into the Company's
existing manufacturing facility located in Irvine, California. Therefore,
based upon this decision, the Company did not hire the majority of the
HP employees associated with the RF power amplifier business. The terms of the
HP Acquisition allow the Company to contract from HP the existing RF power
amplifier employees for up to one year from the date of the acquisition. The
Company has hired 40 HP employees, including 35 engineers. The Company intends
to maintain a research and development location in the Folsom area.
 
  Upon completion of the HP Acquisition on October 9, 1998, the Company became
responsible for the operations of the Folsom facility and the production of
products formerly manufactured by HP. The Company does not have any experience
in operating multiple manufacturing facilities and the Company is reliant upon
a significant number of contract employees from HP and third party employment
services to man and operate the Folsom facility. There can be no assurance
that the Company will be successful in operating the Folsom manufacturing
facility, or that it will be able to consolidate the Folsom manufacturing
operations to its Irvine, California facility within the time schedule it has
established. If the Company is not able to adequately operate the Folsom
facility or it is delayed or unable to consolidate the Folsom manufacturing
operations with its Irvine operations, such failures would have a material
adverse effect on the Company's business, financial condition and results of
operations.
 
  The transfer and consolidation of the Folsom manufacturing operations
includes many risk factors, such as the ability to properly train new
employees on how to manufacture existing products, the risk of losing the
existing manufacturing skills of the Folsom employees without the proper
transition to new employees, the possible delay or inability to achieve
requalification from the customer of the product being produced from the new
manufacturing location (Irvine). Several of the products contain transistors
designed and manufactured solely by HP. As part of the HP Acquisition, the
Company has a supply agreement with HP under which HP agrees to continue to
supply such components for up to one year to the Company. While the Company
has begun engineering work to redesign the product to use alternative
transistors, there can be no assurance that the Company will be successful in
such redesign efforts or that such redesigns will not significantly increase
the cost or reduce the performance of the products. If the Company is unable
to properly train new employees prior to losing the services of existing
Folsom employees, or is unable to obtain requalification of the products from
the customers, such failures would have a material adverse effect on the
Company's business, results of operations and financial condition. In
addition, if the Company is unable to redesign the products to utilize
alternative transistor sources, and obtain requalification for such redesigned
products, the inability to utilize alternative
 
                                      26
<PAGE>
 
transistors and/or obtain requalification of the products would have a
material adverse effect on the Company's business, financial condition and
results of operations.
 
 Fluctuations in Quarterly Results
 
  The Company has experienced, and expects to continue to experience,
significant fluctuations in sales and operating results from quarter to
quarter. Quarterly results fluctuate due to a number of factors, any of which
could have a material adverse effect on the Company's business, results of
operations and financial condition. In particular, the Company's quarterly
results of operations can vary due to the timing, cancellation, or
rescheduling of customer orders and shipments; cancellations or rescheduling
of customer orders and shipments due to economic slowdowns in the Company's
customers' operating regions, such as South Korea or South America; failure to
integrate the HP facility; cancellations or rescheduling of customer orders
and shipments due to excess inventory levels caused by changes in demand or
deployment schedules at the customer; variations in manufacturing capacities,
efficiencies and costs; delays in the qualification by customers of new
products or redesigns or qualification of new production facilities; the
availability and cost of components; capacity and production constraints
associated with single source component suppliers; the timing, availability
and sale of new products by the Company; product failures and associated in-
field service support costs; changes in the mix of products having differing
gross margins; warranty expenses; changes in average sales prices; long sales
cycles associated with the Company's products; and variations in product
development and other operating expenses. The Company's quarterly revenues are
also affected by volume discounts given to certain customers for large volume
purchases over a given period of time. In addition, the Company's quarterly
results of operations are influenced by competitive factors, including
pricing, availability and demand for the Company's and competitor's amplifier
products. A large portion of the Company's expenses are fixed and difficult to
reduce in a short period of time. If net sales do not meet the Company's
expectations, the Company's fixed expenses would exacerbate the effect of such
net sales shortfall. Furthermore, announcements by the Company or its
competitors regarding new products and technologies could cause customers to
defer purchases of the Company's products. In addition, while the Company
receives periodic order forecasts from its major customers, such customers
have no binding obligation to purchase the forecasted amounts. See "--Customer
Concentration." Order deferrals and cancellations by the Company's customers,
declining average sales prices, changes in the mix of products sold, delays in
the Company's introduction of new products and longer than anticipated sales
cycles for the Company's products have in the past adversely affected the
Company's quarterly results of operations. There can be no assurance that the
Company's quarterly results of operations will not be similarly adversely
affected in the future.
 
  The Company currently sells products to its major customers under purchase
orders which are usually placed with short-term delivery requirements. As
such, while the Company receives periodic order forecasts from its major
customers, such customers have no obligation to purchase the forecasted
amounts and may cancel orders, change delivery schedules or change the mix of
products ordered with minimal notice. In spite of these limitations, the
Company maintains significant work-in-progress and raw materials inventory as
well as maintaining increased levels of technical production staff to meet
estimated order forecasts. The recent significant reduction in sales to the
Company's South Korean customers coupled with the Company's HP Acquisition has
caused the Company to maintain higher levels of inventory than it originally
planned. While the Company currently believes that it has managed these
increases effectively, there can be no assurance that it will continue to be
able to do so. To the extent its major customers purchase less than the
forecasted amounts or cancel or delay existing purchase orders, the Company
will have higher levels of inventory than otherwise needed, increasing the
risk of obsolescence, and the Company will have increased levels of production
staff to support such forecasted orders. Such higher levels of inventory and
increased employee levels would reduce the Company's liquidity and could have
a material adverse effect on the Company's business, results of operations and
financial condition. In addition, in the event the Company's major customers
desire to purchase products in excess of the forecasted amounts, the Company
may not have sufficient inventory or manufacturing capacity to fill such
increased orders, which could have a material adverse effect on the Company's
relationships and future business with its customers.
 
  Due to the foregoing factors, the Company believes that period-to-period
comparisons of its operating results are not necessarily meaningful and that
such comparisons cannot be relied upon as indicators of future
 
                                      27
<PAGE>
 
performance. There can be no assurance that the Company will maintain its
current profitability in the future or that future revenues and operating
results will not be below the expectations of public market analysts and
investors. In either case, the price of the Company's Common Stock could be
materially adversely affected. See "--Possible Volatility of Stock Price."
 
 Reliance upon South Korean Market and Growth of Wireless Services Market
 
  Four of the Company's customers, Hyundai, LGIC, Samsung and SK Global
collectively accounted for approximately 29.7% of the Company's net sales for
fiscal year 1998 and three of these customers, Hyundai, LGIC and Samsung
accounted for approximately 82.9% of net sales for fiscal year 1997. These
customers have purchased products for deployment in the South Korean digital
cellular and PCS networks. During fiscal 1996, 1997, and 1998, Hyundai, LGIC
and Samsung purchased multi-carrier linear RF power amplifiers for
installation in the build-out of the South Korean digital cellular networks.
 
  The build-out of the South Korean PCS networks began in the first quarter of
1997. During 1997, the Company began shipping, in volume, PCS single carrier
RF power amplifiers for use in the new PCS networks being built in South
Korea. Sales to the Company's South Korean customers for the South Korean PCS
networks represented substantially all of the Company's PCS sales during 1997
and approximately 85.8% of the Company's PCS sales for the first nine months
of 1998. During the fourth quarter of 1998, the Company significantly
increased its non-Korean PCS sales. The delay, postponement and cancellation
of the build-out of the South Korean digital wireless networks which occurred
during 1998, did have an adverse effect on the Company's revenues and results
of operations during 1998. The continued delay, termination or early
completion of the infrastructure build-out of the South Korean digital
wireless networks could continue to have a material adverse effect on the
Company's business, results of operations and financial condition. Further,
even if these networks are developed as originally anticipated, there can be
no assurance that the Company's products will continue to be purchased by the
Company's South Korean customers or be capable of being manufactured at
competitive prices in sufficient volumes.
 
  During the fourth quarter of 1997, certain Asian countries, including South
Korea, began to experience weaknesses in their currencies, banking systems and
equity markets. The deteriorating economic and currency conditions throughout
Asia led South Korea, along with several other Asian countries, including
Indonesia and Thailand, to request economic support from the International
Monetary Fund in December 1997. During this time, the Company's South Korean
customers continued to order and take delivery of products from the Company
and continued to make timely payments to the Company for amounts owed.
However, during 1998, economic and currency conditions in Asia and South Korea
have continued to deteriorate which has negatively impacted overall market
conditions within South Korea. As a result, the Company has experienced
postponed, rescheduled and cancelled orders from its South Korean customers
for both the cellular and PCS networks in South Korea.
 
  The weakness in the equivalent U.S. dollar value of the South Korean Won has
adversely affected South Korean wireless service operators' demand for the
Company's products. The Company's South Korean customers pay for the Company's
products with U.S. dollars. As such, the strengthening of the U.S. dollar as
compared to the South Korean Won, which began in the fourth quarter of 1997
and has continued during 1998, has increased the effective cost of the
Company's products by at times as much as 100% or more for its South Korean
customers. This increase in cost to the Company's South Korean OEM customers
is being passed along to the South Korean wireless service providers in the
form of increased costs for infrastructure equipment. The significant increase
in the local currency cost of such products makes them less attractive to such
customers. Additionally, due to the economic problems facing the South Korean
banking network, it has become more difficult for local operating companies to
raise additional financing to support the increased costs of their
infrastructure buildout. The Company also notes that the types of economic
problems experienced in Asia have been encountered in other areas of the world
where the Company operates, such as Brazil in South America.
 
  Therefore, the Company currently believes that the completion of the
buildout of the South Korean wireless networks is dependent upon a
stabilization of economic, currency and banking conditions within South Korea.
It
 
                                      28
<PAGE>
 
is currently anticipated that the continued deployment of both the cellular
and PCS digital networks will be delayed until such time that economic
conditions become stabilized from a long-term perspective. Accordingly, the
Company is unable to predict when, if ever, these networks will be completed
pursuant to the South Korean wireless network operators' original build-out
projections. In any event, sales related to these networks are anticipated to
continue to decrease significantly during 1999, and the Company is unable to
predict what level, if any, such sales will be for 1999.
 
  Hyundai, LGIC and Samsung have also been marketing wireless infrastructure
equipment for installation in networks outside of the South Korean market.
There can be no assurance that such customers will be successful in obtaining
new business outside of South Korea or that, if successful, they will continue
to purchase RF power amplifiers from the Company. Any significant decrease in
the Company's sale of RF power amplifiers to these customers, without an
offsetting increase in sales to other customers, could have a material adverse
effect on the Company's business, results of operations and financial
condition.
 
  A substantial majority of the Company's revenues are derived from the sale
of RF power amplifiers for wireless communications networks, and the future
success of the Company depends to a considerable extent upon the continued
growth and increased availability of cellular and other wireless
communications services, including PCS, in the United States and
internationally. There can be no assurance that either subscriber use or the
implementation of wireless communications services will continue to grow, or
that such factors will create demand for the Company's products. The Company
believes that continued growth in the use of wireless communications services
depends on several factors, including significant reductions in infrastructure
capital equipment cost per subscriber and corresponding reductions in wireless
service pricing and continuing favorable economic conditions for the area in
which the wireless service operates. While in the United States the Federal
Communications Commission ("FCC") has adopted regulations requiring local
phone companies to reduce the rates charged to cellular carriers for
connection to their wireline networks, it is anticipated that wireless service
rates will remain higher than rates charged by traditional wireline companies.
The growth in the implementation of wireless communications services is
dependent upon both developed countries, such as the United States, allowing
continued deployment of new networks, and less developed foreign countries
deploying wireless communications networks as opposed to constructing wireline
infrastructures. Foreign countries or local government authorities may decline
to construct wireless communications systems, place moratoriums on building
base stations or terminate or delay construction of such systems for a variety
of reasons, including environmental issues, political unrest, economic
downturns, the availability of favorable pricing for other communications
services, the availability and cost of related equipment or other delays in
the implementation of these systems, in which event demand for the Company's
products will be similarly reduced or delayed, which would materially
adversely affect the Company's business, results of operations and financial
condition. See "--Risks of Doing Business in International Markets."
 
 Risks of Doing Business in International Markets
 
  For fiscal years 1996, 1997 and 1998, international revenues (excluding
North American sales) accounted for approximately 77%, 84% and 41%
respectively, of the Company's net sales. The Company expects that
international revenues and revenues derived from sales to OEMs in North
America for infrastructure deployments in international locations will
continue to account for a significant percentage of the Company's net sales
for the foreseeable future. As a result, the Company is subject to various
risks, including political and economic instability, the difficulty of
administering business globally, compliance with multiple and potentially
conflicting regulatory requirements such as export requirements, tariffs and
other barriers, differences in intellectual property protections, health and
safety requirements, difficulties in staffing and managing foreign operations,
longer accounts receivable cycles, currency exchange fluctuations,
restrictions against the repatriation of earnings, export control
restrictions, overlapping or differing tax structures, political and economic
instability and general trade restrictions. If any of these risks
materializes, it could have a material adverse effect on the Company's
business, results of operations and financial condition. In particular, a
large portion of the Company's existing customers and potential new customers
are servicing new markets in developing countries that the Company's customers
expect will deploy wireless communications networks as an alternative to the
construction
 
                                      29
<PAGE>
 
of a wireline infrastructure or may require upgrades to existing wireless
communication networks. Such international locations include South America and
Asia as well as Europe. If such countries decline to construct wireless
communication systems, or construction of such systems are delayed for any of
a variety of reasons, including business and economic conditions, delays in
government or administrative approvals or changes in economic stability due to
factors such as increased inflation and political turmoil, such delays could
have a material adverse effect on the Company's business, results of
operations and financial condition. In recent years, a substantial majority of
the Company's net sales resulted from the sale of products to three companies
in South Korea, where future sales are dependent upon favorable business and
economic conditions, as well as trade relations with the United States and a
lack of political conflicts with North Korea.
 
  Beginning during the fourth quarter of 1997 and continuing throughout 1998,
economic conditions deteriorated throughout the Asia-Pacific region, causing
reductions in local exchange rates throughout the region and general financial
market uncertainty. Countries in Asia, including South Korea, have experienced
weaknesses in their currencies, banking systems and equity markets. During
1998, these weaknesses adversely affected both the Company's South Korean
customers' demand for the Company's products and their ability to pay for the
products in U.S. dollars. The Company's foreign customers currently pay for
the Company's products with U.S. dollars. As such, the strengthening of the
U.S. dollar as compared to such foreign currencies as the South Korean Won,
has at times effectively increased the local currency price of the Company's
products by as much as 100% or more for its South Korean customers. The
significant increase in the local currency cost of such products makes them
less attractive to such customers. Additionally, due to the economic problems
facing the South Korean banking system, it has become more difficult for South
Korean operating companies to raise additional U.S. dollar financing to
support the increased costs of purchasing the Company's products. Accordingly,
changes in exchange rates, and in particular a strengthening of the U.S.
dollar, may negatively impact the Company's future sales, gross margins,
results of operations and financial condition.
 
  In addition, during the last year, there have been press reports of
deteriorating living conditions within North Korea, which could lead to civil
unrest possibly resulting in potential military conflicts with South Korea.
There have also been press reports of military conflicts between North and
South Korea, which could potentially escalate into a large-scale conflict.
With the deteriorating economic conditions within South Korea, there have also
been press reports of protesting and striking South Korean workers. Any
conflict, either political or military, between North and South Korea or
within South Korea alone, could have a material adverse effect on the
Company's business, results of operations and financial condition. Any
significant change in the South Korean economy or the deterioration of United
States trade relations or the economic or political stability of other foreign
locations in which the Company sells its products would have a material
adverse effect on the Company's business, results of operations and financial
condition.
 
  In 1998, the Company increased its sales efforts to both potential customers
in South America and to OEMs for possible deployment to customers in South
America. There has been instability in several of the region's currencies,
economies, banking systems and political governments, especially in Brazil,
which could cause delays or cancellations of planned deployments in the
region. Any significant delay in the deployments of wireless networks due to
these factors could have a material adverse effect on the Company's business,
results of operations and financial condition. During the third quarter of
fiscal 1998, the Company believes that large interest rate fluctuations
impacted customer demand in Brazil. Any continued economic fluctuations or
worsening economic conditions in Brazil or other international locations could
have a material adverse effect on the Company's business, results of
operations and financial condition.
 
  The Company's foreign sales are generally invoiced in U.S. dollars.
Accordingly, the Company does not currently engage in foreign currency hedging
transactions. However, as the Company further expands its international
operations, the Company may be paid in foreign currencies and exposure to
losses in foreign currency transactions may increase. The Company may choose
to limit such exposure by the purchase of forward foreign exchange contracts
or similar hedging strategies. There can be no assurance that a currency
hedging strategy would be successful in avoiding exchange-related losses. In
addition, if the relative value of the U.S. dollar in comparison to the
currency of the Company's foreign customers should increase, the resulting
 
                                      30
<PAGE>
 
effective price increase of the Company's products to such foreign customers
could result in decreased sales which could have a material adverse impact on
the Company's business, results of operations and financial condition. The
increasing value of the U.S. dollar in comparison of the weakening of an
international customer's local currency and associated weakening of such
customer's local banking system, may negatively impact such customer's ability
to meet their payment obligations to the Company. During a time of uncertain
economic and banking conditions, such as the current situation in Brazil and
South Korea, there can be no assurance that such customers will continue to be
able meet such obligations. The Company regularly monitors the credit
worthiness of its international customers and makes credit decisions based on
both prior sales experience with such customers as well as current financial
performance and overall economic conditions. Due to competitive reasons, the
Company may decide to offer certain foreign customers extended payment terms
and or sell certain products or services in the local currency of such
customers. There can be no assurance that the Company's review of its
customers credit worthiness will be accurate or that such review will prevent
the Company from incurring significant losses if such customers default on
their payment obligations to the Company. If the Company's international
customers default on payment terms or are unable to make payment to the
Company in U.S. dollars, the resulting payment shortages would have a material
adverse effect on the Company's business, results of operations and financial
condition.
 
 Declining Average Sales Prices
 
  The Company has experienced, and expects to continue to experience,
declining average sales prices for its products. Wireless infrastructure OEMs
have come under increasing price pressure from cellular service providers and
PCS service providers, which in turn has resulted in downward pricing pressure
on the Company's products. In addition, competition among third-party
suppliers has increased the downward pricing pressure on the Company's
products. Since wireless infrastructure OEMs frequently negotiate supply
arrangements far in advance of delivery dates, the Company must often commit
to price reductions for its products before it knows how, or if, cost
reductions can be obtained. In addition, average sales prices are affected by
price discounts negotiated for large volume purchases by certain customers
over a given period of time. To offset declining average sales prices, the
Company believes that in the near term it must achieve manufacturing cost
reductions and consolidation of its manufacturing facilities, and in the
longer term the Company must develop new products that incorporate advanced
features and that can be manufactured at lower cost or sold at higher average
sales prices. If, however, the Company is unable to achieve such cost
reductions or consolidation or product improvements, the Company's gross
margins would decline, and such decline could have a material adverse effect
on the Company's business, results of operations and financial condition.
 
  If the Company's outstanding orders with its major customers are
significantly reduced, delayed or cancelled, the resulting loss of volume
purchasing could adversely effect the Company's ability to achieve
manufacturing cost reductions in the form of price discounts for large volume
purchases of components. Any reduction in the Company's ability to obtain
manufacturing cost reductions would have a material adverse affect on the
Company's business, results of operations and financial condition.
 
  Due to the economic problems facing Asia, the Company currently anticipates
that demand for wireless infrastructure equipment throughout Asia will remain
reduced going forward. The reduction in demand has caused suppliers of
wireless infrastructure equipment, including RF power amplifiers, to increase
their sales and marketing efforts in the remaining markets outside of Asia.
Any possible increase in competition in the sale of RF power amplifiers could
cause increased price competition which could lead to further declining
average sales prices for the Company's products. If the Company is unable to
offset further declining average sales prices of its products through cost
reductions or product improvements, the Company's gross margins will decline,
and such decline could have a material adverse effect on the Company's
business, results of operations and financial condition.
 
  In the fourth quarter of 1996, the Company introduced single carrier RF
power amplifiers for PCS networks, and such products accounted for an
increased percentage of the Company's net sales during 1997. Sales of single
carrier RF power amplifiers have been subject to intense price competition and
tend to carry lower gross margins
 
                                      31
<PAGE>
 
than multi-carrier RF power amplifier products. The Company believes that
single carrier RF power amplifier products will continue to account for a
larger portion of the Company's net sales in 1999. In addition, the Company's
recently completed HP Acquisition includes only single carrier business with
no existing multi-carrier RF power amplifier business. Therefore, the expected
increase in the percentage of single carrier products in the Company's overall
sales mix has had an adverse effect on the Company's gross margins. In the
event that the Company is unable to reduce the manufacturing costs of its
single carrier RF power amplifiers and such RF power amplifiers account for an
increased percentage of net sales, the Company's overall gross margins will
continue to be materially adversely affected.
 
 Management of Growth; HP Acquisition; Dependence Upon Key Personnel
 
  The growth in the Company's business has placed, and is expected to continue
to place, a significant strain on the Company's management and operations. The
Company's ability to compete effectively and to manage future expansion of its
operations, including its HP Acquisition, will require the Company to continue
to improve its operations and manufacturing processes, financial and
management controls, reporting systems and procedures on a timely basis and
effectively expand, train and manage its work force. In particular, the
Company must carefully manage production and inventory levels and product
quality to meet increasing product demand and new product introductions.
Inaccuracies in demand forecasts or abrupt changes in customer orders in the
environment in which the Company operates can quickly result in either
insufficient or excessive inventories and disproportionate overhead expenses.
Any degradation in product quality could adversely impact production rates,
product delivery schedules and overhead expenses associated with product
support. While the Company works to implement a number of new financial and
management controls and attempts to improve reporting systems and procedures,
there can be no assurance that such actions will prevent the Company from
encountering inappropriate inventory levels, disproportionate overhead
expenses and reductions in product quality and production rates. During the
last twelve months, the Company has hired a significant number of employees,
including engineers, production technicians and sales and marketing employees
to meet demand forecasts. In the event that the Company's new personnel are
unable to work effectively as a team or achieve desired production levels and
product quality or if the Company's demand forecasts are incorrect, or the
Company's customers cancel or delay existing orders, the Company's business,
results of operations and financial condition could be materially adversely
affected. There can be no assurance that the Company will be able to continue
to attract and retain qualified personnel necessary for the development of its
business. In addition, there can be no assurance that the Company will be able
to effectively manage the HP business or complete the transition of the Folsom
manufacturing operations to the Company's Irvine facility. The Company's
failure to manage growth effectively or manage the HP Acquisition would have a
material adverse effect on the Company's business, results of operations and
financial condition.
 
  Due to the specialized nature of the Company's business, the Company is
highly dependent on the continued services of, and on its ability to attract
and retain, qualified technical, marketing and managerial personnel.
Competition for such personnel, particularly qualified engineers, is intense,
and the loss of a significant number of such persons, as well as the failure
to recruit and train additional technical personnel in a timely manner, could
have a material adverse effect on the Company's business, results of
operations and financial condition.
 
 Dependence on Single Sources for Key Components
 
  The Company currently procures, and expects to continue to procure, certain
components from single source manufacturers due to unique component designs as
well as certain quality and performance requirements. In addition, in order to
take advantage of volume pricing discounts, the Company purchases certain
customized components for its products from single sources. The Company has
experienced, and may in the future experience, shortages of single-sourced
components. In such event, the Company may have to make adjustments to both
product designs and production schedules. If such single-sourced components
were to become unavailable in sufficient quantities or were to become
available only on terms unsatisfactory to the Company, the Company would be
required to purchase comparable components from other sources and "retune" its
 
                                      32
<PAGE>
 
products to function properly with the replacement components or redesign its
products to use other components, either of which could result in delays in
production, product requalification and delivery. If for any reason the
Company could not obtain comparable replacement components in sufficient
volume from other sources or could not expeditiously retune its products to
operate with the replacement components, achieve customer approval to utilize
new components (if required), or redesign its products to use other
components, the Company's business, results of operations and financial
condition could be adversely affected. In addition, if the Company were unable
to obtain sufficient quantities of single-sourced components used in the
manufacture of its RF power amplifiers, resulting delays or reductions in
product shipments could occur and could have a material adverse affect on the
Company's business, results of operations and financial condition, including a
material adverse effect on the Company's relationships with its customers as
well as potential customers.
 
  The RF power amplifier business which the Company acquired from HP in
October 1998 utilizes certain custom components manufactured by HP. While the
Company secured a one-year supply commitment from HP, the Company is expected
to begin sourcing such components from new suppliers. If the Company is
unsuccessful in adding such new suppliers, such failure could have a material
adverse effect on the Company's business, results of operations and financial
condition.
 
  Due to the Company's reliance on certain single-sourced customized
components, if the Company experiences an abrupt reduction in customer demand,
the Company may end up with excess inventories of such components due to the
nature of the volume purchasing agreements that the Company enters to obtain
component cost reductions. If the Company is unable to utilize such components
in a timely manner and is unable to sell such components due to their
customized nature, the resulting negative impact on the Company's liquidity
and resulting increased inventory levels could have a material adverse effect
on the Company's business, results of operations and financial condition.
 
 Competition
 
  The wireless infrastructure equipment industry is extremely competitive and
is characterized by rapid technological change, new product development,
product obsolescence, evolving industry standards and significant price
erosion over the life of a product. The principal elements of competition in
the Company's market include performance, functionality, reliability, pricing,
quality, the ability to design products which can be efficiently manufactured
in volume production, time-to-market delivery capabilities and standards
compliance. While the Company believes that overall it competes favorably with
respect to the foregoing elements, there can be no assurance that it will be
able to continue to do so.
 
  Currently, the Company competes primarily with AML Communications, Inc.,
M/A-COM, Inc. (a subsidiary of AMP, Inc.), Microwave Power Devices, Inc. and
Spectrian Corporation, in addition to the RF power amplifier manufacturing
operations captive within certain of the leading wireless infrastructure OEMs
such as Ericsson, Lucent, Motorola, Nokia and Samsung. The Company also
competed with Avantek, a division of Hewlett-Packard Company, until the
Company's recent purchase of the assets of this division on October 9, 1998
(the HP Acquisition). Certain of the Company's current and potential
competitors have significantly greater financial, technical, manufacturing,
sales, marketing and other resources than the Company and have achieved
greater name recognition for their existing products and technologies than has
the Company.
 
  The Company's success depends in part upon the rate at which wireless
infrastructure OEMs incorporate the Company's products into their systems. The
Company believes that a substantial portion of the present worldwide
production of RF power amplifiers is captive within the internal manufacturing
operations of a small number of wireless infrastructure OEMs and that the RF
power amplifiers manufactured by these OEMs are offered for sale as part of
their wireless systems. These OEMs include, among others, Ericsson, Lucent,
Motorola and Nokia. In addition, Samsung, a significant customer of the
Company, manufacturers RF power amplifiers in addition to purchasing such
components from the Company. The Company believes that these OEMs, as well as
other customers of the Company, continuously evaluate whether to manufacture
their own RF power amplifiers rather than purchase them from third-party
vendors such as the Company. These and other large manufacturers
 
                                      33
<PAGE>
 
of wireless infrastructure equipment could also determine to offer and sell
their RF power amplifiers to other OEMs or customers of the Company and
compete directly with the Company. In addition, these or other OEMs may enter
into joint ventures or strategic relationships with the Company's competitors,
in which event the Company's ability to sell products to such OEMs could be
reduced or eliminated. See "--Internal RF power Amplifier Production
Capabilities of OEMs."
 
  The Company has experienced significant price competition and expects price
competition in the sale of RF power amplifiers to increase. No assurance can
be given that the Company's competitors or customers will not develop new
technologies or enhancements to existing products or introduce new products
that will offer lower prices or superior performance features. The Company
expects its competitors to offer new and existing products at prices necessary
to gain or retain market share. Several of the Company's competitors have
substantial financial resources, which may enable them to withstand sustained
price competition or a downturn in the market better than the Company. There
can be no assurance that the Company will be able to compete successfully in
the pricing of its products, or otherwise, in the future.
 
 Rapid Technological Change; Dependence on New Products
 
  The markets in which the Company and its customers compete are characterized
by rapidly changing technology, evolving industry standards and communications
protocols, and continuous improvements in products and services. The Company's
future success depends on its ability to enhance its current products and to
develop and introduce in a timely manner new products that keep pace with
technological developments, industry standards and communications protocols,
compete effectively on the basis of price, performance and quality, adequately
address OEM customer and end-user customer requirements and achieve market
acceptance. The Company believes that to remain competitive in the future it
will need to continue to develop new products, which will require the
investment of significant financial resources in new product development.
During 1998, the Company continued to invest significant resources in the
development and manufacture of RF power amplifiers for both Cellular and PCS
networks and expects to continue to invest significant resources in these
areas. There can be no assurance that the deployment of wireless networks will
not be delayed or that the Company's products will achieve widespread market
acceptance or be capable of being manufactured at competitive prices in
sufficient volumes. In the event that the Company's products are not timely
and economically developed or are not produced in sufficient quantities or do
not gain widespread market acceptance, the Company's business, results of
operations and financial condition would be materially adversely affected.
 
  In addition to its new product development efforts, the Company continues to
develop improvements and additions to its existing Cellular and PCS lines of
RF power amplifier products, including the Company's multi-carrier linear
cellular RF power amplifiers. Any delays in commencement of commercial
shipments of these products may result in customer dissatisfaction and delay
or loss of product revenues, which could have a material adverse effect on the
Company's business, results of operations and financial condition. No
assurance can be given that the Company's product development efforts will be
successful, or that its new products will achieve customer acceptance or that
its customers' products and services will achieve market acceptance. If a
significant number of development projects do not result in manufacturable new
products or product enhancements within anticipated time frames, the Company's
business, results of operations and financial condition could be materially
adversely affected. Any failure by the Company to anticipate or respond
adequately to technological developments and customer requirements, or any
significant delays in product development, introduction or deliveries, could
result in a loss of competitiveness and reduced net sales. While the Company
maintains an active development program to attempt to improve its product
offerings, there can be no assurance that such efforts will be successful or
that other companies or institutions will not develop and commercialize
products based on new technologies that are superior in performance or cost-
effectiveness to the Company's products. There can also be no assurance that
the Company's products will not be rendered obsolete by the introduction and
acceptance of new communications protocols.
 
  As part of the Company's HP Acquisition, the Company intends to incorporate
existing HP designs into its product line as well as redesign certain HP
products. Any delays or failures in the redesign of these products or
 
                                      34
<PAGE>
 
the inability to produce commercial quantities of such redesigned or new
products based on such designs, or the inability to obtain customer
qualification of such products in a timely manner, could result in customer
dissatisfaction and the delay or loss of product revenues, which could have a
material adverse effect on the Company's business, results of operations and
financial condition. No assurance can be given that the Company's product
development efforts associated with the HP Acquisition will be successful, or
that its new products will achieve customer acceptance or that its customers'
products and services will achieve market acceptance. Any failure by the
Company to adequately manage the technical development efforts associated with
the HP Acquisition could result in a loss of competitiveness and could have a
material adverse effect on the Company's business, results of operations and
financial condition.
 
 No Assurance of Product Manufacturability, Quality or Reliability
 
  Manufacturing the Company's products is an extremely complex process and
requires significant time and expertise to tune the products to meet
customers' specifications. The ability of the Company to cost-effectively
manufacture its RF power amplifier products in volume is substantially
dependent upon the Company's ability to tune these products to meet
specifications in an efficient manner. In this regard, the Company is
dependent upon its staff of trained technicians and engineers. If the Company
is unable to design its products to minimize the manual tuning process or if
the Company were unable to attract additional trained technicians, or were to
lose the services of a number of its trained technicians, the Company's
business, financial condition and results of operations would be materially
adversely affected. The Company has been required to replace certain
components in some of its products in accordance with warranty provisions
under which the products were sold. The Company recently introduced single
carrier RF power amplifiers for PCS networks and anticipates that it will
continue to introduce new-generation RF power amplifiers products for both
cellular and PCS networks. Companies involved in the development and
manufacture of new products which contain complex technologies often encounter
difficulties in performance and reliability and encounter delays in product
introduction and volume shipments. The Company believes that customers will
demand increasingly stringent product performance, quality and reliability.
The Company has in the past experienced, and may from time to time in the
future experience, quality problems with its products. If any of these
problems were to occur on a significant level, the Company could experience
increased costs, delays in or cancellations of, or rescheduling of, orders or
deliveries and product returns, any of which could damage relationships with
current customers and have a material adverse effect on the Company's
business, results of operations and financial condition. There can be no
assurance that the Company's product designs will continue to be successful or
will keep pace with technological developments, evolving industry standards
and communications protocols, and allow for continuous improvements in product
quality and meet the quality standards of customers. Any potential design
problems could damage relationships with both existing and prospective
customers and, in particular, could limit the Company's ability to market its
products to large OEMs, many of which manufacture RF power amplifiers
internally and have stringent quality control standards. See "--Internal RF
power Amplifier Production Capabilities of OEMs."
 
  As part of the Company's HP Acquisition, the Company is required to master
and utilize the complex manufacturing processes utilized by HP. There can be
no assurance that the Company will be successful in handling the HP
manufacturing processes. If the Company is unsuccessful in reproducing or
managing the HP manufacturing processes, such failure could have a material
adverse effect on the Company's business, results of operations and financial
condition.
 
 Lengthy Sales Cycle
 
  The sales cycle associated with the Company's products is typically lengthy,
often lasting from six to eighteen months. The Company's customers normally
conduct significant technical evaluations of its products and its competitors'
products before making purchase commitments. The Company's OEM customers
typically require extensive technical qualification of the Company's products
before they are integrated into each OEM's products. This qualification
process involves a significant investment of time and resources from the
Company
 
                                      35
<PAGE>
 
and the OEMs to ensure that the Company's product designs are fully qualified
to perform with each OEM's equipment. Also, individual wireless network
operators can subject the Company's products to field and evaluation trials,
which can last anywhere from one to six months, before making a purchase. The
qualification and evaluation process and the customer field trials may delay
the shipment of sales forecasted for a specific customer for a particular
quarter and the Company's operating results for that quarter could be
materially adversely affected.
 
 Internal RF power Amplifier Production Capabilities of OEMs
 
  Many of the leading wireless infrastructure equipment manufacturers
internally manufacture their own RF power amplifiers, and the Company believes
that its existing customers continuously evaluate whether to manufacture their
own RF power amplifiers. Certain customers of the Company have produced
internally designed RF power amplifiers in an attempt to replace products
manufactured by the Company. The Company expects that this practice will
continue. In addition, LGIC, one of the Company's customers, has entered into
a joint venture manufacturing arrangement with one of the Company's
competitors. In the event that customers of the Company do manufacture their
own RF power amplifiers, such customers could reduce or eliminate their
purchases of the Company's products. There can be no assurance that the
Company's current customers will continue to rely, or expand their reliance,
on the Company as an external source of supply for their RF power amplifiers,
or that other wireless telecommunications OEMs such as Lucent, Ericsson,
Motorola, Nokia and Nortel will become and remain customers of the Company.
OEMs with internal manufacturing capabilities could also sell RF power
amplifiers externally to other OEMs, thereby competing directly with the
Company. In addition, even if the Company were successful in selling its
products to these OEMs, it is anticipated that such OEMs would demand price
and other concessions based on their ability to manufacture RF power
amplifiers internally. There can be no assurance that the Company will
continue to enter into supply contracts with OEMs on terms that are acceptable
to the Company, if at all, or that such contracts will not be terminated on
short notice. Any significant loss of sales to current customers, not offset
by sales to other customers, would have a material adverse effect on the
Company's business, results of operations and financial condition. If, for any
reason, the Company's major customers decide to produce their RF power
amplifiers internally or through joint ventures with other competitors, or
require the Company to participate in joint venture manufacturing with such
OEM, the Company's business, results of operations and financial condition
could be materially adversely affected.
 
  The Company's customers and other wireless infrastructure equipment
manufacturers are protective of their intellectual property, which may
contribute to certain manufacturers deciding to not seek RF power amplifiers
from external sources. While the Company takes measures to ensure the
confidentiality of intellectual property disclosed to the Company by its
customers or developed by the Company for such customers, the appearance of a
close working relationship with a particular customer may adversely affect the
Company's ability to establish or maintain a relationship with, or sell
products to, competitors of the particular customer. If the Company's major
customers decide not to purchase products from the Company due to the
Company's relationship to other customers, the Company's business, results of
operations and financial condition could be materially adversely affected.
 
 Proprietary Technology; Risk of Third-Party Claims of Infringement
 
  The Company relies primarily upon trade secrets to protect its intellectual
property. The Company generally enters into confidentiality and non-disclosure
agreements with its employees and limits access to and distribution of its
proprietary information. In addition, during 1998 the Company was granted its
first U.S. patent for an aspect of its multi-carrier technology. The Company
has applied for several additional U.S. and international patents for various
aspects of its proprietary technology and regularly examines various aspects
of its technology for possible patent applications. The Company believes that
its success depends upon the knowledge and experience of its management and
technical personnel and its ability to market its existing products and to
develop new products. The departure of any of the Company's management and
technical personnel, the breach
 
                                      36
<PAGE>
 
of their confidentiality and non-disclosure obligations to Powerwave or the
failure to achieve the Company's intellectual property objectives may have a
material adverse effect on the Company's business, financial condition and
results of operations.
 
  The Company's ability to compete successfully and achieve future revenue
growth will depend, in part, on its ability to protect its proprietary
technology and operate without infringing upon the rights of others. There can
be no assurance that the Company will be able to successfully protect its
intellectual property or that the Company's intellectual property or
proprietary technology will not otherwise become known or be independently
developed by competitors. In addition, the laws of certain countries in which
the Company's products are or may be sold may not protect the Company's
products and intellectual property rights to the same extent as the laws of
the United States. The inability of the Company to protect its intellectual
property and proprietary technology could have a material adverse effect on
its business, financial condition and results of operations. As the number of
patents, copyrights and other intellectual property rights in the Company's
industry increases, and as the coverage of these rights and the functionality
of the products in the market further overlap, the Company believes that its
products may increasingly become the subject of infringement claims. The
Company may in the future be notified that it is infringing upon certain
patent or other intellectual property rights of others. Although the Company
is not aware of any pending or threatened intellectual property lawsuits
against the Company, there can be no assurance that such litigation or
infringement claims will not occur in the future. Such litigation or claims
could result in substantial costs and diversion of resources and could have a
material adverse effect on the Company's business, results of operations and
financial condition. A third party claiming infringement may also be able to
obtain an injunction or other equitable relief, which could effectively block
the ability of the Company or its customers to distribute, sell or import into
the United States allegedly infringing products. If it appears necessary or
desirable, the Company may seek licenses under patents or other rights from
third parties covering intellectual property that the Company is allegedly
infringing. No assurance can be given, however, that any such licenses could
be obtained on terms acceptable to the Company, if at all. The failure to
obtain the necessary licenses or other rights could have a material adverse
effect on the Company's business, financial condition and results of
operations.
 
 Risks Associated with Developing Technologies; Product Liability
 
  If wireless telecommunications systems or other systems or devices that rely
on or incorporate the Company's products are determined, perceived or alleged
to create a health risk, the Company could be named as a defendant, and held
liable, in product liability lawsuits commenced by individuals alleging that
the Company's products harmed them. The occurrence of any such event could
have a material adverse effect on the Company's business, results of
operations and financial condition. Any alleged health or environmental risk
could also lead to a delay or prohibition against the installation of wireless
networks which could have a material adverse effect on the Company's business,
results of operations and financial condition. In addition, an inability to
maintain insurance at an acceptable cost or to otherwise protect against
potential product liability could inhibit the commercialization of the
Company's products and have a material adverse effect on the Company's
business, results of operations and financial condition. Further, the
installation of base stations for wireless networks may be delayed or
prohibited by various environmental regulations. Any such delay or prohibition
would have a material adverse effect on the Company's business, results of
operations and financial condition.
 
 Environmental Regulations
 
  The Company is subject to a variety of local, state and federal government
regulations relating to the storage, discharge, handling, emission,
generation, manufacture and disposal of toxic or other hazardous substances
used to manufacture the Company's products. Certain of the Company's products
are also subject to regulation of emissions by the FCC and similar government
agencies. The Company believes that it is currently in compliance in all
material respects with such regulations and that it has obtained all necessary
environmental permits and licenses to conduct its business. The failure to
comply with current or future regulations could result in the imposition of
substantial fines on the Company, suspension of production, alteration of its
manufacturing
 
                                      37
<PAGE>
 
processes or cessation of operations. Corrective action may require the
Company to acquire expensive remediation equipment or to incur substantial
expenses. Any failure by the Company to control the use, disposal, removal or
storage of, or to adequately restrict the discharge of, or assist in the
cleanup up, hazardous or toxic substances, could subject the Company to
significant liabilities, including joint and several liability under certain
statutes. The imposition of such liabilities could materially adversely affect
the Company's business, results of operations and financial condition. In
addition, the installation of base stations by wireless service providers may
be delayed or restricted by various environmental regulations, land use
restrictions and zoning ordinances. Any such delay or restriction could have a
material adverse effect on the Company's business, results of operations and
financial condition.
 
 Government Regulation of Communications Industry
 
  Radio frequency transmissions and emissions, and certain equipment used in
connection therewith, are regulated in the United States, Canada and
internationally. Regulatory approvals generally must be obtained by the
Company in connection with the manufacture and sale of its products, and by
the Company's customers to operate the Company's products. The FCC has adopted
regulations that impose more stringent radio frequency emissions standards on
the communications industry and there can be no assurance that the Company and
its customers will not be required to alter the manner in which radio signals
are transmitted or otherwise alter the equipment transmitting such signals,
which could materially adversely affect the Company's products and markets.
The Company is also subject to regulatory requirements in international
markets where the Company is less prominent than local competitors and may
have fewer opportunities to participate in the formation of regulatory and
standards policies. The enactment by federal, state, local or international
governments of new laws or regulations or a change in the interpretation of
existing regulations could adversely affect the market for the Company's
products. Although recent liberalization of international communications
industries along with recent radio frequency spectrum allocations made by the
FCC have increased the potential demand for the Company's products by
providing users of those products with opportunities to establish new PCS
networks, there can be no assurance that the trend toward deregulation and
current regulatory developments favorable to the promotion of new and expanded
wireless services will continue or that other future regulatory changes will
have a positive impact on the Company. The increasing demand for wireless
communications has exerted pressure on regulatory bodies worldwide to adopt
new standards for such products, generally following extensive investigation
and deliberation over competing technologies. The delays inherent in this
governmental approval process have in the past caused, and may in the future
cause, the cancellation, postponement or rescheduling of the installation of
communications systems by the Company's customers. These delays could have a
material adverse effect on the Company's business, results of operations and
financial condition.
 
 Possible Volatility of Stock Price
 
  The Company's Common Stock has from time to time experienced significant
price and volume fluctuations. In additon, the stock market has from time to
time experienced significant price and volume fluctuations that are unrelated
to the operating performance of particular companies, and the market prices
for securities of technology companies have been especially volatile. These
broad market fluctuations have and may continue to adversely affect the market
price of the Company's Common Stock. Factors such as fluctuations in the
Company's results of operations, sales of a significant number of shares of
restricted securities, failure of such results of operations to meet the
expectations of stock market analysts and investors, changes in the economic
outlook of the markets into which the Company sells it products (such as South
Korea or Brazil), changes in stock market analyst recommendations regarding
the Company and or its competitors, the timing and announcements of
technological innovations or new products by the Company, or its competitors,
developments with respect to patents and proprietary rights, timing and
announcements of developments related to the Company's customers, results of
operations of certain of the Company's competitors, government regulation,
political or economic instability in countries in which the Company sells its
products, changes in the wireless communications industry generally and
general market conditions may have a significant adverse effect on the market
price of the Company's Common Stock.
 
                                      38
<PAGE>
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
  Index to Financial Statements/Schedule:
 
<TABLE>
<CAPTION>
Consolidated Financial Statements                                       Page(s)
---------------------------------                                       -------
<S>                                                                     <C>
Independent Auditors' Report...........................................    40
Consolidated Balance Sheets--January 3, 1999 and December 28, 1997.....    41
Consolidated Statements of Operations--Three years ended January 3,
 1999..................................................................    42
Consolidated Statements of Shareholders' Equity (Deficit)--Three years
 ended January 3, 1999.................................................    43
Consolidated Statements of Cash Flows--Three years ended January 3,
 1999..................................................................    44
Notes to Consolidated Financial Statements.............................    45
Financial Statement Schedule...........................................
Schedule--Valuation and Qualifying Accounts--Three years ended January
 3, 1999...............................................................    69
Exhibit 11.1--Computation of Net Income (Loss) per Share...............
</TABLE>
 
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
        DISCLOSURE
 
  Not Applicable.
 
                                       39
<PAGE>
 
                         INDEPENDENT AUDITORS' REPORT
 
To the Board of Directors and Shareholders of
Powerwave Technologies, Inc.:
 
  We have audited the accompanying consolidated balance sheets of Powerwave
Technologies, Inc. (the Company) as of January 3, 1999 and December 28, 1997,
and the related consolidated statements of operations, shareholders' equity
(deficit) and cash flows for each of the three years in the period ended
January 3, 1999. Our audits also included the financial statement schedule
listed in Item 8. These financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and financial statement
schedule based on our audits.
 
  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
  In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Powerwave Technologies, Inc.
as of January 3, 1999 and December 28, 1997, and the results of its operations
and its cash flows for each of the three years in the period ended January 3,
1999, in conformity with generally accepted accounting principles. Also, in
our opinion, such financial statement schedule, when considered in relation to
the financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
 
DELOITTE & TOUCHE LLP
 
Costa Mesa, California
January 19, 1999
 
                                      40
<PAGE>
 
                          POWERWAVE TECHNOLOGIES, INC.
 
                          CONSOLIDATED BALANCE SHEETS
                     (in thousands, except per share data)
 
<TABLE>
<CAPTION>
                                                        January 3, December 28,
                                                           1999        1997
                                                        ---------- ------------
<S>                                                     <C>        <C>
                        ASSETS
 
Current Assets:
  Cash and cash equivalents............................  $ 13,307    $ 67,433
  Accounts receivable, net of allowance for doubtful
   accounts of $1,270 and $769 at January 3, 1999 and
   December 28, 1997, respectively.....................    31,212      11,967
  Inventories, net.....................................    28,583       8,844
  Prepaid expenses and other current assets............     1,633       1,222
  Deferred tax assets..................................     3,303       3,083
                                                         --------    --------
    Total current assets...............................    78,038      92,549
 
Property and equipment.................................    26,286      11,020
Less accumulated depreciation and amortization.........    (5,838)     (2,643)
                                                         --------    --------
  Net property and equipment...........................    20,448       8,377
                                                         --------    --------
Assets held for sale, net..............................     8,122         --
Intangible assets, net.................................    17,916         --
Deferred tax assets....................................     4,254         --
Other non-current assets...............................     3,207         757
                                                         --------    --------
    Total assets.......................................  $131,985    $101,683
                                                         ========    ========
 
         LIABILITIES AND SHAREHOLDERS' EQUITY
 
Current Liabilities:
  Accounts payable.....................................  $ 18,667    $  9,607
  Accrued expenses and other liabilities...............    13,918      10,249
  Current portion of long-term debt....................     6,528         507
  Income taxes payable.................................     3,715       4,674
                                                         --------    --------
    Total current liabilities..........................    42,828      25,037
 
Deferred tax liabilities...............................       --          289
Long-term debt, net of current portion.................    17,621         659
Other non-current liabilities..........................       466         218
                                                         --------    --------
    Total liabilities..................................    60,915      26,203
                                                         --------    --------
 
Shareholders' Equity:
  Preferred Stock, $.0001 par value, 5,000 shares
   authorized and no shares outstanding................       --          --
  Common Stock, $.0001 par value, 40,000 shares
   authorized, 17,956 shares issued and 17,250 shares
   outstanding at January 3, 1999, and 17,774 shares
   issued and 17,264 shares outstanding at December 28,
   1997................................................    65,027      64,801
  Retained earnings....................................    28,729      31,695
  Less treasury stock at cost..........................   (22,686)    (21,016)
                                                         --------    --------
    Total shareholders' equity.........................    71,070      75,480
                                                         --------    --------
    Total liabilities and shareholders' equity.........  $131,985    $101,683
                                                         ========    ========
</TABLE>
 
   The accompanying notes are an integral part of these financial statements
 
                                       41
<PAGE>
 
                          POWERWAVE TECHNOLOGIES, INC.
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                        YEARS ENDED
                                            ------------------------------------
                                            JANUARY 3, DECEMBER 28, DECEMBER 29,
                                               1999        1997         1996
                                            ---------- ------------ ------------
<S>                                         <C>        <C>          <C>
Net sales..................................  $100,231    $119,709     $60,331
Cost of sales..............................    66,056      71,027      34,770
                                             --------    --------     -------
Gross profit...............................    34,175      48,682      25,561
 
Operating expenses:
  Sales and marketing......................     9,533       9,053       4,365
  Research and development.................    13,472      11,483       5,771
  General and administrative...............     5,771       4,889       2,990
  In-process research and development......    12,400         --          --
                                             --------    --------     -------
    Total operating expenses...............    41,176      25,425      13,126
                                             --------    --------     -------
Operating income (loss)....................    (7,001)     23,257      12,435
Other income, net..........................     2,330       2,601         483
                                             --------    --------     -------
Income (loss) before income taxes..........    (4,671)     25,858      12,918
Provision (benefit) for income taxes.......    (1,705)      9,667       5,296
                                             --------    --------     -------
Net income (loss)..........................  $ (2,966)   $ 16,191     $ 7,622
                                             ========    ========     =======
Basic earnings (loss) per share............  $  (0.17)   $   0.95     $  0.67
                                             ========    ========     =======
Diluted earnings (loss) per share..........  $  (0.17)   $   0.92     $  0.52
                                             ========    ========     =======
Basic weighted average common shares.......    17,178      16,958      11,460
                                             ========    ========     =======
Diluted weighted average common shares.....    17,178      17,436      14,606
                                             ========    ========     =======
</TABLE>
 
 
 
   The accompanying notes are an integral part of these financial statements.
 
                                       42
<PAGE>
 
                          POWERWAVE TECHNOLOGIES, INC.
 
           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
                                 (in thousands)
 
<TABLE>
<CAPTION>
                           Common Stock    Treasury Stock                   Total
                          ---------------  ----------------  Retained   Shareholders'
                          Shares  Amount   Shares   Amount   Earnings  Equity (Deficit)
                          ------  -------  ------  --------  --------  ----------------
<S>                       <C>     <C>      <C>     <C>       <C>       <C>
Balance at January 1,
 1996...................   8,886  $   471  5,064   $(12,231) $ 7,882       $(3,878)
Issuance of Common Stock
 related to the exercise
 of stock options.......     113      300    --         --       --            300
Issuance of Common Stock
 related to the IPO,
 net....................   1,800   18,301    --         --       --         18,301
Conversion of Preferred
 Stock to Common Stock..   5,064   14,498    --         --       --         14,498
Net income..............     --       --     --         --     7,622         7,622
                          ------  -------  -----   --------  -------       -------
Balance at December 29,
 1996...................  15,863   33,570  5,064    (12,231)  15,504        36,843
Issuance of Common Stock
 related to the exercise
 of stock options.......     510    1,639    --         --       --          1,639
Tax benefit related to
 stock option exercises.     --     4,459    --         --       --          4,459
Compensation expense
 related to stock option
 grants.................     --        39    --         --       --             39
Issuance of Common Stock
 related to the Employee
 Stock Purchase Plan....      41      400    --         --       --            400
Tax benefit related to
 the sale of shares
 purchased under the
 Employee Stock Purchase
 Plan...................     --       200    --         --       --            200
Exercise of over-
 allotment, related to
 the IPO, net...........     360    3,884    --         --       --          3,884
Issuance of Common Stock
 related to the
 secondary offering,
 net....................   1,000   20,610    --         --       --         20,610
Repurchases of Common
 Stock..................    (510)     --     510     (8,785)     --         (8,785)
Net income..............     --       --     --         --    16,191        16,191
                          ------  -------  -----   --------  -------       -------
Balance at December 28,
 1997...................  17,264  $64,801  5,574   $(21,016) $31,695       $75,480
Issuance of Common Stock
 related to the exercise
 of stock options.......     229     (728)   (70)     1,392      --            664
Tax benefit related to
 stock option exercises.     --       893    --         --       --            893
Compensation expense
 related to stock option
 grants.................     --        33    --         --       --             33
Issuance of Common Stock
 related to the Employee
 Stock Purchase Plan....      57      (27)   (34)       679      --            652
Tax benefit related to
 the sale of shares
 purchased under the
 Employee Stock Purchase
 Plan...................     --        55    --         --       --             55
Repurchases of Common
 Stock..................    (300)     --     300     (3,741)     --         (3,741)
Net loss................     --       --     --         --    (2,966)       (2,966)
                          ------  -------  -----   --------  -------       -------
Balance at January 3,
 1999...................  17,250  $65,027  5,770   $(22,686) $28,729       $71,070
                          ======  =======  =====   ========  =======       =======
</TABLE>
 
 
 
   The accompanying notes are an integral part of these financial statements.
 
                                       43
<PAGE>
 
                          POWERWAVE TECHNOLOGIES, INC.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
 
<TABLE>
<CAPTION>
                                                        Years Ended
                                            ------------------------------------
                                            January 3, December 28, December 29,
                                               1999        1997         1996
                                            ---------- ------------ ------------
<S>                                         <C>        <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net income (loss)........................   $ (2,966)   $16,191      $ 7,622
 Adjustments to reconcile net income
  (loss) to net cash provided by (used
  in) operating activities:
   Depreciation and amortization..........      4,106      1,683          657
   Write off of in-process research and
    development...........................     12,400        --           --
   Change in provision for doubtful
    accounts..............................        501        284          363
   Change in provision for inventory
    reserves..............................        (73)     1,117          609
   Deferred income taxes..................     (4,763)    (1,107)        (655)
   Compensation costs related to stock
    options...............................         33         39          --
 Changes in current assets and
  liabilities (net of effects of the
  acquisition):
   Accounts receivable....................    (19,746)    (8,926)        (584)
   Inventories............................     (3,163)    (5,253)        (593)
   Income tax refund receivable...........        --         --           610
   Prepaid expenses and other current
    assets................................       (411)      (894)        (313)
   Accounts payable.......................      9,060      6,018           81
   Accrued expenses and other liabilities.     (3,982)     6,370        1,798
   Income taxes payable...................        (11)     7,675        1,658
 Other non-current assets.................         50       (648)         (57)
 Other non-current liabilities............        248        218          --
                                             --------    -------      -------
     Net cash provided by (used in)
      operating activities................     (8,717)    22,767       11,196
CASH FLOWS FROM INVESTING ACTIVITIES:
 Purchase of property and equipment.......     (4,933)    (6,902)      (3,792)
 Cash paid for acquisition and related
  costs...................................    (58,534)       --           --
 Purchase of long-term investments........     (2,500)       --           --
                                             --------    -------      -------
     Net cash used in investing
      activities..........................    (65,967)    (6,902)      (3,792)
 
CASH FLOW FROM FINANCING ACTIVITIES:
 Proceeds from issuance of long-term
  debt....................................     25,000        --           --
 Principal payments on long-term debt.....     (2,017)      (413)        (134)
 Proceeds from sale of property and
  equipment...............................        --       1,847          704
 Decrease in amounts due to shareholders..        --         --           (50)
 Issuance of Common Stock.................        652     24,894       18,301
 Repurchase of Common Stock...............     (3,741)    (8,785)         --
 Proceeds from exercise of stock options..        664      1,639          300
                                             --------    -------      -------
     Net cash provided by financing
      activities..........................     20,558     19,182       19,121
                                             --------    -------      -------
NET INCREASE (DECREASE) IN CASH AND CASH
 EQUIVALENTS..............................    (54,126)    35,047       26,525
CASH AND CASH EQUIVALENTS, beginning......     67,433     32,386        5,861
                                             --------    -------      -------
CASH AND CASH EQUIVALENTS, end............   $ 13,307    $67,433      $32,386
                                             ========    =======      =======
 
SUPPLEMENTAL CASH FLOW INFORMATION:
 Cash paid for:
   Interest...............................   $    218    $   100      $    18
                                             ========    =======      =======
   Income taxes...........................   $  3,069    $ 3,100      $ 3,809
                                             ========    =======      =======
NON CASH ITEMS:
 Acquisition of property and equipment
  through capital lease...................   $    --     $   805      $   704
                                             ========    =======      =======
 Conversion of Preferred Stock to Common
  Stock...................................   $    --     $   --       $14,498
                                             ========    =======      =======
 Tax benefit related to stock option
  exercises...............................   $    893    $ 4,459      $   --
                                             ========    =======      =======
 Tax benefit related to sale of shares
  purchased under the Employee Stock
  Purchase Plan...........................   $     55    $   200      $   --
                                             ========    =======      =======
 
 
DETAIL OF HP BUSINESS ACQUIRED IN PURCHASE
 BUSINESS COMBINATION:
 Tangible assets acquired.................   $ 34,711
 Intangible assets acquired...............     31,133
 Cash paid for acquisition and related
  costs...................................    (58,534)
                                             --------
 Liabilities assumed......................   $  7,310
                                             ========
</TABLE>
 
 
   The accompanying notes are an integral part of these financial statements.
 
                                       44
<PAGE>
 
                         POWERWAVE TECHNOLOGIES, INC.
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                (in thousands, except share and per share data)
 
Note 1. Nature of Operations
 
  Powerwave Technologies, Inc. ("Powerwave" or the "Company") is a Delaware
corporation engaged in the design, manufacture and marketing of radio
frequency ("RF") power amplifiers and related equipment for use in the
wireless communications market. The Company manufactures both single and
multi-carrier RF power amplifiers for a variety of frequency ranges and a wide
range of digital and analog transmission protocols. The Company's products are
currently being utilized in both cellular and personal communication services
("PCS") base stations in both digital and analog-based networks. The Company
also produces RF power amplifiers for the wireless local loop ("WLL") and land
mobile radio ("LMR") markets.
 
Note 2. Summary of Significant Accounting Policies
 
 Basis of Presentation
 
  The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All intercompany accounts and transactions
have been eliminated in consolidation.
 
 Fiscal Year
 
  The Company's fiscal year ends on the Sunday closest to December 31. Fiscal
year 1996 ended on December 29, 1996, fiscal year 1997 ended on December 28,
1997 and fiscal year 1998 ended on January 3, 1999. Fiscal year 1999 will end
on January 2, 2000.
 
 Cash and Cash Equivalents
 
  Cash and cash equivalents generally consist of cash, time deposits,
commercial paper, money market funds and other money market instruments. The
Company invests its excess cash in only investment grade money market
instruments from a variety of industries and, therefore, bears minimal risk.
Securities with maturity dates all have original maturity dates of three
months or less. Such investments are stated at cost, which approximates fair
value.
 
 Accounts Receivable
 
  The Company performs ongoing credit evaluations of its customers and
generally does not require collateral. The Company maintains reserves for
potential credit losses and such losses have been within management's
expectations.
 
 Inventories
 
  Inventories are stated at the lower of cost, determined on a first-in,
first-out basis, or market. The Company periodically reviews inventory
quantities on hand and provides reserves for obsolete inventory based
primarily on current production requirements and forecasted product demand.
 
 Property and Equipment
 
  Property and equipment are stated at cost. The Company depreciates these
assets using the straight-line method over the estimated useful lives of the
various classes of assets, as follows:
 
<TABLE>
       <S>                                                         <C>
       Machinery and equipment.................................... 2 to 5 years
       Office furniture and equipment............................. 3 to 5 years
       Leasehold improvements..................................... Life of lease
       Property under capital leases.............................. 3 to 5 years
</TABLE>
 
                                      45
<PAGE>
 
                         POWERWAVE TECHNOLOGIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
 Assets Held for Sale
 
  Assets held for sale include the land, land improvements, building and
building improvements acquired in the HP Acquisition (Note 16), and are
recorded at net realizable value, net of estimated selling costs.
 
 Goodwill
 
  Goodwill arising from the HP Acquisition (Notes 5 and 16) is amortized over
ten years on a straight-line basis. The Company annually evaluates the
carrying value of goodwill for any impairment of value based on an
undiscounted cash flow analysis. At January 3, 1999, the Company believes
there has been no impairment of the value of goodwill.
 
 Other Intangible Assets
 
  Other intangible assets arising from the HP Acquisition (Notes 5 and 16) are
amortized on a straight-line basis over periods ranging from three to ten
years.
 
 Long-Lived Assets
 
  The Company accounts for the impairment and disposition of long-lived assets
in accordance with Statement of Financial Accounting Standard ("SFAS") No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. In accordance with SFAS No. 121, long-lived assets
to be held are reviewed for events or changes in circumstances which indicate
that their carrying value may not be recoverable. The Company periodically
reviews the carrying value of long-lived assets to determine whether or not an
impairment to such value has occurred based on an undiscounted cash flow
analysis. As of January 3, 1999, no such impairment was noted.
 
 Accounting for Stock-Based Compensation
 
  SFAS No. 123, Accounting for Stock-Based Compensation, requires disclosure
of the fair value method of accounting for stock options and other equity
instruments. Under the fair value method, compensation cost is measured at the
grant date based on the fair value of the award and is recognized over the
service period which is usually the vesting period. The Company has chosen,
under the provisions of SFAS No. 123, to continue to account for employee
stock-based transactions under Accounting Principles Board (APB) Opinion No.
25, Accounting for Stock Issued to Employees. The Company has disclosed in
Note 9 to the financial statements pro forma basic and diluted net (loss)
income and (loss) earnings per share as if the Company had applied this method
of accounting.
 
 Income Taxes
 
  The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes, which requires that the Company recognize
deferred tax liabilities and assets based on the differences between the
financial statement carrying amounts and the tax bases of assets and
liabilities, using enacted tax rates in effect in the years the differences
are expected to reverse. Deferred income tax benefits result from the
recognition of temporary differences between financial statement and income
tax reporting of income and expenses.
 
 Revenue Recognition
 
  The Company recognizes revenue from product sales at the time of shipment.
The Company also offers certain of its customers, on a limited basis, a right
of return on sales and records an estimate of such returns at the time of
product delivery based on historical experience.
 
                                      46
<PAGE>
 
                         POWERWAVE TECHNOLOGIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
 Warranties
 
  The Company offers warranties of various lengths depending on the product
and negotiated terms of purchase agreements with its customers. An estimate
for warranty related costs based on historical experience is recorded at the
time of sale.
 
 Stock Split
 
  In October 1996, the Company's Board of Directors approved a 3-for-2 stock
split of the Company's Common Stock effective October 8, 1996, and increased
the number of shares of authorized Common Stock to 40,000,000. All share and
per share information relating to Common Stock and conversion amounts relating
to Series A Convertible Preferred Stock ("Series A Preferred Stock") and stock
options included in the accompanying consolidated financial statements and
footnotes have been restated to reflect the stock split for all periods
presented.
 
 Earnings (Loss) Per Share and Pro Forma Earnings (Loss) Per Share
 
  In accordance with SFAS No. 128, Earnings per Share, basic earnings per
share and pro forma basic earnings per share amounts are based upon the
weighted average number of common shares outstanding and the pro forma
conversion of preferred stock into common stock up to the date of such
conversion. Diluted earnings per share and pro forma diluted earnings per
share amounts are based upon the weighted average number of common and
potential common shares for each period presented and the pro forma conversion
of preferred stock into common stock up to the date of such conversion.
Potential common shares include stock options using the treasury stock method.
Outstanding stock options are excluded from the calculation of diluted
earnings per share for the year ended January 3, 1999, as they are anti-
dilutive.
 
 Use of Estimates
 
  The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles necessarily 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.
 
 Supplier Concentrations
 
  Certain of the Company's products utilize components that are available in
the short-term only from a single or a limited number of sources. In addition,
in order to take advantage of volume pricing discounts, the Company purchases
certain customized components for its RF power amplifiers from single sources.
Any inability to obtain single sourced components in the amounts needed on a
timely basis or at commercially reasonable prices could result in delays in
product introductions or 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.
 
 New Accounting Pronouncements
 
  The Company has adopted SFAS No. 130, Reporting Comprehensive Income. For
the years ended January 3, 1999, December 28, 1997 and December 29, 1996, the
Company has no reportable differences between net income (loss) and
comprehensive income (loss). Therefore statements of comprehensive income
(loss) have not been presented.
 
                                      47
<PAGE>
 
                         POWERWAVE TECHNOLOGIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The Company has adopted SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information. In accordance with SFAS No. 131, the
Company has disclosed in Note 12 certain information about operating segments
and certain information about the Company's products, geographic areas to
which the Company sells its products, and major customers.
 
  In June 1998, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
which the Company is required to adopt effective in its fiscal year 2000. SFAS
No. 133 will require the Company to record all derivatives on the balance
sheet at fair value. The Company does not currently engage in hedging
activities and will continue to evaluate the effect of adopting SFAS No. 133.
The Company will adopt SFAS No. 133 in its fiscal year 2000.
 
NOTE 3. INVENTORIES
 
  Inventories, net consist of the following:
 
<TABLE>
<CAPTION>
                                                         JANUARY 3, DECEMBER 28,
                                                            1999        1997
                                                         ---------- ------------
     <S>                                                 <C>        <C>
     Parts and components...............................  $14,728      $3,167
     Work-in-process....................................    7,444       3,950
     Finished goods.....................................    6,411       1,727
                                                          -------      ------
     Total..............................................  $28,583      $8,844
                                                          =======      ======
</TABLE>
 
NOTE 4. NET PROPERTY AND EQUIPMENT
 
  Net property and equipment consist of the following:
 
<TABLE>
<CAPTION>
                                                         JANUARY 3, DECEMBER 28,
                                                            1999        1997
                                                         ---------- ------------
     <S>                                                 <C>        <C>
     Machinery and equipment............................  $20,105     $ 7,776
     Office furniture and equipment.....................    3,010       1,832
     Leasehold improvements.............................    2,437       1,313
     Construction in progress...........................      734          99
                                                          -------     -------
                                                           26,286      11,020
     Less accumulated depreciation and amortization.....   (5,838)     (2,643)
                                                          -------     -------
     Net property and equipment.........................  $20,448     $ 8,377
                                                          =======     =======
</TABLE>
 
  Included in property and equipment are assets under capital lease of $1,508
and $1,570 at January 3, 1999 and December 28, 1997, respectively. Accumulated
amortization of assets under capital lease was $627 and $371 at January 3,
1999 and December 28, 1997, respectively.
 
  In 1997 the Company entered into sale-leaseback transactions for certain
equipment. In 1997 the Company received proceeds of $1,831 for equipment that
it subsequently leased back under capital and operating leases. The amounts
leased back under capital and operating leases in 1997 were $805 and $1,026
respectively. No amounts were sold and leased back during 1998.
 
                                      48
<PAGE>
 
                         POWERWAVE TECHNOLOGIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
Note 5. Intangible Assets
 
  Intangible assets consist of the following:
 
<TABLE>
<CAPTION>
                                                                        January 3,
                                                                           1999
                                                                        ----------
     <S>                                                                <C>
     Developed technology, net of accumulated amortization of $543.....  $10,957
     Goodwill, net of accumulated amortization of $107.................    4,445
     Customer list, net of accumulated amortization of $157............    1,843
     Non-compete agreement, net of accumulated amortization of $24.....      476
     Workforce, net of accumulated amortization of $5..................      195
                                                                         -------
                                                                         $17,916
                                                                         =======
 
  Amortization periods are as follows (in years):
 
     Developed technology..............................................        5
     Goodwill..........................................................       10
     Customer list.....................................................        3
     Non-compete agreement.............................................        4
     Workforce.........................................................       10
</TABLE>
 
Note 6. Financing Arrangements
 
  On August 21, 1997, the Company entered into a $10.0 million unsecured
revolving credit agreement. The Company was required to pay a commitment fee
equal to .1% per annum on the average daily unused portion of the facility.
The commitment fee was payable quarterly in arrears. The Company never
borrowed any funds under this agreement. On July 28, 1998, the Company amended
the credit agreement to extend the termination date of the agreement from July
31, 1998 to September 30, 1998. The agreement was terminated on September 30,
1998.
 
  On September 30, 1998 in connection with the HP Acquisition, the Company
entered into a $35.0 million credit agreement secured by a pledge of all of
the Company's assets with two commercial banks. The credit agreement consists
of three credit facilities; an $18.0 million term loan (the "Term Loan"), a
$7.0 million purpose loan associated with the Folsom manufacturing and
research and development facility (the "Purpose Loan") and a $10.0 million
revolving credit agreement (the "Revolving Credit Facility"). The Company is
required to pay a commitment fee ranging from 0.25% to 0.50% per annum on the
average daily unused portion of the Revolving Credit Facility. The rate of the
commitment fee is based upon a debt leverage ratio for the Company. At January
3, 1999, the commitment fee rate was 0.375% per annum. The Commitment fee is
payable quarterly in arrears. Each of the credit facilities allows for
borrowings based either upon the bank's prime rate (7.75% at January 3, 1999)
plus a margin of 0% or 0.25% per annum, based upon a debt leverage ratio for
the Company, or the bank's LIBOR rate plus a margin of 1.50% to 2.25% per
annum, based upon a debt leverage ratio for the Company, all at the Company's
option. The credit agreement contains customary affirmative covenants covering
certain financial ratios, negative covenants including limitations on future
indebtedness, restricted payments, transactions with affiliates, liens,
restriction on payments of dividends without the banks' consent, mergers,
transfers of assets and conditions of borrowing.
 
  The Term Loan is a three-year loan with equal monthly principal repayments
of $0.5 million payable on the last business day of each month, with the final
principal payment due on September 30, 2001. At January 3, 1999, there was
$16.5 million outstanding under the Term Loan at a weighted average interest
rate of 7.12% per annum.
 
 
                                      49
<PAGE>
 
                         POWERWAVE TECHNOLOGIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The $7.0 million Purpose Loan is payable in full upon the earlier of (i)
January 5, 2000 or (ii) 10 days following the close of escrow for the sale of
the Company's Folsom manufacturing facility. At January 3, 1999, there was
$7.0 million outstanding under the Purpose Loan at an interest rate of 7.098%
per annum.
 
  As of January 3, 1999, no amounts have been drawn under the $10.0 million
Revolving Credit Facility. The Company was in compliance with all covenants
contained in the credit agreement at January 3, 1999, and the full $10.0
million of the Revolving Credit Facility, which is based on a percentage of
certain accounts receivable, was available to the Company.
 
  The debt repayment schedules for the Term Loan and Purpose Loan and
commitments under Capital Leases at January 3, 1999 are as follows:
 
<TABLE>
<CAPTION>
                                            Repayments     Commitments
                                          ---------------- -----------
                                           Term    Purpose   Capital
                                           Loan     Loan     Leases     Total
                                          -------  ------- ----------- -------
   <S>                                    <C>      <C>     <C>         <C>
   Fiscal Year:
     1999................................ $ 6,000  $  --      $ 566    $ 6,566
     2000................................   6,000   7,000       128     13,128
     2001................................   4,500     --        --       4,500
     2002................................     --      --        --         --
     2003................................     --      --        --         --
     Thereafter..........................     --      --        --         --
                                          -------  ------     -----    -------
   Total principal repayments............  16,500   7,000       694     24,194
   Less amounts representing interest....     --      --        (45)       (45)
                                          -------  ------     -----    -------
   Present value of future minimum
    payments.............................  16,500   7,000       649     24,149
                                          -------  ------     -----    -------
   Less current portion..................  (6,000)    --       (528)    (6,528)
                                          -------  ------     -----    -------
                                          $10,500  $7,000     $ 121    $17,621
                                          =======  ======     =====    =======
</TABLE>
 
Note 7. Income Taxes
 
  The provision (benefit) for income taxes for the fiscal years ended January
3, 1999, December 28, 1997 and December 29, 1996 consists of the following:
 
<TABLE>
<CAPTION>
                                                        1998     1997     1996
                                                       -------  -------  ------
   <S>                                                 <C>      <C>      <C>
   Current:
     Federal.......................................... $ 2,982  $ 8,865  $4,664
     State............................................      76    1,910   1,288
                                                       -------  -------  ------
     Total current provision..........................   3,058   10,775   5,952
   Deferred:
     Federal..........................................  (3,760)    (835)   (572)
     State............................................  (1,003)    (273)    (84)
                                                       -------  -------  ------
     Total deferred benefit...........................  (4,763)  (1,108)   (656)
                                                       -------  -------  ------
   Provision (benefit) for income taxes............... $(1,705) $ 9,667  $5,296
                                                       =======  =======  ======
</TABLE>
 
                                      50
<PAGE>
 
                         POWERWAVE TECHNOLOGIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
  The difference between income taxes provided in the financial statements and
as required by the federal statutory rate of 35% for the fiscal years ended
January 3, 1999, December 28, 1997 and December 29, 1996 is as follows:
 
<TABLE>
<CAPTION>
                                                         1998     1997    1996
                                                        -------  ------  ------
   <S>                                                  <C>      <C>     <C>
   Taxes at federal statutory rate..................... $(1,635) $9,051  $4,521
   State taxes, net....................................    (602)  1,064     783
   Other...............................................     532    (448)     (8)
                                                        -------  ------  ------
   Provision (benefit) for income taxes................ $(1,705) $9,667  $5,296
                                                        =======  ======  ======
</TABLE>
 
  The Company's net deferred tax asset was comprised of the following major
components:
 
<TABLE>
<CAPTION>
                                                         January 3, December 28,
                                                            1999        1997
                                                         ---------- ------------
   <S>                                                   <C>        <C>
   Depreciation of property.............................  $(1,094)     $ (289)
   Accruals and reserves................................    1,966       1,820
   Costs capitalized into inventories...................    1,540       1,147
   State taxes..........................................     (308)        116
   Amortization of intangibles..........................    5,453         --
                                                          -------      ------
   Net deferred tax asset...............................  $ 7,557      $2,794
                                                          =======      ======
</TABLE>
 
Note 8. Profit-Sharing and Pension Plans
 
  The Company sponsors a 401(k) profit-sharing plan covering all eligible
employees. There were no profit sharing contributions authorized for the year
ended January 3, 1999. For the years ended December 28, 1997 and December 29,
1996, profit sharing contributions were $870 and $595, respectively.
 
  The 401(k) pension plan provided for Company matching participant
contributions up to a maximum of 20% of each participant's annual contribution
for the year ended January 3, 1999. Employee contributions are limited to 15%
of base salary. Employer matching contributions for the years ended January 3,
1999, December 28, 1997 and December 29, 1996 were $157, $83 and $22,
respectively.
 
Note 9. Stock Option Plans
 
  1995 Stock Option Plan--The Company's 1995 Stock Option Plan (the "1995
Plan"), as amended, permits executive personnel, key employees and non-
employee members of the Board of Directors of the Company to participate in
ownership of the Company. The 1995 Plan is administered by the Compensation
Committee of the Company's Board of Directors. Each option agreement includes
a provision requiring the Optionee to consent to the terms of the agreement.
The 1995 Plan provides for the grant of nonstatutory stock options under the
applicable provisions of the Internal Revenue Code. The option price per share
may not be less than 85% of the fair market value of a share of Common Stock
on the grant date as determined by the Company's Board of Directors. In
addition, the exercise price may not be less than 110% of the fair market
value of a share of Common Stock on the grant date, as determined by the
Company's Board of Directors, for any individual possessing 10% or more of the
voting power of all classes of stock of the Company. Options generally vest at
the rate of 25% on the first anniversary date and 2% per month thereafter and
expire no later than ten years after the grant date. Up to 1,938,615 shares of
the Company's Common Stock were reserved for issuance under the 1995 Plan.
Under an agreement with the Company, certain shareholders have agreed that,
once the Company has issued an initial 1,095,000 shares of Common Stock under
the 1995 Stock Option Plan, any additional shares
 
                                      51
<PAGE>
 
                         POWERWAVE TECHNOLOGIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
issued under that Plan upon an option exercise will be coupled with a pro rata
redemption from those shareholders of an equal number of shares at a
redemption price equaling the option exercise price. The Company and those
certain shareholders have agreed that this share redemption agreement applies
only to the exercise of options to purchase a total of 843,615 shares of the
Company's Common Stock. As of January 3, 1999, 836,085 options have been
exercised under the 1995 Plan and there were 1,101,802 options outstanding
under the 1995 Plan at a weighted average exercise price of $5.07.
 
  1996 Stock Incentive Plan--The Company's 1996 Stock Incentive Plan (the
"1996 Plan"), became effective December 5, 1996, and was amended in August of
1998 to increase the number of shares of Common Stock available for issuance
under the plan from 1,500,000 to 3,000,000. The 1996 Plan also covers any
shares which are or become available for grant under the 1995 Plan. The 1996
Plan provides for the granting of "incentive stock options," within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), nonstatutory options and restricted stock grants to directors,
officers, employees and consultants of the Company, except that incentive
stock options may not be granted to non-employee directors or consultants. As
of January 3, 1999, all of the options granted under the 1996 Plan have been
nonstatutory options. The purpose of the 1996 Plan is to provide participants
with incentives which will encourage them to acquire a proprietary interest
in, and continue to provide services to, the Company. The 1996 Plan is
administered by the Compensation Committee of the Board of Directors, which
has sole discretion and authority, consistent with the provisions of the 1996
Plan, to determine which eligible participants will receive options, the time
when options will be granted, the terms of options granted and the number of
shares which will be subject to options granted under the 1996 Plan. As of
January 3, 1999, 15,312 options have been exercised under the 1996 Plan. There
were 1,503,300 options outstanding under the 1996 Plan as of January 3, 1999
at a weighted average exercise price of $12.58.
 
  1996 Director Stock Option Plan--The Company's 1996 Director Stock Option
Plan (the "Director Plan"), became effective December 5, 1996, and was amended
in August of 1998 to increase the number of shares of Common Stock available
for issuance under the plan from 200,000 to 400,000. The Director Plan
provides that each member of the Company's Board of Directors who is not an
employee or paid consultant of the Company automatically will be eligible to
receive options to purchase stock under the Director Plan. Pursuant to the
terms of the Director Plan, each director elected after December 5, 1996 will
be granted an initial option under the plan covering 30,000 shares of Common
Stock, which option shall vest at the rate of 25% on the first anniversary of
the grant date and the remaining 75% shall vest in equal monthly installments
over the following three years. Furthermore, on December 5, 1996 and on each
anniversary date thereof, each director who shall have been an eligible
participant under the Director Plan for at least six (6) months shall be
granted an annual option under the Director Plan to purchase 5,000 shares of
Common Stock. There were 110,000 options outstanding under the Director Plan
as of January 3, 1999 at a weighted average exercise price of $17.19.
 
  Employee Stock Purchase Plan--On October 7, 1996, the shareholders of the
Company approved the Employee Stock Purchase Plan (the "Purchase Plan"), which
became effective on December 5, 1996. The Purchase Plan covers an aggregate of
500,000 shares of Common Stock. The Purchase Plan, which is intended to
qualify as an "employee stock purchase plan" under Section 423 of the Internal
Revenue Code, is implemented utilizing six-month offerings with purchases
occurring at six month intervals. The Purchase Plan is administered by the
Board of Directors. Employees are eligible to participate if they are employed
by the Company for at least 20 hours per week and if they have been employed
by the Company for at least 90 days. The Purchase Plan permits eligible
employees to purchase Common Stock through payroll deductions, which may not
exceed 20% of an employee's compensation. The price of Common Stock purchased
under the Purchase Plan will be 85% of the lower of the fair market value of
the Common Stock at the beginning of each six-month offering period or on the
applicable purchase date. Employees may end their participation in any
offering at any time during the offering period, and participation ends
automatically on termination of employment. The Board
 
                                      52
<PAGE>
 
                         POWERWAVE TECHNOLOGIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
may at any time amend or terminate the Purchase Plan, except that no such
amendment or termination may adversely affect options previously granted under
the Purchase Plan. During fiscal 1998, the second and third purchases under
the Purchase Plan occurred on January 30, 1998 and July 31, 1998 respectively.
A total of 23,456 shares were purchased in the second purchase at $11.63 per
share and 33,944 shares were purchased in the third offering at $11.16 per
share. At January 3, 1999 there were rights to purchase approximately
30,000 shares outstanding under the Purchase Plan and there were 401,718
shares available for purchase under the plan.
 
  The following table summarizes activity under the Company's 1995 Plan, 1996
Plan and Director Plan:
 
<TABLE>
<CAPTION>
                                                               Number of Options
                                      Number of    Price Per   Exercisable as of
                                       Shares        Share      Fiscal Year End
                                      ---------  ------------- -----------------
<S>                                   <C>        <C>           <C>
Balance at December 29, 1996......... 1,919,252  $ 2.47-$11.50      262,490
                                                                    =======
  Granted............................   435,050  $14.50-$40.56
  Exercised..........................  (510,334) $ 2.47-$11.50
  Canceled...........................  (145,354) $ 2.47-$33.00
                                      ---------
Balance at December 28, 1997......... 1,698,614  $ 2.47-$40.56      436,256
                                                                    =======
  Granted............................ 1,724,050  $ 6.56-$19.56
  Exercised..........................  (228,563) $ 2.47-$16.25
  Canceled...........................  (478,999) $ 2.47-$40.56
                                      ---------
Balance at January 3, 1999........... 2,715,102  $ 2.47-$31.75      737,109
                                      =========                     =======
</TABLE>
 
  At January 3, 1999, 1,772,116 options were available for grant under all of
the Company's option plans.
 
 
<TABLE>
<CAPTION>
                            Options Outstanding At January 3, 1999
                          -------------------------------------------
                                                                                         Weighted
                                         Weighted    Weighted Average      Options       Average
                            Options      Average        Remaining        Exercisable     Exercise
Range of Exercise Prices  Outstanding Exercise Price Contractual Life at January 3, 1999  Price
------------------------  ----------- -------------- ---------------- ------------------ --------
                                                          (years)
<S>                       <C>         <C>            <C>              <C>                <C>
$ 2.47-$ 4.67...........     963,789      $ 3.66           7.23            604,481        $ 3.61
$ 6.56-$13.44...........     594,700      $ 8.97           9.14             36,164        $11.35
$13.75-$14.50...........     757,750      $13.83           9.15             33,513        $14.08
$14.56-$31.75...........     398,863      $17.67           8.07             62,951        $17.37
                           ---------                                       -------
  Total.................   2,715,102      $ 9.72           8.31            737,109        $ 5.64
                           =========                                       =======
</TABLE>
 
  The price at which options were granted during 1995 and 1996 prior to the
Company's IPO were based upon an independent appraisal of the value of the
Company. The Company is recording compensation expense of approximately $122
relating to the difference between estimated fair market value and the actual
value of 28,125 options granted in September 1996 over the vesting term of
such options. The first vesting of these options occurred during the third
quarter of fiscal 1997. The Company recorded a total of $33 and $39 as
compensation expense during fiscal 1998 and 1997, respectively. All options
granted after the Company's IPO are priced at an exercise price equal to the
market price of the Company's Common Stock on the date of grant.
 
  The weighted average fair value of options granted during 1998 was $8.03 per
share. The estimated weighted average fair value of options granted during
1997 was $13.81 per share and during 1996 was $2.44. Pursuant to SFAS No. 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 APB Opinion No. 25 and related Interpretations in accounting
for its stock option and purchase plans. Accordingly, no compensation cost has
been
 
                                      53
<PAGE>
 
                         POWERWAVE TECHNOLOGIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
recognized for its stock option plans and its stock purchase plan other than
that described above. Had compensation cost for the Company's stock option
plans and its stock purchase plans been determined based on the fair value at
the grant dates for awards under those plans consistent with the fair value
method of SFAS No. 123, the Company's net income (loss) and basic and diluted
earnings (loss) per share for the years ended January 3, 1999, December 28,
1997 and December 29, 1996 would have been reduced or increased to the pro
forma amounts indicated in the following table:
 
<TABLE>
<CAPTION>
                                                      1998     1997     1996
                                                     -------  -------  -------
   <S>                                               <C>      <C>      <C>
   Net income (loss) before taxes
     As reported.................................... $(4,671) $25,858  $12,918
   Less: Net expense per SFAS No. 123...............  (4,631)  (2,563)  (1,384)
                                                     -------  -------  -------
   Pro forma operating income (loss) before taxes...  (9,302)  23,295   11,534
   Less: Pro forma provision (benefit) for income
    taxes...........................................  (3,395)   8,709    4,729
                                                     -------  -------  -------
   Pro forma net income (loss) ..................... $(5,907) $14,586  $ 6,805
                                                     =======  =======  =======
   Net income (loss) as reported.................... $(2,966) $16,191  $ 7,622
                                                     =======  =======  =======
 
<CAPTION>
                                                      1998     1997     1996
                                                     -------  -------  -------
   <S>                                               <C>      <C>      <C>
   Basic earnings (loss) per share:
     As reported.................................... $ (0.17) $  0.95  $  0.67
     Pro forma...................................... $ (0.34) $  0.86  $  0.59
   Diluted earnings (loss) per share:
     As reported.................................... $ (0.17) $  0.92  $  0.52
     Pro forma...................................... $ (0.34) $  0.84  $  0.47
   Basic weighted average common shares.............  17,178   16,958   11,460
                                                     =======  =======  =======
   Diluted weighted average common shares...........  17,178   17,436   14,606
                                                     =======  =======  =======
</TABLE>
 
  The fair value of options granted under the Company's stock option plans
during 1998, 1997 and 1996 was estimated on the date of grant using the Black-
Scholes option-pricing model utilizing the multiple option approach with the
following weighted-average assumptions used:
 
<TABLE>
<CAPTION>
                                                               1998  1997  1996
                                                               ----  ----  ----
<S>                                                            <C>   <C>   <C>
Weighted average risk-free interest rates..................... 4.88% 5.52% 6.03%
Expected years from vest date to exercise date................  0.4   0.5   1.0
Expected stock volatility.....................................  100%   89%   83%
Dividend yield................................................ None  None  None
</TABLE>
 
                                      54
<PAGE>
 
                         POWERWAVE TECHNOLOGIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
Note 10. Commitments and Contingencies
 
  The Company leases its manufacturing and headquarters facility from a
limited liability company owned by three of the Company's shareholders. The
lease term commenced on July 15, 1996, and will continue for ten years. The
Company paid $1,000,000 to the limited liability company as payment for
additional tenant improvements made to the facility at the request of the
Company. The Company has an option to purchase the facility at fair market
value during the lease term. The Company also leases equipment from unrelated
parties. Future minimum lease payments required under operating leases at
January 3, 1999 are as follows:
 
<TABLE>
<CAPTION>
                                                 Commitment to Operating
                                                 shareholders   leases   Total
                                                 ------------- --------- ------
   <S>                                           <C>           <C>       <C>
   Fiscal Year:
     1999.......................................    $  736      $1,019   $1,755
     2000.......................................       758         132      890
     2001.......................................       781           7      788
     2002.......................................       804         --       804
     2003.......................................       829         --       829
     Thereafter.................................     2,216         --     2,216
                                                    ------      ------   ------
   Total future minimum lease payments..........    $6,124      $1,158   $7,282
                                                    ======      ======   ======
</TABLE>
 
  Total rent expense was $2,616, $2,503 and $2,109 for the years ended January
3, 1999, December 28, 1997 and December 29, 1996, respectively.
 
  The Company is subject, from time to time, to various legal proceedings
relating to claims arising out of its operations in the ordinary course of its
business. On July 16, 1998, a lawsuit was filed in the United States District
Court for the Central District of California, Southern Division, by a
shareholder of the Company, against the Company and certain of its present and
former directors and officers. A similar suit was filed on July 29, 1998. The
shareholder in each suit purports to represent a class consisting of all
persons who purchased Common Stock of the Company between June 4, 1997 and
January 16, 1998. These lawsuits allege, among other things, that the
defendants violated federal securities laws by making alleged
misrepresentations which the plaintiffs claim were designed to artificially
inflate the Company's stock price and enable the individual defendants to sell
their stock at artificially inflated prices. The Company, its directors and
officers deny the allegations of wrong doing in the complaints and intend to
vigorously defend against the claims made in the lawsuits. The ultimate
outcome of these suits or any potential loss is not presently determinable.
 
  The Company is not currently a party to any other legal proceedings, the
adverse outcome of which, individually or in the aggregate, management
believes would have a material adverse effect on the business, financial
condition or results of operations of the Company.
 
                                      55
<PAGE>
 
                         POWERWAVE TECHNOLOGIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
Note 11. Earnings (Loss) Per Share
 
<TABLE>
<CAPTION>
                                                   1998     1997    1996
                                                  -------  ------- ------
   <S>                                            <C>      <C>     <C>
   Basic:
     Basic weighted average common shares........  17,178   16,958 11,460
     Net income (loss)............................$(2,966).$16,191 $7,622
                                                  -------  ------- ------
     Basic earnings (loss) per share............. $ (0.17) $  0.95 $ 0.67
                                                  =======  ======= ======
   Diluted:
     Basic weighted average common shares........  17,178   16,958 11,460
     Potential common shares.....................     --       478  3,146
                                                  -------  ------- ------
     Diluted weighted average common shares......  17,178   17,436 14,606
     Net income (loss)........................... $(2,966) $16,191 $7,622
                                                  -------  ------- ------
     Diluted earnings (loss) per share........... $ (0.17) $  0.92 $ 0.52
                                                  =======  ======= ======
</TABLE>
 
Note 12. Segments
 
  Utilizing the management approach, the Company has broken down its business
based upon the RF frequency in which the product is utilized in, i.e.,
cellular, PCS, LMR and WLL and other (note that for 1996 other includes sales
of air/ground RF power amplifiers). The Company does not allocate operating
expenses to these segments, nor does it allocate specific assets to these
segments. Therefore, segment information reported includes only net sales,
cost of sales and gross profit (loss).
 
<TABLE>
<CAPTION>
                                                 Business Segments
                                      -------------------------------------------
                                                                WLL and
                                      Cellular   PCS     LMR     Other    Total
                                      -------- -------  ------  -------  --------
<S>                                   <C>      <C>      <C>     <C>      <C>
1998
Net sales............................ $77,355  $18,835  $3,071  $  970   $100,231
Cost of sales........................  45,543   15,885   3,786     842     66,056
                                      -------  -------  ------  ------   --------
Gross profit (loss).................. $31,812  $ 2,950  $ (715) $  128   $ 34,175
                                      =======  =======  ======  ======   ========
1997
Net sales............................ $73,065  $40,385  $6,227  $   32   $119,709
Cost of sales........................  36,746   29,639   4,481     161     71,027
                                      -------  -------  ------  ------   --------
Gross profit (loss).................. $36,319  $10,746  $1,746  $ (129)  $ 48,682
                                      =======  =======  ======  ======   ========
1996
Net sales............................ $47,961  $   663  $6,543  $5,164   $ 60,331
Cost of sales........................  26,576      819   4,371   3,004     34,770
                                      -------  -------  ------  ------   --------
Gross profit (loss).................. $21,385  $  (156) $2,172  $2,160   $ 25,561
                                      =======  =======  ======  ======   ========
</TABLE>
 
  The following schedule presents an analysis of the Company's net sales based
upon the country to which a product was shipped. North American sales include
sales to the United States, Canada and Mexico. International sales include
sales to all other foreign countries.
 
                                      56
<PAGE>
 
                         POWERWAVE TECHNOLOGIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
<TABLE>
<CAPTION>
                                                  North
                                                 American International  Total
                                                 -------- ------------- --------
   <S>                                           <C>      <C>           <C>
   Sales for the year ended January 3, 1999..... $59,012    $ 41,219    $100,231
   Sales for the year ended December 28, 1997... $18,708    $101,001    $119,709
   Sales for the year ended December 29, 1996... $13,739    $ 46,592    $ 60,331
</TABLE>
 
  For the fiscal years ended January 3, 1999, December 28, 1997 and December
29, 1996, sales to the Company's South Korean customers accounted for $30.1
million, $99.3 million and $45.8 million, respectively.
 
  The Company's product sales have historically been concentrated in a small
number of customers. During the years ended January 3, 1999, December 28, 1997
and December 29, 1996 sales to four customers (three customers for year ended
December 28, 1997) totaled $68.7 million, $99.3 million and $50.3 million,
respectively.
 
Note 13. Royalty Agreement
 
  The Company has a royalty agreement related to the sale of air-to-ground RF
power amplifiers which requires payment of a 10% commission on certain
licensed products. The Company had no sales of the licensed product during
fiscal 1998 or 1997. Therefore, the Company did not have any royalty
commitments beyond December 1996. Total royalty expense was $284 for the year
December 29, 1996. For the year ended December 29, 1996, sales of the related
product represented 5% of net sales.
 
Note 14. Other Information
 
  Accrued expenses and other liabilities consist of the following:
 
<TABLE>
<CAPTION>
                                                        January 3, December 28,
                                                           1999        1997
                                                        ---------- ------------
   <S>                                                  <C>        <C>
   Accrued warranty costs..............................  $ 6,408     $ 1,741
   Accrued sales returns...............................      345         359
   Accrued payroll and employee benefits...............    1,570       2,624
   Other accrued expenses..............................    5,595       3,661
   Amounts due for settlement of Common Stock
    repurchases........................................      --        1,864
                                                         -------     -------
                                                         $13,918     $10,249
                                                         =======     =======
</TABLE>
 
Note 15. Related Party Transactions
 
  As disclosed in Note 10, the Company leases its manufacturing and office
facility from certain of the Company's shareholders. Rent paid to the
shareholders was $714, $704 and $365 for the years ended January 3, 1999,
December 28, 1997 and December 29, 1996, respectively.
 
  A member of the Board of Directors of the Company is Executive Vice
President and Director of ComSpace Corporation, formerly known as Unique
Technologies International, L.L.C., an affiliate of Unique Wireless
Developments, L.L.C. The former Chairman (now Chairman Emeritus) of the
Company is also a member of the Board of Directors of ComSpace Corporation.
During fiscal 1997 and 1996 ComSpace Corporation was a customer of the Company
and purchased products from the Company on terms which management believes
were no less favorable to the Company than could otherwise be obtained from
unaffiliated third parties. Sales to ComSpace Corporation were $0 in fiscal
1998, and less than $35 per year in fiscal 1997 and 1996.
 
                                      57
<PAGE>
 
                         POWERWAVE TECHNOLOGIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
  On April 28, 1998 the Company purchased $2.5 million of 13.75% Senior
Secured Bridge Notes due April 28, 2000 ("The Notes") from Metawave
Communications Corporation in a private offering. The total amount raised in
the offering was $29.0 million. The Notes initially accrue interest at a rate
of 13.75% per annum and interest is payable semi-annually. The Notes contain
provisions to increase the rate of interest during the life of the Notes if
the Notes are not repaid prior to maturity. The Notes are secured by certain
assets of Metawave Communications Corporation and mature on April 28, 2000.
The interest rate on the notes at January 3, 1999 was 13.75% per annum. These
notes and accrued interest receivable are included in other non-current assets
in the accompanying consolidated financial statements. For 1998, Metawave
Communications Corporation accounted for approximately 8% of the Company's
revenues. The President of the Company joined the Board of Directors of
Metawave Communications Corporation with the Company's purchase of the Notes.
 
Note 16. The HP Acquisition
 
  On August 31, 1998, the Company signed a definitive agreement to acquire
Hewlett-Packard Company's ("HP") RF power amplifier business and its
manufacturing and research and development facility in Folsom, California for
approximately $59 million (the "HP Acquisition"). This business was part of
HP's Wireless Infrastructure Division and focused on the design and
manufacture of RF power amplifiers for wireless communications, including
cellular, PCS and WLL. The HP Acquisition included certain assets,
liabilities, operations and business related to the design, manufacture and
marketing of RF power amplifiers for use in wireless communications. Powerwave
purchased all intellectual property rights to the products as well as
in-process research and development activities. The Company also assumed
certain existing orders for the products acquired. The products acquired cover
a broad range of wireless transmission protocols, including CDMA, TDMA and
GSM. Powerwave completed the purchase on October 9, 1998 for a total purchase
price of approximately $65.9 million, of which approximately $57.4 million was
paid to HP in cash and the balance related to acquisition costs and assumed
liabilities. Powerwave financed the acquisition utilizing borrowings of $25
million under a new $35 million secured credit facility which was dated as of
September 30, 1998. The Company utilized its existing cash balances for the
remainder of the cash purchase price paid. This acquisition was accounted for
in the fourth quarter of fiscal 1998.
 
  The HP Acquisition was accounted for as a purchase and, accordingly, the
total purchase price was allocated to the assets acquired and liabilities
assumed at their estimated fair values in accordance with Accounting
Principles Board Opinion No. 16. The purchase price was allocated to tangible
assets acquired of approximately $34.7 million, developed technology of $11.5
million, in-process research and development of $12.4 million, other
intangible assets of $2.7 million and goodwill of approximately $4.6 million.
The Company's financial statements for the year ended January 3, 1999 include
a charge of $12.4 million for the write-off of acquired in-process research
and development expenses associated with the HP Acquisition. The in-process
research and development expenses arose from new product projects that were
under development at the date of the acquisition and expected to eventually
lead to new products but had not yet established technological feasibility and
for which no future alternative use was identified. The valuation of the in-
process research and development projects was based upon the discounted
expected future net cash flows of the products over the products expected
life, reflecting the estimated stage of completion of the projects and the
estimate of the costs to complete the projects.
 
  New product development projects underway at HP at the time of the
acquisition included, among others, single carrier CDMA technology, ultra-
linear technology for use in multi-carrier RF power amplifiers and very linear
power module technology for use in next generation wireless communications.
The Company estimated that these projects were approximately 75% complete at
the date of the acquisition and estimated that the cost to complete these
projects will aggregate approximately $2.5 million and will be incurred over a
two year period. The Company incurred approximately $0.2 million of research
and development expenses during the
 
                                      58
<PAGE>
 
                         POWERWAVE TECHNOLOGIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
fourth quarter of 1998 related to these projects, which was less than
originally planned, due to personnel constraints. However, the activity
related to these projects is expected to increase over the next several
quarters.
 
  Uncertainties that could impede the progress of converting a development
project to a developed technology include the availability of financial
resources to complete the project, failure of the technology to function
properly, continued economic feasibility of developed technologies, customer
acceptance, customer demand and customer qualification of such new technology,
and general competitive conditions in the industry. There can be no assurance
that the in-process research and development projects will be successfully
completed and commercially introduced.
 
  As part of the HP Acquisition, the Company assumed certain specific
liabilities from HP related to the acquired business, including certain
warranty obligations. During the fourth quarter of 1998, the Company incurred
approximately $0.2 million of warranty expenses which were offset against
specific liabilities assumed in the acquisition. Also, the Company assumed
certain specific liabilities related to the acquired business, including
certain retention bonuses for contracted HP employees. During the fourth
quarter of 1998, the Company paid insignificant amounts for these retention
bonuses which were offset against specific liabilities assumed in the
acquisition. These retention bonuses will be paid over the period of the
Folsom manufacturing facility closure, which is expected to be completed in
the second half of 1999.
 
  As part of the purchase price allocation, the Company recorded liabilities
related to moving and relocation costs associated with the planned closure of
the Folsom manufacturing facility. During the fourth quarter of 1998, the
Company paid insignificant amounts related to these moving and relocation
costs. The Company currently expects to complete the closure of the Folsom
manufacturing facility in the second half of 1999.
 
  The Company's financial statements for the year ended January 3, 1999
reflect the one-time charge of $12.4 million related to the allocation of a
portion of the purchase price to in-process research and development expenses
associated with the HP Acquisition. The Company's financial statements for the
year ended January 3, 1999 reflect the purchase price allocation as follows:
 
<TABLE>
<CAPTION>
                                                                  Purchase Price
                                                                    Allocation
                                                                  --------------
     <S>                                                          <C>
     Purchase Price Allocation
       Property, plant and equipment.............................    $18,211
       Inventory.................................................     16,500
       In-process research and development.......................     12,400
       Developed technology......................................     11,500
       Customer list.............................................      2,000
       Non-compete agreement.....................................        500
       Workforce.................................................        200
       Goodwill..................................................      4,553
                                                                     -------
                                                                     $65,864
                                                                     =======
</TABLE>
 
                                      59
<PAGE>
 
                         POWERWAVE TECHNOLOGIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
  The following unaudited proforma condensed consolidated results of
operations assumes that the HP Acquisition had occurred on the first day of
the Company's fiscal year ended December 28, 1997. The proforma condensed
consolidated results of operations is presented for information purposes only.
It is based on historical information and does not necessarily reflect the
actual results that would have occurred nor is it necessarily indicative of
future results of operations of the combined enterprise.
 
<TABLE>
<CAPTION>
                                                               Years ended
                                                         -----------------------
                                                         January 3, December 28,
                                                            1999        1997
                                                         ---------- ------------
                                                          (in thousands, except
                                                           per share amounts)
     <S>                                                 <C>        <C>
     Net sales..........................................  $165,324    $186,909
     Net income (loss)..................................    (8,793)     11,852
     Earnings (loss) per share
       Basic............................................      (.51)        .70
       Diluted..........................................      (.51)        .68
</TABLE>
 
Note 17. Selected Quarterly Financial Data (Unaudited)
 
<TABLE>
<CAPTION>
                                                  Quarters Ended
                                    -------------------------------------------
                                    March 29, June 28, September 27, January 3,
                                      1998      1998       1998         1999
                                    --------- -------- ------------- ----------
                                     (in thousands, except per share amounts)
<S>                                 <C>       <C>      <C>           <C>
Fiscal 1998:
  Net sales........................  $22,650  $21,099     $16,456     $ 40,026
  Cost of sales....................   13,795   12,567      10,697       28,997
                                     -------  -------     -------     --------
  Gross profit.....................    8,855    8,532       5,759       11,029
  Operating expenses:
    Sales and marketing............    2,031    2,164       2,147        3,191
    Research and development.......    2,957    2,950       2,938        4,627
    General and administrative.....    1,236    1,204       1,329        2,002
    In-process research and
     development...................      --       --          --        12,400
                                     -------  -------     -------     --------
  Total operating expenses.........    6,224    6,318       6,414       22,220
                                     -------  -------     -------     --------
  Operating income (loss)..........    2,631    2,214        (655)     (11,191)
  Other income (loss)..............      845      745         845         (105)
                                     -------  -------     -------     --------
  Income (loss) before income
   taxes...........................    3,476    2,959         190      (11,296)
  Provision (benefit) for income
   taxes...........................    1,269    1,080          69       (4,123)
                                     -------  -------     -------     --------
  Net income (loss)................  $ 2,207  $ 1,879     $   121     $ (7,173)
                                     =======  =======     =======     ========
  Basic earnings (loss) per share..  $   .13  $   .11     $   .01     $   (.42)
  Diluted Earnings (loss) per
   share...........................  $   .13  $   .11     $   .01     $   (.42)
  Basic weighted average common
   shares..........................   17,136   17,140      17,188       17,248
  Diluted weighted average common
   shares..........................   17,353   17,466      17,347       17,248
</TABLE>
 
                                      60
<PAGE>
 
                          POWERWAVE TECHNOLOGIES, INC.
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
 
 
<TABLE>
<CAPTION>
                                                 Quarters Ended
                                  ---------------------------------------------
                                  March 30, June 29, September 28, December 28,
                                    1997      1997       1997          1997
                                  --------- -------- ------------- ------------
                                    (in thousands, except per share amounts)
<S>                               <C>       <C>      <C>           <C>
Fiscal 1997:
  Net sales......................  $20,243  $27,360     $34,349      $37,757
  Cost of sales..................   11,528   16,857      20,565       22,077
                                   -------  -------     -------      -------
  Gross profit...................    8,715   10,503      13,784       15,680
  Operating expenses:
    Sales and marketing..........    1,581    2,141       2,341        2,990
    Research and development.....    2,211    2,385       3,342        3,545
    General and administrative...      943    1,019       1,361        1,566
                                   -------  -------     -------      -------
  Total operating expenses.......    4,735    5,545       7,044        8,101
                                   -------  -------     -------      -------
  Operating income...............    3,980    4,958       6,740        7,579
  Other income...................      473      571         720          837
                                   -------  -------     -------      -------
  Income before income taxes.....    4,453    5,529       7,460        8,416
  Provision for income taxes.....    1,692    2,101       2,760        3,114
                                   -------  -------     -------      -------
  Net income.....................  $ 2,761  $ 3,428     $ 4,700      $ 5,302
                                   =======  =======     =======      =======
  Basic earnings per share.......  $   .17  $   .21     $   .27      $   .30
  Diluted earnings per share.....  $   .17  $   .20     $   .26      $   .29
  Basic weighted average common
   shares........................   16,219   16,275      17,649       17,690
  Diluted weighted average common
   shares........................   16,728   16,856      18,072       18,039
</TABLE>
 
                                       61
<PAGE>
 
                                   PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
Directors
 
  John L. Clendenin, 65, has been non-executive Chairman of the Company's
Board of Directors since January 3, 1999 and has been a member of the Board of
Directors since May 1998. Mr. Clendenin is a Chairman Emeritus of BellSouth
Corporation, a telecommunications holding company. He served as Chairman of
the Board of BellSouth until December 31, 1997 and as President and Chief
Executive Officer from 1984 until his retirement at the end of 1996. Prior to
BellSouth, Mr. Clendenin was President of Southern Bell from April 1981 to
December 1983. He also serves on the Board of Directors of Coca-Cola
Enterprises, Inc., Equifax Inc., National Service Industries, Inc., RJR
Nabisco Holdings Corp., The Kroger Company, Springs Industries, Inc., The Home
Depot, Inc. and Wachovia Corporation.
 
  Bruce C. Edwards, 45, joined the Company in February 1996 as President and
Chief Executive Officer and Director. Mr. Edwards was Executive Vice
President, Chief Financial Officer and Director of AST Research, Inc., a
personal computer company, from July 1994 to December 1995 and Senior Vice
President, Finance and Chief Financial Officer of AST Research, Inc. from
March 1988 to July 1994. Mr. Edwards currently serves on the Board of
Directors of Diamond Multimedia Systems, Inc., HMT Technology Corporation and
Metawave Communications Corporation.
 
  Gregory M. Avis, 40, has been a member of the Company's Board of Directors
since October 1995. Mr. Avis has been a managing partner of Summit Partners, a
venture capital investment firm, since January 1990. Mr. Avis also serves on
the Board of Directors of Extended Systems, Inc. and Splash Technology
Holdings, Inc.
 
  Alfonso G. Cordero, 58, one of the founders of the Company, has served as a
director since the Company's inception. From June 1985 to January 1996, Mr.
Cordero served as Chief Executive Officer of the Company and from January 1996
to January 1999 served as Chairman of the Company. Mr. Cordero is currently
Chairman Emeritus of the Company and continues as a non-employee director of
the Company. Mr. Cordero also serves on the Board of Directors of ComSpace
Corporation, formerly known as Unique Technologies, International, L.L.C.
 
  David L. George, 45, has been a member of the Company's Board of Directors
since November 1995. Mr. George has served as Executive Vice President and
Chief Technical Officer of ComSpace Corporation, formerly known as Unique
Technologies, International, L.L.C., an LMR network company, since February
1994. Mr. George also serves on the Board of Directors of ComSpace
Corporation. From November 1983 to February 1994, Mr. George served as Vice
President, Director of Operations, Commercial Division of Uniden America.
 
  Eugene L. Goda, 63, has been a member of the Company's Board of Directors
since November 1995. Since June 1997, Mr. Goda has served as Chairman of the
Board, President and Chief Executive Officer of Objectshare Inc., formerly
known as Park Place Digitalk, a software company. From October 1991 to October
1995, Mr. Goda served as Chief Executive Officer of Simulation Sciences, Inc.,
a software company. From July 1989 to September 1991, he served as Chief
Executive Officer of Meridian Software Systems.
 
  Andrew J. Sukawaty, 43, has been a member of the Company's Board of
Directors since May 1998. Mr. Sukawaty has served as Chief Executive Officer
of Sprint PCS since September 1996. Prior to joining Sprint PCS, Mr. Sukawaty
was Chief Executive Officer of NTL Limited, a British diversified broadcast
transmission and communications company, since 1994. From 1989 to 1994, he was
Chief Operating Officer of Mercury One-2-One, a PCS service provider in the
United Kingdom. Prior to 1989, Mr. Sukawaty held various positions with US
WEST, Inc., a telecommunications holding company.
 
 
                                      62
<PAGE>
 
Executive Officers
 
  Stephen C. Cooper, 50, joined the Company in February 1999 as Executive Vice
President, Operations. Prior to joining the Company, Mr. Cooper worked for
Hewlett Packard Company for the past 25 years in a variety of management
positions in the United States and Asia. Most recently, Mr. Cooper was the
Operations Manager for the Hewlett Packard Power Amplifier business in Folsom,
California which was acquired by Powerwave in October, 1998.
 
  Kevin T. Michaels, 40, joined the Company in June 1996 as Vice President,
Finance and Chief Financial Officer and was appointed Secretary in June 1996.
Prior to joining the Company, Mr. Michaels worked for AST Research, Inc. for
eight years, most recently as Vice President, Treasurer from October 1995 to
June 1996. From July 1991 to October 1995 Mr. Michaels was Treasurer of AST
Research, Inc. and from June 1988 to June 1991, he was Assistant Treasurer.
 
  Anthony J. Zuanich, 55, joined the Company in June 1998 as Senior Vice
President, Sales and Marketing. Prior to joining the Company, Mr. Zuanich was
employed at Gregory Associates as Senior Vice President, Global Sales and
Marketing from July 1995 to December 1997. From December 1973 to October 1994,
Mr. Zuanich held various executive positions with Triad Systems Corporation,
an integrated computer systems manufacturer.
 
ITEM 11. EXECUTIVE COMPENSATION
 
  There is incorporated herein by reference the information required by this
Item included in the Company's Proxy Statement for the 1998 Annual Meeting of
Shareholders under the captions "Executive Compensation," "Compensation
Committee Interlocks and Insider Participation" and "Stock Performance Graph,"
which will be filed with the Securities and Exchange Commission no later than
120 days after the close of the fiscal year ended January 3, 1999.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
  There is incorporated herein by reference the information required by this
Item included in the Company's Proxy Statement for the 1998 Annual Meeting of
Shareholders under the caption "Security Ownership of Beneficial Owners,"
which will be filed with the Securities and Exchange Commission no later than
120 days after the close of the fiscal year ended January 3, 1999.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
  There is incorporated herein by reference the information required by this
Item included in the Company's Proxy Statement for the 1998 Annual Meeting of
Shareholders under the caption "Compensation Committee Interlocks and Insider
Participation" which will be filed with the Securities and Exchange Commission
no later than 120 days after the close of the fiscal year ended January 3,
1999.
 
                                      63
<PAGE>
 
                                    PART IV
 
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
 
  (a) Documents filed as a part of this report:
 
      (1) Index to Financial Statements
 
          The financial statements included in Part II, Item 8 of this document
          are filed as part of this Report.
 
      (2) Financial Statement Schedules
 
          The financial statement schedule included in Part II, Item 8 of this
          document is filed as part of this Report.
 
          All other schedules are omitted as the required information is
          inapplicable or the information is presented in the consolidated
          financial statements or related notes.
 
<TABLE>
<CAPTION>
 Exhibit
 Number                                Description
 -------                               -----------
 <C>     <S>
  2.1    Amended and Restated Asset Purchase Agreement with Hewlett-Packard
         Company, dated as of October 9, 1998 (incorporated by reference to
         Exhibit 2.1 to the Company's Form 8-K as filed with the Securities and
         Exchange Commission on October 26, 1998)

  2.2    Purchase and Sale Agreement and Joint Escrow Instructions with
         Hewlett-Packard Company, dated as of August 31, 1998. (incorporated by
         reference to Exhibit 2.2to the Company's Form 8-K as filed with the
         Securities and Exchange Commission on October 26, 1998)

  3.2    Form of Amended and Restated Certificate of Incorporation of the
         Company (incorporated by reference to Exhibit 3.2 to the Company's
         Registration Statement on Form-S-1 (File No. 333-13679) as filed with
         the Securities and Exchange Commission on December 3, 1996).

  3.4    Form of Amended and Restated Bylaws of the Company (incorporated by
         reference to Exhibit 3.4 to the Company's Registration Statement on
         Form-S-1 (File No. 333-13679) as filed with the Securities and
         Exchange Commission on December 3, 1996).

  4.1    Stockholders' Agreement, dated October 10, 1995, among the Company and
         certain shareholders (incorporated by reference to Exhibit 4.1 to the
         Company's Registration Statement on Form-S-1 (File No. 333-13679) as
         filed with the Securities and Exchange Commission on October 8, 1996).

  4.2    Amendment to Stockholders Agreement (incorporated by reference to
         Exhibit 4.2 to the Company's Registration Statement on Form-S-1 (File
         No. 333-13679) as filed with the Securities and Exchange Commission on
         October 8, 1996).

 10.1    Milcom International, Inc. 1995 Stock Option Plan (the "1995 Plan")
         (incorporated by reference to Exhibit 10.1 to the Company's
         Registration Statement on Form-S-1 (File No. 333-13679) as filed with
         the Securities and Exchange Commission on October 8, 1996).*

 10.2    Form of Stock Option Agreement for 1995 Plan (incorporated by
         reference to Exhibit 10.2 to the Company's Registration Statement on
         Form-S-1 (File No. 333-13679) as filed with the Securities and
         Exchange Commission on October 8, 1996).*

 10.3    Amendment No. 1 to 1995 Stock Option Plan (incorporated by reference
         to Exhibit 10.3 to the Company's Registration Statement on Form-S-1
         (File No. 333-13679) as filed with the Securities and Exchange
         Commission on October 8, 1996).*

 10.3.1  Amendment No. 2 to Plan (incorporated by reference to Exhibit 10.3.1
         to the Company's Registration Statement on Form-S-1 (File No. 333-
         28463) as filed with the Securities and Exchange Commission on June 4,
         1997)

 10.4    Powerwave Technologies, Inc. 1996 Stock Incentive Plan (the "1996
         Plan") (incorporated by reference to Exhibit 10.4 to the Company's
         Registration Statement on Form-S-1 (File No. 333-13679) as filed with
         the Securities and Exchange Commission on October 8, 1996).*
</TABLE>
 
                                      64
<PAGE>
 
<TABLE>
<CAPTION>
 Exhibit
 Number                                Description
 -------                               -----------
 <C>     <S>
 10.5    Form of Stock Option Agreement for 1996 Plan (incorporated by
         reference to Exhibit 10.5 to the Company's Registration Statement on
         Form-S-1 (File No. 333-13679) as filed with the Securities and
         Exchange Commission on October 8, 1996).*

 10.6    Form of Restricted Stock Purchase Agreement for 1996 Plan
         (incorporated by reference to Exhibit 10.6 to the Company's
         Registration Statement on Form-S-1 (File No. 333-13679) as filed with
         the Securities and Exchange Commission on October 8, 1996).*

 10.6.1  Amendment No. 1 to 1996 Plan (incorporated by reference to Exhibit
         10.6.1 to the Company's Registration Statement on Form-S-1 (File No.
         333-28463) as filed with the Securities and Exchange Commission on
         June 4, 1997).

 10.6.2  Amendment No. 2 to 1996 Plan (incorporated by reference to Exhibit 4.6
         to the Company's Registration Statement on Form S-8 (File No. 333-
         20549) as filed with the Securities and Exchange Commission on October
         8, 1998).
 
 10.7    Powerwave Technologies, Inc. 1996 Director Stock Option Plan (the
         "Director Plan") (incorporated by reference to Exhibit 10.7 to the
         Company's Registration Statement on Form-S-1 (File No. 333-13679) as
         filed with the Securities and Exchange Commission on October 8,
         1996).*
 
 10.7.1  Amendment No.1 to Director Plan (incorporated by reference to Exhibit
         4.7 to the Company's Registration Statement on Form S-8 (File No. 333-
         20549) as filed with the Securities and Exchange Commission on October
         8, 1998).
 
 10.8    Form of Stock Option Agreement for Director Plan (incorporated by
         reference to Exhibit 10.8 to the Company's Registration Statement on
         Form-S-1 (File No. 333-13679) as filed with the Securities and
         Exchange Commission on October 8, 1996).*
 
 10.9    Powerwave Technologies, Inc. Employee Stock Purchase Plan
         (incorporated by reference to Exhibit 10.9 to the Company's
         Registration Statement on Form-S-1 (File No. 333-13679) as filed with
         the Securities and Exchange Commission on October 8, 1996).*
 
 10.9.1  Amendment No. 1 to Employee Stock Purchase Plan (incorporated by
         reference to Exhibit 10.9.1 to the Company's Registration Statement on
         Form-S-1 (File No. 333-28463) as filed with the Securities and
         Exchange Commission on June 4, 1997).
 
 10.10   Series A Convertible Preferred Stock Purchase Agreement, dated October
         10, 1995, among the Company and certain shareholders (incorporated by
         reference to Exhibit 10.10 to the Company's Registration Statement on
         Form-S-1 (File No. 333-13679) as filed with the Securities and
         Exchange Commission on October 8, 1996).
 
 10.11   Redemption Agreement, dated October 10, 1995, among the Company and
         certain shareholders (incorporated by reference to Exhibit 10.11 to
         the Company's Registration Statement on Form-S-1 (File No. 333-13679)
         as filed with the Securities and Exchange Commission on October 8,
         1996).
 
 10.12   Registration Rights Agreement, dated October 10, 1995, among the
         Company and certain shareholders (incorporated by reference to Exhibit
         10.12 to the Company's Registration Statement on Form-S-1 (File No.
         333-13679) as filed with the Securities and Exchange Commission on
         October 8, 1996).
 
 10.13   Indemnification Agreement, dated October 10, 1995, between the Company
         and certain shareholders (incorporated by reference to Exhibit 10.13
         to the Company's Registration Statement on Form-S-1 (File No. 333-
         13679) as filed with the Securities and Exchange Commission on October
         8, 1996).*
 
 10.14   Form of Indemnification Agreement (incorporated by reference to
         Exhibit 10.14 to the Company's Registration Statement on Form-S-1
         (File No. 333-13679) as filed with the Securities and Exchange
         Commission on October 8, 1996).*
 
 10.16   Standard Industrial/Commercial Single-Tenant Lease-Net, dated July 1,
         1996, between the Company and CNH, LLC, a California limited liability
         company (incorporated by reference to Exhibit 10.16 to the Company's
         Registration Statement on Form-S-1 (File No. 333-13679) as filed with
         the Securities and Exchange Commission on October 8, 1996).
</TABLE>
 
                                       65
<PAGE>
 
<TABLE>
<CAPTION>
 Exhibit
 Number                                Description
 -------                               -----------
 <C>     <S>
 10.17   Business Loan Agreement, dated May 30, 1996 between the Company and
         Bank of America (incorporated by reference to Exhibit 10.17 to the
         Company's Registration Statement on Form-S-1 (File No. 333-13679) as
         filed with the Securities and Exchange Commission on October 8, 1996).

 10.18   Agreement, dated February 16, 1996, between the Company and LG
         Information & Communications Ltd. (portions omitted and filed
         separately with the Securities and Exchange Commission pursuant to
         Rule 406) (incorporated by reference to Exhibit 10.18 to the Company's
         Registration Statement on Form-S-1 (File No. 333-13679) as filed with
         the Securities and Exchange Commission on October 8, 1996).

 10.19   Agreement, dated July 20, 1995, between the Company and Samsung
         Electronics (portions omitted and filed separately with the Securities
         and Exchange Commission pursuant to Rule 406) (incorporated by
         reference to Exhibit 10.19 to the Company's Registration Statement on
         Form-S-1 (File No. 333-13679) as filed with the Securities and
         Exchange Commission on October 8, 1996).

 10.20   Technology License Agreement, dated August 30, 1995, between the
         Company and Unique Wireless Developments, L.L.C., a Delaware limited
         liability company (incorporated by reference to Exhibit 10.20 to the
         Company's Registration Statement on Form-S-1 (File No. 333-13679) as
         filed with the Securities and Exchange Commission on October 8, 1996).

 10.21   Separation Agreement and Mutual General Release, dated May 2, 1997,
         between the Company and Peter Manno (incorporated by reference to
         Exhibit 10.21 to the Company's Registration Statement on Form-S-1
         (File No. 333-28463) as filed with the Securities and Exchange
         Commission on June 4, 1997).

 10.22   Credit Agreement, dated as of August 1, 1997, between Powerwave
         Technologies, Inc. and Bank of America NT & SA (incorporated by
         reference to Exhibit 10.1 to the Company's Quarterly Report on Form
         10-Q as filed with the Securities and Exchange Commission on October
         31, 1997).

 10.22.1 First Amendment to Credit Agreement, dated as of December 11, 1997
         (incorporated by reference to exhibit 10.22.1 to the Company's Annual
         Report on Form 10-K as filed with the Securities and Exchange
         Commission on February 27, 1998).

 10.22.2 Second Amendment to Credit Agreement dated as of April 28, 1998
         between Powerwave Technologies, Inc. and Bank of America NT & SA
         (incorporated by reference to Exhibit 10.22.2 to the Company's
         Quarterly Report on Form 10-Q as filed with the Securities and
         Exchange Commission on August, 8 1998).

 10.22.3 Third Amendment to Credit Agreement dated as of July 28, 1998 between
         Powerwave Technologies, Inc. and Bank of America NT & SA (incorporated
         by reference to Exhibit 10.22.3 to the Company's Quarterly Report on
         Form 10-Q as filed with the Securities and Exchange Commission on
         August 8, 1998).

 10.23   Loan and Security Agreement, dated as of September 30, 1998, by and
         among the Company, Comerica Bank-California, as Agent, and the lenders
         party thereto (incorporated by reference to Exhibit 10.23 to the
         Company's Form 8-K as filed with the Securities and Exchange
         Commission on October 26, 1998).

 11.1    Computation of net income (loss) per share.

 21.1    Subsidiaries of the registrant.

 23.1    Independent Auditors' Consent

 27.1    Financial Data Schedule.

 99.1    Press Release dated October 9, 1998 (incorporated by reference to
         Exhibit 99.1 to the Company's Form 8-K as filed with the Securities
         and Exchange Commission on October 26, 1998).

 99.2    Financial Statements of the Business acquired (incorporated by
         reference to Exhibit 99.2 to the Company's Form 8-KA as filed with the
         Securities and Exchange Commission on December 28, 1998).
</TABLE>
 
                                       66
<PAGE>
 
<TABLE>
<CAPTION>
 Exhibit
 Number                               Description
 -------                              -----------
 <C>     <S>
 99.3    Pro Forma Financial Statements (incorporated by reference to Exhibit
         99.3 to the Company's Form 8-K/A as filed with the Securities and
         Exchange Commission on December 28, 1998).
</TABLE>
--------
 * Indicates Item 14(a)(3) exhibit.
 
  (b) Items reported on Form 8-K in Fourth Quarter
 
    On August 31, 1998, the Company announced that it signed a definitive
  agreement with Hewlett-Packard Company ("HP") under which the Company would
  acquire HP's radio frequency RF power amplifier business and its
  manufacturing facility in Folsom, California. The acquisition would include
  certain assets and liabilities, operations and the business related to the
  design, manufacture and marketing of RF power amplifiers for use in
  wireless communications. The acquisition was completed on October 9, 1998
  and the cash price paid including acquisition costs was approximately $58.5
  million. The Company financed the acquisition utilizing $25 million of a
  new $35 million secured credit facility. This credit facility is secured by
  a pledge of all of the Company's assets and contains various financial
  operating covenants. The Company utilized its existing cash balances for
  the remainder of the cash purchase price paid on October 9, 1998.
 
  (c) Financial Statements Schedule
 
    Schedule Valuation and Qualifying Accounts
 
  Powerwave Technologies, Powerwave and the Powerwave Technologies logo are
  registered trademarks of Powerwave Technologies, Inc.
 
  All other products or service names mentioned herein may be trademarks or
  registered trademarks of their respective owners.
 
                                      67
<PAGE>
 
                                  SIGNATURES
 
  Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Irvine, State of California, on the 22nd day of February, 1999.
 
                                          POWERWAVE TECHNOLOGIES, INC.
 
                                                   /s/ Bruce C. Edwards
                                          By: _________________________________
                                                      Bruce C. Edwards
                                               President and Chief Executive
                                                          Officer
 
  We, the undersigned directors and officers of Powerwave Technologies, Inc.,
do hereby constitute and appoint Bruce C. Edwards and Kevin T. Michaels as our
true and lawful attorney-in-fact and agents with power of substitution, to do
any and all acts and things in our name and behalf in our capacities as
directors and officers and to execute any and all instruments for us and in
our names in the capacities indicated below, which said attorney-in-fact and
agent may deem necessary or advisable to enable said corporation to comply
with the Securities and Exchange Act of 1934, as amended, and any rules,
regulations and requirements of the Securities and Exchange Commission, in
connection with this Annual Report on Form 10-K, including specifically but
without limitation, power and authority to sign for us or any of us in our
names in the capacities indicated below, any and all amendments (including
post-effective amendments) hereto; and we do hereby ratify and confirm all
that said attorney-in-fact and agent, shall do or cause to be done by virtue
hereof.
 
  Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated.
 
<TABLE>
<CAPTION>
             Signature                           Title                   Date
             ---------                           -----                   ----
 
<S>                                  <C>                           <C>
      /s/ Bruce C. Edwards           President, Chief Executive     February 22, 1999
____________________________________  Officer and Director
          Bruce C. Edwards            (Principal Executive
                                      Officer)
 
     /s/ Kevin T. Michaels           Vice President, Finance and    February 22, 1999
____________________________________  Chief Financial Officer
         Kevin T. Michaels            (Principal Accounting
                                      Officer)
 
     /s/ John L. Clendenin           Chairman of the Board          February 22, 1999
____________________________________
         John L. Clendenin
 
     /s/ Alfonso G. Cordero          Director                       February 22, 1999
____________________________________
         Alfonso G. Cordero
 
      /s/ Gregory M. Avis            Director                       February 22, 1999
____________________________________
          Gregory M. Avis
 
       /s/ Eugene L. Goda            Director                       February 22, 1999
____________________________________
           Eugene L. Goda
 
      /s/ David L. George            Director                       February 22, 1999
____________________________________
          David L. George
 
     /s/ Andrew J. Sukawaty          Director                       February 22, 1999
____________________________________
         Andrew J. Sukawaty
</TABLE>
 
                                      68
<PAGE>
 
                 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
                                 (in thousands)
 
<TABLE>
<CAPTION>
                           Balance at Charges to             Balance at
                           Beginning  Costs and                End of
Description                of Period   Expenses   Deductions   Period
-----------                ---------- ----------  ---------- ----------
<S>                        <C>        <C>         <C>        <C>
Year ended January 3,
 1999:
  Allowance for doubtful
   accounts...............   $  769     $  525      $ (24)     $1,270
  Inventory reserves......   $2,518     $3,468(1)   $(902)     $5,084
Year ended December 28,
 1997:
  Allowance for doubtful
   accounts...............   $  485     $  752      $(468)     $  769
  Inventory reserves......   $1,401     $1,120      $  (3)     $2,518
Year ended December 29,
 1996:
  Allowance for doubtful
   accounts...............   $  123     $  377      $ (15)     $  485
  Inventory reserves......   $  792     $1,008      $(399)     $1,401
</TABLE>
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(1) Includes inventory reserves recorded as part of the HP Acquisition.
 
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