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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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Form 10-K



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|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------



For the fiscal year ended January 2, 2005



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



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POWERWAVE TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Delaware                                                       |  | 11-2723423                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



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

(Address of principal executive offices, zip code)



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



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Securities registered pursuant to Section 12(b) of the Act: None



Securities registered pursuant to Section 12(g) of the Act: Common Stock, Par Value $.0001



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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. ̈



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



As of July 4, 2004, the aggregate market value of the voting stock of the Registrant held by non-affiliates of the Registrant was
$705,737,403 computed using the closing price of $7.28 per share of Common Stock on July 2, 2004, the last trading day of the second quarter, as reported by Nasdaq, based on the assumption that directors and officers and more than 10% stockholders
are affiliates. As of February 28, 2005 the number of outstanding shares of Common Stock, par value $.0001 per share, of the Registrant was 99,619,488.



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POWERWAVE TECHNOLOGIES, INC.



INDEX



|                                                           |  |          |  |                                                                                                              |  |   
|---------------------------------------------------------- |  | -------- |  | ------------------------------------------------------------------------------------------------------------ |  | --
|CAUTIONARY STATEMENT RELATED TO FORWARD LOOKING STATEMENTS |  | 3       
|                                                           | 
|HOW TO OBTAIN POWERWAVE SEC FILINGS                        |  | 3       
|                                                           |  |          | 
|PART I                                                     |  |          |  |                                                                                                              |  | 3 
|                                                           |  |          | 
|                                                           |  | ITEM 1.  |  | Business                                                                                                     |  | 3 
|                                                           |  |          | 
|                                                           |  | ITEM 2.  |  | Properties                                                                                                   |  | 12
|                                                           |  |          | 
|                                                           |  | ITEM 3.  |  | Legal Procedings                                                                                             |  | 12
|                                                           |  |          | 
|                                                           |  | ITEM 4.  |  | Submission of Matters to a Vote of Security Holders                                                          |  | 12
|                                                           |  |          | 
|PART II                                                    |  |          |  |                                                                                                              |  | 13
|                                                           |  |          | 
|                                                           |  | ITEM 5.  |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 13
|                                                           |  |          | 
|                                                           |  | ITEM 6.  |  | Selected Financial Data                                                                                      |  | 14
|                                                           |  |          | 
|                                                           |  | ITEM 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 14
|                                                           |  |          | 
|                                                           |  | ITEM 7a. |  | Quantitative and Qualitative Disclosures About Market Risk                                                   |  | 40
|                                                           |  |          | 
|                                                           |  | ITEM 8.  |  | Financial Statements and Supplementary Data                                                                  |  | 43
|                                                           |  |          | 
|                                                           |  |          |  | Reports of Independent Registered Public Accounting Firm                                                     |  | 44
|                                                           |  |          |  | Consolidated Balance Sheets                                                                                  |  | 45
|                                                           |  |          |  | Consolidated Statements of Operations                                                                        |  | 46
|                                                           |  |          |  | Consolidated Statements of Comprehensive Operations                                                          |  | 47
|                                                           |  |          |  | Consolidated Statements of Shareholders Equity                                                              |  | 48
|                                                           |  |          |  | Consolidated Statements of Cash Flows                                                                        |  | 49
|                                                           |  |          |  | Notes to Consolidated Financial Statements                                                                   |  | 51
|                                                           |  |          |  | Quarterly Financial Data (Unaudited)                                                                         |  | 72
|                                                           |  |          | 
|                                                           |  | ITEM 9.  |  | Changes and Disagreements with Accountants on Accounting and Financial Disclosure                            |  | 73
|                                                           |  |          | 
|                                                           |  | ITEM 9a. |  | Controls and Procedures                                                                                      |  | 73
|                                                           |  |          | 
|                                                           |  | ITEM 9b. |  | Other Information                                                                                            |  | 75
|                                                           |  |          | 
|PART III                                                   |  |          |  |                                                                                                              |  | 75
|                                                           |  |          | 
|                                                           |  | ITEM 10. |  | Directors and Executive Officers of the Registrant                                                           |  | 75
|                                                           |  |          | 
|                                                           |  | ITEM 11. |  | Executive Compensation                                                                                       |  | 77
|                                                           |  |          | 
|                                                           |  | ITEM 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 77
|                                                           |  |          | 
|                                                           |  | ITEM 13. |  | Certain Relationships and Related Party Transactions                                                         |  | 77
|                                                           |  |          | 
|                                                           |  | ITEM 14. |  | Principal Accounting Fees and Services                                                                       |  | 77
|                                                           |  |          | 
|PART IV                                                    |  |          |  |                                                                                                              |  | 78
|                                                           |  |          | 
|                                                           |  | ITEM 15. |  | Exhibits, Financial Statement Schedules                                                                      |  | 78
|                                                           | 
|SIGNATURES                                                 |  | 82      
|                                                           | 
|SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS            |  | 83      





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CAUTIONARY STATEMENT RELATED TO FORWARD LOOKING STATEMENTS



This Annual Report on Form 10-K includes forward-looking statements as defined within Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended,
relating to revenue, revenue composition, market conditions, demand and pricing trends, future expense levels, competition in our industry, trends in average selling prices and gross margins, product and infrastructure development, market demand and
acceptance, the timing of and demand for next generation products, customer relationships, employee relations, the timing of and cost saving synergies from integration activities of the former LGP Allgon businesses, the timing and cost to acquire
the remaining outstanding common shares of LGP Allgon under compulsory acquisition proceedings restructuring charges, the completion of integration activities related to LGP Allgon and the level of expected future capital and research and
development expenditures. Such forward-looking statements are based on the beliefs of, estimates made by, and information currently available to Powerwave Technologies, Inc.s (Powerwave or the Company) management and
are subject to certain risks, uncertainties and assumptions. Any other statements contained herein (including without limitation statements to the effect that Powerwave or management estimates, expects,
anticipates, plans, believes, projects, continues, may, will, could, or would or statements concerning potential or
opportunity or variations thereof or comparable terminology or the negative thereof) that are not statements of historical fact are also forward-looking statements. The actual results of Powerwave may vary materially from those expected
or anticipated in these forward-looking statements. The realization of such forward-looking statements may be impacted by certain important unanticipated factors, including those discussed in Additional Factors That May Affect Our Future
Results under Part II, Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations. Because of these and other factors that may affect Powerwaves operating results, past performance
should not be considered as an indicator of future performance, and investors should not use historical results to anticipate results or trends in future periods. We undertake no obligation to publicly release the results of any revisions to these
forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Readers should carefully review the risk factors described in this and other documents that
Powerwave files from time to time with the Securities and Exchange Commission, including subsequent Current Reports on Form 8-K, Quarterly Reports on Form 10-Q and Annual Reports on Form 10-K.



HOW TO OBTAIN POWERWAVE SEC FILINGS



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



PART I



ITEM 1. BUSINESS



General



Powerwave Technologies, Inc. (Powerwave or the
Company or our or we) was incorporated in Delaware in January 1985, originally under the name Milcom International, Inc., and changed its name to Powerwave Technologies, Inc. in June 1996. Powerwave is a global
supplier of end-to-end wireless solutions for wireless communications networks. Our primary business consists of the design, manufacture and marketing and sale of products to improve coverage, capacity and data speed in wireless communications
networks, including antennas, boosters, combiners, filters, radio frequency power amplifiers, repeaters, tower-mounted amplifiers, and advanced coverage solutions. These products are utilized in major wireless networks throughout the world which
support voice and data communications by use of cell phones and other wireless communication devices. We sell such products to both original equipment manufacturers, who incorporate our products into their proprietary base stations (which they then
sell to network operators), and directly to individual wireless network operators for deployment into their existing networks.



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We also operate a contract manufacturing business under the trade name of Arkivator. This
business manufactures and sells advanced industrial components, primarily for the automotive and food industries, under contract manufacturing arrangements primarily with certain Nordic industrial companies. This business accounted for approximately
5.3% percent of our revenues during fiscal 2004.



We believe
that our future success depends upon continued growth in demand for wireless services as well as our ability to broaden our customer base. For the fiscal year ended January 2, 2005 (fiscal 2004), our largest customer was Nortel, who
accounted for approximately 24% of our net sales. Our next largest customer in fiscal 2004, Nokia, accounted for 10% or more of our net sales. The loss of either of these customers, or a significant loss, reduction or rescheduling of orders from any
of our customers would have a material adverse effect on our business, results of operations and financial condition. See Additional Factors That May Affect Our Future ResultsWe rely upon a few customers for the majority of our
revenues; Our success is tied to the growth of the wireless services communications market...; and Our future success is dependent upon our ability to compete globally under Part II, Item 7, Managements
Discussion and Analysis of Financial Condition and Results of Operations.



A limited number of large original equipment manufacturers account for a majority of wireless base station equipment purchasers in the wireless equipment market, and our future success is dependent upon our ability to
establish and maintain relationships with these types of customers. While we regularly attempt to expand our customer base, we cannot give any assurance that a major customer will not reduce, delay or eliminate its purchases from us. We have
previously experienced significant reductions in demand from our customers, including the significant reduction in demand during fiscal 2003 as compared to fiscal 2002, that had an adverse effect on our business and results of operations. Any future
reductions in demand by any of our major customers would have a material adverse effect on our business, results of operations and financial condition. See Additional Factors That May Affect Our Future Results We rely upon a few
customers for the majority of our revenues under Part II, Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations.



We have experienced, and expect to continue to experience, declining average sales prices for our products. Consolidation
among wireless service providers has enabled such companies to place increased pricing pressure on wireless infrastructure manufacturers, which in turn has resulted in downward pricing pressure on our products. In addition, ongoing competitive
pressures in the wireless infrastructure equipment market have put pressure on us to continually reduce the sales price of our products. Consequently, we believe that our gross margins may decline over time and that in order to maintain or improve
our gross margins, we must achieve manufacturing cost reductions and develop new products that incorporate advanced features that may generate higher gross margins. See Additional Factors That May Affect Our Future ResultsWe rely upon a
few customers for the majority of our revenues; Our success is tied to the growth of the wireless services communications market; Our average sales prices have declined; and Our future success is dependent upon
our ability to compete globally under Part II, Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations.



Significant Business Developments in Fiscal 2004



On May 3, 2004, we completed our exchange offer for the outstanding shares of LGP Allgon Holding AB (LGP
Allgon), a Swedish public company and global provider of wireless infrastructure equipment and coverage solutions to wireless network communications operators and original equipment manufacturers. Pursuant to the terms of the exchange offer,
LGP Allgon shareholders were offered 1.1 shares of newly issued Powerwave Common Stock in exchange for each share of LGP Allgon common stock. In addition, pursuant to the exchange offer, Powerwave offered a cash alternative whereby LGP Allgon
shareholders could elect to exchange their LGP Allgon common stock for a fixed price of Swedish kronor (SEK) 61.87 in lieu of Powerwave shares. This cash alternative was subject to an aggregate maximum of $125.0 million. The acquisition
of LGP Allgon provided Powerwave with an extensive array of wireless infrastructure equipment including antennas, filters, repeaters, tower-mounted amplifiers and advanced coverage solutions. We believe that the acquisition of LGP Allgon increased
Powerwaves product offerings within the global wireless infrastructure market and improved our ability to offer more complete end-to-end solutions for our customers complex network requirements. These factors contributed to a purchase
price in excess of the fair value of the net assets acquired, resulting in goodwill of approximately $237.3 million as of the purchase date.



As of January 2, 2005, Powerwave had acquired approximately 98% of LGP Allgons outstanding common stock in exchange for approximately $96.1 million
in cash and 40,685,596 shares of Powerwave Common Stock, valued at $297.0 million based upon the average closing price for the three days before and after the announcement



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of the transaction. We have initiated compulsory acquisition proceedings to acquire the remaining LGP Allgon shares that
were not tendered and expect to pay approximately $7.9 million as additional purchase price related to such proceedings. There are approximately 785,948 shares of LGP Allgon common stock outstanding.



Effective November 10, 2004, we completed the private placement of a total of
$200.0 million aggregate principal amount of 1.875% convertible subordinated notes due November 2024 to Deutsche Bank Securities, Inc. and concurrently repurchased an aggregate amount of $40.0 million of our Common Stock (5,050,505 shares) from
purchasers of the notes. We received net proceeds of $154.2 million after the deduction of debt issuance costs and the repurchase of our Common Stock. The notes require semi-annual interest payments on June 15 and December 15 and the $200.0 million
principal balance is due on November 15, 2024. The notes are convertible into common shares of Powerwave at a conversion price of $11.09 per share. This represents a conversion rate of approximately 90.1713 shares of common stock per $1,000
principal amount of notes.



Industry Segments and Geographic Information



Powerwave operates in two reportable business segments:
wireless communications and contract manufacturing. Sales in the wireless communications segment are derived primarily from the sale of wireless communications network products and coverage solutions, including antennas, boosters, combiners,
filters, radio frequency power amplifiers, repeaters, tower-mounted amplifiers and advanced coverage solutions for use in wireless communications networks. Sales in the contract manufacturing segment are derived from the manufacture and sale of
advanced industrial components, primarily for the automotive and food industries, under contract manufacturing arrangements primarily with certain Nordic industrial companies. For the purposes of Statement of Financial Accounting Standards No. 131,
Disclosures About Segments of an Enterprise and Related Information, we have provided a breakdown of our sales in Note 22. Segments of the Notes to Consolidated Financial Statements under Part II, Item 8,
Financial Statements and Supplementary Data. For a summary of our sales by geographic region, please refer to Note 22. Segments of the Notes to Consolidated Financial Statements under Part II, Item 8,
Financial Statements and Supplementary Data.



Business Strategy



Powerwaves strategy is to become the leading
supplier of wireless communications network products and coverage solutions and includes the following key elements:



| |  |  | providing leading technology to the wireless communications infrastructure equipment industry through research and development that continues to improve our products technical
performance while reducing our costs and establishing new levels of technical performance for the industry;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | utilizing our research and development efforts combined with our internal and external manufacturing and supply chain capabilities to raise our productivity and to lower our product
costs;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | leveraging our position as a leading supplier of wireless communication products and coverage solutions to increase our market share and expand our relationships with both our
existing customers and potential new customers;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | continuing to expand our customer base of wireless network original equipment manufacturers and leading wireless network operators; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------



| |  |  | maintaining our focus on the quality, reliability and manufacturability of our wireless communications products and coverage solutions.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------



Our focus on radio frequency technology and the experience we have gained
through the implementation of our products in both analog and digital wireless networks throughout the world has enabled us to develop substantial expertise in various aspects of wireless infrastructure equipment technology. We intend to continue to
research and develop new methods to improve our products performance, including efforts to support future generation transmission standards. We believe that both our existing products and new products under development will enable us to continue to
expand our customer base by offering a broad range of products at attractive price points to meet the diverse requirements of wireless original equipment manufacturers and network operators. We also intend to leverage our product lines in an attempt
to expand our relationships with our existing customers and to add new



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customers. We believe that we are able to respond quickly and cost-effectively to new transmission protocols and design
specifications by obtaining components from numerous leading technology companies and utilizing various contract manufacturers. We also believe that our focus on the manufacturability of our product designs helps us to increase our manufacturing
productivity while reducing our product costs. We believe that this ability to offer a broad range of products represents a competitive advantage over other third-party manufacturers of wireless infrastructure equipment.



If we are unsuccessful in designing new products, improving existing products
or reducing the costs of our products, our inability to meet these objectives would have a negative effect on our gross profit margins, business, results of operations and financial condition. In addition, if our outstanding customer orders were to
be significantly reduced, the resulting loss of purchasing volume would also adversely affect our cost competitive advantage, which would negatively affect our gross profit margins, business, results of operations and financial condition. See
Additional Factors That May Affect Our Future Results Our average sales prices have declined; and We may fail to develop products that are sufficiently manufacturable... under Part II, Item 7, Managements
Discussion and Analysis of Financial Condition and Results of Operations.



Markets



As a global supplier of end-to-end
wireless solutions for wireless communications networks, our primary business consists of the design, manufacture, marketing and sale of products to improve coverage, capacity and data speed in wireless communication networks, including antennas,
boosters, combiners, filters, radio frequency power amplifiers, repeaters, tower-mounted amplifiers and advanced coverage solutions. These products are utilized in major wireless networks throughout the world that support voice and data
communications by use of cell phones and other wireless communication devices. We sell such products to both original equipment manufacturers, who incorporate our products into their proprietary base stations (which they then sell to wireless
network operators), and directly to individual wireless network operators for deployment into their existing networks.



Our wireless communications business is primarily dependent upon the worldwide demand for wireless communications and the resulting requirements for
infrastructure spending by wireless network operators to support such demand. Today, the majority of the wireless network operators offer wireless voice and data services on what are commonly referred to as 2G or 2.5G networks. These wireless
networks utilize common transmission protocols including Code Division Multiple Access or CDMA, Time Division Multiple Access or TDMA, and Global System for Mobile or GSM, all of which define different standards for transmitting voice and data
within wireless networks. Within these transmission protocols, there are various improvements available to increase the speed of data transmission or to increase the amount of voice capacity in the network. These types of improvements are generally
referred to as 2.5G and include upgrades to GSM such as General Packet Radio Service or GPRS and Enhanced Data rates for Global Evolution or EDGE. For CDMA networks, various upgrades are referred to as CDMA 1x, CDMA2000 and CDMA EV/DO.



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



We also operate a contract manufacturing business under the
trade name of Arkivator. In this business, we manufacture and sell advanced industrial components, primarily for the automotive and food industries, under contract manufacturing arrangements. This business accounted for approximately
5.3% of our revenues for fiscal 2004.



Principal Product Groups



Our wireless communications business segment is divided
into the following product groups:



Antenna Systems



This product group includes base station antennas and tower
mounted amplifiers. Powerwave offers an extensive line of base station antennas which cover all major radio frequency bands including the cellular, PCS and



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2100 MHz bands. Our products also support all major wireless transmission protocols. The Companys base station
antenna products include single, dual and triple-band solutions based on proprietary technology in a variety of sizes. Powerwave also offers remote adjustable electrical tilt (RET) antennas which provide remote control and monitoring capabilities.



We also manufacture a full line of tower mounted amplifiers
which improve wireless network performance by filtering and amplifying as close as possible to the receiving antenna, thus significantly reducing signal loss and noise. Our tower mounted amplifier products cover all major wireless frequency ranges
and transmission protocols.



Base Station Subsystems



This product group includes products that are installed into
or around the base station of wireless networks and include products such as boosters, combiners, filters, radio frequency power amplifiers and radio transceivers.



Powerwave offers both single and multi-carrier radio frequency power amplifiers for use in cellular networks, including
ultra-linear multi-carrier radio frequency power amplifiers for CDMA, cdma2000, TDMA and GSM digital cellular systems as well as analog systems utilizing AMPS and TACS protocols. We also offer both single and multi-carrier radio frequency power
amplifiers for use in PCS networks that operate in the international DCS-1800 frequency (1800 MHz) and the United States PCS band at 1900 MHz and multi-carrier radio frequency power amplifiers for 3G UMTS networks operating at 2100 MHz. Typical
system applications include CDMA, cdma 2000, W-CDMA, TDMA, and GSM protocols with output power ranging from 10 to 180 Watts.



We also produce filters which can improve the signal transmission for both up and down link as well as help to reduce out of band performance. Our filters
cover various wireless frequencies, including cellular, PCS and 2100 MHz. Along with filters we also provide radio frequency power combiners which allow for the connecting of multiple radio frequency power signals.



Powerwave is also participating in the new category of integrated radio
solutions. These integrated radio solutions offer new alternative approaches to providing lower cost base station solutions. One product offering we are currently developing is the digital radio head, which provides operators the ability to
partition the radio transceiver, power amplifier and duplexer in a remote chassis, which can then be co-located near the antenna to minimize signal loss over the traditional antenna path. The digital radio head utilizes base band (I/Q) signals from
the output of the modem via fiber optic cables which offer improved performance over distance versus traditional cable. This next generation technology offers significant potential cost reduction opportunities and Powerwave is actively involved in
developing and commercializing this technology.



Coverage
Solutions



This product group consists primarily of
microwave radio, distributed antenna systems, repeaters and advanced coverage solutions. Powerwave offers a modular family of point-to-point microwave radio links for frequencies between 7 and 386 GHz. These products cover flexible solutions with
designs for high reliability for wireless network operators as well as private and public fixed network operators.



Powerwaves distributed antenna systems solutions provide the equipment to co-locate multiple wireless operators on multiple frequency bands within a
single location, while allowing each operator to maintain full control over parameters critical to their network performance. These systems are custom designed by Powerwave for convention centers, airports, transportation centers, dense urban
business districts and business campuses. These custom designed antenna systems are designed to be readily connected to base station equipment, thereby reducing installation costs.



Our repeater systems are utilized in wireless communications networks to improve signal quality where physical structures or
geographic constrains cause low radio frequency signal strength. They can also be utilized as a low cost alternative to base stations in areas where coverage is more critical than capacity. These products can be used for both single and
multiple-operator applications. Powerwaves systems are available in a wide frequency range from 800 MHz to 2100 MHz and support all major transmission protocols. Our systems have features and functions that allow network operators to remotely
monitor and adjust these systems.



Powerwaves advanced
coverage solutions team provides an integrated team of radio frequency and system engineers to design and implement wireless coverage applications utilizing our coverage solutions products. We



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provide advanced coverage engineers to design the right solution for any type of wireless coverage issue. Based upon our
design, we will oversee installation and operation of the chosen coverage solution. The types of sites utilizing our services include convention centers, airports, hotels, office building, and various locations where traditional wireless service
coverages are not available.



Customers



We sell our products to customers worldwide, including a variety of wireless
original equipment manufacturers, such as Ericsson, Lucent, Motorola, Nokia, Nortel, Samsung and Siemens. We also sell our products to operators of wireless networks, such as ALLTEL Corporation, Cingular Wireless, Sprint PCS, Orange, Vodafone and
Verizon Wireless.



For fiscal 2004, our largest customer,
Nortel, accounted for approximately 24% of our net sales. Our next largest customer in fiscal 2004, Nokia, accounted for 10% or more of our net sales. The loss of any one of these customers, or a significant loss, reduction or rescheduling of orders
from any of our customers, would have a material adverse effect on our business, results of operations and financial condition. See Additional Factors That May Affect Our Future ResultsWe rely upon a few customers for the majority of our
revenues under Part II, Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations.



Marketing and Distribution, International Sales



We sell our products through a highly technical direct sales force, through independent sales representatives and, in certain countries, through
resellers. Direct sales personnel are assigned to geographic territories and, in addition to sales responsibilities, manage networks of independent sales representatives. We utilize a network of independent sales representatives selected for their
familiarity with our potential customers and their knowledge of the wireless infrastructure equipment market. Our direct sales personnel, resellers and independent sales representatives generate product sales, provide product and customer service,
and provide customer feedback for product development. In addition, our sales personnel, resellers and independent sales representatives receive support from our marketing, product support and customer service departments.



Our marketing efforts are focused on establishing and developing long-term
relationships with potential customers. The initial sales cycle for many of our products are lengthy, typically ranging from six to eighteen months. Our customers typically conduct significant technical evaluations of our products before making
purchase commitments. In addition, as is customary in the industry, sales are made through standard purchase orders that can be subject to cancellation, postponement or other types of delays. While certain customers provide us with estimated
forecasts of their future requirements, they are not typically bound by such forecasts.



International sales (excluding North American sales) of our products approximated 71%, 46%, and 33% of net sales for the fiscal years ended January 2, 2005, December 28, 2003, December 29, 2002, respectively. Foreign
sales of some of our products may be subject to national security and export regulations and may require us to obtain a permit or license. In recent years, we have not experienced any significant difficulties in obtaining required permits or
licenses. International sales also subject us to risks related to political upheaval and economic downturns in foreign countries and regions, such as the economic downturn in the South Korean and Asian markets in 1998 and the Brazilian market during
1999. Since a large percentage of our foreign customers typically pay for our products with U.S. Dollars, a strengthening of the U.S. Dollar as compared to a foreign customers local currency would effectively increase the cost of our products
for that customer, thereby making our products less attractive to such customers. See Additional Factors That May Affect Our Future ResultsOur future success is dependent upon our ability to compete globally under Part II,
Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations.



Service and Warranty



We offer warranties of various lengths which differ by customer and product type and typically cover defects in materials and workmanship. We, along with
our contract manufacturers, perform warranty obligations and other maintenance services for our products at our facilities in Southern California, Sweden, Estonia, China, and at our contract manufacturing locations in Asia.



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Product Development



We invest significant resources in the research and development of new products within our wireless communications product area. This includes significant
resources in the development of new products to support new transmission protocols, including EDGE and third generation protocols such as W-CDMA and cdma2000. Our development efforts also seek to reduce the cost and increase the manufacturing
efficiency of both new and existing products. Our total research and development staff consisted of 367 people as of January 2, 2005. Expenditures for research and development approximated $47.2 million in 2004, $38.9 million in 2003, and
$33.1 million in 2002. See Additional Factors That May Affect Our Future ResultsThe wireless communications infrastructure equipment industry is extremely competitive...; and If we are unable to hire and retain highly qualified
technical and managerial personnel under Part II, 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, rapid product obsolescence, evolving industry standards and significant price erosion over the life of a product. Our 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 we believe that we compete favorably with respect to the foregoing characteristics, there can
be no assurance that we will be able to continue to do so.



Our
current competitors include Andrew Corporation, Filtronic PLC, Fujitsu Limited, Hitachi Kokusai Electric Inc., Japan Radio Co., Ltd., Kathrein-Werke KG, Mitsubishi Electric Corporation, Radio Frequency Systems and REMEC, Inc. We also compete with a
number of other foreign and privately held companies throughout the world, the subsidiaries of certain multinational corporations and, more importantly, the captive design and manufacturing operations within certain leading wireless infrastructure
original equipment manufacturers such as Ericsson, Motorola, Nokia, Nortel and Samsung. Some competitors have significantly greater financial, technical, manufacturing, sales, marketing and other resources than Powerwave and have achieved greater
name recognition for their existing products and technologies than we have. We cannot guarantee that we will be able to successfully increase our market penetration or our overall share of the wireless communication infrastructure equipment
marketplace. Our results of operations could be adversely impacted if we are unable to effectively increase our share of the marketplace.



Powerwaves success depends in large part upon the rate at which wireless infrastructure original equipment manufacturers incorporate our products
into their systems. We believe that a substantial portion of the present worldwide production of radio frequency power amplifiers is captive within the internal manufacturing operations of a small number of leading wireless infrastructure
manufacturers such as Ericsson, Motorola, Nokia and Samsung. In addition, most large wireless infrastructure original equipment manufacturers maintain internal amplifier design capabilities that may compete directly with our products and our own
designs. Many of our customers internally design and/or manufacture their own radio frequency power amplifiers rather than purchase them from third-party vendors such as Powerwave. Many of our customers also continuously evaluate whether to
manufacture their own radio frequency power amplifiers or whether to utilize contract manufacturers to produce their own internal designs. Certain of our customers regularly produce or design radio frequency power amplifiers in an attempt to replace
products sold by us. We believe that this practice will continue. In the event that a customer manufactures or designs their own radio frequency power amplifiers, such customer could reduce or eliminate their purchase of our products, which would
result in reduced revenues and would adversely impact our results of operations and liquidity. Wireless infrastructure equipment manufacturers with internal manufacturing capabilities, including many of our customers, could also sell radio frequency
power amplifiers externally to other manufacturers, thereby competing directly with us. If, for any reason, our customers decide to produce their radio frequency power amplifiers internally, increase the percentage of their internal production,
require us to participate in joint venture manufacturing with them or compete directly against us, our revenues would decrease which would adversely impact our results of operations.



We have experienced significant price competition and we expect price competition in the sale of our products to increase.
No assurance can be given that our competitors will not develop new technologies or enhancements to



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existing products or introduce new products that will offer superior price or performance features. We expect our
competitors to offer new and existing products at prices necessary to gain or retain market share. Certain of our competitors have substantial financial resources which may enable them to withstand sustained price competition or a market downturn
better than us. There can be no assurance that we will be able to compete successfully in the pricing of our products, or otherwise, in the future.



Backlog



Our six-month backlog of orders on January 2, 2005 was estimated at $55.6 million as compared to approximately $40.5 million on December 28, 2003. We include in our reported backlog only the accepted product purchase
orders with respect to which a delivery schedule has been specified for product shipment within six months.



Product orders in our backlog are frequently subject to changes in delivery schedules or to cancellation at the option of the purchaser without
significant penalty. While we regularly review our backlog of orders to ensure that it adequately reflects product orders expected to be shipped within a six-month period, we cannot make any guarantee that such orders will actually be shipped or
that such orders will not be delayed or cancelled in the future. We make regular adjustments to our backlog as customer delivery schedules change and in response to changes in our production schedule. Accordingly, we stress that backlog as of any
particular date should not be considered a reliable indicator of sales for any future period and our revenues in any given period may depend substantially on orders placed in that period.



Manufacturing and Suppliers



Our manufacturing process involves the assembly of numerous individual components and precise fine-tuning by production technicians. The parts and
materials used by us and our contract manufacturers consist primarily of printed circuit boards, specialized subassemblies, fabricated housings, relays and small electric circuit components, such as integrated circuits, semiconductors, resistors and
capacitors.



We operate both company-owned manufacturing
locations as well as utilize contract manufacturers for a significant percentage of our manufacturing activities. We have owned manufacturing operations in Sweden, Estonia, China and the United States. In addition, we utilize contract manufacturers
in Asia and the United States.



As a result of outsourcing a
portion of our production to contract manufacturers, the cost, quality, performance and availability of our offshore contract manufacturing operations are, and will continue to be, essential to the successful production and sale of our products. Any
delays in the ramp-up of our production lines at contract manufacturers, or any delays in the qualification by our customers of the contract manufacturer facilities and the products produced there, could cause us to miss customer agreed product
delivery dates. Similarly, the inability of our contract manufacturers to meet production schedules or produce products in accordance with the quality and performance standards established by us or our customers could also cause us to miss customer
agreed product delivery dates. In addition, the cost, quality, performance and availability of our company-owned manufacturing is also essential to the successful production and sale of our products. Any delays in the ramp-up of production lines at
our plants, or any delays in the qualification by our customers of our facilities and the products produced there, could cause us to miss customer agreed product delivery dates. Any failure to meet customer agreed delivery dates could result in lost
revenues due to customer cancellations, potential financial penalties payable by us to our customers and additional costs to expedite products or production schedules.



Our manufacturing, production and design operations are ISO 9001, ISO 14001, TL-9000 and TickIT-5 certified. ISO refers to
the quality model developed by the International Organization for Standardization. TL refers to the set of quality system requirements that are specific to the telecommunications industry. TickIT refers to the set of quality standards that are
specific to the software industry. Numerous customers and potential customers throughout the world, particularly in Europe, require that their suppliers be ISO certified. In addition, many customers require that their suppliers purchase components
only from subcontractors that are ISO certified. Powerwave requires that all of its contract manufacturers maintain ISO and/or TL certifications.



A number of the parts used in our products are available from only one or a limited number of outside suppliers due to unique component designs as well as
certain quality and performance requirements. To take advantage of volume pricing discounts, we, along with our contract manufacturers, purchase certain customized components from single or limited sources. Powerwave has experienced, and expects to
continue to experience, shortages of single-source



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and limited-source components. Shortages have compelled us to adjust our product designs and production schedules and
have caused us to miss customer requested delivery dates. If single-source or limited-source components become unavailable in sufficient quantities in the desired time periods, are discontinued or are available only on unsatisfactory terms, we would
be required to purchase comparable components from other sources and retune our products to function with the replacement components, or may be required to redesign our products to use other components, either of which could delay
production and delivery of our products. If production and delivery of our products are delayed such that they do not meet the agreed upon delivery dates of our customers, such delays could result in lost revenues due to customer cancellations, as
well as potential financial penalties payable to our customers. Any such loss of revenue or financial penalties would have a material adverse effect on our results of operations.



Our reliance on certain single-source and limited-source components exposes us to quality control issues if these suppliers
experience a failure in their production process or otherwise fail to meet our quality requirements. A failure in single-source or limited-source components or products could force us to repair or replace a product utilizing replacement components.
If we cannot obtain comparable replacements or effectively retune or redesign our products, we could lose customer orders or incur additional costs, which could have a material adverse effect on our gross margins and results of operations.



We believe that the production facilities that we utilize,
including those owned by our contract manufacturers, are in good condition and well maintained and are not currently in need of any major investments.



Intellectual Property



We rely upon trade secrets and patents to protect our intellectual property. We execute confidentiality and non-disclosure agreements with our employees
and suppliers and limit access to, and distribution of, our proprietary information. We have an on-going program to identify and file applications for both U.S. and international patents for various aspects of our technology. We have been granted
approximately 75 U.S. patents and approximately 140 foreign patents, and we have filed applications for over 50 additional U.S. patents and over 150 additional foreign patents. All of these efforts, along with the knowledge and experience of our
management and technical personnel, strengthen our ability to market our existing products and to develop new products. The departure of any of our management and technical personnel, the breach of their confidentiality and non-disclosure
obligations to us, or the failure to achieve our intellectual property objectives may have a material adverse effect on our business, financial condition and results of operations.



We believe that our success depends upon the knowledge and experience of our management and technical personnel, our ability
to market our existing products and our ability to develop new products. We do not have non-compete agreements with our employees who generally are employed on an at-will basis. Therefore, employees have left and may continue to leave us
and go to work for competitors. While we believe that we have adequately protected our proprietary technology and that we have taken all legal measures to protect it, we will continue to pursue all reasonable means available to protect it and to
prohibit the unauthorized use of our proprietary technology. In spite of our efforts, the use of our processes by a competitor could have a material adverse effect on our business, financial condition and results of operations.



Our ability to compete successfully and achieve future revenue growth will
depend, in part, on our ability to protect our proprietary technology and operate without infringing upon the rights of others. We may not be able to successfully protect our intellectual property, or our intellectual property or proprietary
technology may otherwise become known or be independently developed by competitors. In addition, the laws of certain countries in which our products are or may be sold may not protect our products and intellectual property rights to the same extent
as the laws of the United States.



The inability to protect our
intellectual property and proprietary technology could have a material adverse effect on our business, financial condition and results of operations. As the number of patents, copyrights and other intellectual property rights in our industry
increases, and as the coverage of these rights and the functionality of the products in the market further overlap, we believe that we, along with other companies in our industry, may face more frequent infringement claims. Such litigation or claims
of infringement could result in substantial costs and diversion of resources and could have a material adverse effect on our 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 our ability or our customers ability to distribute, sell or import allegedly infringing products. If it appears necessary or desirable, we may seek licenses from third parties
covering intellectual property



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that we are allegedly infringing. No assurance can be given, however, that any such licenses could be obtained on terms
acceptable to us, if at all. The failure to obtain the necessary licenses or other rights could have a material adverse effect on our business, financial condition and results of operations.



Employees



As of January 2, 2005, Powerwave had 1,675 full and part-time employees, including 985 in manufacturing, 54 in quality, 367
in research and development, 97 in sales and marketing and 172 in general and administration. A total of 909 employees in Sweden and 51 employees in Finland are represented by unions with contract expiration dates through 2007. No other employees
are represented by a union. We believe that our employee relations are good.



Contract Personnel



Powerwave also utilizes
contract personnel hired from third party agencies. As of January 2, 2005, we were utilizing approximately 267 contract personnel, primarily in our manufacturing operations.



ITEM 2. PROPERTIES



We believe
that our existing facilities provide adequate space for our operations. The following table shows our significant facilities:



|                    |  |              |  |                                    
|------------------- |  | ------------ |  | -----------------------------------
|Location            |  | Owned/Leased |  | ApproximateFloor Area inSquare Feet
|Santa Ana, CA       |  | Owned        |  | 360,000                            
|Santa Ana, CA       |  | Leased       |  | 115,000                            
|El Dorado Hills, CA |  | Leased       |  | 31,000                             
|Coppell, TX         |  | Leased       |  | 17,000                             
|Forth Worth, TX     |  | Leased       |  | 78,000                             
|                    |  |              |  |                                    
|U.S. sub-total      |  |              |  | 601,000                            
|                    |  |              |  |                                    
|Falköping, Sweden   |  | Owned        |  | 161,000                            
|Göteborg, Sweden    |  | Leased       |  | 42,000                             
|Täby, Sweden        |  | Owned        |  | 178,000                            
|Tullinge, Sweden    |  | Owned        |  | 167,000                            
|Saku Vald, Estonia  |  | Leased       |  | 32,000                             
|Wuxi, China         |  | Leased       |  | 42,000                             
|                    |  |              |  |                                    
|Non-U.S. sub-total  |  |              |  | 622,000                            
|                    |  |              |  |                                    
|Total               |  |              |  | 1,223,000                          
|                    |  |              |  |                                    



Additionally, we
maintain over 25 sales, engineering, and operating offices worldwide.



ITEM 3. LEGAL PROCEDINGS



We are
subject to various legal proceedings and threatened legal proceedings from time to time as part of our business. We are not currently party to any legal proceedings nor aware of any threatened legal proceedings, the adverse outcome of which,
individually or in the aggregate, we believe would have a material adverse effect on our business, financial condition and results of operations. However, any potential litigation, regardless of its merits, could result in substantial costs to us
and divert managements attention from our operations. Such diversions could have an adverse impact on our business, results of operations and financial condition.



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 2004.



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PART II



ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES



Market Information



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 Powerwaves Common Stock for the periods indicated.



|                                       |  |      |       |     |   |     
|-------------------------------------- |  | ---- | ----- | --- | - | ----
|                                       |  | High |       | Low
|Fiscal Year 2004                       |  |      |       |     |   |     
|First Quarter Ended April 4, 2004      |  | $    | 11.55 |     | $ | 6.94
|Second Quarter Ended July 4, 2004      |  | $    | 8.50  |     | $ | 6.66
|Third Quarter Ended October 3, 2004    |  | $    | 7.25  |     | $ | 4.54
|Fourth Quarter Ended January 2, 2005   |  | $    | 9.10  |     | $ | 6.00
|                                       |  |     
|Fiscal Year 2003                       |  |      |       |     |   |     
|First Quarter Ended March 30, 2003     |  | $    | 6.10  |     | $ | 3.05
|Second Quarter Ended June 29, 2003     |  | $    | 7.64  |     | $ | 3.11
|Third Quarter Ended September 28, 2003 |  | $    | 10.96 |     | $ | 5.15
|Fourth Quarter Ended December 28, 2003 |  | $    | 7.96  |     | $ | 6.04



Holders



There were approximately 113 stockholders of record as of February 28, 2005.
We believe there are approximately 33,000 stockholders of Powerwaves Common Stock held in street name.



Dividends



We have not
paid any dividends to date and do not anticipate paying any dividends on our Common Stock in the foreseeable future. We anticipate that all future earnings will be retained to finance future growth.



Recent Sales of Unregistered Securities



Effective November 10, 2004, we completed the private placement of a total
of $200.0 million aggregate principal amount of 1.875% convertible subordinated notes due November 2024 to Deutsche Bank Securities, Inc. and concurrently repurchased an aggregate amount of $40.0 million of our Common Stock (5,050,505 shares) from
purchasers of the notes. All purchasers of notes were accredited investors, as defined in Rule 501(a) of the Securities Act of 1933. The private placement was exempt from registration under the Securities Act of 1933 based upon its compliance with
the requirements of Rule 506 of the Securities Act. We received net proceeds of $154.2 million after the deduction of debt issuance costs and the repurchase of our Common Stock. The notes require semi-annual interest payments on June 15 and December
15 and the $200.0 million principal balance is due on November 15, 2024. At the election of their respective holders, the notes are convertible into common shares of Powerwave at a conversion price of $11.09 per share. This represents a conversion
rate of approximately 90.1713 shares of common stock per $1,000 principal amount of notes. For additional information on this private placement, please refer to Note 10. Financing Arrangements and Long-Term Debt of the Notes to
Consolidated Financial Statements under Part II, Item 8, Financial Statements and Supplementary Data.



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Our shareholders have previously approved all stock option plans under which our Common Stock is reserved
for issuance. The following table provides summary information as of January 2, 2005, for all of our stock option plans:



|                             |  |                                                                                                   |  |                                                                          |       |                                                                                                                                         |          
|---------------------------- |  | ------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------ | ----- | --------------------------------------------------------------------------------------------------------------------------------------- | ---------
|                             |  | Number of Shares ofCommon Stock tobe Issued uponExercise ofOutstandingOptions, Warrantsand Rights |  | Weighted AverageExercise Price ofOutstanding Options,Warrants and Rights |       | Number of Shares ofCommon StockRemaining Availablefor Future Issuanceunder our StockOption Plans(Excluding
SharesReflected in Column 1)
|Approved by shareholders     |  | 8,949,251                                                                                         |  | $                                                                        | 10.90 |                                                                                                                                         | 1,709,903
|Not approved by shareholders |  |                                                                                                  |  |                                                                          |      |                                                                                                                                         |         
|                             |  |                                                                                                   |  |                                                                          |       |                                                                                                                                         |          
|Total                        |  | 8,949,251                                                                                         |  | $                                                                        | 10.90 |                                                                                                                                         | 1,709,903
|                             |  |                                                                                                   |  |                                                                          |       |                                                                                                                                         |          



Below is a summary of
stock repurchases for the quarter ended January 2, 2005 (in thousands, except average price per share).



|                  |  |                       |  |                       |      |                                                 | 
|----------------- |  | --------------------- |  | --------------------- | ---- | ----------------------------------------------- | 
|Period            |  | SharesRepurchased (1) |  | AveragePrice PerShare |      | MaximumNumber of Sharesthat May Yet bePurchased
|November 10, 2004 |  | 5,051                 |  | $                     | 7.92 |                                                 | 
|                  |  |                       |  |                       |      |                                                 | 



|(1) | All shares were purchased simultaneously with the private placement of our $200.0 million aggregate principal amount of 1.875% convertible subordinated notes due
November 2024 to Deutsche Bank Securities, Inc. on November 10, 2004.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



ITEM 6. SELECTED FINANCIAL DATA



The following selected consolidated financial data has been derived from Powerwaves audited consolidated financial statements. The audited consolidated financial statements as of January 2, 2005 and December 28, 2003 and for the
fiscal years ended January 2, 2005, December 28, 2003, and December 29, 2002 are included herein. The information set forth below is not necessarily indicative of the expectations of results for 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.



|                                                                   |  |                                                          |           |   |                  |   |         |                   |  |                  |         |  |                   |         |   |  |   |        
|------------------------------------------------------------------ |  | -------------------------------------------------------- | --------- | - | ---------------- | - | ------- | ----------------- |  | ---------------- | ------- |  | ----------------- | ------- | - |  | - | -------
|                                                                   |  | Fiscal Years Ended (in thousands, except per share data)
|                                                                   |  | January 2,2005 (1)                                       |           |   | December 28,2003 |   |         | December 29, 2002 |  | December 30,2001 |         |  | December 31, 2000
|Consolidated Statements of Operations Data:                        |  |                                                          |           |   |                  |   |         |                   |  |                  |         |  |                   |         |   |  |   |        
|Net sales                                                          |  | $                                                        | 473,914   |   |                  | $ | 239,069 |                   |  | $                | 384,889 |  | $                 | 300,293 |   |  | $ | 447,422
|Operating income (loss)                                            |  | $                                                        | (26,927   | ) |                  | $ | (55,824 | )                 |  | $                | 3,910   |  | $                 | (37,615 | ) |  | $ | 64,717 
|Net income (loss)                                                  |  | $                                                        | (72,122   | ) |                  | $ | (32,859 | )                 |  | $                | 4,111   |  | $                 | (20,512 | ) |  | $ | 45,653 
|Basic earnings (loss) per share                                    |  | $                                                        | (0.80     | ) |                  | $ | (0.51   | )                 |  | $                | 0.06    |  | $                 | (0.33   | ) |  | $ | 0.75   
|Diluted earnings (loss) per share                                  |  | $                                                        | (0.80     | ) |                  | $ | (0.51   | )                 |  | $                | 0.06    |  | $                 | (0.33   | ) |  | $ | 0.71   
|Basic weighted average common shares                               |  |                                                          | 90,212    |   |                  |   | 64,667  |                   |  |                  | 65,485  |  |                   | 64,197  |   |  |   | 61,953 
|Diluted weighted average common shares                             |  |                                                          | 90,212    |   |                  |   | 64,667  |                   |  |                  | 66,230  |  |                   | 64,197  |   |  |   | 65,313 
|                                                                   |  |                                                          |           |   |                 
|Consolidated Balance Sheet Data:                                   |  |                                                          |           |   |                  |   |         |                   |  |                  |         |  |                   |         |   |  |   |        
|Cash, cash equivalents, restricted cash and short-term investments |  | $                                                        | 289,466   |   |                  | $ | 260,528 |                   |  | $                | 162,529 |  | $                 | 123,171 |   |  | $ | 128,733
|Working capital                                                    |  | $                                                        | 344,132   |   |                  | $ | 280,245 |                   |  | $                | 218,504 |  | $                 | 186,255 |   |  | $ | 196,733
|Total assets                                                       |  | $                                                        | 1,020,771 |   |                  | $ | 466,257 |                   |  | $                | 369,173 |  | $                 | 363,017 |   |  | $ | 393,797
|Long-term debt, net of current portion                             |  | $                                                        | 330,000   |   |                  | $ | 130,000 |                   |  | $                |        |  | $                 | 239     |   |  | $ | 42     
|Total shareholders equity                                         |  | $                                                        | 515,612   |   |                  | $ | 271,037 |                   |  | $                | 325,661 |  | $                 | 316,235 |   |  | $ | 316,272

---

|(1) | Fiscal year 2004 includes the
financial results of LGP Allgon beginning May 2004 and a non-cash charge of $45.0 million related to the establishment of a full valuation allowance against our net U.S deferred tax assets. See Note 16. Income Taxes and Note 17.
Acquisitions of the Notes to Consolidated Financial Statements under Part II, Item 8, Financial Statements and Supplementary Data.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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. This discussion contains
forward-looking statements, the realization of which may be impacted by certain important factors including, but not limited to, those discussed in Additional Factors That May Affect Our Future Results.



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Introduction and Overview



Powerwave is a global supplier of end-to-end wireless solutions for wireless communications networks. Our primary business
consists of the design, manufacture, marketing and sale of products to improve coverage, capacity and data speed in wireless communication networks, including antennas, boosters, combiners, filters, radio frequency power amplifiers, repeaters,
tower-mounted amplifiers and advanced coverage solutions. These products are utilized in major wireless networks throughout the world that support voice and data communications by use of cell phones and other wireless communication devices. We sell
such products to both original equipment manufacturers, who incorporate our products into their proprietary base stations (which they then sell to wireless network operators), and directly to individual wireless network operators for deployment into
their existing networks.



We also operate a contract
manufacturing business under the trade name of Arkivator. This business manufactures and sells advanced industrial components, primarily for the automotive and food industries, under contract manufacturing arrangements. This business
accounted for approximately 5.3% of our revenues for fiscal 2004.



During the last three years, demand for wireless communications infrastructure equipment has fluctuated dramatically and there have been significant slowdowns in capital spending by wireless network operators due to delays in the expected
deployment of next generation equipment and financial difficulties on the part of the wireless network operators who have been forced to consolidate and reduce spending to strengthen their balance sheets and improve their profitability. These
changes have had a significant negative impact on overall demand for wireless infrastructure products, and at various times, have directly reduced demand for our products and increased price competition within our industry which has led to
reductions in our revenues and contributed to our reported operating losses.



We believe that we have maintained our overall market share within the wireless communications infrastructure equipment market during this difficult industry period. We continue to invest in the research and
development of wireless communications network technology and the diversification of our product offerings, and we believe that we have one of our industrys leading product portfolios in terms of performance and features. We believe that our
proprietary design technology is a further differentiator for our products.



During fiscal 2003, we focused on restructuring Powerwave to lower our operating cost structure while ensuring that we maintained our operating flexibility to support future growth in the industry. During fiscal 2004,
we continued to focus on cost savings while we expanded our market opportunities, as evidenced by our acquisition of LGP Allgon. This acquisition involved the integration of two companies based in different countries that previously have operated
independently, which was a complex, costly and time-consuming process. We have implemented our plans to restructure and integrate LGP Allgons operations, technology and personnel with ours and currently expect that such efforts will be
completed by the second quarter of fiscal 2005. We believe LGP Allgons product offerings and customer relationships are highly complimentary with those of Powerwave and that this acquisition provides us with a strong position in the global
wireless infrastructure market and improves our ability to provide more complete end-to-end solutions for our customers complex network requirements.



We measure our success by monitoring our net sales and gross margins, with a short-term goal of maintaining a positive operating cash flow while striving
to achieve long-term operating profits. We believe that there continues to be long-term growth opportunities within the wireless communications infrastructure marketplace, and we are focused on positioning Powerwave to benefit from these long-term
opportunities.



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Critical Accounting Policies and Estimates



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



Revenue Recognition



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



Accounts Receivable



We perform ongoing credit evaluations of our customers and adjust credit
limits based upon payment history, the customers credit worthiness and various other factors, as determined by our review of their credit information. We monitor collections and payments from our customers and maintain an allowance for
estimated credit losses based upon our historical experience and any specific customer collection issues that we have identified. While such credit losses have historically been within our expectations and the provisions established, we cannot
guarantee that we will continue to experience the same credit loss rates that we have in the past. Since our accounts receivable are highly concentrated in a small number of customers, a significant change in the liquidity or financial position of
any one of these customers could have a material adverse effect on the collectibility of our accounts receivable, our liquidity and our future operating results.



Inventories



We value our inventory at the lower of the actual cost to purchase and/or manufacture the inventory or the current estimated market value of the
inventory. We regularly review inventory quantities on hand and on order and record a provision for excess and obsolete inventory and/or vendor cancellation charges related to purchase commitments. Depending on the product line, such provisions are
established based on historical usage for the preceding twelve months, adjusted for known changes in demands for such products, or the estimated forecast of product demand and production requirements for the next twelve months. Our industry is
characterized by rapid technological change, frequent new product development, and rapid product obsolescence that could result in an increase in the amount of obsolete inventory quantities on hand. As demonstrated during the past three fiscal
years, demand for our products can fluctuate significantly. A significant increase in the demand for our products could result in a short-term increase in the cost of inventory purchases while a significant decrease in demand could result in an
increase in the amount of excess inventory quantities on hand. In addition, our estimates of future product demand may prove to be inaccurate, in which case we may have understated or overstated the provision required for excess and obsolete
inventory. In the future, if our inventory is determined to be overvalued, we would be required to recognize additional expense in our cost of goods sold at the time of such determination. Likewise, if our inventory is determined to be undervalued,
we may have over-reported our costs of goods sold in previous periods and would be required to recognize additional gross profit at the time such inventory is sold. Although we make reasonable efforts to ensure the accuracy of our forecasts of
future product demand, any significant unanticipated changes in demand or technological developments could have a material effect on the value of our inventory and our reported operating results.



Income Taxes



We recognize current and deferred tax assets and liabilities, as well as the
associated income statement benefit or expense, based on our reported operating results and the differences between the financial statement carrying values and the tax bases of assets and liabilities in each separate tax jurisdiction within which we
conduct business. We do not provide deferred U.S. income taxes on undistributed earnings from certain foreign subsidiaries where we consider such earnings to be permanently reinvested. Given the increased global scope of our operations and the
complexity of global tax and transfer pricing rules and regulations, it has become increasingly difficult to predict and manage our earnings within each tax jurisdiction. This has resulted in, and could continue to result in, significant
fluctuations in our effective tax rate.



We regularly review
our deferred tax assets for recoverability and establish a valuation allowance based on historical taxable income, projected future taxable income, and the expected timing of the reversals of existing temporary differences within each taxing
jurisdiction. During the fourth quarter of fiscal 2004, we recorded a non-



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cash charge of $45.0 million to establish a full valuation allowance against our U.S. deferred tax assets due to our U.S.
cumulative loss position and the uncertainties involved in generating sufficient future U.S taxable income as the result of the increased global scope of our operations following the acquisition of LGP Allgon.



Goodwill, Intangible Assets and Long-Lived Assets



We record the assets acquired and liabilities assumed in business
combinations at their respective fair values at the date of acquisition, with any excess purchase price recorded as goodwill. Because of the expertise required to value intangible assets and in-process research and development, we typically engage
independent valuation specialists to assist us in determining those values. Valuation of intangible assets and in-process research and development entails significant estimates and assumptions including, but not limited to, determining the timing
and expected costs to complete development projects, estimating future cash flows from product sales, developing appropriate discount rates, estimating probability rates for the successful completion of development projects, continuation of customer
relationships and renewal of customer contracts, and approximating the useful lives of the intangible assets acquired. To the extent actual results differ from these estimates, our future results of operations may be affected.



We review the recoverability of the carrying value of goodwill on an annual
basis or more frequently when an event occurs or circumstances change to indicate that an impairment of goodwill has possibly occurred. The determination of whether any potential impairment of goodwill exists is based upon a comparison of the fair
value of a reporting unit to the accounting value of the underlying net assets of such reporting unit. To determine the fair value of a reporting unit, we review the market value of our outstanding Common Stock based upon its average and closing
stock prices, as well as subjective valuations for the reporting unit based on multiples of sales, EBITDA and EBIT, and other valuation metrics. If the fair value of the reporting unit is less than the accounting value of the underlying net assets,
goodwill is deemed impaired and an impairment loss is recorded to the extent that the carrying value of goodwill is less than the difference between the fair value of the reporting unit and the fair value of all its underlying identifiable assets
and liabilities. While we do not believe that any portion of our recorded goodwill is presently impaired, any future impairment of our goodwill could have a material adverse affect on our financial position and results of operations.



Purchased intangible assets with determinable useful lives are carried at
cost less accumulated amortization, and are amortized using the straight-line method over their estimated useful lives, which generally range up to 6 years. We review the recoverability of the carrying value of identified intangibles and other
long-lived assets, including fixed assets, whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of these assets is determined based upon the forecasted undiscounted future
net cash flows expected to result from the use of such asset and its eventual disposition. Our estimate of future cash flows is based upon, among other things, certain assumptions about expected future operating performance, growth rates and other
factors. The actual cash flows realized from these assets may vary significantly from our estimates due to increased competition, changes in technology, fluctuations in demand, consolidation of our customers and reductions in average selling prices.
If the carrying value of an asset is determined not to be recoverable from future operating cash flows, the asset is deemed impaired and an impairment loss is recognized to the extent the carrying value exceeds the estimated fair market value of the
asset. While we do not believe that any of our intangible or other long-lived assets are currently impaired, any future impairment of such assets could have a material adverse affect on our financial position and results of operations.



Warranties



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



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Accruals for Restructuring and Impairment Charges



We recorded $2.6 million and $15.5 million of restructuring and impairment
charges during fiscal years 2004 and 2003, respectively. In addition, as a result of the acquisition of LGP Allgon in May 2004, we recorded $22.1 million of additional restructuring liabilities and asset write-downs under purchase accounting for
expected integration and consolidation activities related to their operations. These restructuring and impairment accruals related primarily to workforce reductions, consolidation of facilities, and the discontinuation of certain product lines,
including the associated write-downs of inventory, manufacturing and test equipment, and certain intangible assets. Such accruals were based on estimates and assumptions made by management about matters which were uncertain at the time, including
the timing and amount of sublease income that will be recovered on vacated property and the net realizable value of used equipment that is no longer needed in our continuing operations. While we used our best current estimates based on facts and
circumstances available at the time to quantify these charges, different estimates could reasonably be used in the relevant periods to arrive at different accruals and/or the actual amounts incurred or recovered may be substantially different from
the assumptions utilized, either of which could have a material impact on the presentation of our financial condition or results of operations for a given period. As a result, we periodically review the estimates and assumptions used and reflect the
effects of those revisions in the period that they become known.





New Accounting Pronouncements



In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard 123R (Revised 2004),
Share-Based Payment(SFAS 123R), which requires that the compensation cost relating to share-based payment transactions be recognized in financial statements based on alternative fair value models. The share-based compensation
cost will be measured based on the fair value of the equity or liability instruments issued. We current disclose pro forma compensation expense quarterly and annually. Upon adoption, the pro forma disclosures previously permitted under SFAS 123 will
no longer be an alternative to financial statement recognition. The provisions of SFAS 123R are effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. We are currently evaluating the method of
adoption and the effect that the adoption of SFAS 123R will have on our financial position and results of operations.



In November 2004, the FASB issued Statement of Financial Accounting Standard 151, Inventory Costs  an amendment of ARB No. 43, Chapter 4
(SFAS 151). SFAS 151 amends the guidance in ARB No. 43 to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). SFAS 151 requires that these costs be recognized as
current period charges regardless of whether they are abnormal. In addition, SFAS 151 requires that allocation of fixed production overheads to the costs of manufacturing be based on the normal capacity of the production facilities. The provisions
of SFAS 151 are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. We are currently evaluating the effect that the adoption of this new standard may have on our consolidated financial position or results of
operations.



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Results of Operations



The following table summarizes Powerwaves results of operations as a percentage of net sales for the years ended January 2, 2005, December 28, 2003,
and December 29, 2002:



|                                          |  |                    |    |  |                  |    |  |                  |  
|----------------------------------------- |  | ------------------ | -- |  | ---------------- | -- |  | ---------------- | -
|                                          |  | Fiscal Years Ended |   
|                                          |  | January 2,2005     |    |  | December 28,2003 |    |  | December 29,2002 |  
|Net sales                                 |  | 100.0              | %  |  | 100.0            | %  |  | 100.0            | %
|Cost of sales:                            |  |                    |    |  |                  |    |  |                  |  
|Cost of goods                             |  | 76.5               |    |  | 89.6             |    |  | 83.4             |  
|Intangible asset amortization             |  | 1.0                |    |  | 0.3              |    |  | 0.3              |  
|Restructuring and impairment charges      |  | 0.1                |    |  | 3.3              |    |  |                 |  
|                                          |  |                    |    |  |                  |    |  |                  |  
|Total cost of sales                       |  | 77.6               |    |  | 93.2             |    |  | 83.7             |  
|                                          |  |                    |    |  |                  |    |  |                  |  
|Gross profit                              |  | 22.4               |    |  | 6.8              |    |  | 16.3             |  
|Operating expenses:                       |  |                    |    |  |                  |    |  |                  |  
|Sales and marketing                       |  | 6.0                |    |  | 4.8              |    |  | 3.0              |  
|Research and development                  |  | 10.0               |    |  | 16.3             |    |  | 8.6              |  
|General and administrative                |  | 5.1                |    |  | 5.8              |    |  | 3.7              |  
|Intangible asset amortization             |  | 1.6                |    |  |                 |    |  |                 |  
|In-process research and development       |  | 4.9                |    |  |                 |    |  |                 |  
|Restructuring and impairment charges      |  | 0.4                |    |  | 3.2              |    |  |                 |  
|                                          |  |                    |    |  |                  |    |  |                  |  
|Total operating expenses                  |  | 28.0               |    |  | 30.1             |    |  | 15.3             |  
|                                          |  |                    |    |  |                  |    |  |                  |  
|Operating income (loss)                   |  | (5.6               | )  |  | (23.3            | )  |  | 1.0              |  
|Other income, net                         |  |                   |    |  | 1.0              |    |  | 0.5              |  
|                                          |  |                    |    |  |                  |    |  |                  |  
|Income (loss) before income taxes         |  | (5.6               | )  |  | (22.3            | )  |  | 1.5              |  
|Provision for (benefit from) income taxes |  | 9.6                |    |  | (8.6             | )  |  | 0.4              |  
|                                          |  |                    |    |  |                  |    |  |                  |  
|Net income (loss)                         |  | (15.2              | )% |  | (13.7            | )% |  | 1.1              | %
|                                          |  |                    |    |  |                  |    |  |                  |  



Years ended January 2, 2005 and
December 28, 2003



Net Sales



Our sales are derived primarily from the sale of wireless communications
network products and coverage solutions, including antennas, boosters, combiners, filters, radio frequency power amplifiers, repeaters, tower-mounted amplifiers and advanced coverage solutions for use in cellular, PCS, and 3G wireless communications
networks throughout the world. We also manufacture and sell advanced industrial components, primarily for the automotive and food industries, under contract manufacturing arrangements. Sales increased by 98% to $473.9 million, for the year ended
January 2, 2005, from $239.1 million, for the year ended December 28, 2003. This increase was primarily due to our acquisition of LGP Allgon which was included in our results from May 2004 forward.



The following table presents an analysis of our net sales based upon business
segment:



|                        |  |                                   |         |  |                   |   |  |   |         |  |       |  
|----------------------- |  | --------------------------------- | ------- |  | ----------------- | - |  | - | ------- |  | ----- | -
|                        |  | Fiscal Years Ended (in thousands) |        
|Segment                 |  | January 2, 2005                   |         |  | December 28, 2003 |  
|Wireless communications |  | $                                 | 448,867 |  | 94.7              | % |  | $ | 239,069 |  | 100.0 | %
|Contract manufacturing  |  |                                   | 25,047  |  | 5.3               | % |  |   |        |  |      | %
|                        |  |                                   |         |  |                   |   |  |   |         |  |       |  
|Total sales             |  | $                                 | 473,914 |  | 100.0             | % |  | $ | 239,069 |  | 100.0 | %
|                        |  |                                   |         |  |                   |   |  |   |         |  |       |  



The contract
manufacturing business segment was acquired as part of our purchase of LGP Allgon and operates under the name Arkivator.



The following table presents a further analysis of our sales within the wireless communications business segment based upon product group:



|                                      |  |                                   |         |  |                   |   |  |   |         |  |       |  
|------------------------------------- |  | --------------------------------- | ------- |  | ----------------- | - |  | - | ------- |  | ----- | -
|                                      |  | Fiscal Years Ended (in thousands) |        
|Wireless Communications Product
Group |  | January 2, 2005                   |         |  | December 28, 2003 |  
|Antenna systems                       |  | $                                 | 110,991 |  | 24.7              | % |  | $ |        |  |      | %
|Base station subsystems               |  |                                   | 277,521 |  | 61.8              | % |  |   | 239,069 |  | 100.0 | %
|Coverage solutions                    |  |                                   | 60,355  |  | 13.5              | % |  |   |        |  |      | %
|                                      |  |                                   |         |  |                   |   |  |   |         |  |       |  
|Total net sales                       |  | $                                 | 448,867 |  | 100.0             | % |  | $ | 239,069 |  | 100.0 | %
|                                      |  |                                   |         |  |                   |   |  |   |         |  |       |  



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Antenna systems consist of base station antennas and tower-mounted amplifiers. Base station subsystems
consist of products that are installed into or around the base station of wireless networks and include products such as boosters, combiners, filters and radio frequency power amplifiers. Coverage solutions consist primarily of repeaters and
advanced coverage solutions. The increase in all three product groups during the fiscal year ended January 2, 2005 as compared to the fiscal year ended December 28, 2003 was a result of our acquisition of LGP Allgon. All of the products included in
the antenna systems group and coverage systems group, as well as certain products in the base station subsystems group, were obtained in the LGP Allgon acquisition.



We track the geographic location of our sales based upon the location of our customers to which our products are shipped.
Since many of our customers purchase products from us at central locations and then reship the product with other base station equipment to locations throughout the world, we are unable to identify the final installation location of our products.
The following table presents an analysis of our net sales based upon the geographic area to which a product was shipped:



|                               |  |                                   |         |  |                   |   |  |   |         |  |       |  
|------------------------------ |  | --------------------------------- | ------- |  | ----------------- | - |  | - | ------- |  | ----- | -
|                               |  | Fiscal Years Ended (in thousands) |        
|Geographic Area                |  | January 2, 2005                   |         |  | December 28, 2003 |  
|North America                  |  | $                                 | 137,517 |  | 29.0              | % |  | $ | 128,350 |  | 53.7  | %
|Asia                           |  |                                   | 61,895  |  | 13.1              | % |  |   | 31,974  |  | 13.4  | %
|Europe and other international |  |                                   | 274,502 |  | 57.9              | % |  |   | 78,745  |  | 32.9  | %
|                               |  |                                   |         |  |                   |   |  |   |         |  |       |  
|Total net sales                |  | $                                 | 473,914 |  | 100.0             | % |  | $ | 239,069 |  | 100.0 | %
|                               |  |                                   |         |  |                   |   |  |   |         |  |       |  



Revenues in the
Americas, Asia Pacific and Europe and other international locations increased in fiscal 2004 as compared to fiscal 2003 primarily as a result of our acquisition of LGP Allgon. The significant growth in our European revenues is due to the significant
percentage of LGP Allgon revenues generated in Europe, as this company was headquartered in Sweden. Since wireless network infrastructure spending is dependent on individual network coverage and capacity demands during the year, we do not believe
that our revenue fluctuations for any geographic region are necessarily indicative of a predictable trend for our future revenues by geographic area.



For the year ended January 2, 2005, total sales to Nortel accounted for approximately 24% of sales and sales to Nokia accounted for 10% or more of sales
for such period. For the year ended December 28, 2003, total sales to Nortel accounted for approximately 57% of sales and sales to Nokia accounted for 10% or more of sales. Our business is dependent upon a limited number of customers and we cannot
guarantee that we will continue to be successful in attracting new customers or retaining or increasing business with our existing customers. Notwithstanding the acquisition of LGP Allgon, our business remains largely dependent upon the limited
number of customers within the wireless communications market and we cannot guarantee that we will continue to be successful in attracting new customers or retaining or increasing business with our existing customers.



A number of factors have caused delays and may cause future delays in new
wireless infrastructure and upgrade deployment schedules throughout the world, including deployments in the United States, Europe, Asia, South America and other areas. In addition, a number of factors may cause original equipment manufacturers to
alter their outsourcing strategy concerning certain wireless communications network products, which could cause such original equipment manufacturers to reduce or eliminate their demand for external supplies of such products or shift their demand to
alternative suppliers or internal suppliers. Such factors include lower perceived internal manufacturing costs and competitive reasons to remain vertically integrated. Due to the possible uncertainties associated with wireless infrastructure
deployments and original equipment manufacturer demand, we have experienced and expect to continue to experience significant fluctuations in demand from our original equipment manufacturer and network operator customers. Such fluctuations have
caused and may continue to cause significant reductions in our revenues and/or operating results, which has adversely impacted and may continue to adversely impact our business, financial condition and results of operations.



Cost of Sales and Gross Profit



Our cost of sales includes both fixed and variable cost components and
consists primarily of materials, assembly and test labor, overhead, which includes equipment and facility depreciation, transportation costs,



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warranty costs and amortization of product-related intangibles. Components of our fixed cost structure include test
equipment and facility depreciation, purchasing and procurement expenses and quality assurance costs. Given the fixed nature of such costs, the absorption of our overhead costs into inventory decreases and the amount of overhead variances expensed
to cost of sales increases as volumes decline since we have fewer units to absorb our overhead costs against. Conversely, the absorption of our overhead costs into inventory increases and the amount of overhead variances expensed to cost of sales
decreases as volumes increase since we have more units to absorb our overhead costs against. As a result, our gross profit margins generally decrease as revenue and volumes decline due to lower sales volume and higher amounts of overhead variances
expensed to cost of sales; and our gross profit margins generally increase as our revenue and volumes increase due to higher sales volume and lower amounts of overhead variances expensed to cost of sales.



The following table presents an analysis of our gross profit:



|                                     |  |                                   |         |  |                   |   |  |   |         |  |       |  
|------------------------------------ |  | --------------------------------- | ------- |  | ----------------- | - |  | - | ------- |  | ----- | -
|                                     |  | Fiscal Years Ended (in thousands) |        
|                                     |  | January 2, 2005                   |         |  | December 28, 2003 |  
|Net sales                            |  | $                                 | 473,914 |  | 100.0             | % |  | $ | 239,069 |  | 100.0 | %
|Cost of sales:                       |  |                                   |         |  |                   |   |  |   |         |  |       |  
|Cost of goods                        |  |                                   | 362,872 |  | 76.5              | % |  |   | 214,247 |  | 89.6  | %
|Intangible asset amortization        |  |                                   | 4,615   |  | 1.0               | % |  |   | 756     |  | 0.3   | %
|Restructuring and impairment charges |  |                                   | 506     |  | 0.1               | % |  |   | 7,851   |  | 3.3   | %
|                                     |  |                                   |         |  |                   |   |  |   |         |  |       |  
|Total cost of sales                  |  |                                   | 367,993 |  | 77.6              | % |  |   | 222,854 |  | 93.2  | %
|                                     |  |                                   |         |  |                   |   |  |   |         |  |       |  
|Gross profit                         |  | $                                 | 105,921 |  | 22.4              | % |  | $ | 16,215  |  | 6.8   | %
|                                     |  |                                   |         |  |                   |   |  |   |         |  |       |  



Our gross profit
margins were favorably impacted during fiscal 2004 by the increased revenue from the enlarged product portfolio and initial cost savings realized from the integration of purchasing activities following our acquisition of LGP Allgon, as well as the
initial cost savings realized from the consolidation of LGP Allgon manufacturing activities. In addition, we realized cost savings from the outsourcing of the production of our radio frequency power amplifier products to contract manufacturers
during fiscal 2003. This impact was slightly offset by increased amortization of product-related intangibles primarily acquired in connection with the acquisition of LGP Allgon as well as additional overhead costs associated with the LGP Allgon
manufacturing facilities. During the fiscal year ended January 2, 2005, we recorded restructuring and impairment charges within cost of sales of approximately $0.5 million primarily related to severance costs resulting from the rationalization of
Powerwave operations as part of our integration plans with LGP Allgon. This compares to restructuring and impairment charges of $7.9 million during the fiscal year ended December 28, 2003, primarily related to the outsourcing of our radio frequency
power amplifier manufacturing operations and new product introductions that accelerated the timing of certain technology transitions. See Note 9. Restructuring and Impairment Charges in the Notes to Consolidated Financial
Statements included in Part II, Item 8, Financial Statements and Supplementary Data for additional information.



The wireless communications infrastructure equipment industry is extremely competitive and is characterized by rapid technological change, new product
development and product obsolescence, evolving industry standards and significant price erosion over the life of a product. Certain of our competitors have aggressively lowered prices in an attempt to gain market share. Due to these competitive
pressures and the pressures of our customers to continually lower product costs, we expect that the average sales prices of our products will continue to decrease and negatively impact our gross margins. As an example, the average sales price for
our radio frequency power amplifier products declined between 2% and 23% from fiscal 2003 to fiscal 2004. In addition, we have introduced new products at lower sales prices and these lower sales prices have impacted the average sales prices of our
products. We have also reduced prices on our existing products in response to our competitors and customer demands. We currently expect that pricing pressures will remain strong in our industry. Future pricing actions by our competitors and us may
adversely impact our gross profit margins and profitability, which could result in decreased liquidity and adversely affect our business, financial condition and results of operations.



We continue to strive for manufacturing and engineering cost reductions to offset pricing pressures on our products, as
evidenced by our decision following the acquisition of LGP Allgon to consolidate our worldwide manufacturing operations and our decision during 2003 to outsource the majority of our radio frequency power amplifier production to contract
manufacturers in order to reduce our cost structure. However, we cannot guarantee that these cost reduction, outsourcing or product redesign efforts will keep pace with price declines and cost increases. If we are unable to further reduce our costs
through our manufacturing, outsourcing and/or engineering



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efforts, our gross margins and profitability will be adversely affected. See Additional Factors That May Affect Our
Future ResultsOur average sales prices have declined; and Our reliance on contract manufacturers exposes us to risks



Operating Expenses



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



|                                     |  |                                   |         |  |                   |   |  |   |        |  |      |  
|------------------------------------ |  | --------------------------------- | ------- |  | ----------------- | - |  | - | ------ |  | ---- | -
|                                     |  | Fiscal Years Ended (in thousands) |        
|Operating Expenses                   |  | January 2, 2005                   |         |  | December 28, 2003 |  
|Sales and marketing                  |  | $                                 | 28,461  |  | 6.0               | % |  | $ | 11,557 |  | 4.8  | %
|Research and development             |  |                                   | 47,188  |  | 10.0              | % |  |   | 38,928 |  | 16.3 | %
|General and administrative           |  |                                   | 24,291  |  | 5.1               | % |  |   | 13,946 |  | 5.8  | %
|Intangible asset amortization        |  |                                   | 7,355   |  | 1.6               | % |  |   |       |  |     |  
|In-process research and development  |  |                                   | 23,450  |  | 4.9               | % |  |   |       |  |     |  
|Restructuring and impairment charges |  |                                   | 2,103   |  | 0.4               | % |  |   | 7,608  |  | 3.2  | %
|                                     |  |                                   |         |  |                   |   |  |   |        |  |      |  
|Total operating expenses             |  | $                                 | 132,848 |  | 28.0              | % |  | $ | 72,039 |  | 30.1 | %
|                                     |  |                                   |         |  |                   |   |  |   |        |  |      |  



Sales and marketing
expenses consist primarily of sales salaries and commissions, travel expenses, charges for customer demonstration units and trade show expenses. Sales and marketing expenses increased by $16.9 million, or 146.3%, during fiscal 2004 as compared to
fiscal 2003 primarily as a result of our acquisition to LGP Allgon, as well as higher personnel costs and professional fees. The acquisition of LGP Allgon added approximately 54 people to our sales and marketing groups which represented an
approximate 125% increase over our previous staffing levels.



Research and development expenses consist of ongoing product design and development expenses as well as design expenses associated with reducing the cost and improving the manufacturability of existing products. Current programs include
antennas, base station subsystems including radio frequency power amplifiers and coverage solution products. Research and development expenses can fluctuate dramatically from period to period depending on numerous factors including new product
introduction schedules, prototype developments and hiring patterns. Research and development expenses increased by $8.3 million, or 21.2%, during fiscal 2004 as compared to fiscal 2003. This increase is primarily attributable to our acquisition of
LGP Allgon which resulted in the addition of approximately 223 people to our research and development groups, nearly doubling these resources. This increase was partially offset by a decrease in material costs related to prototype and pre-production
builds for new product introductions and personnel reductions as part of our consolidation activities.



General and administrative expenses consist primarily of salaries and other expenses for management, finance, information systems, facilities and human
resources. General and administrative expenses increased by $10.3 million, or 74.2%, during fiscal 2004. Approximately 25% of this increase was due to increased personnel costs and professional fees incurred by the legacy Powerwave operations. The
remaining increase was a result of our acquisition of LGP Allgon and increased facility personnel costs and professional fees. Approximately 106 people were added to our general and administrative groups as part of the LGP Allgon acquisition.
Additional personnel expenses associated with LGP Allgon were approximately $5.5 million and additional depreciation was approximately $1.5 million.



Amortization of customer-related intangibles acquired in the LGP Allgon acquisition amounted to $7.4 million for fiscal 2004, compared to no such charges
during fiscal 2003. We also recorded a one-time charge of $23.5 million for purchased in-process research and development that was expensed upon completion of the LGP Allgon acquisition. This charge related to certain product development activities
of LGP Allgon that had not reached technological feasibility such that successful development was uncertain and no future alternative uses existed. No similar in-process research and development charges were recorded in fiscal 2003. See Note
17. Acquisitions of the Notes to Consolidated Financial Statements under Part II, Item 8, Financial Statements and Supplementary Data for a discussion of in-process research and development expenses.



Restructuring and impairment charges amounted to $2.1 million during fiscal
2004 compared to $7.6 million during fiscal 2003. The charges recorded during fiscal 2004 related primarily to the rationalization of Powerwave operations as part of our integration plans with LGP Allgon, including workforce reductions and facility
consolidations. The charges recorded during fiscal 2003 related primarily to workforce reductions and the write-down



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of excess equipment related to the outsourcing of our radio frequency power amplifier manufacturing operations, as well
as the write-down of goodwill and certain customer-related intangibles. See Note 5. Goodwill and Note 9. Restructuring and Impairment Charges in the Notes to Consolidated Financial Statements included in Part II,
Item 8, Financial Statements and Supplementary Data for additional information.



Other Income, net



The
following table presents a breakdown of other income, net:



|                                  |  |                                   |        |   |                   |      |    |  |   |        |   |  |      |   
|--------------------------------- |  | --------------------------------- | ------ | - | ----------------- | ---- | -- |  | - | ------ | - |  | ---- | --
|                                  |  | Fiscal Years Ended (in thousands) |       
|                                  |  | January 2, 2005                   |        |   | December 28, 2003 |     
|Interest income                   |  | $                                 | 2,920  |   |                   | 0.7  | %  |  | $ | 2,425  |   |  | 1.0  | % 
|Interest expense                  |  |                                   | (3,861 | ) |                   | (0.7 | )% |  |   | (1,162 | ) |  | (0.5 | )%
|Foreign currency gain (loss), net |  |                                   | 394    |   |                   |     | %  |  |   | 33     |   |  |     | % 
|Other income (expense)            |  |                                   | 665    |   |                   |     | %  |  |   | 1,098  |   |  | 0.5  | % 
|                                  |  |                                   |        |   |                   |      |    |  |   |        |   |  |      |   
|Total                             |  | $                                 | 118    |   |                   |     | %  |  | $ | 2,394  |   |  | 1.0  | % 
|                                  |  |                                   |        |   |                   |      |    |  |   |        |   |  |      |   



Other income, net
consists primarily of interest income, less interest expense. Other income, net, decreased to $0.1 million for the year ended January 2, 2005, from $2.4 million during the year ended December 28, 2003. The decrease in other income, net, for fiscal
2004 was primarily due to a full year of interest expense associated with our 1.25% subordinated convertible notes issued in July 2003 and interest expense associated with our 1.875% subordinated convertible notes issued in November 2004.



Provision for (Benefit from) Income Taxes



We recorded a $45.3 million tax provision resulting primarily from the
establishment of a full valuation allowance against our net U.S deferred tax assets during the year ended January 2, 2005. We recorded a tax benefit of 38.5% for the year ended December 28, 2003. Our effective tax rate differs from the U.S federal
statutory rate of 35% primarily due to the impact of state taxes on domestic operations, foreign taxes on international operations and the change in valuation allowance.



23



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Net Loss



The following table presents a reconciliation of operating loss to net loss:



|                                          |  |                                   |         |   |                  |   |         |  
|----------------------------------------- |  | --------------------------------- | ------- | - | ---------------- | - | ------- | -
|                                          |  | Fiscal Years Ended (in thousands) |        
|                                          |  | January 2,2005                    |         |   | December 28,2003 |  
|Operating loss                            |  | $                                 | (26,927 | ) |                  | $ | (55,824 | )
|Other income, net                         |  |                                   | 118     |   |                  |   | 2,394   |  
|                                          |  |                                   |         |   |                  |   |         |  
|Loss before income taxes                  |  |                                   | (26,809 | ) |                  |   | (53,430 | )
|Provision for (benefit from) income taxes |  |                                   | 45,313  |   |                  |   | (20,571 | )
|                                          |  |                                   |         |   |                  |   |         |  
|Net loss                                  |  | $                                 | (72,122 | ) |                  | $ | (32,859 | )
|                                          |  |                                   |         |   |                  |   |         |  



The net loss for the
year ended January 2, 2005 was $72.1 million compared to net loss of $32.9 million for the year ended December 28, 2003. The net loss for fiscal 2004 was higher than the net loss for fiscal 2003 primarily due to our recording of a non-cash charge of
$45.0 million to establish a full valuation allowance against our net U.S. deferred tax assets as well as the in-process research and development charge and increased amortization of purchased intangibles resulting from the LGP Allgon acquisition.
For fiscal year 2004, our improved operating performance was largely due to cost reduction activities such as the outsourcing of manufacturing operations to Asia taken during fiscal year 2003, and the realization of cost synergies from the
consolidation of LGP Allgon manufacturing activities. The significant increase in overall revenue due to the LGP Allgon acquisition also contributed to the improved performance.



Years ended December 28, 2003 and December 29, 2002



Net Sales



For fiscal years 2003 and 2002, our sales were derived primarily from the sale of radio frequency power amplifiers for use in wireless communications
networks. Sales decreased by 38% to $239.1 million, for the year ended December 28, 2003, from $384.9 million, for the year ended December 29, 2002. This decrease was primarily due to an overall reduction in demand resulting from the significant
economic downturn that impacted the wireless communications industry that resulted in curtailed wireless infrastructure spending and reduced average selling prices.



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



|                               |  |                                   |         |  |                   |   |  |   |         |  |       |  
|------------------------------ |  | --------------------------------- | ------- |  | ----------------- | - |  | - | ------- |  | ----- | -
|                               |  | Fiscal Years Ended (in thousands) |        
|Geographic Area                |  | December 28, 2003                 |         |  | December 29, 2002 |  
|North America                  |  | $                                 | 128,350 |  | 53.7              | % |  | $ | 257,009 |  | 66.8  | %
|Asia                           |  |                                   | 31,974  |  | 13.4              | % |  |   | 37,460  |  | 9.7   | %
|Europe and other international |  |                                   | 78,745  |  | 32.9              | % |  |   | 90,420  |  | 23.5  | %
|                               |  |                                   |         |  |                   |   |  |   |         |  |       |  
|Total sales                    |  | $                                 | 239,069 |  | 100.0             | % |  | $ | 384,889 |  | 100.0 | %
|                               |  |                                   |         |  |                   |   |  |   |         |  |       |  



Net sales in each
geographic region were lower in fiscal 2003 as compared to fiscal 2002 primarily as a result of the fiscal 2003 industry-wide reduction in wireless infrastructure spending.



For the year ended December 28, 2003, total sales to Nortel accounted for approximately 57% of sales and sales to Nokia
accounted for 10% or more of sales for such period. For the year ended December 29, 2002, total sales to Nortel accounted for approximately 49% of sales and sales to Cingular Wireless and Nokia each accounted for 10% or more of sales. Reduced demand
for our products negatively impacted our revenues and operating results during the second half of fiscal 2002 and continued to do so during fiscal 2003.



Cost of Sales and Gross Profit



The following table presents an analysis of our gross profit:



|                                     |  |                                   |         |  |                   |   |  |   |         |  |       |  
|------------------------------------ |  | --------------------------------- | ------- |  | ----------------- | - |  | - | ------- |  | ----- | -
|                                     |  | Fiscal Years Ended (in thousands) |        
|                                     |  | December 28, 2003                 |         |  | December 29, 2002 |  
|Net sales                            |  | $                                 | 239,069 |  | 100.0             | % |  | $ | 384,889 |  | 100.0 | %
|Cost of sales:                       |  |                                   |         |  |                   |   |  |   |         |  |       |  
|Cost of goods                        |  |                                   | 214,247 |  | 89.6              | % |  |   | 320,963 |  | 83.4  | %
|Intangible asset amortization        |  |                                   | 756     |  | 0.3               | % |  |   | 1,144   |  | 0.3   | %
|Restructuring and impairment charges |  |                                   | 7,851   |  | 3.3               | % |  |   |        |  |      | %
|                                     |  |                                   |         |  |                   |   |  |   |         |  |       |  
|Total cost of sales                  |  |                                   | 222,854 |  | 93.2              | % |  |   | 322,107 |  | 83.7  | %
|                                     |  |                                   |         |  |                   |   |  |   |         |  |       |  
|Gross profit                         |  | $                                 | 16,215  |  | 6.8               | % |  | $ | 62,782  |  | 16.3  | %
|                                     |  |                                   |         |  |                   |   |  |   |         |  |       |  



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The reduction in our gross profit margins during fiscal 2003 as compared to fiscal 2002 was due to
several factors, the primary factor being the significant reduction in revenues which resulted in lower absorption of our manufacturing overhead expenses and increased labor costs when viewed as a percentage of revenues. In addition, approximately
$7.9 million of restructuring charges relating to severance costs and the write-down of excess equipment and certain product/technology intangibles were recorded in cost of sales during fiscal 2003. There were no restructuring charges included in
cost of sales during fiscal 2002. See Note 9. Restructuring and Impairment Charges in the Notes to Consolidated Financial Statements included in Part II, Item 8, Financial Statements and Supplementary Data.



Operating Expenses



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



|                                     |  |                                   |        |  |                   |   |  |   |        |  |      |  
|------------------------------------ |  | --------------------------------- | ------ |  | ----------------- | - |  | - | ------ |  | ---- | -
|                                     |  | Fiscal Years Ended (in thousands) |       
|Operating Expenses                   |  | December 28, 2003                 |        |  | December 29, 2002 |  
|Sales and marketing                  |  | $                                 | 11,557 |  | 4.8               | % |  | $ | 11,384 |  | 3.0  | %
|Research and development             |  |                                   | 38,928 |  | 16.3              | % |  |   | 33,087 |  | 8.6  | %
|General and administrative           |  |                                   | 13,946 |  | 5.8               | % |  |   | 14,401 |  | 3.7  | %
|Restructuring and impairment charges |  |                                   | 7,608  |  | 3.2               | % |  |   |       |  |     | %
|                                     |  |                                   |        |  |                   |   |  |   |        |  |      |  
|Total operating expenses             |  | $                                 | 72,039 |  | 30.1              | % |  | $ | 58,872 |  | 15.3 | %
|                                     |  |                                   |        |  |                   |   |  |   |        |  |      |  



Sales and marketing
expenses increased by $0.2 million, or 1.5%, during fiscal 2003 as compared to fiscal 2002. While sales and marketing expenses remained relatively constant over the two years, we spent more on customer demonstration and trial units during fiscal
2003, which was offset by a reduction in sales commissions due to lower total sales compared to fiscal 2002.



Research and development expenses increased by $5.8 million, or 17.6%, during fiscal 2003 as compared to fiscal 2002. This increase was primarily
attributable to material and personnel costs associated with prototype and pre-production product development builds and other product development activities that occurred during fiscal 2003 as we pursued more new customer opportunities.



General and administrative expenses decreased by $0.5 million, or 3.2%,
during fiscal 2003 as compared to fiscal 2002 due to cost control efforts.



Restructuring and impairment charges amounted to $7.6 million during fiscal 2003 compared to no such charges during fiscal 2002. These charges related primarily to our write-down of goodwill, as well as engineering
test equipment and certain customer related intangibles, and severance payments made in connection with a reduction to our work force. See Note 5. Goodwill and Note 9. Restructuring and Impairment Charges in the Notes
to Consolidated Financial Statements included in Part II, Item 8, Financial Statements and Supplementary Data for additional information.



Other Income, net



The following table presents a breakdown of other income, net:



|                                  |  |                                   |        |   |                  |   |       |  
|--------------------------------- |  | --------------------------------- | ------ | - | ---------------- | - | ----- | -
|                                  |  | Fiscal Years Ended (in thousands) |       
|                                  |  | December 28,2003                  |        |   | December 29,2002 |  
|Interest income                   |  | $                                 | 2,425  |   |                  | $ | 2,664 |  
|Interest expense                  |  |                                   | (1,162 | ) |                  |   | (81   | )
|Foreign currency gain (loss), net |  |                                   | 33     |   |                  |   | (36   | )
|Other income (expense)            |  |                                   | 1,098  |   |                  |   | (584  | )
|                                  |  |                                   |        |   |                  |   |       |  
|Total                             |  | $                                 | 2,394  |   |                  | $ | 1,963 |  
|                                  |  |                                   |        |   |                  |   |       |  



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Other income, net increased slightly to $2.4 million for the year ended December 28, 2003, from $2.0
million during the year ended December 29, 2002. The slight increase in other income for fiscal 2003 was primarily due to increased interest income resulting from higher average cash investment balances during fiscal 2003 as compared to fiscal 2002,
offset by the interest expense associated with the subordinated convertible notes issued in July 2003.



Provision for (Benefit from) Income Taxes



We recorded a tax benefit at a rate of 38.5% during the year ended December 28, 2003 as compared to a tax provision of 30.0% for the year ended December
29, 2002. Our effective tax rate differed from the U.S. federal statutory tax rate of 35% primarily due to the impact of state taxes on domestic operations and foreign taxes on non-U.S. operations.



Net Income (Loss)



The following table presents a reconciliation of operating income (loss) to
net income (loss):



|                                          |  |                                   |         |   |                  |   |      
|----------------------------------------- |  | --------------------------------- | ------- | - | ---------------- | - | -----
|                                          |  | Fiscal Years Ended (in thousands)
|                                          |  | December 28,2003                  |         |   | December 29,2002
|Operating income (loss)                   |  | $                                 | (55,824 | ) |                  | $ | 3,910
|Other income, net                         |  |                                   | 2,394   |   |                  |   | 1,963
|                                          |  |                                   |         |   |                  |   |      
|Income (loss) before income taxes         |  |                                   | (53,430 | ) |                  |   | 5,873
|Provision for (benefit from) income taxes |  |                                   | (20,571 | ) |                  |   | 1,762
|                                          |  |                                   |         |   |                  |   |      
|Net income (loss)                         |  | $                                 | (32,859 | ) |                  | $ | 4,111
|                                          |  |                                   |         |   |                  |   |      



The net loss for the
year ended December 28, 2003 was $32.9 million compared to net income of $4.1 million for the year ended December 29, 2002. The net loss recorded during fiscal 2003 was primarily due to the decline in revenues combined with lower gross profit
margins, as well as our restructuring and impairment charges recorded in fiscal 2003.



Restructuring and Impairment Charges



Integration with LGP Allgon



In connection
with our acquisition of LGP Allgon during the second quarter of fiscal 2004, the Company formulated and began to implement its plan to restructure and integrate LGP Allgons operations with Powerwaves operations. As a result, we recorded
a restructuring charge related to our legacy operations of approximately $2.6 million during fiscal 2004 in accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This amount included
approximately $2.2 million in connection with workforce reductions of approximately 100 employees at various operating locations and $0.4 million in connection with future lease obligations and asset write-downs related to the closure of our
facility in Long Island, New York, and the consolidation of engineering facilities in El Dorado Hills, California. Based on the job classification of the impacted employees or the characterization of the underlying assets and lease expenses,
approximately $0.5 million of this restructuring charge was recorded in cost of sales and approximately $2.1 million was recorded in operating expenses. In addition, we recognized $22.1 million as liabilities or additional asset fair value
adjustments in connection with the LGP Allgon acquisition for estimated restructuring and integration costs related to the consolidation of LGP Allgon operations, including amounts for future lease obligations on excess facilities, impairment of
excess equipment, write-downs of inventory for discontinued product lines and severance related costs for expected workforce reductions. These estimated costs were included in the allocation of the purchase price and recorded as an adjustment to
goodwill. Implementation of the Companys restructuring and integration plan is underway and additional actions are expected pending certain product related decisions and the further assessment of workforce and facility related requirements.
Integration activities related to such plan are currently expected to continue through the second quarter of fiscal 2005.



Outsourcing of Radio Frequency Power Amplifier Production



We outsourced the majority of our radio frequency power amplifier production to contract manufacturers located in Asia during fiscal 2003 in order to
further reduce our operating cost structure and enable us to be more competitive. Additionally, we accelerated the timing of certain technology transitions and new product introductions due to our transition to outsourced manufacturing, as well as
the continued economic downturn that significantly impacted demand in the wireless infrastructure industry. As a result, we recorded approximately $10.6 million of restructuring and impairment charges during fiscal 2003. These charges included cash
restructuring charges of approximately $4.6 million related primarily to severance payments made in connection with a reduction of our work force of approximately 550 employees. The remaining non-cash impairment charges of approximately $6.0 million
related to a $3.0 million write-down of excess manufacturing and test equipment and a $3.0 million write-down of certain product/technology and customer related intangibles, the value of which was impaired by the technology and product transitions
that were implemented during the year. These restructuring and impairment charges were recorded in cost of sales or operating expenses based upon the job classification of the impacted employees or the character of the underlying assets.
Approximately $7.9 million of these restructuring and impairment charges was recorded in cost of sales and approximately $2.7 million was recorded in operating expenses.



Goodwill Impairment



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



Liquidity and Capital Resources



We have historically financed our operations through a combination of cash on hand, cash provided from operations, equipment lease financings, available
borrowings under bank lines of credit, private debt placements and both private and public equity offerings. Our principal sources of liquidity consist of existing cash balances, short-term investments and funds expected to be generated from future
operations. As of January 2, 2005, we had working capital of $344.1 million, including $282.7 million in unrestricted cash, cash equivalents and short-term investments, as compared to working capital of $280.2 million at December 28, 2003, which
included $259.9 million in unrestricted cash, cash equivalents and short-term investments. We currently invest our excess cash in short-term, investment-grade, money-market instruments with maturities of three months or less as well as certain
auction-rate securities that reset interest rates at auction intervals ranging from between 28 and 35 days. While these auction-rate securities may have contractual maturities ranging up to thirty years, they are readily saleable at par value on
each auction date. We typically hold such investments until maturity, or auction, as applicable, and then reinvest the proceeds in similar instruments. We believe that all of our cash equivalents and short-term investments would be readily available
to us should the need arise.



Cash Flows



The following table summarizes Powerwaves cash flows for the years
ended January 2, 2005 and December 28, 2003:



|                                                     |  |                                   |          |   |                   |   |         |  
|---------------------------------------------------- |  | --------------------------------- | -------- | - | ----------------- | - | ------- | -
|                                                     |  | Fiscal Years Ended (in thousands) |         
|                                                     |  | January 2, 2005                   |          |   | December 28, 2003 |  
|Net cash provided by (used in):                      |  |                                   |          |   |                   |   |         |  
|Operating activities                                 |  | $                                 | (13,742  | ) |                   | $ | 6,906   |  
|Investing activities, including acquisitions         |  |                                   | (148,614 | ) |                   |   | (62,707 | )
|Financing activities                                 |  |                                   | 127,468  |   |                   |   | 103,415 |  
|Effect of foreign currency translation               |  |                                   | 2,486    |   |                   |   |        |  
|                                                     |  |                                   |          |   |                   |   |         |  
|Net increase (decrease) in cash and cash equivalents |  | $                                 | (32,402  | ) |                   | $ | 47,614  |  
|                                                     |  |                                   |          |   |                   |   |         |  



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Net cash provided by operations during fiscal 2004 decreased by $20.6 million as compared to fiscal 2003.
This decrease was due largely to the reductions in accounts payable and other current liabilities, the majority of which were associated with the acquisition of LGP Allgon. As part of the acquisition, we significantly reduced outstanding accounts
payables of LGP Allgon, which had been incurred prior to the acquisition. During the year ended January 2, 2005, our net accounts receivable increased to $133.1 million from $56.3 million at December 28, 2003, primarily due to the acquisition of LGP
Allgon and our higher sales during the fourth quarter of 2004. In addition, our accounts receivable increased due to the longer collection times typically associated with international sales, particularly in Europe. Our days sales outstanding
increased from 71 days as of December 28, 2003 to 77 days at January 2, 2005. Our net inventories increased to $65.8 million during the year ended January 2, 2005, from $15.2 million at December 28, 2003, primarily due to inventory acquired from LGP
Allgon and the purchase of additional inventory to support sales growth.



Net cash used in investing activities of $148.6 million reflects the cash portion of the acquisition of LGP Allgon, capital spending for property, plant and equipment, as well as investments in marketable securities
during fiscal 2004. This compares to net cash used in investing activities of $62.7 million in fiscal 2003 related to the acquisition of Ericsson Amplifier Technologies, capital spending for property, plant & equipment, and investments in
marketable securities. Total capital expenditures during fiscal 2004 and 2003 were approximately $12.7 million and $3.9 million, respectively. The majority of the capital spending during such periods related to computer hardware, test equipment and
manufacturing equipment utilized in our manufacturing and research and development areas. We expect our future annual capital spending requirements to range between $25 million and $35 million per year, consisting primarily of test and production
equipment, as well as computer hardware and software.



The
$127.5 million in net cash provided by financing activities during fiscal 2004 resulted primarily from our November 2004 issuance of $200.0 million of 1.875% convertible subordinated notes due November 2024, offset by the simultaneous repurchase of
$40.0 million of our Common Stock and the repayment of $33.1 million of debt assumed from LGP Allgon. This compares to $103.4 million in net cash provided by financing activities during fiscal 2003 that resulted primarily from our July 2003 issuance
of $130.0 million of 1.25% convertible subordinated debentures due July 2008, offset by the simultaneous repurchase of $25.0 million of our Common Stock.



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



Financing Activities



Our $20 million revolving unsecured credit agreement with Comerica Bank-California expired on May 31, 2004. We decided to delay the renewal of this credit
facility in light of our acquisition of LGP Allgon. We are currently evaluating our long-term financing needs and may decide to negotiate a new credit agreement in the future. However, we cannot guarantee that we will be able to establish a new
credit agreement on terms acceptable to us. We do not require a credit line to finance our operations.



As part of our acquisition of LGP Allgon, we assumed short-term and long-term debt obligations consisting of capital leases, fixed and variable rate bank
term loans, and amounts outstanding under bank lines of credit. From the date of acquisition through January 2, 2005, we repaid the entire amount of bank debt assumed in the acquisition, as well as the scheduled payments under the capital lease
obligations. This amount totaled approximately $33.1 million.



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Effective November 10, 2004, we completed the private placement of $200.0 million aggregate principal
amount of convertible subordinated notes due November 2024 to Deutsche Bank Securities, Inc. and raised approximately $154.2 million in net proceeds after the deduction of debt issuance costs and the repurchase of 5,050,505 shares of our Common
Stock. The notes are convertible into the Common Stock of Powerwave at a conversion price of $11.09 per share and accrue interest at an annual rate of 1.875%. The notes mature in 2024. Powerwave may redeem the notes beginning on November 21, 2009
until November 20, 2010 and on or after November 21, 2010 until November 20, 2011, if the closing price of Powerwaves Common Stock is more than $17.74 and $14.42, respectively, for at least 20 trading days within a 30 consecutive trading day
period. The notes may be redeemed by Powerwave at any time after November 21, 2011. Holders of the notes may require Powerwave to repurchase all or a portion of their notes for cash on November 15, 2011, 2014 and 2019 at 100% of the principal amount
of the notes, plus accrued and unpaid interest up to but not including the date of such repurchase.



On July 18, 2003, we completed the private placement of $130.0 million aggregate principal amount of 1.25% convertible subordinated notes due July 2008
and raised approximately $100.9 million in net proceeds after the deduction of debt issuance costs and the simultaneous repurchase of $25.0 million of our Common Stock (3,144,654 shares). The notes require semi-annual interest payments on January 15
and July 15 and the $130.0 million principal balance is due on July 15, 2008. The notes are convertible into common shares of Powerwave at the conversion price of $10.49 per share. This represents a conversion rate of approximately 95.3289 shares of
Common Stock per $1,000 principal amount of notes.



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



Off-Balance Sheet Arrangements



Our off-balance sheet arrangements consist primarily of conventional operating leases, purchase commitments and other commitments arising in the normal
course of business, as further discussed below under Contractual Obligations and Commercial Commitments. As of January 2, 2005, we did not have any other relationships with unconsolidated entities or financial partners, such as entities
often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.



Contractual Obligations and Commercial Commitments



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



Short-Term and Long-Term Debt



At January 2, 2005, we had $330.0 million of long-term debt, consisting of our outstanding 1.25% convertible subordinated notes due July 2008 and our
1.875% outstanding convertible subordinated notes due November 2024. The notes due July 2008 are convertible into shares of our Common Stock at the option of the holder at a conversion price of $10.49 per share and accrue interest at an annual rate
of 1.25%, payable semi-annually on January 15 and July 15. The notes due November 2024 are convertible into shares of our Common Stock at the option of the holder at a conversion price of $11.09 per share and accrue interest at an annual rate of
1.875%, payable semi-annually on June 15 and December 15. See Note 10. Financing Arrangements and Long-Term Debt in the Notes to Consolidated Financial Statements included under Part II, Item 8, Financial Statements and
Supplementary Data for additional information.



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Capital Lease Obligations



We assumed various capital lease obligations in connection with our acquisition of LGP Allgon. Our current outstanding
capital lease obligations of $0.1 million relate primarily to manufacturing and test equipment and are included as part of short-term and long-term debt, as appropriate, within our consolidated balance sheet.



Operating Lease Obligations



We have various operating leases covering vehicles, equipment, facilities
and sales offices located throughout the world with future minimum payments of $13.8 million as of January 2, 2005.



Purchase Commitments with Contract Manufacturers



We generally issue purchase orders to our contract manufacturers with delivery dates from four to six weeks from the purchase order date. In addition, we
regularly provide such contract manufacturers with rolling six-month forecasts of material and finished goods requirements for planning and long-lead time parts procurement purposes only. We are committed to accept delivery of materials pursuant to
our purchase orders subject to various contract provisions which allow us to delay receipt of such orders or cancel orders beyond certain agreed lead times. Such cancellations may or may not result in cancellation costs payable by us. In the past,
we have been required to take delivery of materials from our suppliers that were in excess of our requirements and we have previously recognized charges and expenses related to such excess material. If we are unable to adequately manage our contract
manufacturers and adjust such commitments for changes in demand, we may incur additional inventory expenses related to excess and obsolete inventory. Such expenses could have a material adverse effect on our business, financial condition and results
of operations.



Other Purchase Commitments



We also incur various purchase obligations with other vendors and
suppliers for the purchase of inventory, as well as other goods and services, in the normal course of business. These obligations are generally evidenced by purchase orders with delivery dates from four to six weeks from the purchase order date, and
in certain cases, supply agreements that contain the terms and conditions associated with these purchase arrangements. We are committed to accept delivery of such materials pursuant to such purchase orders subject to various contract provisions
which allow us to delay receipt of such orders or cancel orders beyond certain agreed lead times. Such cancellations may or may not result in cancellation costs payable by us. In the past, we have been required to take delivery of materials from our
suppliers that were in excess of our requirements and we have previously recognized charges and expenses related to such excess material. If we are not able to adequately manage our supply chain and adjust such commitments for changes in demand, we
may incur additional inventory expenses related to excess and obsolete inventory. Such expenses could have a material adverse effect on our business, financial condition and results of operations.



We have initiated compulsory acquisition proceedings under Swedish law to
acquire the remaining outstanding common shares of LGP Allgon that were not tendered in our exchange offer. We currently expect to pay approximately $7.9 million as additional purchase price related to such proceedings within the next twelve months.



Guarantees Under Letters of Credit



We occasionally issue guarantees for certain contingent liabilities under
various contractual arrangements, including customer contracts, self-insured retentions under certain insurance policies, and governmental value-added tax compliance programs. These guarantees normally take the form of standby letters of credit
issued by our bank that may be secured by cash deposits or pledges, or performance bonds issued by an insurance company.



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##### Table of Contents

As of January 2, 2005, expected future cash payments related to contractual obligations and commercial
commitments were as follows:



|                                                         |  |                                       |        |           |   |           |  |            |         |       |   |         |  |   |        
|-------------------------------------------------------- |  | ------------------------------------- | ------ | --------- | - | --------- |  | ---------- | ------- | ----- | - | ------- |  | - | -------
|                                                         |  | Payments Due by Period (in thousands)
|                                                         |  | Less than 1Year                       |        | 1-3 Years |   | 3-5 Years |  | Thereafter |         | Total
|Short-term and long-term debt (including interest)       |  | $                                     | 5,375  |           | $ | 10,750    |  | $          | 139,125 |       | $ | 256,250 |  | $ | 411,500
|Capital lease obligations                                |  |                                       | 33     |           |   | 14        |  |            |        |       |   |        |  |   | 47     
|Operating lease obligations                              |  |                                       | 4,316  |           |   | 5,852     |  |            | 2,670   |       |   | 967     |  |   | 13,805 
|Purchase commitments with contract manufacturers         |  |                                       | 55,092 |           |   |          |  |            |        |       |   |        |  |   | 55,092 
|Other purchase commitments                               |  |                                       | 34,085 |           |   |          |  |            |        |       |   |        |  |   | 34,085 
|Guarantees under letters of credit                       |  |                                       |       |           |   |          |  |            |        |       |   |        |  |   |       
|                                                         |  |                                       |        |           |   |           |  |            |         |       |   |         |  |   |        
|Total contractual obligations and commercial commitments |  | $                                     | 98,901 |           | $ | 16,616    |  | $          | 141,795 |       | $ | 257,217 |  | $ | 514,529
|                                                         |  |                                       |        |           |   |           |  |            |         |       |   |         |  |   |        



We believe that our
existing cash balances and funds expected to be generated from future operations will be sufficient to satisfy these contractual obligations and commercial commitments and that the ultimate payments associated with these commitments will not have a
material adverse effect on our liquidity position.



Disclosure About Stock
Option Plans



Our stock option program is a broad-based,
long-term retention program that is intended to attract and retain talented employees and align stockholder and employee interests. The program consists of five separate plans: one under which non-employee directors may be granted options to
purchase shares of stock and four broad-based plans under which options may be granted to all employees, including officers. Options granted under these plans expire either 5 or 10 years from the grant date and generally vest over two to four years.



All stock option grants to our executive officers and vice
presidents are made after a review by, and with the approval of, either the Compensation Committee of the Board of Directors or the entire Board of Directors. All members of the Compensation Committee are independent directors, as defined in the
applicable rules for issuers traded on the Nasdaq Stock Market. Our executive officers include Bruce C. Edwards, Executive Chairman of the Board, Ronald J. Buschur, President and Chief Executive Officer, Kevin T. Michaels, Senior Vice President,
Finance, Chief Financial Officer and Secretary, Johan H. Ek, President, European Business Unit and Robert J. Legendre, President, Americas and Asia Business Unit. See the Compensation Committee Report On Executive Compensation appearing
in the Companys Annual Proxy Statement for further information concerning the policies and procedures of the Company and the Compensation Committee regarding the use of stock options.



During the year ended January 2, 2005, we granted options to purchase a total
of 1,602,500 shares of Common Stock to employees. After deducting 1,354,684 shares for options forfeited, the result was net option grants of 247,816. Net option grants during the year represented 0.2% of our total outstanding common shares of
99,410,946 as of January 2, 2005. The following table summarizes the net stock option grants during the three most recent fiscal periods:



|                                                                                                 |  |                    |   |  |                  |    |  |                  |  
|------------------------------------------------------------------------------------------------ |  | ------------------ | - |  | ---------------- | -- |  | ---------------- | -
|                                                                                                 |  | Fiscal Years Ended |  
|                                                                                                 |  | January 2,2005     |   |  | December 28,2003 |    |  | December 29,2002 |  
|Net grants (forfeitures) during the period as a % of total outstanding common shares             |  | 0.2                | % |  | (0.5             | )% |  | 3.1              | %
|Grants to executive officers during the period as a % of total options granted during the period |  | 46.8               | % |  | 18.0             | %  |  | 19.0             | %
|Grants to executive officers during the period as a % of total outstanding common shares         |  | 0.8                | % |  | 0.4              | %  |  | 0.9              | %
|Cumulative options held by executive officers as a % of total options outstanding                |  | 26.7               | % |  | 16.1             | %  |  | 19.5             | %



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At January 2, 2005, a total of 1,709,903 options were available for grant under all of our option plans
and a total of 246,774 shares of Common Stock were held in escrow to cover all remaining exercises under the 1995 Stock Option Plan. See Note 13. Stock Option Plans in the Notes to Consolidated Financial Statements included
under Part II, Item 8, Financial Statements and Supplementary Data included herein for additional information regarding the 1995 Stock Option Plan.



The following table summarizes outstanding stock options that are in-the-money and out-of the-money as of January 2, 2005. For
purposes of this table, in-the-money stock options are those options with an exercise price less than $8.48 per share, the closing price of Powerwave Common Stock on December 31, 2004, the last trading day of the fiscal year, and out-of-the-money
stock options are stock options with an exercise price greater than or equal to the $8.48 per share closing price.



|                          |  |             |  |                        |       |             |           |                        |   |       |  |          
|------------------------- |  | ----------- |  | ---------------------- | ----- | ----------- | --------- | ---------------------- | - | ----- |  | ---------
|                          |  | Exercisable |  | Unexercisable          |       | TotalShares
|                          |  | Shares      |  | Wtd. Avg.ExercisePrice |       | Shares      |           | Wtd. Avg.ExercisePrice |  
|In-the-Money              |  | 2,575,888   |  | $                      | 4.79  |             | 2,861,835 |                        | $ | 6.07  |  | 5,437,723
|Out-of-the-Money          |  | 2,979,718   |  | $                      | 20.44 |             | 531,810   |                        | $ | 13.02 |  | 3,511,528
|                          |  |             |  |                        |       |             |           |                        |   |       |  |          
|Total Options Outstanding |  | 5,555,606   |  | $                      | 13.18 |             | 3,393,645 |                        | $ | 7.16  |  | 8,949,251
|                          |  |             |  |                        |       |             |           |                        |   |       |  |          



For additional
information regarding the stock options granted to and exercised by executive officers during fiscal 2004, see Executive Compensation in the Companys Annual Proxy Statement filed in connection with its Annual Meeting of
Stockholders under the heading Executive Compensation.



Additional Factors That May Affect Our Future Results



We rely upon a few customers for the majority of our revenues and 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 our
business, results of operations and financial condition.



We sell most of our products to a small number of customers, and we expect that this will continue. For the year ended January 2, 2005, sales to Nortel accounted for approximately 24% of net sales and sales to Nokia accounted for
approximately 10% of our net sales. For fiscal year 2003, Nortel accounted for approximately 57% of our net sales and Nokia accounted for 10% or more of our net sales. Our future success is dependent upon the continued purchases of our products by
such customers and any fluctuations in demand from such customers could negatively impact our results of operations. If we are unable to broaden our customer base and expand relationships with major wireless original equipment manufacturers and
major operators of wireless networks, our business will continue to be impacted by unanticipated demand fluctuations due to our dependence on a small number of customers. Unanticipated demand fluctuations can have a negative impact on our revenues
and business, and an adverse effect on our results of operations and financial condition. In addition, our dependence on a small number of major customers exposes us to numerous other risks, including:



| |  |  | a slowdown or delay in deployment of wireless networks by any one customer could significantly reduce demand for our products;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------



| |  |  | reductions in a single customers forecasts and demand could result in excess inventories;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | each of our customers has significant purchasing leverage over us to require changes in sales terms including pricing, payment terms and product delivery schedules;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | direct competition should a customer decide to increase its level of internal designing and/or manufacturing of wireless communication network products; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | concentration of accounts receivable credit risk, which could have a material adverse effect on our liquidity and financial condition if one of our major customers declared
bankruptcy or delayed payment of their receivables.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We may incur unanticipated costs as we complete the integration of our business with the business of LGP Allgon.



On May 3, 2004, we completed the exchange offer for the outstanding shares of LGP Allgon. This acquisition involves the integration of two companies based
in different countries that previously have operated independently, which is a complex, costly and time consuming process. We have limited experience integrating operations as substantial and geographically diverse as those of LGP Allgon, and as a
result, we may not successfully integrate the operations of Powerwave and LGP Allgon in a timely manner. The failure to successfully integrate the two companies operations could undermine the anticipated benefits and synergies of the
combination, which could adversely affect our business, financial condition and results of operations. The anticipated benefits and synergies relate to cost savings associated with operational efficiencies, greater economies of scale and revenue
enhancement opportunities. However, these anticipated benefits and synergies are based on projections and assumptions, not actual experience, and assume a smooth and successful integration of the two companies.



In addition, the acquisition of LGP Allgon is the largest acquisition we have
completed and the complex process of integrating LGP Allgon requires significant resources. We have incurred and will continue to incur significant costs and commit significant management time in integrating LGP Allgons operations,
information, communications and other systems and personnel, among other items. The integration of these businesses has resulted and will continue to result in cash outflows related to the integration process, such as:



| |  |  | fees and expenses of professionals and consultants involved in completing the integration process;
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | settling existing liabilities of the acquired businesses;
| | - |  | ---------------------------------------------------------



| |  |  | integrating technology and personnel; and
| | - |  | -----------------------------------------



| |  |  | other transaction costs associated with the acquisition, including financial advisor, attorney, accountant and other fees.
| | - |  | --------------------------------------------------------------------------------------------------------------------------



There have been significant reductions in customer demand for our
products, and if this continues, our operating results will continue to be adversely impacted.



We have a history of significant reductions in demand that demonstrates the risks related to our customer and industry concentration levels. While our
revenues increased during fiscal year 2004, a majority of this increase was due to the acquisition of LGP Allgon. During fiscal 2003, we experienced significantly reduced demand for our products due to lower than anticipated capital spending plans
by major wireless network operators. This reduction in spending by wireless network operators also resulted in reduced purchases by wireless original equipment manufacturers, whose primary customers are wireless network operators. As a result, our
revenues decreased during fiscal 2003 to $239.1 million from $384.9 million in fiscal 2002. Revenues from wireless network operators decreased to $47.9 million in 2003 from $73.5 million in 2002. If these reductions in overall market demand continue
to result in significant reductions in future demand for our products, our revenues will be flat or down and our results of operations will continue to be negatively impacted.



We have also experienced significant reductions in wireless network operator demand as well as significant delays in demand
for WCDMA, or 3G, based products due to the high projected capital cost of building such networks and market concerns regarding the inoperability of such network protocols. In combination with these market issues, a majority of wireless network
operators have, in the past, regularly reduced their capital spending plans in order to improve their overall cash flow. The continuation of any delays in development of 3G networks will result in continued reduced demand for our products which will
have a material adverse effect on our business.



We have
experienced, and will continue to experience, significant fluctuations in sales and operating results from quarter to quarter.



Our quarterly results fluctuate due to a number of factors, including:



| |  |  | the lack of any obligation by our customers to purchase their forecasted demand for our products;
| | - |  | -------------------------------------------------------------------------------------------------



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| |  |  | variations in the timing, cancellation, or rescheduling of customer orders and shipments;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | high fixed expenses that increase operating expenses, especially during a quarter with a sales shortfall;
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | product failures and associated warranty and in-field service support costs; and
| | - |  | --------------------------------------------------------------------------------



| |  |  | discounts given to certain customers for large volume purchases.
| | - |  | ----------------------------------------------------------------



We have regularly generated a large percentage of our revenues in the last month of a quarter. Since we attempt to ship products quickly after we receive
orders, we may not always have a significant amount of unfilled orders at the start of each quarter and we may be required to obtain a substantial portion of our orders during the quarter in which such orders ship. Our major customers generally have
no obligation to purchase forecasted amounts and may cancel orders, change delivery schedules or change the mix of products ordered with minimal notice and without penalty. As a result, we may not be able to accurately predict our quarterly sales.
Because our expense levels are partially based on our expectations of future sales, our expenses may be disproportionately large relative to our revenues, and we may be unable to adjust spending in a timely manner to compensate for any unexpected
revenue shortfall. Any shortfall in sales relative to our quarterly expectations or any delay of customer orders would adversely affect our revenues and results of operations.



Order deferrals and cancellations by our customers, declining average sales prices, changes in the mix of products sold,
delays in the introduction of new products and longer than anticipated sales cycles for our products have, in the past, adversely affected our results of operations. Despite these factors, we, along with our contract manufacturers, maintain
significant finished goods, work-in-progress and raw materials inventory to meet estimated order forecasts. If our customers purchase less than their forecasted orders or cancel or delay existing purchase orders, there will be higher levels of
inventory that face a greater risk of obsolescence. If our customers desire to purchase products in excess of the forecasted amounts or in a different product mix, there may not be enough inventory or manufacturing capacity to fill their orders.



Due to these and other factors, our past results are not
reliable indicators of our future performance. Future revenues and operating results may not meet the expectations of public market analysts or investors. In either case, the price of our Common Stock could be materially adversely affected.



Our average sales prices have declined, and we anticipate
that the average sales prices for our products will continue to decline and negatively impact our gross profit margins.



Wireless service providers are continuing to place pricing pressure on wireless infrastructure manufacturers, which in turn, has resulted in lower selling
prices for our products, with certain competitors aggressively reducing prices in an effort to increase their market share. As an example, the average sales price for our radio frequency power amplifier products declined by between 2% to 23% from
fiscal 2003 to fiscal 2004. Since wireless infrastructure manufacturers frequently negotiate supply arrangements far in advance of delivery dates, we must often commit to price reductions for our products before we know how, or if, we can obtain
such cost reductions. In addition, average sales prices are affected by price discounts negotiated without firm orders for large volume purchases by certain customers. To offset declining average sales prices, we must reduce manufacturing costs and
ultimately develop new products with lower costs or higher average sales prices. If we cannot achieve such cost reductions or increases in average selling prices, our gross margins will decline.



Our suppliers, contract manufacturers or customers could become
competitors.



Many of our customers internally design
and/or manufacture their own wireless communications network products. These customers also continuously evaluate whether to manufacture their own wireless communications network products or utilize contract manufacturers to produce their own
internal designs. Certain of our customers regularly produce or design wireless communications network products in an attempt to replace products manufactured by us. We believe that this practice will continue. In the event that our customers
manufacture or design their own wireless communications network products, such customers could reduce or eliminate their purchases of our products, which would result in reduced revenues and would adversely impact our results of operations and
liquidity. Wireless infrastructure equipment manufacturers with internal manufacturing capabilities, including many of our customers, could also sell wireless communications network products externally to other manufacturers, thereby competing
directly with us. In addition, our suppliers or contract manufacturers may decide to produce competing products directly for our customers and, effectively, compete against us. If, for any reason, our customers produce their wireless communications
network products internally, increase the percentage of their internal production, require us to participate in joint venture manufacturing with them, engage our suppliers or contract manufacturers to manufacture competing products, or otherwise
compete directly against us, our revenues would decrease, which would adversely impact our results of operations.



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Our success is tied to the growth of the wireless services communications market and our future
revenue growth is dependent upon the expected increase in the size of this market.



Our revenues come primarily from the sale of wireless communications network products and coverage solutions. Our future success depends upon the growth and increased availability of wireless communications services.
Wireless communications services may not grow at a rate fast enough to create demand for our products, as we experienced during fiscal 2003. During this period, wireless network operators reduced or delayed capital spending on wireless networks in
order to preserve their operating cash and improve their balance sheets. Such reduced spending on wireless networks has had a negative impact on our operating results. If wireless network operators continue to delay or maintain reduced levels of
capital spending, our operating results will continue to be negatively impacted.



Our reliance on contract manufacturers exposes us to risks of excess inventory or inventory carrying costs.



If our contract manufacturers are unable to timely respond to changes in customer demand, we may be unable to produce enough products to respond to sudden
increases in demand resulting in lost revenues, or alternatively, in the case of order cancellations or decreases in demand, we may be liable for excess or obsolete inventory or cancellation charges resulting from contractual purchase commitments
that we have with our contract manufacturers. We regularly provide rolling forecasts of our requirements to our contract manufacturers for planning purposes, pursuant to our agreements, a portion of which is binding upon us. Additionally, we are
committed to accept delivery on the forecasted terms for a portion of the rolling forecast. Cancellations of orders or changes to the forecasts provided to any of our contract manufacturers may result in cancellation costs payable by us. In the
past, we have been required to take delivery of materials from other suppliers and subcontractors that were in excess of our requirements and we have previously recognized charges and expenses related to such excess material.



By using contract manufacturers, our ability to directly control the use of
all inventory is reduced since we do not have full operating control over their operations. If we are unable to accurately forecast demand for our contract manufacturers and manage the costs associated with our contract manufacturers, we may be
required to pay inventory carrying costs or purchase excess inventory. If we or our contract manufacturers are unable to utilize such excess inventory in a timely manner, and are unable to sell excess components or products due to their customized
nature, our operating results and liquidity would be negatively impacted.



We depend on single sources or limited sources for key components and products, which exposes us to risks related to product shortages or delays, as well as potential product quality issues, all of which could
increase the cost of our products thereby reducing our operating profits.



A number of our products and the parts used in our products are available from only one or a limited number of outside suppliers due to unique component designs, as well as certain quality and performance
requirements. To take advantage of volume pricing discounts, we also purchase certain products, and along with our contract manufacturers, purchase certain customized components from single or limited sources. We have experienced, and expect to
continue to experience, shortages of single-source and limited-source components. Shortages have compelled us to adjust our product designs and production schedules and have caused us to miss customer requested delivery dates. To date, the missed
customer delivery dates have not had an adverse impact on our financial results. If single-source or limited-source components become unavailable in sufficient quantities in the desired time periods, are discontinued or are available only on
unsatisfactory terms, we would be required to purchase comparable components from other sources and may be required to redesign our products to use such components which could delay production and delivery of our products. If production and delivery
of our products are delayed such that we do not meet the agreed upon delivery dates of our customers, such delays could result in lost revenues due to customer cancellations, as well as potential financial penalties payable to our customers. Any
such loss of revenue or financial penalties would have a material adverse effect on our results of operations.



Our reliance on certain single-source and limited-source components and products also exposes us and our contract manufacturers to quality control risks
if these suppliers experience a failure in their production process or otherwise fail to meet our quality requirements. A failure in a single-source or limited-source component or product could force us to repair or replace a product utilizing
replacement components. If we cannot obtain comparable replacements or redesign our products, we could lose customer orders or incur additional costs, which would have a material adverse effect on our results of operations.



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We may fail to develop products that are sufficiently manufacturable, which could negatively impact
our ability to sell our products.



Manufacturing our
products is a complex process that requires significant time and expertise to meet customers specifications. Successful manufacturing is substantially dependent upon the ability to assemble and tune these products to meet specifications in an
efficient manner. In this regard, we largely depend on our staff of assembly workers and trained technicians at our internal manufacturing operations in the U.S., Europe and Asia, as well as our contract manufacturers staff of assembly workers
and trained technicians. If we cannot design our products to minimize the manual assembly and tuning process, or if we or our contract manufacturers lose a number of trained assembly workers and technicians or are unable to attract additional
trained assembly workers or technicians, we may be unable to have our products manufactured in a cost effective manner.



We may fail to develop products that are of adequate quality and reliability, which could negatively impact our ability to sell our products.



We have had quality problems with our products in the past
and may have similar problems in the future. We have replaced components in some products in accordance with our product warranties. We believe that our customers will demand that our products meet increasingly stringent performance and reliability
standards. If we cannot keep pace with technological developments, evolving industry standards and new communications protocols, if we fail to adequately improve product quality and meet the quality standards of our customers, or if our contract
manufacturers fail to achieve the quality standards of our customers, we risk losing business which would negatively impact our results of operations. Design problems could also damage relationships with existing and prospective customers and could
limit our ability to market our products to large wireless infrastructure manufacturers, many of which build their own products and have stringent quality control standards.



If we are unable to hire and retain highly qualified technical and managerial personnel, we may not be able to sustain or
grow our business.



Competition for personnel,
particularly qualified engineers, is intense. 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 our business,
results of operations and financial condition. The departure of any of our management and technical personnel, the breach of their confidentiality and non-disclosure obligations to Powerwave or the failure to achieve our intellectual property
objectives may also have a material adverse effect on our business.



We believe that our success depends upon the knowledge and experience of our management and technical personnel and our ability to market our existing products and to develop new products. Our employees are generally employed on an at-will
basis and do not have non-compete agreements. Therefore, we have had, and may continue to have, employees leave us and go to work for competitors.



Future acquisitions or strategic alliances may present risks, and we may be unable to achieve the financial and strategic goals intended at the time of
any acquisition or strategic alliance.



In the past, we
have acquired and made investments in other companies, products and technologies and entered into strategic alliances with other companies. We continually evaluate these types of opportunities. In the future, we may acquire or invest in other
companies, products or technologies, or we may enter into joint ventures, mergers or strategic alliances with other companies. Such transactions subject us to numerous risks, including the following:



| |  |  | difficulty integrating the operations, technology and personnel of the acquired company;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | inability to achieve the anticipated financial and strategic benefits of the specific acquisition or strategic alliance;
| | - |  | ------------------------------------------------------------------------------------------------------------------------



| |  |  | inability to retain key technical and managerial personnel from the acquired company;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | difficulty in maintaining controls, procedures and policies during the transition and integration process;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | diversion of our managements attention from other business concerns;
| | - |  | ---------------------------------------------------------------------



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| |  |  | failure of our due diligence process to identify significant issues, including issues with respect to product quality, product architecture, legal and financial contingencies, and
product development; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | significant exit charges if products acquired in business combinations are unsuccessful.
| | - |  | ----------------------------------------------------------------------------------------



If we are unable to effectively manage these risks as part of any acquisition or joint venture, our business would be
adversely affected.



There are significant risks related to
our internal and contract manufacturing operations in Asia.



As part of our strategy to reduce our production costs, we have outsourced the majority of our radio frequency power amplifier manufacturing operations to contract manufacturers in China, Singapore and Thailand. We also maintain our own
manufacturing operations in China. The Chinese legal system lacks transparency, which gives the Chinese central and local government authorities a higher degree of control over our business in China than is customary in the United States and makes
the process of obtaining necessary regulatory approval in China inherently unpredictable. In addition, the protection accorded our proprietary technology and know-how under the Chinese and Thai legal systems is not as strong as in the United States
and, as a result, we may lose valuable trade secrets and competitive advantage. Also, manufacturing our products and utilizing contract manufacturers, as well as other suppliers throughout the Asia region, exposes our business to the risk that our
proprietary technology and ownership rights may not be protected or enforced to the extent that they may be in the United States.



Although the Chinese government has been pursuing economic reform and a policy of welcoming foreign investments during the past two decades, it is
possible that the Chinese government will change its current policies in the future, making continued business operations in China difficult or unprofitable.



We require air or ocean transport to ship products built in Asia to our customers. Transportation costs would escalate if there were a shortage of air or
ocean cargo space and any significant increase in transportation costs would cause an increase in our expenses and negatively impact our results of operations. In addition, if we are unable to obtain cargo space or secure delivery of components or
products due to labor strikes, lockouts, work slowdowns or work stoppages by longshoremen, dock workers, airline pilots or other transportation industry workers our delivery of products could be adversely delayed.



The initial sales cycle associated with our products is typically lengthy,
often lasting from nine to eighteen months, which could cause delays in forecasted sales and cause us to incur substantial expenses before we record any associated revenues.



Our customers normally conduct significant technical evaluations, trials and qualifications of our products before making
purchase commitments. This qualification process involves a significant investment of time and resources from both our customers and us in order to ensure that our product designs are fully qualified to perform as required. The qualification and
evaluation process, as well as customer field trials, may take longer than initially forecasted, thereby delaying the shipment of sales forecasted for a specific customer for a particular quarter and causing our operating results for the quarter to
be less than originally forecasted. Such a sales shortfall would reduce our profitability and negatively impact our results of operations.



We conduct a significant portion of our business internationally, which exposes us to increased business risks.



For fiscal years 2004, 2003, and 2002, international revenues (excluding
North American sales) accounted for approximately 71%, 46%, and 33% of our net sales, respectively. There are many risks that currently impact, and will continue to impact our international business and multinational operations, including the
following:



| |  |  | compliance with multiple and potentially conflicting regulations in Europe, Asia and North and South America, including export requirements, tariffs, import duties and other trade
barriers, as well as health and safety requirements;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | potential labor strikes, lockouts, work slowdowns and work stoppages at U.S. and international ports;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | differences in intellectual property protections throughout the world;
| | - |  | ----------------------------------------------------------------------



| |  |  | difficulties in staffing and managing foreign operations in Europe, Asia and South America, including dealings with unionized labor pools in Europe;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | longer accounts receivable collection cycles in Europe, Asia and South America;
| | - |  | -------------------------------------------------------------------------------



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| |  |  | currency fluctuations and resulting losses on currency translations;
| | - |  | --------------------------------------------------------------------



| |  |  | terrorists attacks on American companies;
| | - |  | -----------------------------------------



| |  |  | economic instability, including inflation and interest rate fluctuations, such as those previously seen in South Korea and Brazil;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



| |  |  | competition for foreign based suppliers throughout the world;
| | - |  | -------------------------------------------------------------



| |  |  | overlapping or differing tax structures;
| | - |  | ----------------------------------------



| |  |  | the complexity of global tax and transfer pricing rules and regulations and our potential inability to benefit/offset losses in one tax jurisdiction with income from another;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | cultural and language differences between the United States, and the rest of the world; and
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | political or civil turmoil.
| | - |  | ---------------------------



Any failure on our part to manage these risks effectively would seriously reduce our competitiveness in the wireless infrastructure marketplace.



Protection of our intellectual property is limited.



We rely upon trade secrets and patents to protect our
intellectual property. We execute confidentiality and non-disclosure agreements with certain employees and our suppliers, as well as limit access to and distribution of our proprietary information. We have an on-going program to identify and file
applications for U.S. and other international patents.



The
departure of any of our management and technical personnel, the breach of their confidentiality and non-disclosure obligations to us, or the failure to achieve our intellectual property objectives could have a material adverse effect on our
business, results of operations and financial condition. We do not have non-compete agreements with our employees who are generally employed on an at-will basis. Therefore, we have had, and may continue to have, employees leave us and go to work for
competitors. If we are not successful in prohibiting the unauthorized use of our proprietary technology or the use of our processes by a competitor, our competitive advantage may be significantly reduced which would result in reduced revenues.



We are at risk of third-party claims of infringement that
could harm our competitive position.



We have received
third-party claims of infringement in the past and have been able to resolve such claims without having a material impact on our business. Currently, certain parties have notified the Company of potential claims against the Company. While the
Company reviews such potential claims, we do not believe that their resolution will have a material affect on the Company. As the number of patents, copyrights and other intellectual property rights in our industry increases, and as the coverage of
these rights and the functionality of the products in the market further overlap, we believe that we may face additional infringement claims. Such claims, whether or not valid, could result in substantial costs and diversion of our resources. A
third party claiming infringement may also obtain an injunction or other equitable relief, which could effectively block the distribution or sale of allegedly infringing products, which would adversely affect our customer relationships and
negatively impact our revenues.



The communications industry
is heavily regulated. We must obtain regulatory approvals to manufacture and sell our products, and our customers must obtain approvals to operate our products. Any failure or delay by us or any of our customers to obtain such approvals could
negatively impact our ability to sell our products.



Various governmental agencies have adopted regulations that impose stringent radio frequency emissions standards on the communications industry. Future regulations may require that we alter the manner in which radio signals are transmitted
or otherwise alter the equipment transmitting such signals. The enactment by governments of new laws or regulations or a change in the interpretation of existing regulations could negatively impact the market for our products.



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 type of governmental approval process have caused, and may
continue to cause, the cancellation, postponement or rescheduling of the installation of communications systems by our customers. These types of unanticipated delays would result in delayed or cancelled customer orders.



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The price of our Common Stock has been, and may continue to be, volatile and our shareholders may not
be able to resell shares of our Common Stock at or above the price paid for such shares.



The price for shares of our Common Stock has exhibited high levels of volatility with significant volume and price fluctuations, which makes our Common Stock unsuitable for many investors. For example, for the two
years ended January 2, 2005, the price of our Common Stock ranged from a high of $11.55 to a low of $3.05. The fluctuations in the price of our Common Stock have occasionally been unrelated to our operating performance. These broad fluctuations may
negatively impact the market price of shares of our Common Stock. The price of our Common Stock has also been influenced by:



| |  |  | fluctuations in our results of operations or the operations of our competitors or customers;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | failure of our results of operations to meet the expectations of stock market analysts and investors;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | reductions in wireless infrastructure demand or expectations of future wireless infrastructure demand by our customers;
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | delays or postponement of wireless infrastructure deployments, including new 3G deployments;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | changes in stock market analyst recommendations regarding us, our competitors or our customers;
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | the timing and announcements of technological innovations, new products or financial results by us or our competitors; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in the wireless industry.
| | - |  | ---------------------------------



In addition, the increase in the number of shares of our outstanding Common Stock due to the LGP Allgon acquisition may lead to sales of such shares or
the perception that such sales may occur, either of which may adversely affect the market for, and the market price of, our Common Stock. This increase, together with our outstanding convertible debt instruments, and any potential future sale or
issuance of shares of our Common Stock or instruments convertible or exchangeable into shares of our Common Stock, or the perception that such sales or transactions could occur, could adversely affect the market price of our Common Stock.



Based on the above, we expect that our stock price will
continue to be extremely volatile. Therefore, we cannot guarantee that our investors will be able to resell their Powerwave shares at or above their acquisition price.



We may need additional capital in the future and such additional financing may not be available at favorable terms.



We may need to raise additional funds through public or
private debt or equity financings in order to take advantage of opportunities, including more rapid international expansion or acquisitions of complementary businesses or technologies. If we are not successful in integrating our business and
managing the worldwide aspects of the combined company resulting from the LGP Allgon acquisition, our operations may not generate profits and may consume our cash resources faster than we anticipate. Such losses would make it difficult to obtain new
sources of financing. In addition, if we do not generate sufficient cash flow from operations, we may need to raise additional funds to repay our outstanding convertible debt that we issued in 2003 and 2004. Our ability to secure additional
financing or sources of funding is dependent upon numerous factors, including the current outlook of our business, our credit rating and the market price of our common stock, all of which are directly impacted by our ability to increase revenues and
generate profits. Our ability to increase revenues and generate profits is subject to numerous risks and uncertainties and any significant decrease in our revenues or profitability could reduce our operating cash flows and erode our existing cash
balances. If we are unable to secure additional financing or such financing is not available at acceptable terms, we may not be able to take advantage of such opportunities, or otherwise respond to unanticipated competitive pressures.



The wireless communications infrastructure equipment industry is
extremely competitive and is characterized by rapid technological change, frequent new product development, rapid product obsolescence, evolving industry standards and significant price erosion over the life of a product. If we are unable to compete
effectively, our business, results of operations and financial condition would be adversely affected.



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Our products compete on the basis of the following 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.
| | - |  | -----------------------------------



If we fail to address the above factors, there could be a material adverse effect on our business, results of operations and financial condition.



Our current competitors include Andrew Corporation, Filtronic
PLC, Fujitsu Limited, Hitachi Kokusai Electric Inc., Japan Radio Co., Ltd., Kathrein-Werke KG, Mitsubishi Electric Corporation, Radio Frequency Systems and REMEC, Inc., in addition to a number of privately held companies throughout the world,
subsidiaries of certain multinational corporations and the internal manufacturing operations and design groups of the leading wireless infrastructure manufacturers such as Ericsson, Motorola, Nokia, Nortel, Samsung and Siemens. Some competitors have
adopted aggressive pricing strategies in an attempt to gain market share, which in return, has caused us to lower our prices in order to remain competitive. Such pricing actions have had an adverse effect on our financial condition and results of
operations. In addition, some competitors have significantly greater financial, technical, manufacturing, sales, marketing and other resources than we do and have achieved greater name recognition for their products and technologies than we have. If
we are unable to successfully increase our market penetration or our overall share of the wireless communications infrastructure equipment market, our revenues will decline, which would negatively impact our results of operations.



Our failure to enhance our existing products or to develop and introduce
new products that meet changing customer requirements and evolving technological standards could have a negative impact on our ability to sell our products.



To succeed, we must improve current products and develop and introduce new products that are competitive in terms of price, performance and quality.
These products must adequately address the requirements of wireless infrastructure manufacturing customers and end-users. To develop new products, we invest in the research and development of wireless communications network products and coverage
solutions. We target our research and development efforts on major wireless network deployments worldwide, which cover a broad range of frequency and transmission protocols. In addition, we are currently working on products for next generation
networks, as well as development projects for products requested by our customers and improvements to our existing products. The deployment of a wireless network may be delayed which could result in the failure of a particular research or
development effort to generate a revenue producing product. Additionally, the new products we develop may not achieve market acceptance or may not be able to be manufactured cost effectively in sufficient volumes. Our research and development
efforts are generally funded internally and our customers do not normally pay for our research and development efforts. These costs are expensed as incurred. Therefore, if our efforts are not successful at creating or improving products that are
purchased by our customers, there will be a negative impact on our operating results due to high research and development expenses.



Failure to maintain effective internal controls over financial reporting could adversely affect our business and the market price of our Common Stock.



Pursuant to rules adopted by the SEC implementing Section
404 of the Sarbanes-Oxley Act of 2002, we are required to assess the effectiveness of our internal controls over financial reporting and provide a management report on our internal controls over financial reporting in all annual reports, beginning
with our Annual Report on Form 10-K for the fiscal year ended January 2, 2005. This report contains, among other matters, a statement as to whether or not our internal controls over financial reporting are effective and the disclosure of any
material weaknesses in our internal controls over financial reporting identified by management. Section 404 also requires our independent auditor to attest to, and report on, managements assessment of our internal controls over financial
reporting.



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The Committee of Sponsoring Organizations of the Treadway Commission (COSO) provides a framework for
companies to assess and improve their internal control systems. Auditing Standard No. 2 provides the professional standards and related performance guidance for auditors to attest to, and report on, managements assessment of the effectiveness
of internal control over financial reporting under Section 404. Managements assessment of internal controls over financial reporting requires management to make subjective judgments and, particularly because Section 404 and Auditing Standard
No. 2 are newly effective, some of the judgments will be in areas that may be open to interpretation. Therefore, our managements report on our internal controls over financial reporting may be difficult to prepare, and our auditors may not
agree with our managements assessment.



While we
currently believe our internal controls over financial reporting are effective, we are required to comply with Section 404 on an annual basis. If we identify one or more material weaknesses in our internal controls over financial reporting during
this continuous evaluation process, our management will be unable to assert such internal controls are effective. In addition, although we currently anticipate being able to continue to satisfy the requirements of Section 404 in a timely fashion, we
cannot be certain as to the timing of completion of our evaluation, testing and any required remediation due in large part to the fact that there is no precedent available by which to measure compliance with these new requirements. Therefore, if we
are unable to assert that our internal controls over financial reporting are effective in the future, or if our auditors are unable to attest that our managements report is fairly stated or they are unable to express an opinion on the
effectiveness of our internal controls, we could lose investor confidence in the accuracy and completeness of our financial reports, which would have an adverse effect on our business and the market price of our Common Stock.



Our shareholder rights plan and charter documents could make it more
difficult for a third party to acquire us, even if doing so would be beneficial to our shareholders.



Our shareholder rights plan and certain provisions of our certificate of incorporation and Delaware law are intended to encourage potential acquirers to
negotiate with us and allow our Board of Directors the opportunity to consider alternative proposals in the interest of maximizing shareholder value. However, such provisions may also discourage acquisition proposals or delay or prevent a change in
control, which in turn, could harm our stock price and our shareholders.



Our business is subject to the risks of earthquakes and other natural catastrophic events, and to interruptions by man made problems such as computer viruses or terrorism.



Our corporate headquarters and the majority of our U.S. based research and
development operations are located in the State of California in regions known for seismic activity. In addition, we have production facilities and have outsourced some of our production to contract manufacturers in Asia, another region known for
seismic activity. A significant natural disaster, such as an earthquake in either of these regions, could have a material adverse effect on our business, operating results and financial condition. In addition, despite our implementation of network
security measures, our servers are vulnerable to computer viruses, break-ins, and similar disruptions from unauthorized tampering with our computer systems. Any such event could have a material adverse effect on our business.



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



Our financial instruments include cash and cash equivalents, restricted cash, short-term investments, capital leases and long-term debt. At January 2,
2005, the carrying values of our financial instruments approximated their fair values based upon current market prices and rates.



We are exposed to a number of market risks in the ordinary course of business. These risks, which include foreign currency risk, interest rate risk and
commodity price risk, arise in the normal course of business rather than from trading. We have examined our exposures to these risks and have concluded that none of our exposures in these areas are material to fair values, cash flows or earnings.



Foreign Currency Risk



With the acquisition of LGP Allgon, our international operations represent a
substantial portion of our operating results and asset base. We maintain various operations in multiple foreign locations including China, Finland, France, Singapore, Sweden, Estonia and the United Kingdom. These international operations generally
incur local operating costs and generate third party revenues in currencies other than the U.S. dollar. Such foreign currency revenues and expenses expose us to foreign currency risk and give rise to foreign exchange gains and losses.



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We regularly pursue new customers in various international locations where new deployments or upgrades to
existing wireless communication networks are planned. As a result, a significant portion of our revenues are derived from international sources, with our international customers accounting for approximately 71% of our net sales during fiscal 2004,
46% of our fiscal 2003 net sales and 33% of our fiscal 2002 net sales. Such international sources include Europe, Asia and South America, where there has been historical volatility in several of the regions currencies. Although we currently
invoice a large percentage of our international customers in U.S. Dollars, changes in the value of the U.S. Dollar versus the local currency in which our products are sold exposes us to foreign currency risk since 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 us. In addition, certain of our international customers require that we transact business with them in their
own local currency, regardless of the location of our operations, which also exposes us to foreign currency risk. As we sell products or services in foreign currencies, we may be required to convert the payments received into U.S. Dollars or utilize
such foreign currencies as payments for expenses of our business, which may give rise to foreign exchange gains and losses. Given the uncertainty as to when and what specific foreign currencies we may be required or decide to accept as payment from
our international customers, we cannot predict the ultimate impact that such a decision would have on our business, gross margins and results of operations.



While we monitor our foreign currency exposures, we do not currently maintain an active foreign currency hedging program. We may decide in the future to
implement an active hedging program utilizing derivative instruments to assist in managing our foreign exchange rate risk. Based on our overall foreign exchange rate exposure at January 2, 2005, we do not believe that a 10% change in foreign
currency rates would have a material effect on our consolidated results of operations or cash flows.



Interest Rate Risk



As
of January 2, 2005, we had cash equivalents and a short-term cash investment portfolio of approximately $254.9 million with maturities of three months or less, as well as cash balances of approximately $27.7 million in both interest and non-interest
bearing accounts including restricted cash. We also had $130.0 million of convertible subordinated notes due July 2008 at a fixed annual interest rate of 1.25%, $200.0 million of convertible subordinated notes due November 2024 at a fixed annual
interest rate of 1.875%, and $0.1 million capital lease obligations with various maturities at fixed interest rates. We are exposed to interest rate risk primarily through our short-term cash investment portfolio. While short-term investment rates
remained at historical lows during fiscal 2004, we believe that we are not subject to material fluctuations in principal given the short-term maturities and high-grade investment quality of our investment portfolio, and the fact that the effective
interest rate of our portfolio tracks closely to various short-term money market interest rate benchmarks. Therefore, we currently do not use derivative instruments to mange the interest rate risk related to our short-term investment portfolio or
our variable rate bank debt. Based on our overall interest rate exposure at January 2, 2005, we do not believe that a 100 basis point change in interest rates would have a material effect on our consolidated financial position, results of operations
or cash flows.



Commodity Price Risk



Our internal manufacturing operations and contract manufacturers require
significant quantities of transistors, semiconductors and various metals for use in the manufacture of our products. Therefore, we are exposed to certain commodity price risk associated with variations in the market prices for these electronic
components as these prices directly impact the cost to manufacture products and the price we pay our contract manufacturers to manufacture our products. We attempt to manage this risk by entering into supply agreements with our contract
manufacturers and various suppliers of these components. These supply agreements are not long-term supply agreements. If we or our contract manufacturers become subject to a significant increase in the price of one of these components, we would
likely be forced to pay such higher prices and we may be unable to pass such costs onto our customers. In addition, certain transistors and semiconductors are regularly revised or changed by their manufacturers, which may result in a requirement for
us to redesign a product that utilizes such components or cease to produce such products. In such events, our business, results of operations and financial condition could be adversely affected. Additionally, we require specialized electronic test
equipment, which is utilized in both the design and manufacture of our products. Such electronic test equipment is available from limited sources and may not be available in the time periods required for us to meet our customers demand. If
required, we may be forced to pay higher prices for such



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equipment and/or we may not be able to obtain the equipment in the time periods required, which would then delay our
development or production of new products. Such delays and any potential additional costs could have a material adverse effect on our business, results of operations and financial condition.



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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



Index to Financial Statements/Schedule:



|                                                        |  |   
|------------------------------------------------------- |  | --
|Consolidated Financial Statements                       |  |   
|                                                        | 
|Report of Independent Registered Public Accounting Firm |  | 44
|                                                        | 
|Consolidated Balance Sheets                             |  | 45
|                                                        | 
|Consolidated Statements of Operations                   |  | 46
|                                                        | 
|Consolidated Statements of Comprehensive Operations     |  | 47
|                                                        | 
|Consolidated Statements of Shareholders Equity         |  | 48
|                                                        | 
|Consolidated Statements of Cash Flows                   |  | 49
|                                                        | 
|Notes to Consolidated Financial Statements              |  | 51
|                                                        | 
|Quarterly Financial Data (Unaudited)                    |  | 72
|                                                        | 
|Financial Statement Schedule                            |  |   
|                                                        | 
|Schedule II  Valuation and Qualifying Accounts         |  | 83



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and Shareholders of Powerwave Technologies, Inc.:



We have audited the accompanying consolidated balance sheets of Powerwave Technologies, Inc. and subsidiaries (the Company) as of January 2, 2005 and December 28, 2003, and the related consolidated
statements of operations, comprehensive operations, shareholders equity, and cash flows for each of the three years in the period ended January 2, 2005. Our audits also included the financial statement schedule listed in the Index at Item 15.
These financial statements and the financial statement schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on the financial statements and the financial statement schedule based on our
audits.



We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board (United States). 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.
and subsidiaries at as of January 2, 2005 and December 28, 2003, and the results of their operations and their cash flows for each of the three years in the period ended January 2, 2005, in conformity with accounting principles generally accepted in
the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth
therein.



We have also audited, in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Companys internal control over financial reporting as of January 2, 2005, based on the criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 10, 2005 expressed an unqualified opinion on managements assessment of the effectiveness of the
Companys internal control over financial reporting and an unqualified opinion on the effectiveness of the Companys internal control over financial reporting.



/s/    DELOITTE & TOUCHE LLP



Costa Mesa, California

March 10, 2005



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POWERWAVE TECHNOLOGIES, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)



|                                                                                                                                                                                  |  |                 |           |   |                   |   |         |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------- | --------- | - | ----------------- | - | ------- | -
|                                                                                                                                                                                  |  | January 2, 2005 |           |   | December 28, 2003 |  
|ASSETS                                                                                                                                                                            |  |                 |           |   |                   |   |         |  
|Current assets:                                                                                                                                                                   |  |                 |           |   |                   |   |         |  
|Cash and cash equivalents                                                                                                                                                         |  | $               | 147,451   |   |                   | $ | 179,853 |  
|Restricted cash                                                                                                                                                                   |  |                 | 6,815     |   |                   |   | 600     |  
|Short-term investments                                                                                                                                                            |  |                 | 135,200   |   |                   |   | 80,075  |  
|Accounts receivable, net of allowance for sales returns and doubtful accounts of $6,309 and $2,332 at January 2, 2005 and December 28, 2003,
respectively                         |  |                 | 133,060   |   |                   |   | 56,278  |  
|Inventories                                                                                                                                                                       |  |                 | 65,819    |   |                   |   | 15,187  |  
|Prepaid expenses and other current assets                                                                                                                                         |  |                 | 22,613    |   |                   |   | 6,413   |  
|Deferred tax assets                                                                                                                                                               |  |                 | 3,698     |   |                   |   | 6,940   |  
|                                                                                                                                                                                  |  |                 |           |   |                   |   |         |  
|Total current assets                                                                                                                                                              |  |                 | 514,656   |   |                   |   | 345,346 |  
|                                                                                                                                                                                  |  |                
|Property, plant and equipment, net                                                                                                                                                |  |                 | 146,430   |   |                   |   | 67,975  |  
|Intangible assets, net                                                                                                                                                            |  |                 | 65,366    |   |                   |   | 190     |  
|Goodwill                                                                                                                                                                          |  |                 | 277,223   |   |                   |   | 3,439   |  
|Deferred tax assets                                                                                                                                                               |  |                 |          |   |                   |   | 35,990  |  
|Other non-current assets                                                                                                                                                          |  |                 | 17,096    |   |                   |   | 13,317  |  
|                                                                                                                                                                                  |  |                 |           |   |                   |   |         |  
|TOTAL ASSETS                                                                                                                                                                      |  | $               | 1,020,771 |   |                   | $ | 466,257 |  
|                                                                                                                                                                                  |  |                 |           |   |                   |   |         |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                              |  |                 |           |   |                   |   |         |  
|Current liabilities:                                                                                                                                                              |  |                 |           |   |                   |   |         |  
|Accounts payable                                                                                                                                                                  |  | $               | 79,534    |   |                   | $ | 48,942  |  
|Accrued payroll and employee benefits                                                                                                                                             |  |                 | 19,770    |   |                   |   | 3,203   |  
|Accrued income taxes                                                                                                                                                              |  |                 | 14,332    |   |                   |   | 2,374   |  
|Accrued restructuring                                                                                                                                                             |  |                 | 17,354    |   |                   |   | 20      |  
|Accrued expenses and other current liabilities                                                                                                                                    |  |                 | 39,534    |   |                   |   | 10,562  |  
|                                                                                                                                                                                  |  |                 |           |   |                   |   |         |  
|Total current liabilities                                                                                                                                                         |  |                 | 170,524   |   |                   |   | 65,101  |  
|                                                                                                                                                                                  |  |                
|Long-term debt                                                                                                                                                                    |  |                 | 330,000   |   |                   |   | 130,000 |  
|Deferred tax liabilities                                                                                                                                                          |  |                 | 4,344     |   |                   |   |        |  
|Other non-current liabilities                                                                                                                                                     |  |                 | 291       |   |                   |   | 119     |  
|                                                                                                                                                                                  |  |                 |           |   |                   |   |         |  
|Total liabilities                                                                                                                                                                 |  |                 | 505,159   |   |                   |   | 195,220 |  
|                                                                                                                                                                                  |  |                 |           |   |                   |   |         |  
|Commitments and contingencies (Notes 14 and 15)                                                                                                                                   |  |                 |          |   |                   |   |        |  
|                                                                                                                                                                                  |  |                
|Shareholders equity:                                                                                                                                                             |  |                 |           |   |                   |   |         |  
|Preferred stock, $0.0001 par value, 5,000 shares authorized and no shares issued or outstanding                                                                                   |  |                 |          |   |                   |   |        |  
|Common Stock, $0.0001 par value, 135,000 shares authorized, 99,411 shares issued and outstanding at January 2, 2005 and 63,257 shares issued
and outstanding at December 28, 2003 |  |                 | 485,318   |   |                   |   | 225,651 |  
|Accumulated other comprehensive income (loss)                                                                                                                                     |  |                 | 57,029    |   |                   |   | (1      | )
|Retained earnings (accumulated deficit)                                                                                                                                           |  |                 | (26,735   | ) |                   |   | 45,387  |  
|                                                                                                                                                                                  |  |                 |           |   |                   |   |         |  
|Total shareholders equity                                                                                                                                                        |  |                 | 515,612   |   |                   |   | 271,037 |  
|                                                                                                                                                                                  |  |                 |           |   |                   |   |         |  
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                        |  | $               | 1,020,771 |   |                   | $ | 466,257 |  
|                                                                                                                                                                                  |  |                 |           |   |                   |   |         |  



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



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POWERWAVE TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)



|                                          |  |                    |         |   |                  |   |         |                  |  |   |        
|----------------------------------------- |  | ------------------ | ------- | - | ---------------- | - | ------- | ---------------- |  | - | -------
|                                          |  | Fiscal Years Ended
|                                          |  | January 2,2005     |         |   | December 28,2003 |   |         | December 29,2002
|Net sales                                 |  | $                  | 473,914 |   |                  | $ | 239,069 |                  |  | $ | 384,889
|                                          |  |                    |        
|Cost of sales:                            |  |                    |         |   |                  |   |         |                  |  |   |        
|Cost of goods                             |  |                    | 362,872 |   |                  |   | 214,247 |                  |  |   | 320,963
|Intangible asset amortization             |  |                    | 4,615   |   |                  |   | 756     |                  |  |   | 1,144  
|Restructuring and impairment charges      |  |                    | 506     |   |                  |   | 7,851   |                  |  |   |       
|                                          |  |                    |         |   |                  |   |         |                  |  |   |        
|Total cost of sales                       |  |                    | 367,993 |   |                  |   | 222,854 |                  |  |   | 322,107
|                                          |  |                    |         |   |                  |   |         |                  |  |   |        
|Gross profit                              |  |                    | 105,921 |   |                  |   | 16,215  |                  |  |   | 62,782 
|                                          |  |                    |        
|Operating expenses:                       |  |                    |         |   |                  |   |         |                  |  |   |        
|Sales and marketing                       |  |                    | 28,461  |   |                  |   | 11,557  |                  |  |   | 11,384 
|Research and development                  |  |                    | 47,188  |   |                  |   | 38,928  |                  |  |   | 33,087 
|General and administrative                |  |                    | 24,291  |   |                  |   | 13,946  |                  |  |   | 14,401 
|Intangible asset amortization             |  |                    | 7,355   |   |                  |   |        |                  |  |   |       
|In-process research and development       |  |                    | 23,450  |   |                  |   |        |                  |  |   |       
|Restructuring and impairment charges      |  |                    | 2,103   |   |                  |   | 7,608   |                  |  |   |       
|                                          |  |                    |         |   |                  |   |         |                  |  |   |        
|Total operating expenses                  |  |                    | 132,848 |   |                  |   | 72,039  |                  |  |   | 58,872 
|                                          |  |                    |         |   |                  |   |         |                  |  |   |        
|Operating income (loss)                   |  |                    | (26,927 | ) |                  |   | (55,824 | )                |  |   | 3,910  
|                                          |  |                    |        
|Other income, net                         |  |                    | 118     |   |                  |   | 2,394   |                  |  |   | 1,963  
|                                          |  |                    |         |   |                  |   |         |                  |  |   |        
|Income (loss) before income taxes         |  |                    | (26,809 | ) |                  |   | (53,430 | )                |  |   | 5,873  
|                                          |  |                    |        
|Provision for (benefit from) income taxes |  |                    | 45,313  |   |                  |   | (20,571 | )                |  |   | 1,762  
|                                          |  |                    |         |   |                  |   |         |                  |  |   |        
|Net income (loss)                         |  | $                  | (72,122 | ) |                  | $ | (32,859 | )                |  | $ | 4,111  
|                                          |  |                    |         |   |                  |   |         |                  |  |   |        
|Basic earnings (loss) per share           |  | $                  | (0.80   | ) |                  | $ | (0.51   | )                |  | $ | 0.06   
|                                          |  |                    |         |   |                  |   |         |                  |  |   |        
|Diluted earnings (loss) per share         |  | $                  | (0.80   | ) |                  | $ | (0.51   | )                |  | $ | 0.06   
|                                          |  |                    |         |   |                  |   |         |                  |  |   |        
|Basic weighted average common shares      |  |                    | 90,212  |   |                  |   | 64,667  |                  |  |   | 65,485 
|                                          |  |                    |         |   |                  |   |         |                  |  |   |        
|Diluted weighted average common shares    |  |                    | 90,212  |   |                  |   | 64,667  |                  |  |   | 66,230 
|                                          |  |                    |         |   |                  |   |         |                  |  |   |        



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



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POWERWAVE TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS

(in thousands)



|                                         |  |                    |         |   |                  |   |         |                  |  |   |      
|---------------------------------------- |  | ------------------ | ------- | - | ---------------- | - | ------- | ---------------- |  | - | -----
|                                         |  | Fiscal Years Ended
|                                         |  | January 2,2005     |         |   | December 28,2003 |   |         | December 29,2002
|Net income (loss)                        |  | $                  | (72,122 | ) |                  | $ | (32,859 | )                |  | $ | 4,111
|                                         |  |                    |        
|Other comprehensive income (loss):       |  |                    |         |   |                  |   |         |                  |  |   |      
|Foreign currency translation adjustments |  |                    | 57,030  |   |                  |   | (1      | )                |  |   |     
|                                         |  |                    |         |   |                  |   |         |                  |  |   |      
|Comprehensive income (loss)              |  | $                  | (15,092 | ) |                  | $ | (32,860 | )                |  | $ | 4,111
|                                         |  |                    |         |   |                  |   |         |                  |  |   |      



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



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POWERWAVE TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

(in thousands)



|                                                                            |  |              |   |  |                                             |         |   |                                       |   |        |                           |  |   |         |   |  |   |         |  
|--------------------------------------------------------------------------- |  | ------------ | - |  | ------------------------------------------- | ------- | - | ------------------------------------- | - | ------ | ------------------------- |  | - | ------- | - |  | - | ------- | -
|                                                                            |  | Common Stock |   |  | AccumulatedOtherComprehensive Income (Loss) |         |   | RetainedEarnings(Accumulated Deficit) |   |        | TotalShareholders Equity | 
|                                                                            |  | Shares       |   |  | Amount                                      |         |   |                                       |  
|Balance at December 30, 2001                                                |  | 65,081       |   |  | $                                           | 242,100 |   |                                       | $ |       |                           |  | $ | 74,135  |   |  | $ | 316,235 |  
|Issuance of Common Stock related to employee stock-based compensation plans |  | 626          |   |  |                                             | 3,965   |   |                                       |   |       |                           |  |   |        |   |  |   | 3,965   |  
|Tax benefit related to employee stock-based compensation plans              |  |             |   |  |                                             | 1,291   |   |                                       |   |       |                           |  |   |        |   |  |   | 1,291   |  
|Compensation expense related to stock option grants                         |  |             |   |  |                                             | 59      |   |                                       |   |       |                           |  |   |        |   |  |   | 59      |  
|Net income                                                                  |  |             |   |  |                                             |        |   |                                       |   |       |                           |  |   | 4,111   |   |  |   | 4,111   |  
|                                                                            |  |              |   |  |                                             |         |   |                                       |   |        |                           |  |   |         |   |  |   |         |  
|Balance at December 29, 2002                                                |  | 65,707       |   |  |                                             | 247,415 |   |                                       |   |       |                           |  |   | 78,246  |   |  |   | 325,661 |  
|Issuance of Common Stock related to employee stock-based compensation plans |  | 695          |   |  |                                             | 2,625   |   |                                       |   |       |                           |  |   |        |   |  |   | 2,625   |  
|Tax benefit related to employee stock-based compensation plans              |  |             |   |  |                                             | 573     |   |                                       |   |       |                           |  |   |        |   |  |   | 573     |  
|Compensation expense related to stock option grants                         |  |             |   |  |                                             | 38      |   |                                       |   |       |                           |  |   |        |   |  |   | 38      |  
|Repurchases of Common Stock                                                 |  | (3,145       | ) |  |                                             | (25,000 | ) |                                       |   |       |                           |  |   |        |   |  |   | (25,000 | )
|Foreign currency translation adjustments                                    |  |             |   |  |                                             |        |   |                                       |   | (1     | )                         |  |   |        |   |  |   | (1      | )
|Net loss                                                                    |  |             |   |  |                                             |        |   |                                       |   |       |                           |  |   | (32,859 | ) |  |   | (32,859 | )
|                                                                            |  |              |   |  |                                             |         |   |                                       |   |        |                           |  |   |         |   |  |   |         |  
|Balance at December 28, 2003                                                |  | 63,257       |   |  |                                             | 225,651 |   |                                       |   | (1     | )                         |  |   | 45,387  |   |  |   | 271,037 |  
|Issuance of Common Stock for acquisition, net of issuance costs of $255     |  | 40,686       |   |  |                                             | 296,748 |   |                                       |   |       |                           |  |   |        |   |  |   | 296,748 |  
|Issuance of Common Stock related to employee stock-based compensation plans |  | 519          |   |  |                                             | 2,636   |   |                                       |   |       |                           |  |   |        |   |  |   | 2,636   |  
|Tax benefit related to employee stock-based compensation plans              |  |             |   |  |                                             | 283     |   |                                       |   |       |                           |  |   |        |   |  |   | 283     |  
|Repurchases of Common Stock                                                 |  | (5,051       | ) |  |                                             | (40,000 | ) |                                       |   |       |                           |  |   |        |   |  |   | (40,000 | )
|Foreign currency translation adjustments                                    |  |             |   |  |                                             |        |   |                                       |   | 57,030 |                           |  |   |        |   |  |   | 57,030  |  
|Net loss                                                                    |  |             |   |  |                                             |        |   |                                       |   |       |                           |  |   | (72,122 | ) |  |   | (72,122 | )
|                                                                            |  |              |   |  |                                             |         |   |                                       |   |        |                           |  |   |         |   |  |   |         |  
|Balance at January 2, 2005                                                  |  | 99,411       |   |  | $                                           | 485,318 |   |                                       | $ | 57,029 |                           |  | $ | (26,735 | ) |  | $ | 515,612 |  
|                                                                            |  |              |   |  |                                             |         |   |                                       |   |        |                           |  |   |         |   |  |   |         |  



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



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POWERWAVE TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



|                                                                                         |  |                    |          |   |                  |   |         |                  |  |   |         |  
|---------------------------------------------------------------------------------------- |  | ------------------ | -------- | - | ---------------- | - | ------- | ---------------- |  | - | ------- | -
|                                                                                         |  | Fiscal Years Ended |         
|                                                                                         |  | January 2,2005     |          |   | December 28,2003 |   |         | December 29,2002 | 
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                    |  |                    |          |   |                  |   |         |                  |  |   |         |  
|Net income (loss)                                                                        |  | $                  | (72,122  | ) |                  | $ | (32,859 | )                |  | $ | 4,111   |  
|Adjustments to reconcile net income (loss) to net cash provided by operating activities: |  |                    |          |   |                  |   |         |                  |  |   |         |  
|Depreciation and amortization                                                            |  |                    | 37,555   |   |                  |   | 19,214  |                  |  |   | 22,053  |  
|In-process research and development charge                                               |  |                    | 23,450   |   |                  |   |        |                  |  |   |        |  
|Non-cash restructuring and impairment charges                                            |  |                    | 458      |   |                  |   | 10,909  |                  |  |   |        |  
|Provision for sales returns and doubtful accounts                                        |  |                    | 822      |   |                  |   | 2,004   |                  |  |   | 3,967   |  
|Provision for excess and obsolete inventories                                            |  |                    | 2,249    |   |                  |   | 3,308   |                  |  |   | 5,797   |  
|Deferred income taxes                                                                    |  |                    | 45,748   |   |                  |   | (20,503 | )                |  |   | 11,339  |  
|Tax benefit from stock issuances                                                         |  |                    | 283      |   |                  |   | 573     |                  |  |   | 1,291   |  
|Compensation costs related to stock options                                              |  |                    |         |   |                  |   | 38      |                  |  |   | 59      |  
|Loss (gain) on disposal of property, plant and equipment                                 |  |                    | (92      | ) |                  |   | (24     | )                |  |   | 770     |  
|Gain on sale of assets held for sale                                                     |  |                    | (532     | ) |                  |   |        |                  |  |   |        |  
|Changes in operating assets and liabilities, net of acquisitions:                        |  |                    |          |   |                  |   |         |                  |  |   |         |  
|Accounts receivable                                                                      |  |                    | (129     | ) |                  |   | (5,019  | )                |  |   | 2,502   |  
|Inventories                                                                              |  |                    | (10,084  | ) |                  |   | 10,724  |                  |  |   | (2,193  | )
|Prepaid expenses and other current assets                                                |  |                    | (7,986   | ) |                  |   | 624     |                  |  |   | (3,693  | )
|Accounts payable                                                                         |  |                    | (20,794  | ) |                  |   | 22,099  |                  |  |   | 4,150   |  
|Accrued expenses and other current liabilities                                           |  |                    | (7,785   | ) |                  |   | (643    | )                |  |   | (7,907  | )
|Other non-current assets                                                                 |  |                    | (4,681   | ) |                  |   | (3,574  | )                |  |   | (2,185  | )
|Other non-current liabilities                                                            |  |                    | (102     | ) |                  |   | 35      |                  |  |   | 15      |  
|                                                                                         |  |                    |          |   |                  |   |         |                  |  |   |         |  
|Net cash provided by (used in) operating activities                                      |  |                    | (13,742  | ) |                  |   | 6,906   |                  |  |   | 40,076  |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                    |  |                    |          |   |                  |   |         |                  |  |   |         |  
|Purchase of property, plant and equipment                                                |  |                    | (12,693  | ) |                  |   | (3,903  | )                |  |   | (5,062  | )
|Restricted cash                                                                          |  |                    | (25      | ) |                  |   | (310    | )                |  |   | (190    | )
|Short-term investments                                                                   |  |                    | (55,125  | ) |                  |   | (50,075 | )                |  |   | (30,000 | )
|Proceeds from the sale of property, plant and equipment                                  |  |                    | 1,384    |   |                  |   | 1,515   |                  |  |   | 1,198   |  
|Proceeds from sale of assets held for sale                                               |  |                    | 6,382    |   |                  |   |        |                  |  |   |        |  
|Acquisition, net of cash acquired                                                        |  |                    | (88,537  | ) |                  |   | (9,934  | )                |  |   |        |  
|                                                                                         |  |                    |          |   |                  |   |         |                  |  |   |         |  
|Net cash used in investing activities                                                    |  |                    | (148,614 | ) |                  |   | (62,707 | )                |  |   | (34,054 | )
|CASH FLOW FROM FINANCING ACTIVITIES:                                                     |  |                    |          |   |                  |   |         |                  |  |   |         |  
|Proceeds from long-term debt, net of issuance costs                                      |  |                    | 197,956  |   |                  |   | 125,869 |                  |  |   |        |  
|Principal payments on long-term debt                                                     |  |                    | (33,124  | ) |                  |   | (79     | )                |  |   | (819    | )
|Common stock repurchases                                                                 |  |                    | (40,000  | ) |                  |   | (25,000 | )                |  |   |        |  
|Proceeds from the sale of stock under Employee Stock Purchase Plan                       |  |                    | 1,591    |   |                  |   | 1,505   |                  |  |   | 1,941   |  
|Proceeds from exercise of stock options                                                  |  |                    | 1,045    |   |                  |   | 1,120   |                  |  |   | 2,024   |  
|                                                                                         |  |                    |          |   |                  |   |         |                  |  |   |         |  
|Net cash provided by financing activities                                                |  |                    | 127,468  |   |                  |   | 103,415 |                  |  |   | 3,146   |  
|                                                                                         |  |                    |          |   |                  |   |         |                  |  |   |         |  
|EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS                                    |  |                    | 2,486    |   |                  |   |        |                  |  |   |        |  
|                                                                                         |  |                    |          |   |                  |   |         |                  |  |   |         |  
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                     |  |                    | (32,402  | ) |                  |   | 47,614  |                  |  |   | 9,168   |  
|CASH AND CASH EQUIVALENTS, beginning of period                                           |  |                    | 179,853  |   |                  |   | 132,239 |                  |  |   | 123,071 |  
|                                                                                         |  |                    |          |   |                  |   |         |                  |  |   |         |  
|CASH AND CASH EQUIVALENTS, end of period                                                 |  | $                  | 147,451  |   |                  | $ | 179,853 |                  |  | $ | 132,239 |  
|                                                                                         |  |                    |          |   |                  |   |         |                  |  |   |         |  



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



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POWERWAVE TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED

(in thousands)



|                                    |  |                    |       |                  |   |      |                  |  |   |        |  
|----------------------------------- |  | ------------------ | ----- | ---------------- | - | ---- | ---------------- |  | - | ------ | -
|                                    |  | Fiscal Years Ended |      
|                                    |  | January 2,2005     |       | December 28,2003 |   |      | December 29,2002 | 
|SUPPLEMENTAL CASH FLOW INFORMATION: |  |                    |       |                  |   |      |                  |  |   |        |  
|Cash paid (received) for:           |  |                    |       |                  |   |      |                  |  |   |        |  
|Interest expense                    |  | $                  | 2,149 |                  | $ | 46   |                  |  | $ | 81     |  
|                                    |  |                    |       |                  |   |      |                  |  |   |        |  
|Income taxes                        |  | $                  | 2,666 |                  | $ | (160 | )                |  | $ | (9,662 | )
|                                    |  |                    |       |                  |   |      |                  |  |   |        |  



For supplemental cash
flow information related to the Companys acquisitions, see Note 17. Acquisitions.



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



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POWERWAVE TECHNOLOGIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(tabular amounts in thousands, except per share data)



Note 1. Nature of Operations



Powerwave is a global supplier of end-to-end wireless solutions for wireless communications networks. Powerwave designs, manufactures and markets
antennas, boosters, combiners, filters, radio frequency power amplifiers, repeaters, tower-mounted amplifiers and advanced coverage solutions for use in cellular, PCS and 3G networks throughout the world. The Company also manufactures and sells
advanced industrial components, primarily for the automotive and food industries, under contract manufacturing arrangements.



Note 2. Summary of Significant Accounting Policies



Basis of Presentation



The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and
include the accounts of Powerwave Technologies, Inc. and its subsidiaries. All intercompany balances and transactions have been eliminated in the accompanying consolidated financial statements.



During the second quarter of fiscal 2004, Powerwave completed its acquisition
of LGP Allgon (see Note 17. Acquisitions.) The consolidated financial statements include the operations of LGP Allgon from May 2004 forward.



Reclassifications



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



Fiscal Year



The Company operates on a 52-53 week fiscal year that ends on the Sunday
closest to December 31. The Companys fiscal quarters generally span 13 weeks, with the exception of a 53-week fiscal year, when an additional week is added during the first quarter to adjust the year to the Sunday closest to December 31.
Fiscal year 2002 ended on December 29, 2002, and fiscal 2003 ended on December 28, 2003. Fiscal year 2004, a 53-week fiscal year, ended on January 2, 2005.



New Accounting Pronouncements



In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards 123R (Revised 2004),
Share-Based Payments(SFAS 123R), which requires that the compensation cost relating to share-based payment transactions be recognized in financial statements based on alternative fair value models. The share-based compensation
cost will be measured based on the fair value of the equity or liability instruments issued. The Company currently discloses pro forma compensation expense quarterly and annually. Upon adoption, the pro forma disclosures previously permitted under
SFAS 123 will no longer be an alternative to financial statement recognition. The provisions of SFAS 123R are effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. The Company is currently
evaluating the method of adoption and the effect that the adoption of SFAS 123R will have on its financial position and results of operations.



In November 2004, the FASB issued Statement of Financial Accounting Standards 151, Inventory Costs  an amendment of ARB No. 43, Chapter 4(SFAS 151). SFAS 151 amends the guidance in ARB No. 43 to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). SFAS 151 requires that these costs be
recognized as current period charges regardless of whether they are abnormal. In addition, SFAS 151 requires that allocation of fixed production overheads to the costs of manufacturing be based on the normal capacity of the production facilities.
The provisions of SFAS 151 are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company is currently evaluating the effect that the adoption of this new standard may have on its consolidated financial
position or results of operations.



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Use of Estimates



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



Cash and Cash Equivalents



Cash and cash equivalents generally consist of cash, time deposits, commercial paper, money market funds and other money market instruments with original
maturity dates of three months or less. The Company invests its excess cash in only investment grade money market instruments from companies in a variety of industries and, therefore, believes that it bears minimal principal risk. Such investments
are stated at cost, which approximates fair value.



Short-term Investments



Short-term
investments, which are classified as available for sale, generally consist of auction rate securities with contractual maturities that may range up to 30 years and interest rates that reset at auction intervals ranging from between 28
and 35 days. These auction-rate securities are readily saleable at par value on the auction dates. The carrying value of these securities approximates fair value, therefore there are no unrealized gains or losses recorded. These investments have
been recorded as current assets as they are available for current operations. In prior years, such investments were included in cash equivalents. In 2004, the Company determined such amounts should properly be classified as short-term investments.
As a result, the Company has reclassified $80.1 million in the fiscal 2003 consolidated balance sheet from cash and cash equivalents to short-term investments to conform to the current year presentation. Additionally, the Company made
reclassifications to the prior years statements of cash flows to record the net purchases of auction rate securities of $50.1 million and $30.0 million for fiscal 2003 and 2002, respectively, as an investing activity.



Accounts Receivable



The Company performs ongoing credit evaluations of its customers and
generally does not require collateral. The Company continuously monitors collections and payments from its customers and regularly adjusts credit limits of customers based upon payment history and a customers current credit worthiness, as
judged by the Company. The Company records a provision for estimated 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 records a provision for excess and obsolete inventories based primarily on historical usage, current production requirements and forecasted product demand.



Property, Plant and Equipment



Property, plant and equipment are stated at cost. The Company depreciates or amortizes these assets using the straight-line
method over the estimated useful lives of the various classes of assets, as follows:



|                               |  |                           
|------------------------------ |  | --------------------------
|Machinery and equipment        |  | 2 to 8 years              
|Office furniture and equipment |  | 3 to 5 years              
|Leasehold improvements         |  | Remaining life of lease   
|Property under capital leases  |  | 3 to 5 years              
|Buildings                      |  | 30 years                  
|Building improvements          |  | Remaining life of building



The Company
periodically reviews the recoverability of its long-lived assets using the methodology prescribed in Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The Company also reviews
these assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of these assets is determined



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by comparing the forecasted undiscounted future net cash flows from the operations to which the assets relate, based on
managements best estimates using appropriate assumptions and projections at the time, to the carrying amount of the assets. If the carrying value is determined not to be recoverable from future operating cash flows, the asset is deemed
impaired and an impairment loss is recognized equal to the amount by which the carrying amount exceeds the estimated fair value of the asset.



Goodwill, Intangible Assets and Other Long-Lived Assets Management



The Company records the assets acquired and liabilities assumed in business combinations at their respective fair values at
the date of acquisition, with any excess purchase price recorded as goodwill. Because of the expertise required to value intangible assets and in-process research and development, management typically engages independent valuation specialists to
assist in determining those values. Valuation of intangible assets and in-process research and development entails significant estimates and assumptions including, but not limited to, determining the timing and expected costs to complete development
projects, estimating future cash flows from product sales, developing appropriate discount rates, estimating probability rates for the successful completion of development projects, continuation of customer relationships and renewal of customer
contracts, and approximating the useful lives of the intangible assets acquired.



Purchased intangible assets with determinable useful lives are carried at cost less accumulated amortization, and are amortized using the straight-line method over their estimated useful lives, which generally average
five years. The Company reviews the recoverability of the carrying value of identified intangibles and other long-lived assets, including fixed assets, on an annual basis or whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of these assets is determined based upon the forecasted undiscounted future net cash flows expected to result from the use of such asset and its eventual disposition. Powerwaves
estimate of future cash flows is based upon, among other things, certain assumptions about expected future operating performance, growth rates and other factors. The actual cash flows realized from these assets may vary significantly from our
estimates due to increased competition, changes in technology, fluctuations in demand, consolidation of our customers and reductions in average selling prices. If the carrying value of an asset is determined not to be recoverable from future
operating cash flows, the asset is deemed impaired and an impairment loss is recognized to the extent the carrying value exceeds the estimated fair market value of the asset.



The Company reviews the recoverability of the carrying value of goodwill on an annual basis or more frequently when an event
occurs or circumstances change to indicate that an impairment of goodwill has possibly occurred. The determination of whether any potential impairment of goodwill exists is based upon a comparison of the fair value of a reporting unit to the
accounting value of the underlying net assets of such reporting unit. To determine the fair value of a reporting unit, management reviews the market value of the Companys outstanding Common Stock based upon its average and closing stock
prices, as well as subjective valuations for the reporting unit based on multiples of sales, EBITDA and EBIT, and other valuation metrics. If the fair value of the reporting unit is less than the accounting value of the underlying net assets,
goodwill is deemed impaired and an impairment loss is recorded to the extent that the carrying value of goodwill exceeds the difference between the fair value of the reporting unit and the fair value of all its underlying identifiable assets and
liabilities.



Warranties



Powerwave offers warranties of various lengths to its customers depending
upon the specific product and terms of the customer purchase agreement. Standard warranties require the Company to repair or replace defective product returned to it during such warranty period at no cost to the customer. The Company records an
estimate for standard warranty-related costs based on its actual historical return rates and repair costs at the time of the sale and update such estimate throughout the warranty period. While Powerwaves warranty costs have historically been
within its expectations and the provisions established, there is no guarantee that the Company will continue to experience the same warranty return rates or repair costs that it has in the past. Powerwave also has contractual commitments to various
customers that require it to incur costs to repair an epidemic defect with respect to its products outside of our standard warranty period if such defect were to occur. Any costs related to epidemic defects are generally recorded at the time the
epidemic defect becomes known to the Company and the costs of repair can be reasonably estimated. While the Company has not historically experienced significant costs related to epidemic defects, there is no guarantee that it will not experience
significant costs to repair epidemic defects in the future.



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Stock Based Compensation



Pursuant to Statement of Financial Accounting Standards No. 123, Accounting for Stock Based Compensation (SFAS
123), the Company has elected to continue using the intrinsic value method of accounting for stock based awards granted to employees and directors in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and its related interpretations to account for its stock option and purchase plans. Powerwave only records compensation expense for stock based awards granted with an exercise price below the market value of the Companys stock
at the grant date.



The Black-Scholes option valuation model
prescribed by SFAS 123 was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Option valuation methods require the input of highly subjective assumptions including the
expected stock price volatility. Using the Black-Scholes option valuation model, the estimated weighted average fair value of options granted during 2004, 2003, and 2002 were $2.48 per share, $2.54 per share, and $7.07 per share, respectively. Had
compensation cost for the Companys stock option plans and its stock purchase plans been determined based on the estimated fair value at the grant dates for awards under those plans consistent with the fair value method of SFAS 123 utilizing
the Black-Scholes option-pricing model, the Companys net income (loss) and basic and diluted earnings (loss) per share for the years ended January 2, 2005, December 28, 2003 and December 29, 2002, would have approximated the pro forma amounts
indicated below:



|                                                                                       |  |                    |         |   |                  |   |         |                  |  |   |         |  
|-------------------------------------------------------------------------------------- |  | ------------------ | ------- | - | ---------------- | - | ------- | ---------------- |  | - | ------- | -
|                                                                                       |  | Fiscal Years Ended |        
|                                                                                       |  | January 2,2005     |         |   | December 28,2003 |   |         | December 29,2002 | 
|Net income (loss):                                                                     |  |                    |         |   |                  |   |         |                  |  |   |         |  
|As reported                                                                            |  | $                  | (72,122 | ) |                  | $ | (32,859 | )                |  | $ | 4,111   |  
|Deduct: Additional expense per SFAS 123, fair value method, net of related tax effects |  |                    | (4,760  | ) |                  |   | (8,201  | )                |  |   | (12,566 | )
|                                                                                       |  |                    |         |   |                  |   |         |                  |  |   |         |  
|Pro forma                                                                              |  | $                  | (76,882 | ) |                  | $ | (41,060 | )                |  | $ | (8,455  | )
|                                                                                       |  |                    |         |   |                  |   |         |                  |  |   |         |  
|Basic earnings (loss) per share:                                                       |  |                    |         |   |                  |   |         |                  |  |   |         |  
|As reported                                                                            |  | $                  | (0.80   | ) |                  | $ | (0.51   | )                |  | $ | 0.06    |  
|Pro forma                                                                              |  | $                  | (0.85   | ) |                  | $ | (0.63   | )                |  | $ | (0.13   | )
|Diluted earnings (loss) per share:                                                     |  |                    |         |   |                  |   |         |                  |  |   |         |  
|As reported                                                                            |  | $                  | (0.80   | ) |                  | $ | (0.51   | )                |  | $ | 0.06    |  
|Pro forma                                                                              |  | $                  | (0.85   | ) |                  | $ | (0.63   | )                |  | $ | (0.13   | )



The fair value of
options granted under the Companys stock incentive plans during 2004, 2003 and 2002 was estimated on the date of grant using the Black-Scholes option-pricing model utilizing the multiple option approach using the following weighted-average
assumptions:



|                                         |  |                    |   |  |                  |   |  |                  |  
|---------------------------------------- |  | ------------------ | - |  | ---------------- | - |  | ---------------- | -
|                                         |  | Fiscal Years Ended |  
|                                         |  | January 2,2005     |   |  | December 28,2003 |   |  | December 29,2002 |  
|Weighted average risk-free interest rate |  | 2.80               | % |  | 2.00             | % |  | 2.18             | %
|Expected life (in years)                 |  | 5.3                |   |  | 5.2              |   |  | 5.1              |  
|Expected stock volatility                |  | 57                 | % |  | 67               | % |  | 180              | %
|Dividend yield                           |  | None               |   |  | None             |   |  | None             |  



Due to the fact that
the Companys employee stock options have characteristics significantly different from those of traded options and any changes in the subjective input assumptions can materially affect the fair value estimates, management does not believe that
the Black-Scholes model provides a reliable single measure of the fair value of its employee stock options. Therefore, the Company believes that the pro forma net expense per SFAS 123 calculated above is not a reliable measure of the costs of the
Companys stock option plans.



As previously discussed,
the FASB issued SFAS 123R in December 2004, which will require the Company to begin expensing stock options beginning within its third quarter of fiscal year 2005.



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Revenue Recognition



The Company recognizes revenue from product sales at the time of shipment and passage of title. The Company also offers
certain of its customers a right to return within a limited time after delivery. The Company continuously monitors and tracks such returns and records a provision, as a charge to revenues, to reflect the Companys estimate of such returns,
based on historical experience and any notification received by the Company of such a return. Such returns have historically been within managements expectations.



Foreign Currency Translation



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



Income Taxes



The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109), 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 benefit (expense) results from the change in net deferred tax assets or deferred tax
liabilities. A valuation allowance is recorded when it is more likely than not that some or all or any deferred tax assets will not be realized.



Earnings (Loss) Per Share



In accordance with Statement of Financial Accounting Standards No. 128, Earnings Per Share(SFAS 128), basic earnings (loss) per share
is based upon the weighted average number of common shares outstanding. Diluted earnings (loss) per share is based upon the weighted average number of common and potential common shares for each period presented. Potential common shares include
stock options using the treasury stock method.



Note 3. Inventories



Net inventories consist of the following:



|                     |  |                |        |                  |   |       
|-------------------- |  | -------------- | ------ | ---------------- | - | ------
|                     |  | January 2,2005 |        | December 28,2003
|Parts and components |  | $              | 32,868 |                  | $ | 5,295 
|Work-in-process      |  |                | 2,183  |                  |   | 722   
|Finished goods       |  |                | 30,768 |                  |   | 9,170 
|                     |  |                |        |                  |   |       
|Total inventories    |  | $              | 65,819 |                  | $ | 15,187
|                     |  |                |        |                  |   |       



Inventories are net of
an allowance for excess and obsolete inventories of approximately $15.7 million and $8.6 million as of January 2, 2005 and December 28, 2003, respectively.





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Note 4. Property, Plant and Equipment



Net property, plant and equipment consist of the following:



|                                                |  |                |          |   |                  |   |         |  
|----------------------------------------------- |  | -------------- | -------- | - | ---------------- | - | ------- | -
|                                                |  | January 2,2005 |          |   | December 28,2003 |  
|Machinery and equipment                         |  | $              | 187,163  |   |                  | $ | 51,464  |  
|Buildings and improvements                      |  |                | 82,348   |   |                  |   | 38,660  |  
|Land                                            |  |                | 24,155   |   |                  |   | 14,838  |  
|Office furniture and equipment                  |  |                | 15,008   |   |                  |   | 12,171  |  
|Leasehold improvements                          |  |                | 1,142    |   |                  |   | 953     |  
|Construction-in-progress                        |  |                |         |   |                  |   |        |  
|                                                |  |                |          |   |                  |   |         |  
|Gross property, plant and equipment             |  |                | 309,816  |   |                  |   | 118,086 |  
|Less: Accumulated depreciation and amortization |  |                | (163,386 | ) |                  |   | (50,111 | )
|                                                |  |                |          |   |                  |   |         |  
|Total property, plant and equipment, net        |  | $              | 146,430  |   |                  | $ | 67,975  |  
|                                                |  |                |          |   |                  |   |         |  



During fiscal 2004 and
2003, Powerwave determined that certain of its equipment had become excess to its production requirements as a result of its restructuring efforts and, therefore, was no longer useful to the Company. This equipment was physically segregated from the
Companys remaining active equipment and sold or disposed of prior to January 2, 2005 and December 28, 2003. The difference between the estimated net selling price for such equipment and its net book value resulted in an impairment charge of
approximately $0.4 million and $3.0 million during fiscal 2004 and 2003, respectively. See Note 9. Restructuring and Impairment Charges for additional information.



Note 5. Goodwill



The changes in the carrying amount of goodwill by reportable operating segment for the years ended January 2, 2005 and December 28, 2003 are as follows:



|                                                             |  |         |         |   |                        |   |        |  |   |         |  
|------------------------------------------------------------ |  | ------- | ------- | - | ---------------------- | - | ------ |  | - | ------- | -
|                                                             |  | Telecom |         |   | Contract Manufacturing |   | Total  | 
|Balance, December 29, 2002                                   |  | $       | 4,852   |   |                        | $ |       |  | $ | 4,852   |  
|Impairment charge                                            |  |         | (4,852  | ) |                        |   |       |  |   | (4,852  | )
|Goodwill from acquisition of Ericsson Amplifier Technologies |  |         | 3,439   |   |                        |   |       |  |   | 3,439   |  
|                                                             |  |         |         |   |                        |   |        |  |   |         |  
|Balance, December 28, 2003 and                               |  |         | 3,439   |   |                        |   |       |  |   | 3,439   |  
|Goodwill from acquisition of LGP Allgon                      |  |         | 218,275 |   |                        |   | 18,980 |  |   | 237,255 |  
|Effect of foreign exchange rate changes                      |  |         | 33,606  |   |                        |   | 2,923  |  |   | 36,529  |  
|                                                             |  |         |         |   |                        |   |        |  |   |         |  
|Balance, January 2, 2005                                     |  | $       | 255,320 |   |                        | $ | 21,903 |  | $ | 277,223 |  
|                                                             |  |         |         |   |                        |   |        |  |   |         |  



During the quarter
ended March 30, 2003, Powerwave determined that it was necessary to test its previously recorded goodwill for impairment as a result of the significant economic downturn effecting demand in the wireless infrastructure industry. Since Powerwave
operated in a single business segment as a single reporting unit at such time, the determination of whether any potential impairment of goodwill existed was based on a comparison of the fair value of the entire Company to the accounting value of its
net assets. In estimating the fair value of the entire Company, Powerwave reviewed the average and closing stock prices for its Common Stock, valuations based on multiples of sales, EBITDA and EBIT, as well as other factors. Based on a comparison of
these valuations to the accounting value of the underlying assets and liabilities, the Company concluded that the entire amount of its recorded goodwill had been impaired and, therefore, recorded a non-cash charge of $4.9 million in operating
expenses during the first quarter of fiscal 2003. The Company did not record any similar impairment charge during fiscal 2004.



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Note 6. Intangible Assets



Intangible assets as of January 2, 2005 and December 28, 2003, respectively, are comprised of the following:



|                        |  |                     |        |                             |   |         |               |  |   |        |  |        
|----------------------- |  | ------------------- | ------ | --------------------------- | - | ------- | ------------- |  | - | ------ |  | -------
|                        |  | January 2, 2005     |        | Wtd. Avg.AmortizationPeriod
|                        |  | GrossCarryingAmount |        | AccumulatedAmortization     |   |         | Net BookValue | 
|Non-amortizing:         |  |                     |        |                             |   |         |               |  |   |        |  |        
|Trademark               |  | $                   | 787    |                             | $ |        |               |  | $ | 787    |  |       
|Amortizing:             |  |                     |        |                             |   |         |               |  |   |        |  |        
|Developed technology    |  |                     | 49,188 |                             |   | (16,933 | )             |  |   | 32,255 |  | 5 years
|Customer-related assets |  |                     | 40,428 |                             |   | (8,104  | )             |  |   | 32,324 |  | 5 years
|                        |  |                     |        |                             |   |         |               |  |   |        |  |        
|                        |  | $                   | 90,403 |                             | $ | (25,037 | )             |  | $ | 65,366 |  |        
|                        |  |                     |        |                             |   |         |               |  |   |        |  |        
|                        |  |                    
|                        |  | December 28, 2003   |        | Wtd. Avg.AmortizationPeriod
|                        |  | GrossCarryingAmount |        | AccumulatedAmortization     |   |         | Net BookValue | 
|Developed technology    |  | $                   | 12,070 |                             | $ | (11,880 | )             |  | $ | 190    |  | 5 years
|                        |  |                     |        |                             |   |         |               |  |   |        |  |        



Future amortization
expense is expected to be $14.8 million, $13.7 million, $13.2 million, $12.9 million $8.1 million and $1.9 million in fiscal years 2005, 2006, 2007, 2008, 2009 and 2010, respectively.



Note 7. Other Non-Current Assets



Other non-current assets consist of the following:



|                                       |  |                |        |                  |   |       
|-------------------------------------- |  | -------------- | ------ | ---------------- | - | ------
|                                       |  | January 2,2005 |        | December 28,2003
|Buildings held for sale                |  | $              | 4,451  |                  | $ | 5,850 
|Deferred capitalized acquisition costs |  |                |       |                  |   | 3,607 
|Debt issue costs, net                  |  |                | 8,957  |                  |   | 3,769 
|Long-term deposits                     |  |                | 3,459  |                  |   |      
|Long-term prepaid expenses             |  |                | 229    |                  |   | 91    
|                                       |  |                |        |                  |   |       
|Total other non-current assets         |  | $              | 17,096 |                  | $ | 13,317
|                                       |  |                |        |                  |   |       



Note 8. Accrued Expenses and Other
Current Liabilities



Accrued expenses and other current
liabilities consist of the following:



|                                                     |  |                |        |                  |   |       
|---------------------------------------------------- |  | -------------- | ------ | ---------------- | - | ------
|                                                     |  | January 2,2005 |        | December 28,2003
|Accrued warranty costs                               |  | $              | 10,164 |                  | $ | 4,829 
|Accrued compulsory share liability (Note 17)         |  |                | 7,923  |                  |   |      
|Accrued value added tax                              |  |                | 4,578  |                  |   |      
|Accrued interest expense                             |  |                | 1,270  |                  |   | 750   
|Accrued sales tax                                    |  |                | 416    |                  |   | 921   
|Other accrued expenses and other current liabilities |  |                | 15,183 |                  |   | 4,062 
|                                                     |  |                |        |                  |   |       
|Total accrued expenses and other current liabilities |  | $              | 39,534 |                  | $ | 10,562
|                                                     |  |                |        |                  |   |       



Note 9. Restructuring and
Impairment Charges



Integration with LGP Allgon



In connection with Powerwaves acquisition of LGP
Allgon during the second quarter of fiscal 2004, the Company formulated and began to implement its plan to restructure and integrate LGP Allgons operations with Powerwaves operations. As a result, Powerwave recorded a restructuring
charge related to its legacy operations of approximately $2.6 million during fiscal 2004 in accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This amount included approximately $2.2 million in
connection with workforce reductions of approximately 118 employees at various Powerwave operating locations and $0.4 million in connection with certain impaired equipment. Based on the job classification of the impacted employees or the



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characterization of the underlying assets and lease expenses, approximately $0.5 million of this restructuring charge was
recorded in cost of sales and approximately $2.1 million was recorded in operating expenses. In addition, the Company recognized $22.1 million as liabilities or additional asset fair value adjustments in connection with the LGP Allgon acquisition
for estimated restructuring and integration costs related to the consolidation of LGP Allgon operations, including amounts for future lease obligations on excess facilities, impairment of excess equipment, write-downs of inventory for discontinued
product lines and severance related costs for expected workforce reductions. These estimated costs were included in the allocation of the purchase price and resulted in additional goodwill. Implementation of the Companys restructuring and
integration plan is underway and additional actions are expected pending certain product related decisions and the further assessment of workforce and facility related requirements. Integration activities related to such plan are currently expected
to continue through the second quarter of fiscal 2005.



Outsourcing of Radio Frequency Power Amplifier Production



During fiscal 2003, Powerwave accelerated the restructuring of its manufacturing operations to outsource the majority of its production to contract manufacturers located in Asia in order to further reduce the
Companys operating cost structure and enable it to be more competitive. Additionally, the Company accelerated the timing of technology transitions and new product introductions due to its transition to outsourced manufacturing and the
continued economic downturn that has significantly impacted demand in the wireless infrastructure industry. As a result, the Company recorded approximately $10.6 million of restructuring and impairment charges during fiscal 2003. These charges
included cash restructuring charges of approximately $4.6 million related primarily to severance payments made in connection with a reduction in its work force of approximately 550 employees. The remaining non-cash impairment charges of
approximately $6.0 million related to a $3.0 million write-down of excess manufacturing and test equipment that was disposed of and a $3.0 million write-down of certain product/technology and customer related intangibles, the value of which was
impaired by the technology and product transitions that were implemented during the year. These restructuring and impairment charges were recorded in cost of sales or operating expenses based upon the job classification of the impacted employees or
the character of the underlying assets. Approximately $7.9 million of these restructuring and impairment charges was recorded in cost of sales and approximately $7.6 million was recorded in operating expenses.



A summary of the activity that affected the Companys restructuring and
impair charges and accrued restructuring liability for the years ended December 28, 2003 and January 2, 2005 is as follows:



|                                       |  |                     |        |   |                                        |   |        |                                  |  |   |        |   |  |       |        |   |  |   |         |  
|-------------------------------------- |  | ------------------- | ------ | - | -------------------------------------- | - | ------ | -------------------------------- |  | - | ------ | - |  | ----- | ------ | - |  | - | ------- | -
|                                       |  | WorkforceReductions |        |   | FacilityClosures &EquipmentWrite-downs |   |        | Goodwill &Intangible Write-downs |  |   | Other  |   |  | Total |       
|Balance at December 29, 2002           |  | $                   |       |   |                                        | $ |       |                                  |  | $ |       |   |  | $     |       |   |  | $ |        |  
|Amounts expensed                       |  |                     | 4,550  |   |                                        |   | 2,982  |                                  |  |   | 7,927  |   |  |       |       |   |  |   | 15,459  |  
|Amounts paid/incurred                  |  |                     | (4,530 | ) |                                        |   | (2,982 | )                                |  |   | (7,927 | ) |  |       |       |   |  |   | (15,439 | )
|                                       |  |                     |        |   |                                        |   |        |                                  |  |   |        |   |  |       |        |   |  |   |         |  
|Balance at December 28, 2003           |  |                     | 20     |   |                                        |   |       |                                  |  |   |       |   |  |       |       |   |  |   | 20      |  
|Amounts assumed from LGP Allgon        |  |                     | 464    |   |                                        |   | 3,348  |                                  |  |   |       |   |  |       | 863    |   |  |   | 4,675   |  
|Amounts accrued in purchase accounting |  |                     | 12,665 |   |                                        |   | 3,409  |                                  |  |   |       |   |  |       | 1,348  |   |  |   | 17,422  |  
|Amounts expensed                       |  |                     | 2,151  |   |                                        |   | 458    |                                  |  |   |       |   |  |       |       |   |  |   | 2,609   |  
|Amounts paid/incurred                  |  |                     | (5,471 | ) |                                        |   | (4,010 | )                                |  |   |       |   |  |       | (1,679 | ) |  |   | (11,160 | )
|Effect of exchange rates               |  |                     | 2,925  |   |                                        |   | 796    |                                  |  |   |       |   |  |       | 67     |   |  |   | 3,788   |  
|                                       |  |                     |        |   |                                        |   |        |                                  |  |   |        |   |  |       |        |   |  |   |         |  
|Balance at January 2, 2005             |  | $                   | 12,754 |   |                                        | $ | 4,001  |                                  |  | $ |       |   |  | $     | 599    |   |  | $ | 17,354  |  
|                                       |  |                     |        |   |                                        |   |        |                                  |  |   |        |   |  |       |        |   |  |   |         |  



The accrued
restructuring liability at January 2, 2005 for workforce reductions is expected to be paid during fiscal year 2005 and the liability for facility closures is expected to be paid over the remaining lease term which ends in 2011.



Note 10. Financing Arrangements and Long-Term Debt



On November 10, 2004, Powerwave completed the private placement of $200.0
million aggregate principal amount of convertible subordinated notes due November 2024 (2024 Convert Notes) to Deutsche Bank Securities, Inc. The 2024 Convert Notes are convertible into the Common Stock of Powerwave at a conversion price
of $11.09 per share and accrue interest at an annual rate of 1.875%. Powerwave may redeem the 2024 Convert Notes beginning on November 21, 2009 until November 20, 2010 and on or after November 21, 2010 until November 20, 2011, if the closing price
of Powerwaves Common Stock is more than $17.74 and $14.42, respectively, for at least 20 trading days within a 30 consecutive trading day period. The notes may be redeemed by Powerwave at any time after November 21, 2011. Holders of the 2024
Convert Notes may require Powerwave to repurchase all or a portion of their notes for cash on November 15, 2011, 2014 and 2019 at 100% of the principal amount of the notes, plus accrued and unpaid interest up to but not including the date of such
repurchase. Holders of the 2024 Convert Notes



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may also require Powerwave to repurchase all or a portion of their notes in the case of a change in control. In addition,
under certain circumstances related to a change in control, the conversion price of the 2024 Convert Notes may be adjusted downwards, thereby increasing the number of shares issuable upon conversion, if holders of the 2024 Convert Notes elect to
convert their notes at a time when the 2024 Convert Notes are not redeemable by the Company. Powerwave used a portion of the proceeds of the offering to fund the repurchase of $40.0 million of its Common Stock (5,050,505 shares) simultaneously with
the issuance of the 2024 Convert Notes. The Company received net cash proceeds of approximately $154.2 million after the deduction of the amount used for the Common Stock repurchase and debt issuance costs.



On July 18, 2003, Powerwave completed the private placement of $130.0 million
aggregate principal amount of 1.25% convertible subordinated notes due July 2008 (2008 Convert Notes). The 2008 Convert Notes are convertible into shares of the Common Stock of Powerwave at a conversion price of $10.49 per share and
accrue interest at an annual rate of 1.25% with interest payable semi-annually on January 15 and July 15. The 2008 Convert Notes are callable by the Company beginning July 22, 2007. Powerwave used a portion of the proceeds of the offering to fund
the repurchase of $25.0 million of the Companys Common Stock (3,144,654 shares) simultaneously with the issuance of the 2008 Convert Notes. The Company received net cash proceeds of approximately $100.9 million after the deduction of the
amount used for the Common Stock repurchase and debt issuance costs.



Both the 2024 Convert Notes and 2008 Convert Notes are general unsecured obligations of the Company and are subordinate in right of payment to all of the Companys existing and future senior indebtedness. In addition, the indenture for
the notes does not restrict the Company from incurring senior debt or other indebtedness and does not impose any financial covenants on the Company.



As part of our acquisition of LGP Allgon, we assumed short-term and long-term debt obligations consisting primarily of fixed and variable rate bank term
loans, and amounts outstanding under bank lines of credit. From the date of acquisition through January 2, 2005, we repaid the entire amount of bank debt assumed in the acquisition which totaled approximately $33.1 million.



Note 11. 401(k) and Profit-Sharing Plans



The Company sponsors a 401(k) and profit-sharing plan covering all eligible
U.S. employees and provides for a Company match in cash on a portion of participant contributions. The Companys 401(k) and profit sharing plan is managed by Fidelity Investments, and is an employee self-directed plan which offers a variety of
investment choices via mutual funds. Employees may contribute up to 15% of their base salary, subject to IRS maximums. During fiscal 2004, the Company matched 100% of the first 3% of eligible compensation contributed and 50% of the next 2% of
eligible compensation contributed. Effective fiscal 2005, the Company matches 100% of the first 5% of eligible compensation contributed. The Companys matching contributions are made in cash and are invested in the same percentage among the
various funds offered as selected by the employee. Employer matching contributions for the years ended January 2, 2005, December 28, 2003 and December 29, 2002 were $0.9 million, $1.0 million, and $1.2 million, respectively. There were no
discretionary profit sharing contributions authorized for the years ended January 2, 2005, December 28, 2003 or December 29, 2002.



Note 12. Employee Stock Purchase Plan



The Companys Employee Stock Purchase Plan (the ESPP) provides that a total of 3,000,000 shares of Common Stock are reserved for issuance
under the plan. The ESPP, 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
ESPP administration is overseen 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 ESPP 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 ESPP is 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 an offering at any time during the offering period, and participation ends automatically upon termination of employment.
The Board may at any time amend or terminate the ESPP, except that no such amendment or termination may adversely affect shares previously granted under the ESPP. During fiscal 2004, the fourteenth and fifteenth purchases under the ESPP occurred on
January 30, 2004 and July 30, 2004, respectively. A total of 139,117 shares were purchased in the fourteenth purchase at $6.49 per share and 146,703 shares were purchased in the fifteenth purchase at $4.69 per share. At January 2, 2005, there were
rights to purchase approximately 161,000 shares under the ESPPs sixteenth offering, which will conclude on January 31, 2005. There were 1,342,102 shares available for purchase at January 2, 2005 under the ESPP.



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Note 13. Stock Option Plans



The purposes of the Companys stock option plans are to attract and retain the best available personnel for positions
of substantial responsibility with the Company and to provide participants with additional incentives in the form of options to purchase the Companys Common Stock which will encourage them to acquire a proprietary interest in, and to align
their financial interests with those of the Company and its shareholders. All of the Companys stock option plans have been approved by the Companys shareholders.



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. The 1995 Plan provides for the grant of non-statutory 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, for any individual possessing 10% or more of the voting power of all classes of stock of the Company, 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. Options generally vest at the rate of 25% on the first anniversary of the grant date and 2% per month thereafter. All options expire no later than ten years after the grant date. Up to 5,815,845 shares of the
Companys Common Stock were reserved for issuance under the 1995 Plan. Pursuant to the amended Stockholders Agreement dated as of November 8, 1996, between the Company and certain of its original shareholders, those certain shareholders
agreed that once the Company issued 3,285,000 shares of Common Stock under the 1995 Stock Option Plan, any additional shares issued under that Plan upon an option exercise would be coupled with a 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 2,530,845 shares of the
Companys Common Stock. As of January 2, 2005, a total of 5,569,071 options have been exercised under the 1995 Plan, of which a total of 2,284,071 shares of Common Stock have been funded from those shareholders party to the amended
Stockholders Agreement. The effect of this transaction is to eliminate any dilution from the further exercise of options under the 1995 Plan. At January 2, 2005, there were 234,556 options outstanding under the 1995 Plan at a weighted average
exercise price of $3.58 per share. There were 12,218 shares available for grant under the 1995 Plan at January 2, 2005 and there were a total of 246,774 shares of Common Stock held in escrow by the Company on behalf of those shareholders party to
the Stockholders Agreement to fund all future exercises under the 1995 Plan.



1996 Stock Incentive Plan



The Companys 1996 Stock Incentive Plan (the 1996 Plan), as amended, 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), non-statutory 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. A total of
9,000,000 shares of the Companys Common Stock are reserved for issuance under the 1996 Plan. As of January 2, 2005, all of the options granted under the 1996 Plan have been non-statutory options. The 1996 Plan provides that for non-statutory
stock options, 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 and that the exercise price may not be less than 110% of the fair market value of a share of Common Stock on the
grant date for any individual possessing 10% or more of the voting power of all classes of stock of the Company. Authority to control and manage the 1996 Plan is vested with the Companys Board of Directors, which has sole discretion and
authority, consistent with the provisions of the 1996 Plan, to determine the administration of the 1996 Plan and 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. Options generally vest at the rate of 25% on the first anniversary of the grant date and the remaining 75% vests in equal monthly installments over the following
three years. All options expire no later than ten years after the grant date.As of January 2, 2005, a total of 4,117,549 options had been exercised under the 1996 Plan and there were 4,564,591 options outstanding under the 1996 Plan at a
weighted average exercise price of $12.11 per share. There were 317,860 shares available for grant under the 1996 Plan at January 2, 2005.



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1996 Director Stock Option Plan



The Companys 1996 Director Stock Option Plan (the Director Plan), as amended, provides that a total of
1,200,000 shares of the Companys Common Stock are reserved for issuance under the plan. 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 will
automatically be eligible to receive non-statutory options to purchase common 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
Director Plan covering 30,000 shares of Common Stock, that 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 each
anniversary date of December 5, 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 10,000 shares of Common Stock that
vests 100% on the fourth anniversary date of the grant. The Director Plan provides that the exercise price per share of grants issued under the Director Plan shall be equal to 100% of the fair market value of a share of Common Stock on the grant
date. All options expire no later than five years after the grant date. As of January 2, 2005, a total of 195,000 options had been exercised under the Director Plan. There were 420,000 options outstanding under the Director Plan as of January 2,
2005 at a weighted average exercise price of $16.93 per share. There were 585,000 shares available for grant under the Director Plan at January 2, 2005.



2000 Stock Option Plan



The Companys 2000 Stock Option Plan (the 2000 Plan) provides that a total of 2,640,000 shares of the Companys Common Stock are
reserved for issuance under the 2000 Plan. The 2000 Plan provides for the granting of only non-statutory stock options to employees, executive officers and consultants of the Company. The exercise price per share of Common Stock of the Company
covered by each option shall be equal to 100% of the fair market value of the Common Stock on the date that the option is granted. In no event shall any participant under the 2000 Plan be granted options under the 2000 Plan covering more than
300,000 shares in any one calendar year. Authority to control and manage the 2000 Plan is vested with the Companys Board of Directors, which has sole discretion and authority, consistent with the provisions of the 2000 Plan, to determine the
administration of the 2000 Plan. The Board of Directors may delegate such responsibilities in whole or in part to a committee consisting of two or more members of the Board of Directors or two or more executive officers of the Company (the
Administrator). All option grants to executive officers of the Company shall be approved by the Board of Directors or the Compensation Committee of the Board of Directors. The Administrator of the 2000 Plan shall have the authority,
consistent with the provisions of the 2000 Plan and the authority granted by the Board of Directors, 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 2000 Plan. Notwithstanding the foregoing, the Administrator shall not have the authority to amend an Option Agreement to effect a re-pricing of the exercise price of an option
either by (i) lowering the exercise price of a previously granted option or (ii) by canceling a previously granted option and granting a new option, except that changes in the Companys capital structure or a change in control of the Company
pursuant to the terms of the 2000 Plan shall not be considered a re-pricing of such option. Options generally vest at the rate of 25% on the first anniversary of the grant date and the remaining 75% vests in equal monthly installments over the
following three years. All options expire no later than five years after the grant date. As of January 2, 2005, 17,970 shares had been exercised under the 2000 Plan. There were 2,330,967 options outstanding under the 2000 Plan as of January 2, 2005
at a weighted average exercise price of $11.58 per share. There were 291,063 shares available for grant under the 2000 plan at January 2, 2005.



2002 Stock Option Plan



The Companys 2002 Stock Option Plan (the 2002 Plan) was approved by the shareholders of the Company on April 24, 2002. The 2002 Plan
provides that a total of 2,000,000 shares of the Companys Common Stock are reserved for issuance under the 2002 Plan. Employees and consultants or independent advisors who are in the service of the Company or its subsidiaries are eligible to
participate in the 2002 Plan. The Companys executive officers and other highly paid employees are also eligible to participate in the 2002 Plan. The 2002 Plan provides only for the granting of non-statutory stock options. The exercise price
per share of Common Stock of the Company covered by each option shall be equal to 100% of the fair market value of the Common Stock on the date that the option is granted. In no event shall any participant under the 2002 Plan be granted options
under the 2002 plan covering more than 300,000 shares in any one calendar year. All options granted pursuant to the 2002 Plan shall have a maximum term of no more than ten years from the grant date. Authority to control and manage the 2002 Plan is
vested with the Companys Board of Directors, which has sole discretion and authority, consistent with the provisions of the 2002 Plan, to determine the administration of the 2002 Plan. The Board of Directors may delegate such responsibilities
in whole or in part to a committee consisting of two or more members of the Board of Directors



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or two or more officers of the Company. All option grants to executive officers of the Company shall be approved by the
Board of Directors or the Compensation Committee of the Board of Directors. The Administrator of the 2002 Plan shall have the authority, consistent with the provisions of the 2002 Plan and the authority of the Board of Directors, 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 2002 Plan. Notwithstanding the foregoing, the Administrator
shall not have the authority to amend an option agreement to effect a re-pricing of the exercise price of such option either by (1) lowering the exercise price of a previously granted option or (2) by canceling a previously granted
option and granting a new option except that changes in the Companys capital structure or a change in control of the Company pursuant to the terms of the 2002 Plan shall not be considered a re-pricing of such option. As of January 2, 2005,
97,101 shares had been exercised under the 2002 Plan. There were 1,399,137 options outstanding under the 2002 Plan as of January 2, 2005 at a weighted average exercise price of $5.23 per share. There were 503,762 shares available for grant under the
2002 plan at January 2, 2005.



The following table summarizes
activity under the Companys stock plans:



|                             |  |                 |   |  |                              |       |                             |       |                              |   |      
|---------------------------- |  | --------------- | - |  | ---------------------------- | ----- | --------------------------- | ----- | ---------------------------- | - | -----
|                             |  | Number ofShares |   |  | WeightedAverageExercisePrice |       | Number ofOptionsExercisable |       | WeightedAverageExercisePrice
|Balance at December 30, 2001 |  | 8,022           |   |  | $                            | 17.39 |                             | 3,319 |                              | $ | 13.54
|Granted                      |  | 3,033           |   |  | $                            | 8.17  |                             |       |                              |   |      
|Exercised                    |  | (468            | ) |  | $                            | 4.59  |                             |       |                              |   |      
|Canceled                     |  | (988            | ) |  | $                            | 24.21 |                             |       |                              |   |      
|                             |  |                 |   |  |                              |       |                             |       |                              |   |      
|Balance at December 29, 2002 |  | 9,599           |   |  | $                            | 14.40 |                             | 4,545 |                              | $ | 15.61
|Granted                      |  | 1,527           |   |  | $                            | 6.63  |                             |       |                              |   |      
|Exercised                    |  | (317            | ) |  | $                            | 3.96  |                             |       |                              |   |      
|Canceled                     |  | (1,857          | ) |  | $                            | 21.13 |                             |       |                              |   |      
|                             |  |                 |   |  |                              |       |                             |       |                              |   |      
|Balance at December 28, 2003 |  | 8,952           |   |  | $                            | 12.05 |                             | 4,855 |                              | $ | 13.91
|Granted                      |  | 1,603           |   |  | $                            | 7.51  |                             |       |                              |   |      
|Exercised                    |  | (251            | ) |  | $                            | 4.86  |                             |       |                              |   |      
|Canceled                     |  | (1,355          | ) |  | $                            | 14.41 |                             |       |                              |   |      
|                             |  |                 |   |  |                              |       |                             |       |                              |   |      
|Balance at January 2, 2005   |  | 8,949           |   |  | $                            | 10.90 |                             | 5,556 |                              | $ | 13.18
|                             |  |                 |   |  |                              |       |                             |       |                              |   |      



The following table
summarizes information about all stock options outstanding at January 2, 2005 under the 1995 Plan, 1996 Plan, Director Plan, 2000 Plan and 2002 Plan:



|                         |  |                                        |  |                                       |       |                                             |      |                    |       |                                |   |      
|------------------------ |  | -------------------------------------- |  | ------------------------------------- | ----- | ------------------------------------------- | ---- | ------------------ | ----- | ------------------------------ | - | -----
|                         |  | Options Outstanding at January 2, 2005 |  | Options Exercisable atJanuary 2, 2005
|Range of Exercise Prices |  | OptionsOutstanding                     |  | WeightedAverageExercise Price         |       | Weighted Average Remaining Contractual Life |      | OptionsExercisable |       | WeightedAverage Exercise Price
|$ 0.82 - $ 5.01          |  | 1,863                                  |  | $                                     | 3.98  |                                             | 5.51 |                    | 1,140 |                                | $ | 3.39 
|$ 5.13 - $ 5.41          |  | 1,460                                  |  | $                                     | 5.40  |                                             | 6.83 |                    | 851   |                                | $ | 5.41 
|$ 5.42 - $ 6.75          |  | 1,362                                  |  | $                                     | 6.45  |                                             | 6.08 |                    | 503   |                                | $ | 6.46 
|$ 6.91 - $10.67          |  | 1,309                                  |  | $                                     | 8.64  |                                             | 5.82 |                    | 526   |                                | $ | 10.01
|$10.87 - $14.65          |  | 1,294                                  |  | $                                     | 12.05 |                                             | 4.40 |                    | 1,027 |                                | $ | 12.07
|$15.16 - $33.29          |  | 1,319                                  |  | $                                     | 21.42 |                                             | 3.36 |                    | 1,167 |                                | $ | 21.94
|$33.31 - $67.08          |  | 342                                    |  | $                                     | 53.44 |                                             | 4.45 |                    | 342   |                                | $ | 53.45
|                         |  |                                        |  |                                       |       |                                             |      |                    |       |                                |   |      
|Total                    |  | 8,949                                  |  | $                                     | 10.90 |                                             | 5.34 |                    | 5,556 |                                | $ | 13.18
|                         |  |                                        |  |                                       |       |                                             |      |                    |       |                                |   |      



The Company records
compensation expense for any options granted with an exercise price below the market value of the Companys Common Stock at the date of grant. This compensation expense is calculated as the difference between the market value of the stock and
the option exercise price at the grant date and is amortized over the option vesting period. The Company recorded a total of $0.04 million and $0.06 million as compensation expense during fiscal years 2003 and 2002, respectively. There was no
remaining unamortized compensation expense as of December 28, 2003 and, therefore, no recorded compensation expense in fiscal 2004.



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Note 14. Commitments and Contingencies



Future minimum lease payments required under all operating leases at January 2, 2005 are payable as follows:



|            |  |       |       
|----------- |  | ----- | ------
|Fiscal Year |  | Total
|2005        |  | $     | 4,316 
|2006        |  |       | 3,754 
|2007        |  |       | 2,098 
|2008        |  |       | 1,434 
|2009        |  |       | 1,236 
|Thereafter  |  |       | 967   
|            |  |       |       
|Total       |  | $     | 13,805
|            |  |       |       



Total rent expense was
$3.4 million, $1.9 million and $2.0 million for the years ended January 2, 2005, December 28, 2003 and December 29, 2002, respectively.



Powerwave is subject to various legal proceedings from time to time as part of its business. As of January 2, 2005, Powerwave was not currently party to
any legal proceedings or threatened legal proceedings, the adverse outcome of which, individually or in the aggregate, it believes would have a material adverse effect on its business, financial condition and results of operations.



Note 15. Contractual Guarantees and Indemnities



The Company establishes reserves for future product warranty costs that are
expected to be incurred pursuant to specific warranty provisions with its customers. The Company also has contractual requirements with various customers that could require the Company to incur costs to repair an epidemic defect with respect to its
products outside of the normal warranty period if such defect were to occur. The Companys warranty reserves are generally established at the time of sale and updated throughout the warranty period based upon numerous factors including
historical warranty return rates and expenses over various warranty periods. The Company also accrues additional warranty liabilities for significant and unusual product performance issues at the time such issues are identified and the associated
warranty related costs can be reasonably estimated. A summary of the activity that affected the Companys accrued warranty costs for the years ended December 28, 2003 and January 2, 2005 is as follows:



|                                                         |  |                       |        |  
|-------------------------------------------------------- |  | --------------------- | ------ | -
|Description                                              |  | AccruedWarranty Costs |       
|Balance at December 29, 2002                             |  | $                     | 5,133  |  
|Reductions for warranty costs incurred                   |  |                       | (3,265 | )
|Warranty accrual related to current year sales           |  |                       | 2,771  |  
|Change in estimate related to previous warranty accruals |  |                       | 190    |  
|                                                         |  |                       |        |  
|Balance at December 28, 2003                             |  | $                     | 4,829  |  
|Reserve balances acquired with LGP Allgon                |  |                       | 7,521  |  
|Reductions for warranty costs incurred                   |  |                       | (5,057 | )
|Warranty accrual related to current year sales           |  |                       | 3,071  |  
|Change in estimate related to previous warranty accruals |  |                       | (200   | )
|                                                         |  |                       |        |  
|Balance at January 2, 2005                               |  | $                     | 10,164 |  
|                                                         |  |                       |        |  



During its normal
course of business, the Company makes certain contractual guarantees and indemnities pursuant to which the Company may be required to make future payments under specific circumstances. Powerwave has not recorded any liability for these contractual
guarantees and indemnities in the accompanying consolidated financial statements. A description of significant contractual guarantees and indemnities existing as of January 2, 2005 is included below:



Intellectual Property Indemnities



The Company indemnifies certain customers and its contract manufacturers
against liability arising from third-party claims of intellectual property rights infringement related to the Companys products. These indemnities appear in development and supply agreements with



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our customers as well as manufacturing service agreements with our contract manufacturers, are not limited in amount or
duration and generally survive the expiration of the contract. Given that the amount of any potential liabilities related to such indemnities cannot be determined until an infringement claim has been made, Powerwave is unable to determine the
maximum amount of losses that it could incur related to such indemnifications. Historically, any amounts payable pursuant to such intellectual property indemnifications have not had a material effect on the Companys business, financial
condition or results of operations.



Director and Officer
Indemnities and Contractual Guarantees



The Company has
entered into indemnification agreements with its directors and executive officers which require the Company to indemnify such individuals to the fullest extent permitted by Delaware law. The Companys indemnification obligations under such
agreements are not limited in amount or duration. Certain costs incurred in connection with such indemnifications may be recovered under certain circumstances under various insurance policies. Given that the amount of any potential liabilities
related to such indemnities cannot be determined until a lawsuit has been filed against a director or executive officer, the Company is unable to determine the maximum amount of losses that it could incur relating to such indemnifications.
Historically, any amounts payable pursuant to such director and officer indemnifications have not had a material negative effect on the Companys business, financial condition or results of operations.



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



General Contractual Indemnities/Products Liability



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



Workers Compensation Insurance Guarantees



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



Other Guarantees and Indemnities



The Company occasionally issues guarantees for certain contingent liabilities under various contractual arrangements, including customer contracts,
self-insured retentions under certain insurance policies, and governmental value-added tax compliance programs. These guarantees normally take the form of standby letters of credit issued by the Companys bank, which may be secured by cash
deposits or pledges, or performance bonds issued by an insurance company. Historically, any amounts payable pursuant to such guarantees have not had a material negative effect on Powerwaves business, financial condition or results of
operations. In addition, the Company, as part of the agreements to register the convertible notes it issued in November 2004 and July 2003, agreed to indemnify the selling security holders against certain liabilities, including liabilities under the
Securities Act of 1933. The Companys indemnification obligations under such agreements are not limited in duration and generally not limited in amount.



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Note 16. Income Taxes



The components of income (loss) before income taxes and provision (benefit) for income taxes for the fiscal years ended January 2, 2005, December 28, 2003
and December 29, 2002 consists of the following:



|                                           |  |                    |         |   |                  |   |         |                  |  |   |        |  
|------------------------------------------ |  | ------------------ | ------- | - | ---------------- | - | ------- | ---------------- |  | - | ------ | -
|                                           |  | Fiscal Years Ended |        
|                                           |  | January 2,2005     |         |   | December 28,2003 |   |         | December 29,2002 | 
|Income (loss) before income taxes:         |  |                    |         |   |                  |   |         |                  |  |   |        |  
|United States                              |  | $                  | (20,206 | ) |                  | $ | (49,876 | )                |  | $ | 5,745  |  
|Foreign                                    |  |                    | (6,603  | ) |                  |   | (3,554  | )                |  |   | 128    |  
|                                           |  |                    |         |   |                  |   |         |                  |  |   |        |  
|Total                                      |  | $                  | (26,809 | ) |                  | $ | (53,430 | )                |  | $ | 5,873  |  
|                                           |  |                    |         |   |                  |   |         |                  |  |   |        |  
|Provision for (benefit from) income taxes: |  |                    |         |   |                  |   |         |                  |  |   |        |  
|Current:                                   |  |                    |         |   |                  |   |         |                  |  |   |        |  
|Federal                                    |  | $                  | (632    | ) |                  | $ | (179    | )                |  | $ | (9,337 | )
|State                                      |  |                    | (786    | ) |                  |   | 34      |                  |  |   | (240   | )
|Foreign                                    |  |                    | 983     |   |                  |   | 77      |                  |  |   |       |  
|                                           |  |                    |         |   |                  |   |         |                  |  |   |        |  
|Total current provision (benefit)          |  |                    | (435    | ) |                  |   | (68     | )                |  |   | (9,577 | )
|                                           |  |                    |         |   |                  |   |         |                  |  |   |        |  
|Deferred:                                  |  |                    |         |   |                  |   |         |                  |  |   |        |  
|Federal                                    |  |                    | 36,367  |   |                  |   | (17,914 | )                |  |   | 11,008 |  
|State                                      |  |                    | 6,728   |   |                  |   | (2,597  | )                |  |   | 298    |  
|Foreign                                    |  |                    | 2,653   |   |                  |   | 8       |                  |  |   | 33     |  
|                                           |  |                    |         |   |                  |   |         |                  |  |   |        |  
|Total deferred provision (benefit)         |  |                    | 45,748  |   |                  |   | (20,503 | )                |  |   | 11,339 |  
|                                           |  |                    |         |   |                  |   |         |                  |  |   |        |  
|Total                                      |  | $                  | 45,313  |   |                  | $ | (20,571 | )                |  | $ | 1,762  |  
|                                           |  |                    |         |   |                  |   |         |                  |  |   |        |  



The provision
(benefit) for income taxes in the accompanying consolidated financial statements reconciles to the amount computed by applying the federal statutory rate of 35% to income (loss) before income taxes for the fiscal years ended January 2, 2005,
December 28, 2003 and December 29, 2002 as follows:



|                                           |  |                    |        |   |                  |   |         |                  |  |   |        |  
|------------------------------------------ |  | ------------------ | ------ | - | ---------------- | - | ------- | ---------------- |  | - | ------ | -
|                                           |  | Fiscal Years Ended |       
|                                           |  | January 2,2005     |        |   | December 28,2003 |   |         | December 29,2002 | 
|Taxes at federal statutory rate            |  | $                  | (9,384 | ) |                  | $ | (18,700 | )                |  | $ | 2,055  |  
|State taxes, net                           |  |                    | 3,746  |   |                  |   | (1,666  | )                |  |   | (57    | )
|In-process research and development charge |  |                    | 8,208  |   |                  |   |        |                  |  |   |       |  
|Foreign income taxed at different rates    |  |                    | (888   | ) |                  |   | (132    | )                |  |   | (286   | )
|Research and experimentation tax credits   |  |                    | (1,135 | ) |                  |   |        |                  |  |   | (1,052 | )
|Other                                      |  |                    | (5     | ) |                  |   | (73     | )                |  |   | 50     |  
|Change in federal valuation allowance      |  |                    | 44,771 |   |                  |   |        |                  |  |   | 1,052  |  
|                                           |  |                    |        |   |                  |   |         |                  |  |   |        |  
|Provision (benefit) for income taxes       |  | $                  | 45,313 |   |                  | $ | (20,571 | )                |  | $ | 1,762  |  
|                                           |  |                    |        |   |                  |   |         |                  |  |   |        |  



Deferred income taxes
reflect the net tax effects of tax carry-forwards and temporary differences between the carrying amount of assets and liabilities for tax and financial reporting purposes. The Companys deferred tax assets and liabilities were comprised of the
following major components:



|                                      |  |                |         |   |                  |   |        |  
|------------------------------------- |  | -------------- | ------- | - | ---------------- | - | ------ | -
|                                      |  | January 2,2005 |         |   | December 28,2003 |  
|Deferred Tax Assets:                  |  |                |         |   |                  |   |        |  
|Accruals and provisions               |  | $              | 9,022   |   |                  | $ | 4,327  |  
|Amortizable intangible assets         |  |                |        |   |                  |   | 10,827 |  
|Inventory                             |  |                | 2,955   |   |                  |   | 3,951  |  
|Net operating loss carry-forwards     |  |                | 42,895  |   |                  |   | 27,503 |  
|Property, plant and equipment         |  |                | 7,604   |   |                  |   |       |  
|Tax credit carry-forwards             |  |                | 10,475  |   |                  |   | 10,926 |  
|Other                                 |  |                | 82      |   |                  |   | 137    |  
|                                      |  |                |         |   |                  |   |        |  
|Gross deferred tax assets             |  |                | 73,033  |   |                  |   | 57,671 |  
|Less: valuation allowance             |  |                | (63,680 | ) |                  |   | (9,908 | )
|                                      |  |                |         |   |                  |   |        |  
|Net deferred tax assets               |  |                | 9,353   |   |                  |   | 47,763 |  
|                                      |  |                |         |   |                  |   |        |  
|Deferred Tax Liabilities:             |  |                |         |   |                  |   |        |  
|Amortizable intangible assets         |  |                | (8,302  | ) |                  |   |       |  
|Property, plant and equipment         |  |                |        |   |                  |   | (2,496 | )
|State taxes                           |  |                |        |   |                  |   | (2,337 | )
|Unrepatriated foreign earnings        |  |                | (1,697  | ) |                  |   |       |  
|                                      |  |                |         |   |                  |   |        |  
|Gross deferred tax liabilities        |  |                | (9,999  | ) |                  |   | (4,833 | )
|                                      |  |                |         |   |                  |   |        |  
|Net deferred tax assets (liabilities) |  | $              | (646    | ) |                  | $ | 42,930 |  
|                                      |  |                |         |   |                  |   |        |  



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As of January 2, 2005, Powerwave had combined federal and state operating loss carry-forwards of
approximately $118.5 million and $149.4 million, respectively, that expire from 2016 to 2024 and foreign operating loss carry-forwards of $19.3 million with no expiration date. The Company also had federal and California tax credit carry-forwards of
$3.6 million and $6.9 million, respectively. The federal tax credits will begin to expire in 2016 and the California tax credits will begin to expire in 2006.



Undistributed earnings of the Companys foreign subsidiaries amounted to approximately $5.9 million and $0.3 million at January 2, 2005 and
December 28, 2003, respectively. The Company has provided for the estimated residual U.S. tax on the portion of these earnings, that may not be indefinitely reinvested. The remaining earnings are considered to be indefinitely reinvested. Upon
distribution of those earnings in the form of dividends or otherwise, some portion of the distribution would be subject to both foreign withholding taxes and U.S. income taxes, less applicable foreign tax credits. Determination of the amount of U.S.
income tax liability that would be incurred is not practicable because of the complexities associated with its hypothetical calculation.



The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and the actual timing within which the
underlying temporary differences become taxable or deductible. During fiscal 2004, the Company recorded a full valuation allowance against its U.S deferred tax assets due to its cumulative U.S. loss position and uncertainties involved in generating
sufficient U.S. taxable income in the future.



As part of the
LGP Acquisition, the Company assumed a tax liability related to a tax planning strategy for which the related deductions had previously been disallowed by the Swedish tax authority and the county administrative court. While Powerwave continues to
vigorously contest this determination, the estimated liability of approximately $15.2 million has been included on the balance sheet at January 2, 2005 within accrued income taxes.



Note 17. Acquisitions



LGP Allgon:



On May 3, 2004, the Company completed its exchange offer for the outstanding shares of LGP Allgon Holding AB (LGP Allgon), a Swedish public
company and global provider of wireless infrastructure equipment and coverage solutions to wireless network communications operators and original equipment manufacturers. Pursuant to the terms of the exchange offer, LGP Allgon shareholders were
offered 1.1 shares of newly issued Powerwave Common Stock in exchange for each share of LGP Allgon common stock. In addition, pursuant to the exchange offer, Powerwave offered a cash alternative whereby LGP Allgon shareholders could alternatively
elect to exchange their LGP Allgon common stock for a fixed price of Swedish kronor (SEK) 61.87 in lieu of Powerwave shares. This cash alternative was subject to an aggregate maximum of $125.0 million. The acquisition of LGP Allgon
included all of the assets and liabilities, operations and business of LGP Allgon. Also included were all intellectual property rights to LGP Allgon products as well as in-process research and development activities. The products acquired include a
broad range of wireless infrastructure equipment including antennas, filters, repeaters, tower-mounted amplifiers and advanced coverage solutions. Powerwave believes that the acquisition of LGP Allgon increased the combined companys products
offerings within the global wireless infrastructure market and improved its ability to offer more complete end-to-end solutions for its customers complex network requirements. These factors contributed to a purchase price in excess of the fair
value of the net assets acquired, resulting in goodwill of approximately $237.3 million as of May 3, 2004 which is not deductible for income tax purposes. Goodwill allocated to the telecom and contract manufacturing segments is estimated at $218.3
million and $19.0 million, respectively.



As of January 2,
2005, Powerwave had acquired approximately 98% of LGP Allgons outstanding common stock in exchange for approximately $96.1 million in cash and 40,685,596 shares of Powerwave Common Stock, valued at $297.0 million based upon the average closing
price for the three days before and after the announcement



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of the transaction. The Company has initiated compulsory acquisition proceedings under Swedish law to acquire the
remaining LGP Allgon shares that were not tendered. The related compulsory share liability at the acquisition date was estimated at $14.7 million, a portion of which has been paid as of January 2, 2005. To the extent that the actual liability
differs from this amount, the difference will be adjusted to goodwill. The Company currently expects to pay approximately $7.9 million in the future to satisfy the outstanding compulsory share liability. There are approximately 785,948 shares of LGP
Allgon common stock outstanding.



The aggregate purchase price
of LGP Allgon was comprised of the following:



|                                    |  |   |        
|----------------------------------- |  | - | -------
|Common stock                        |  | $ | 297,005
|Cash                                |  |   | 88,217 
|Compulsory share liability          |  |   | 14,652 
|Transaction costs paid by Powerwave |  |   | 7,678  
|                                    |  |   |        
|Total purchase price                |  | $ | 407,552
|                                    |  |   |        



The Company has
completed a preliminary allocation of the aggregate purchase price to tangible and intangible assets acquired and liabilities assumed upon estimates of fair value determined by management with the assistance of independent valuation specialists. The
estimated fair values of the identifiable intangible assets acquired were determined using the income approach.



In connection with the acquisition, the Company formulated and implemented a plan to restructure and integrate the operations of the combined companies.
Pursuant to such plan, the Company recognized $22.1 million as liabilities or asset write-downs in connection with the acquisition for estimated restructuring and integration costs related to the consolidation of LGP Allgon operations, including
amounts for future lease obligations on excess facilities, impairment of excess equipment, write-downs of inventory for discontinued product lines and severance related costs for expected workforce reductions. These estimated costs were included in
the allocation of the purchase consideration in accordance with SFAS No. 141, Business Combinations and EITF 95-3, Recognition of Liabilities in Connection with a Purchase Business Combination. Implementation of the restructuring and
integration plan is underway and additional actions are expected pending certain product related decisions and the further assessment of workforce and facility related requirements. The restructuring and integration plan is expected to be finalized
by the end of the first quarter of fiscal 2005, at which time any additional charges will be recorded as an adjustment to goodwill. Integration activities related to such plan are currently expected to continue through the second quarter of fiscal
2005. See Note 9. Restructuring and Impairment Charges for additional information on the Companys restructuring and integration plans.



The Companys consolidated financial statements for the year ended January 2, 2005 include a charge of $23.5 million for the write-off of acquired
in-process research and development expenses associated with the acquisition of LGP Allgon. The in-process research and development expenses arose from new product projects that were under development at the date of the acquisition and were 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 LGP Allgon at the time of the acquisition included, among others, various
antenna projects covering multiple system capabilities and full band functionality, various tower-mounted amplifier projects covering full band capability, various filter projects covering new product platforms, and various repeater projects
covering both EDGE and WCDMA applications. At the date of the acquisition, the Company estimated that the cost to complete these projects aggregated approximately $2.3 million and was expected to be incurred over a one year period. As of January 2,
2005, the Company believes that the remaining development projects are approximately 90% complete. Uncertainties that could impede the success 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.



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The following table summarizes the preliminary allocation of the aggregate purchase price to the fair
value of the assets acquired and liabilities assumed in the LGP Allgon acquisition:



|                                                  |  |   |          |  
|------------------------------------------------- |  | - | -------- | -
|Assets:                                           |  |   |          |  
|Cash                                              |  | $ | 11,744   |  
|Restricted cash                                   |  |   | 5,364    |  
|Accounts receivable                               |  |   | 66,269   |  
|Inventories                                       |  |   | 36,609   |  
|Prepaid assets and other current assets           |  |   | 11,266   |  
|Property, plant and equipment                     |  |   | 81,726   |  
|Identifiable intangible assets                    |  |   | 66,686   |  
|Goodwill                                          |  |   | 237,255  |  
|Other non-current assets                          |  |   | 3,893    |  
|                                                  |  |   |          |  
|Total assets:                                     |  |   | 520,812  |  
|                                                  |  |   |          |  
|Liabilities:                                      |  |   |          |  
|Accounts payable                                  |  |   | (45,668  | )
|Accrued liabilities and other current liabilities |  |   | (60,064  | )
|Income taxes, net                                 |  |   | (3,006   | )
|Debt                                              |  |   | (27,789  | )
|Other non-current liabilities                     |  |   | (183     | )
|                                                  |  |   |          |  
|Total liabilities                                 |  |   | (136,710 | )
|                                                  |  |   |          |  
|In process research and development               |  |   | 23,450   |  
|                                                  |  |   |          |  
|Total purchase price                              |  | $ | 407,552  |  
|                                                  |  |   |          |  



The amount allocated
to identifiable intangible assets consists of the following:



|                                     |  |        |        |                        |                  
|------------------------------------ |  | ------ | ------ | ---------------------- | -----------------
|                                     |  | Amount |        | Weighted Average Life
|Patents and developed technology     |  | $      | 30,970 |                        | 5 years          
|Customer  related assets            |  |        | 35,034 |                        | 5 years          
|Trademarks                           |  |        | 682    |                        | Indefinite -lived
|                                     |  |        |        |                        |                  
|Total identifiable intangible assets |  | $      | 66,686 |                        |                  
|                                     |  |        |        |                        |                  



The following
unaudited pro forma financial information for fiscal years ended January 2, 2005 and December 28, 2003, assumes that the LGP Allgon acquisition had occurred on the first day of each period presented. The pro forma financial information is presented
for information purposes only. The unaudited pro forma financial information excludes the effect of the in-process research and development charge of $23.5 million. Such information is based upon the standalone historical results of each company and
does not reflect the actual results that would have been reported had the acquisition been completed when assumed, nor is it indicative of the future results of operations for the combined enterprise.



|                       |  |                    |         |   |                  |   |         |  
|---------------------- |  | ------------------ | ------- | - | ---------------- | - | ------- | -
|                       |  | Fiscal Years Ended |        
|Pro forma              |  | January 2,2005     |         |   | December 28,2003 |  
|Net sales              |  | $                  | 583,752 |   |                  | $ | 525,523 |  
|                       |  |                    |         |   |                  |   |         |  
|Net loss               |  | $                  | (54,724 | ) |                  | $ | (63,961 | )
|                       |  |                    |         |   |                  |   |         |  
|Basic loss per share   |  | $                  | (0.53   | ) |                  | $ | (0.61   | )
|                       |  |                    |         |   |                  |   |         |  
|Diluted loss per share |  | $                  | (0.53   | ) |                  | $ | (0.61   | )
|                       |  |                    |         |   |                  |   |         |  



Ericsson Amplifier
Technologies:



On July 10, 2003, the Company completed the
acquisition of certain assets and liabilities of Ericsson Amplifier Technologies, Inc. (AMT) pursuant to an asset purchase agreement. Under the asset purchase agreement, the Company purchased selected assets of AMT, including certain
inventories, equipment and real estate for a cash payment of $9.8 million. The Company also assumed certain warranty obligations of AMT and made offers of employment to a limited number of employees of AMT as part of the purchase. In connection with
the asset purchase, the Company also entered into an agreement to become a supplier of certain 2.1 GHz W-CDMA radio frequency power amplifiers of Ericsson AB. The acquisition was accounted for under the purchase method of



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accounting and the total purchase price of approximately $10.4 million, including assumed liabilities of $0.4 million and
capitalized acquisition costs of $0.1 million, has been allocated as follows: $1.0 million to equipment, $5.9 million to assets held for sale, $0.1 million to contract intangibles and $3.4 million to goodwill. The results of operations of AMT are
included in the consolidated financial statements from the date of acquisition. The pro-forma effect of the acquisition is not material to the Companys results of operations for fiscal 2003.



Note 18. Other Income, Net



Other income, net, includes gains and losses on foreign currency
transactions, interest income and interest expense associated with our 1.25% subordinated convertible notes. The components of other income, net are as follows:



|                                  |  |                    |        |   |                  |   |        |                  |  |   |       |  
|--------------------------------- |  | ------------------ | ------ | - | ---------------- | - | ------ | ---------------- |  | - | ----- | -
|                                  |  | Fiscal Years Ended |       
|                                  |  | January 2,2005     |        |   | December 28,2003 |   |        | December 29,2002 | 
|Interest income                   |  | $                  | 2,920  |   |                  | $ | 2,425  |                  |  | $ | 2,664 |  
|Interest expense                  |  |                    | (3,861 | ) |                  |   | (1,162 | )                |  |   | (81   | )
|Foreign currency gain (loss), net |  |                    | 394    |   |                  |   | 33     |                  |  |   | (36   | )
|Other income (expense)            |  |                    | 665    |   |                  |   | 1,098  |                  |  |   | (584  | )
|                                  |  |                    |        |   |                  |   |        |                  |  |   |       |  
|Total                             |  | $                  | 118    |   |                  | $ | 2,394  |                  |  | $ | 1,963 |  
|                                  |  |                    |        |   |                  |   |        |                  |  |   |       |  



Note 19. Earnings (Loss) Per Share



In accordance with SFAS 128, basic earnings (loss) per
share is based upon the weighted average number of common shares outstanding. Diluted earnings (loss) per share is based upon the weighted average number of common and potential common shares for each period presented. Potential common shares
include stock options under the treasury stock method and convertible subordinated debt under the if-converted method. Potential common shares of 15,892,536 and 6,033,308 related to the Companys convertible debt and stock option programs have
been excluded from diluted weighted average common shares for the years ended January 2, 2005 and December 28, 2003, respectively, as the effect would be anti-dilutive.



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



|                                       |  |                    |         |   |                  |   |         |                  |  |   |       
|-------------------------------------- |  | ------------------ | ------- | - | ---------------- | - | ------- | ---------------- |  | - | ------
|                                       |  | Fiscal Years Ended
|                                       |  | January 2,2005     |         |   | December 28,2003 |   |         | December 29,2002
|Basic:                                 |  |                    |         |   |                  |   |         |                  |  |   |       
|Basic weighted average common shares   |  |                    | 90,212  |   |                  |   | 64,667  |                  |  |   | 65,485
|Net income (loss)                      |  | $                  | (72,122 | ) |                  | $ | (32,859 | )                |  | $ | 4,111 
|                                       |  |                    |         |   |                  |   |         |                  |  |   |       
|Basic earnings (loss) per share        |  | $                  | (0.80   | ) |                  | $ | (0.51   | )                |  | $ | 0.06  
|                                       |  |                    |         |   |                  |   |         |                  |  |   |       
|Diluted:                               |  |                    |         |   |                  |   |         |                  |  |   |       
|Basic weighted average common shares   |  |                    | 90,212  |   |                  |   | 64,667  |                  |  |   | 65,485
|Potential common shares                |  |                    |        |   |                  |   |        |                  |  |   | 745   
|                                       |  |                    |         |   |                  |   |         |                  |  |   |       
|Diluted weighted average common shares |  |                    | 90,212  |   |                  |   | 64,667  |                  |  |   | 66,230
|Net income (loss)                      |  | $                  | (72,122 | ) |                  | $ | (32,859 | )                |  | $ | 4,111 
|                                       |  |                    |         |   |                  |   |         |                  |  |   |       
|Diluted earnings (loss) per share      |  | $                  | (0.80   | ) |                  | $ | (0.51   | )                |  | $ | 0.06  
|                                       |  |                    |         |   |                  |   |         |                  |  |   |       



Note 20. Customer Concentrations



Powerwaves product sales have historically been
concentrated in a small number of customers. During the years ended January 2, 2005, December 28, 2003, and December 29, 2002, sales to customers that accounted for 10% or more of revenues for the year totaled $163.7 million, $171.0 million, and
$294.3 million, respectively. Sales to Nortel Networks Corporation and related entities (Nortel) accounted for approximately 24%, 57%, and 49% of total revenues during such years, respectively. During the years ended January 2, 2005 and
December 28, 2003, one customer in addition to Nortel accounted for approximately 11% and 15% of total revenues, respectively. During the year ended December 29, 2002, two customers in addition to Nortel accounted for approximately 15% and 13% of
total revenues during such period.



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As of January 2, 2005, approximately 35% of total accounts receivable related to two customers that each
accounted for 10% or more of Powerwaves total revenue during fiscal 2004. The inability to collect outstanding receivables from the customers or the loss of, or reduction in, sales to any of these customers could have a material adverse effect
on the Companys business, financial condition and results of operations.



Note 21. Supplier Concentrations



Certain of
Powerwaves products, as well as components utilized in such products, are available in the short-term only from a single or a limited number of sources. In addition, in order to take advantage of volume pricing discounts, the Company purchases
certain customized components from single-source suppliers as well as finished products from single-source contract manufacturers. The inability to obtain single-source components or finished products in the amounts needed on a timely basis or at
commercially reasonable prices could result in delays in product introductions, interruption in product shipments or increases in product costs, which could have a material adverse effect on the Companys business, financial condition and
results of operations until alternative sources could be developed at a reasonable cost.



Note 22. Segments



The
Companys sales are derived primarily from the sale of wireless communications network products and coverage solutions, including antennas, boosters, combiners, filters, radio frequency power amplifiers, repeaters, tower-mounted amplifiers and
advanced coverage solutions for use in cellular, PCS, and 3G wireless communications networks throughout the world. Powerwave also manufactures and sells advanced industrial components, primarily for the automotive and food industries, under
contract manufacturing. These two reportable segments, Wireless Communications and Contract Manufacturing are regularly evaluated by the Companys executive management in deciding how to allocate resources and in
assessing performance. The accounting policies for each reportable segment are the same as those described in Note 2. Summary of Significant Accounting Policies.



The following schedule presents an analysis of certain financial information for these two business segments:



|                              |  |                    |         |   |                   |   |         |                  |  |   |        
|----------------------------- |  | ------------------ | ------- | - | ----------------- | - | ------- | ---------------- |  | - | -------
|                              |  | Fiscal Years Ended
|                              |  | January 2,2005     |         |   | December 28, 2003 |   |         | December 29,2002
|Net sales:                    |  |                    |         |   |                   |   |         |                  |  |   |        
|Wireless communications       |  | $                  | 448,867 |   |                   | $ | 239,069 |                  |  | $ | 384,889
|Contract manufacturing        |  |                    | 25,047  |   |                   |   |        |                  |  |   |       
|                              |  |                    |         |   |                   |   |         |                  |  |   |        
|Total net sales               |  | $                  | 473,914 |   |                   | $ | 239,069 |                  |  | $ | 384,889
|                              |  |                    |         |   |                   |   |         |                  |  |   |        
|Operating income (loss):      |  |                    |         |   |                   |   |         |                  |  |   |        
|Wireless communications       |  | $                  | (28,175 | ) |                   | $ | (55,824 | )                |  | $ | 3,910  
|Contract manufacturing        |  |                    | 1,248   |   |                   |   |        |                  |  |   |       
|                              |  |                    |         |   |                   |   |         |                  |  |   |        
|Total operating income (loss) |  | $                  | (26,927 | ) |                   | $ | (55,824 | )                |  | $ | 3,910  
|                              |  |                    |         |   |                   |   |         |                  |  |   |        



|                        |  |                |           |                   |   |        
|----------------------- |  | -------------- | --------- | ----------------- | - | -------
|                        |  | January 2,2005 |           | December 28, 2003
|Total assets:           |  |                |           |                   |   |        
|Wireless communications |  | $              | 982,519   |                   | $ | 466,257
|Contract manufacturing  |  |                | 38,252    |                   |   |       
|                        |  |                |           |                   |   |        
|Total assets            |  | $              | 1,020,771 |                   | $ | 466,257
|                        |  |                |           |                   |   |        



The following table
presents a further analysis of Powerwaves sales within the wireless communications business segment, based upon product group:



|                                      |  |                    |         |  |                   |   |  |                   |         |  |       |   |  |   |         |  |       |  
|------------------------------------- |  | ------------------ | ------- |  | ----------------- | - |  | ----------------- | ------- |  | ----- | - |  | - | ------- |  | ----- | -
|                                      |  | Fiscal Years Ended |        
|Wireless Communications Product
Group |  | January 2, 2005    |         |  | December 28, 2003 |   |  | December 29, 2002 |        
|Antenna systems                       |  | $                  | 110,991 |  | 24.7              | % |  | $                 |        |  |      | % |  | $ |        |  |      | %
|Base station subsystems               |  |                    | 277,521 |  | 61.8              | % |  |                   | 239,069 |  | 100.0 | % |  |   | 384,889 |  | 100.0 | %
|Coverage solutions                    |  |                    | 60,355  |  | 13.5              | % |  |                   |        |  |      | % |  |   |        |  |      | %
|                                      |  |                    |         |  |                   |   |  |                   |         |  |       |   |  |   |         |  |       |  
|Total net segment sales               |  | $                  | 448,867 |  | 100.0             | % |  | $                 | 239,069 |  | 100.0 | % |  | $ | 384,889 |  | 100.0 | %
|                                      |  |                    |         |  |                   |   |  |                   |         |  |       |   |  |   |         |  |       |  



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Antenna systems consist of base station antennas and tower-mounted amplifiers. Base station subsystems
consist of products that are installed into or around the base station of wireless networks and include products such as boosters, combiners, filters and radio frequency power amplifiers. Coverage solutions consist primarily of repeaters and
advanced coverage solutions.



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



|                               |  |                    |         |                  |   |                  |  |   |        
|------------------------------ |  | ------------------ | ------- | ---------------- | - | ---------------- |  | - | -------
|                               |  | Fiscal Years Ended
|Geographic Area                |  | January 2,2005     |         | December 28,2003 |   | December 29,2002
|North America                  |  | $                  | 137,517 |                  | $ | 128,350          |  | $ | 257,009
|Asia                           |  |                    | 61,895  |                  |   | 31,974           |  |   | 37,460 
|Europe and other international |  |                    | 274,502 |                  |   | 78,745           |  |   | 90,420 
|                               |  |                    |         |                  |   |                  |  |   |        
|Total net sales                |  | $                  | 473,914 |                  | $ | 239,069          |  | $ | 384,889
|                               |  |                    |         |                  |   |                  |  |   |        



North American sales
include sales to the United States, Canada and Mexico. Asian sales include sales to China, South Korea and other locations in Asia. Europe and Other International sales include sales to Europe and all other foreign countries. Sales to Canada were
$22.9 million, $63.8 million, and $128.7 million during the years ended January 2, 2005, December 28, 2003, and December 29, 2002, respectively. Sales to Finland were $22.8 million, $35.4 million, and $57.2 million during the years ended January 2,
2005, December 28, 2003, and December 29, 2002, respectively. Sales to France were $49.8 million, $41.4 million, and $32.0 million during the years ended January 2, 2005, December 28, 2003, and December 29, 2002, respectively.



The following table reflects the geographic area of Powerwaves
long-lived assets:



|                             |  |                    |         |                  |   |        
|---------------------------- |  | ------------------ | ------- | ---------------- | - | -------
|                             |  | Fiscal Years Ended
|Geographic Area              |  | January 2,2005     |         | December 28,2003
|United States                |  | $                  | 75,487  |                  | $ | 120,911
|Europe, primarily Sweden     |  |                    | 426,686 |                  |   |       
|Asia and other international |  |                    | 3,942   |                  |   |       
|                             |  |                    |         |                  |   |        
|Total                        |  | $                  | 506,115 |                  | $ | 120,911
|                             |  |                    |         |                  |   |        



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QUARTERLY FINANCIAL DATA (UNAUDITED)

(in thousands, except per share data)



|                                       |  |                |         |   |                |   |         |                   |  |   |                   |   |  |   |         |     
|-------------------------------------- |  | -------------- | ------- | - | -------------- | - | ------- | ----------------- |  | - | ----------------- | - |  | - | ------- | ----
|                                       |  | Quarters Ended |        
|                                       |  | April 4, 2004  |         |   | July 4,2004(1) |   |         | October 3,2004(1) |  |   | January 2,2005(1) |  
|Fiscal 2004:                           |  |                |         |   |                |   |         |                   |  |   |                   |   |  |   |         |     
|Net sales                              |  | $              | 63,224  |   |                | $ | 115,981 |                   |  | $ | 138,291           |   |  | $ | 156,418 |     
|Gross profit                           |  | $              | 10,774  |   |                | $ | 22,276  |                   |  | $ | 34,747            |   |  | $ | 38,124  |     
|Operating income (loss)                |  | $              | (5,657  | ) |                | $ | (30,190 | )(2)              |  | $ | 3,435             |   |  | $ | 5,485   |     
|Net income (loss)                      |  | $              | (3,263  | ) |                | $ | (30,162 | )(2)              |  | $ | 2,799             |   |  | $ | (41,496 | )(3)
|                                       |  |                |         |  
|Basic earnings (loss) per share        |  | $              | (0.05   | ) |                | $ | (0.33   | )                 |  | $ | 0.03              |   |  | $ | (0.41   | )   
|Diluted earnings (loss) per share      |  | $              | (0.05   | ) |                | $ | (0.33   | )                 |  | $ | 0.03              |   |  | $ | (0.41   | )   
|Basic weighted average common shares   |  |                | 63,393  |   |                |   | 91,664  |                   |  |   | 104,343           |   |  |   | 101,448 |     
|Diluted weighted average common shares |  |                | 63,393  |   |                |   | 91,664  |                   |  |   | 104,837           |   |  |   | 101,448 |     
|                                       | 
|                                       |  | Quarters Ended |        
|                                       |  | March 30, 2003 |         |   | June 29,2003   |   |         | September 28,2003 |  |   | December 28,2003  |  
|Fiscal 2003:                           |  |                |         |   |                |   |         |                   |  |   |                   |   |  |   |         |     
|Net sales                              |  | $              | 52,154  |   |                | $ | 51,509  |                   |  | $ | 63,158            |   |  | $ | 72,248  |     
|Gross profit                           |  | $              | 3,785   |   |                | $ | (7,121  | )                 |  | $ | 6,409             |   |  | $ | 13,142  |     
|Operating loss                         |  | $              | (17,264 | ) |                | $ | (25,060 | )                 |  | $ | (10,819           | ) |  | $ | (2,681  | )   
|Net loss                               |  | $              | (10,568 | ) |                | $ | (15,237 | )                 |  | $ | (5,666            | ) |  | $ | (1,388  | )   
|                                       |  |                |         |  
|Basic loss per share                   |  | $              | (0.16   | ) |                | $ | (0.23   | )                 |  | $ | (0.09             | ) |  | $ | (0.02   | )   
|Diluted loss per share                 |  | $              | (0.16   | ) |                | $ | (0.23   | )                 |  | $ | (0.09             | ) |  | $ | (0.02   | )   
|Basic weighted average common shares   |  |                | 65,877  |   |                |   | 65,976  |                   |  |   | 63,639            |   |  |   | 63,174  |     
|Diluted weighted average common shares |  |                | 65,877  |   |                |   | 65,976  |                   |  |   | 63,639            |   |  |   | 63,174  |     



|(1) | Financial results include LGP Allgon beginning May 2004.
|--- | --------------------------------------------------------



|(2) | Operating income (loss) and net income (loss) for the quarter ended July 4, 2004 include a non-cash charge of $23.5 million for in-process research and development
acquired in the LGP Allgon acquisition. See Note 17. Acquisitions of the preceding Notes to Consolidated Financial Statements.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | Net income (loss) for the quarter ended January 2, 2005 includes a non-cash charge of $45.0 million related to the establishment of a full valuation allowance
against Powerwaves net U.S. deferred tax asset. See Note 16. Income Taxes of the preceding Notes to Consolidated Financial Statements.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE



None.



ITEM 9A. CONTROLS AND PROCEDURES



Controls and
Procedures



We have established disclosure controls and
procedures to ensure that material information relating to Powerwave and its consolidated subsidiaries is made known to the officers who certify the Companys financial reports, as well as other members of senior management and the Board of
Directors, to allow timely decisions regarding required disclosures. As of the end of the period covered by this report, Powerwave carried out an evaluation, under the supervision and with the participation of the Companys management,
including the Companys Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Companys disclosure controls and procedures pursuant to Rule 13a-15 of the Securities and Exchange Act of
1934. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures are effective in timely alerting them to material information related to the Company that
is required to be included in Powerwaves annual and periodic SEC filings.



There were no changes in our internal controls over financial reporting during the quarter ended January 2, 2005 that have materially affected, or are reasonably likely to materially affect our internal controls over
financial reporting.



Our management, including our Chief
Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to
their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Powerwave have been detected.



Managements Report on Internal Control Over Financial Reporting



Our management is responsible for establishing and maintaining adequate
internal control over our financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). Our management assessed the effectiveness of our internal controls over financial reporting as of January 2, 2005.
Such assessment excluded the internal controls over financial reporting for LGP Allgon and its subsidiaries (LGP Allgon). Since we completed the acquisition of LGP Allgon on May 3, 2004, it was not possible to conduct a complete
assessment of LGP Allgons internal control over financial reporting in the period between the completion of the acquisition and the date of our managements assessment of our internal controls over financial reporting. Therefore, our
conclusion in this Annual Report on Form 10-K regarding the effectiveness of our internal control over financial reporting as of January 2, 2005 does not include the internal controls over financial reporting of LGP Allgon. Our fiscal 2004
consolidated financial statements include the operating results of LGP Allgon for eight months. During this period, these operations generated approximately $259.4 million or 54.7% of total revenues. Additionally, LGP Allgons total assets as
of January 2, 2005 were approximately $611.9 million, or 59.9% of consolidated total assets and LGP Allgons net assets approximated $444.9 million, or 86.3% of consolidated net assets.



In making its assessment of the effectiveness of our internal controls over
financial reporting, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on these criteria, our management has
concluded that, as of January 2, 2005, our internal control over financial reporting, excluding internal controls over financial reporting with respect to LGP Allgon, are effective. Our independent registered public accounting firm, Deloitte &
Touche LLP, has issued an audit report on our assessment of our internal control over financial reporting, which is included herein.



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Report of Independent Registered Public Accounting Firm



To the Board of Directors and Shareholders of Powerwave Technologies, Inc.:



We have audited managements assessment, included in the accompanying
Managements Report on Internal Control over Financial Reporting, that Powerwave Technologies, Inc. and subsidiaries (the Company) maintained effective internal control over financial reporting as of January 2, 2005, based on the
criteria established in Internal ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. As described in Managements Report on Internal Control over Financial Reporting,
management excluded from their assessment the internal control over financial reporting at LGP Allgon Holding AB, which was acquired on May 3, 2004 and whose financial statements reflect total assets and revenues constituting 60 and 55 percent,
respectively, of the related consolidated financial statement amounts as of and for the year ended January 2, 2005. Accordingly, our audit did not include the internal control over financial reporting at LGP Allgon Holding AB. The Companys
management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on managements
assessment and an opinion on the effectiveness of the Companys internal control over financial reporting based on our audit.



We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial
reporting, evaluating managements assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinions.



A
companys internal control over financial reporting is a process designed by, or under the supervision of, the companys principal executive and principal financial officers, or persons performing similar functions, and effected by the
companys board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and
that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.



Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override
of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to
the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



In our opinion, managements assessment that the Company maintained effective internal control over financial reporting
as of January 2, 2005, is fairly stated, in all material respects, based on the criteria established in Internal ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our
opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 2, 2005, based on the criteria established in Internal ControlIntegrated Frameworkissued by the Committee of
Sponsoring Organizations of the Treadway Commission.



We have
also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedule as of and for the year ended January 2, 2005 of the Company and
our report dated March 10, 2005 expressed an unqualified opinion on those financial statements and the financial statement schedule.



/s/    DELOITTE & TOUCHE LLP



Costa Mesa, California



March 10, 2005



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ITEM 9B. OTHER INFORMATION



None.



PART III



ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT



Directors



Bruce C.
Edwards,51, became Executive Chairman of the Board of Directors of Powerwave in February 2005. Mr. Edwards joined the Company in February 1996 as President and Chief Executive Officer and Director. Mr. Edwards was Chief Executive Officer of
Powerwave from February 1996 to February 2005 and was President from February 1996 to May 2004. 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 Emulex Corporation.



Ronald J. Buschur, 41, joined the Company in June 2001 as Chief
Operating Officer. In May 2004, Mr. Buschur became President of the Company and in February 2005, Mr. Buschur became Chief Executive Officer and a member of the Board of Directors. Prior to joining the Company, Mr. Buschur held various positions at
HMT Technology/Komag, an independent supplier of thin-film disks, including President and Chief Operating Officer from 1999 to 2000, Vice President of Sales, Marketing and Quality Assurance from 1997 to 1999 and Vice President of Quality Assurance
from 1994 to 1997. From 1993 to 1994, Mr. Buschur was Director of Quality at Maxtor, a disk drive company. Mr. Buschur held various managerial positions at Digital Equipment Corporation, a computer manufacturer from 1987 to 1993.



John L. Clendenin, 70, became Lead Director in February 2005. Mr.
Clendenin was non-executive Chairman of the Board of Directors of Powerwave from January 3, 1999 to February 2005 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., Acuity Brands, Inc., The Kroger Company and The Home Depot, Inc.



Daniel A. Artusi, 50, joined Powerwaves Board of Directors in
December 2002. Mr. Artusi is the President and Chief Executive Officer of Silicon Laboratories Inc., a designer and manufacturer of integrated circuits for the communications industry. Prior to joining Silicon Laboratories in August 2001, Mr. Artusi
held various positions at Motorola, Inc. from 1977 to 2001. From August 1999 to August 2001, Mr. Artusi served as Corporate Vice President and General Manager of Motorolas Networking and Computing Systems Group. Mr. Artusi served as Vice
President and General Manager of Motorolas Wireless Infrastructure Division from May 1997 to August 1999 and as General Manager of Motorolas RF Products Division from April 1996 to May 1997.



David L. George, 51, has been a member of Powerwaves Board of
Directors since November 1995. Since January 2005, he has served as Executive Vice President Operations of the Land Mobile Division of Vertex Standard Inc., a company that designs, manufactures and sells communications equipment for commercial land
mobile, amateur radio and general aviation applications. From April 2002 to June 2004, Mr. George served as Chief Operating Officer, Chief Technical Officer and President of the Wireless Communications Division of Bizcom U.S.A., Inc., a public
company specializing in emergency management software solutions and wireless communications systems. Prior to joining Bizcom, Mr. George was in private practice providing consulting services to participants in the wireless industry. From June 2000
to June 2001, he was Executive Vice President of Operations for Securicor Wireless, Inc., a large mobile radio network provider. Mr. George was the co-founder and served as Executive Vice President and Chief Technical Officer of ComSpace
Corporation, formerly known as Unique Technologies, International, L.L.C., a wireless technology development company from February 1994 to June 2000. From November 1983 to February 1994, Mr. George served as Vice President, Director of Operations,
Commercial Communications Division of Uniden America. A member of the Institute of Electrical and Electronic Engineers for more than 22 years, he holds several patents relating to wireless technology and networks.



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Eugene L. Goda, 68, has been a member of Powerwaves Board of Directors since November 1995.
From June 1997 to March 2000, Mr. Goda served as Chairman of the Board, President and Chief Executive Officer of Objectshare Inc., 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.



Carl W. Neun, 61, has been a member of Powerwaves Board of Directors since February 2000. From 1993 to January 2000, Mr. Neun was Senior Vice
President and Chief Financial Officer of Tektronix, Inc. From 1987 to 1993, he was Senior Vice President of Administration and Chief Financial Officer of Conner Peripherals, Inc. Mr. Neun currently serves on the Board of Directors of Planar Systems,
RadiSys Corp, and Oregon Steel Mills, Inc.



Andrew J.
Sukawaty, 49, has been a member of Powerwaves Board of Directors since May 1998. Mr. Sukawaty is Chairman and Chief Executive Officer of Inmarsat Group Holdings Ltd. and President of Cable Partners Europe L.L.C. Mr. Sukawaty is also a
Deputy Chairman of mm02, PLC, formerly BT Wireless, and was previously Chairman of Telenet. He is also Chairman of Xyratex Group Ltd (NASDAQ). From September 1996 to June 2000, Mr. Sukawaty served as President and Chief Executive Officer of Sprint
PCS. Prior to joining Sprint PCS, Mr. Sukawaty was Chief Executive Officer of NTL Limited 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., AT&T and Northwestern Bell.



Mikael R. Gottschlich, 44, has been a member of Powerwaves Board of Directors since May 2004. Mr. Gottschlich had previously been a member of the Board of LGP Allgon Holding AB since 1997. Mr. Gottschlich
was President and Chief Executive Officer of LGP Telecom from June 1993 until April 2002, including certain predecessor companies, specifically MG Instruments from 1993 to 1997 and Arkivator from 1997 to 1999. Since March 2003, Mr. Gottschlich is a
Director of Skanditek Industriförvaltning AB, a publicly held industrial holding company with investments in Swedish companies.



Executive Officers



Ronald J. Buschur, 41, joined the Company in June 2001 as Chief Operating Officer. In May 2004, Mr. Buschur became President of the Company and in
February 2005, Mr. Buschur became Chief Executive Officer and a member of the Board of Directors. Prior to joining the Company, Mr. Buschur held various positions at HMT Technology/Komag, an independent supplier of thin-film disks, including
President and Chief Operating Officer from 1999 to 2000, Vice President of Sales, Marketing and Quality Assurance from 1997 to 1999 and Vice President of Quality Assurance from 1994 to 1997. From 1993 to 1994, Mr. Buschur was Director of Quality at
Maxtor, a disk drive company. Mr. Buschur held various managerial positions at Digital Equipment Corporation, a computer manufacturer from 1987 to 1993.



Kevin T. Michaels,46, joined the Company in June 1996 as Vice President, Finance and Chief Financial Officer and was appointed Secretary in June
1996. Mr. Michaels was named Senior Vice President, Finance in February 2000. 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.



Robert J. Legendre, 47, joined the Company in July 2002, as Vice President of Supply Chain Management and Operations. Mr. Legendre was named
President of the Americas and Asian business unit in May 2004 following the completion of the exchange offer for all of the shares of LGP Allgon. Prior to joining the Company, Mr. Legendre was Vice President of Global Supply Chain Management and
Operations for InFocus Corp., a manufacturer of video projectors from June 2001 to July 2002. From May 2000 to May 2001, Mr. Legendre was Vice President of Worldwide Materials at Pemstar Corporation, a supplier of engineering, product design and
automation and test services. From October 1996 to April 2000, Mr. Legendre was Vice President and Managing Director of Operations for Western Digitals disk drive manufacturing operations in Singapore.



Johan H. Ek, 37, has been President of the Companys European
business unit since May of 2004. From September 2001 to April 2003, Mr. Ek was Vice President of Operations of LGP Allgon and in March 2002 Mr. Ek became Executive Vice President of LGP Allgon. Prior to this, Mr. Ek was responsible for LGP
Allgons contract manufacturing division. Mr. Ek joined LGP Allgon in August 1999. From 1995 to 1999, Mr. Ek worked as a consultant for McKinsey & Company. Mr. Ek is a member of the Board of Partnertech AB, listed on the Stockholm Stock
Exchange.



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Audit Committee and Audit Committee Financial Expert



The Company has a standing Audit Committee and the current members of this
committee are David L. George, Eugene L. Goda, and Carl W. Neun, all of whom are independent under both Section 10A of the Securities Act of 1934 (Exchange Act) and under the Nasdaq marketplace rules. The Companys Board of
Directors has determined that Carl W. Neun, a member of the audit committee and Board of Directors, is an audit committee financial expert as such term is defined in Item 401(h) of SEC Regulation S-K. For Mr. Neuns relevant experience, see his
biography listed in Directors above.



Section 16(a) Beneficial
Ownership Reporting Compliance



Section 16(a) of the
Exchange Act requires the Companys directors and executive officers, and persons who own more than ten percent of a registered class of the Companys equity securities, to file reports of ownership with the Securities and Exchange
Commission (SEC) and Nasdaq. Directors, executive officers and greater than ten-percent beneficial owners are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file.



To the Companys knowledge, based solely on a review of filings with the
Securities and Exchange Commission and written representations by each executive officer and director that no other reports were required, we believe that all of our directors and executive officers have complied with the reporting requirements of
Section 16(a) of the Securities Exchange Act of 1934 during fiscal 2004, except that each of the following directors, Mikael Gottschlich, Daniel Artusi, Carl Neun, Andrew Sukawaty, Eugene Goda, David George and John Clendenin inadvertently filed a
Form 4 late to report a director option grant in December 2004.



Code of
Ethics



The Company has adopted a code of ethics that
applies to all employees of the Company, including the Companys principal executive officer, principal financial officer and principal accounting officer. This code of ethics is designed to comply with the Nasdaq marketplace rules related to
codes of conduct. A copy of our Code of Business Conduct and Ethics Policy is attached as Exhibit 14 to this Form 10-K. A copy of our code of Business Conduct and Ethics Policy is also posted on our website at www.powerwave.com and is available upon
written request.



ITEM 11. EXECUTIVE COMPENSATION



The information required hereunder is incorporated by reference from the sections of the Companys Proxy Statement filed in connection with its Annual Meeting of Stockholders under the headings Executive Compensation and
Stock Performance Comparison.



ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS



The information required hereunder is incorporated by reference from the sections of the Companys Proxy Statement filed in connection with its
Annual Meeting of Stockholders under the caption Stock Ownership.



ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS



Information regarding certain relationships and related transactions under Certain Relationships and Related Transactions in the Companys Annual Proxy Statement is incorporated herein by reference.



ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES



Information regarding fees billed to the Company by its principal accountant, Deloitte & Touche LLP, under the heading Principal Accountant Fees and Services in the Companys Annual Proxy
Statement is incorporated herein by reference.



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PART IV



ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES



(a) Documents filed as a part of this report:



| | (1) | Financial Statements
| | --- | --------------------



The financial statements included in Part II, Item 8 of this document are filed as part of this Report.



| | (2) | Financial Statement Schedule
| | --- | ----------------------------



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 included in the consolidated financial statements or related notes.



| | (3) | Exhibits
| | --- | --------



The following exhibits are filed as part of this Report



|              |  |                                                                                                                                                                                                                                                                                                                                  
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                                      
|              | 
|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).                                                                                 
|              | 
|3.5           |  | Certificate of Amendment of Amended and Restated Certificate of Incorporation of Powerwave Technologies, Inc., a Delaware Corporation (incorporated by reference to Exhibit 3.1 to the
Companys Form 10-Q as filed with the Securities and Exchange Commission on August 15, 2000).                                             
|              | 
|3.6           |  | Certificate of Designation of Rights, Preferences and Privileges of Series A Junior Participating Preferred Stock of Powerwave Technologies, Inc. (incorporated herein by reference to Exhibit
2.1 to Registrants Form 8-A dated June 4, 2001).                                                                                 
|              | 
|3.7           |  | Certificate of Amendment of Amended and Restated Certificate of Incorporation (incorporated herein by reference to Exhibit 3.1.2 to Registrants Registration Statement on Form S-3, as
filed with the Securities and Exchange Commission on March 10, 2005).                                                                    
|              | 
|4.1           |  | Stockholders Agreement, dated October 10, 1995, among the Company and certain stockholders (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).                                                                                                 
|              | 
|4.3           |  | Indenture, dated as of July 18, 2003, by and between Powerwave Technologies, Inc. and Deutsche Bank Trust Company Americas, as trustee (incorporated by reference to Exhibit 4.2 of the
Companys Registration Statement on Form S-3 (File No. 333-107633) filed with the Securities and Exchange Commission on August 4, 2003). 
|              | 
|4.4           |  | Registration Rights Agreement, dated as of July 18, 2003, by and between Powerwave Technologies, Inc. and Deutsche Bank Securities Inc. (incorporated by reference to Exhibit 4.3 of the
Companys Registration Statement on Form S-3 (File No. 333-107633) filed with the Securities and Exchange Commission on August 4, 2003).



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|       |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       | 
|4.5    |  | Rights Agreement, dated as of June 1, 2001 between Powerwave Technologies, Inc. and U.S. Stock Transfer Corporation, as Rights Agent, which includes as Exhibit A thereto the form of
Certificate of Designation for the Series A Junior Participating Preferred Stock, as Exhibit B thereto the Form of Rights Certificate and as Exhibit C thereto a Summary of Terms of Stockholder Rights Plan. (incorporated herein by reference to
Exhibit 2.1 to Registrants Form 8-A12G dated June 4, 2001).
|       | 
|4.5.1  |  | First Amendment to Rights Agreement, dated June 19, 2003, between Powerwave Technologies, Inc. and U.S. Stock Transfer Corporation, as Rights Agent (incorporated by reference to Exhibit 2 of
the Companys Form 8-A12G/A as filed with the Securities and Exchange Commission on July 10, 2003).                                                                                                                                                                                                   
|       | 
|4.6    |  | Form of Global 1.25% Convertible Subordinated Note Due 2008 (incorporated by reference to Exhibit 4.4 to the Companys Form S-3 (File No. 333-107633) as filed with the Securities and
Exchange Commission on August 4, 2003).                                                                                                                                                                                                                                                                       
|       | 
|4.7    |  | Indenture, dated as of November 10, 2004, by and between Powerwave Technologies, Inc. and Deusche Bank Trust Company Americas, as trustee (incorporated by reference to Exhibit 4.1 of the
Companys Current Report on Form 8-K dated November 4, 2004 filed with the Securities and Exchange Commission on November 10, 2004).                                                                                                                                                                      
|       | 
|4.8    |  | Registration Rights Agreement, dated as of November 10, 2004, by and between Powerwave Technologies, Inc. and Deutsche Bank Securities Inc. (incorporated by reference to Exhibit 4.2 of the
Companys Current Report on Form 8-K dated November 4, 2004 filed with the Securities and Exchange Commission on November 10, 2004).                                                                                                                                                                    
|       | 
|4.9    |  | Form of Global 1.875% Convertible Subordinated Note due 2024 (included in Exhibit 4.7).                                                                                                                                                                                                                                                                                                                                                                                                              
|       | 
|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 the 1995 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).*                                                                                                                                                                                                                              
|       | 
|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).*                                                                                                                                                                                                                                                      



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|       |  |                                                                                                                                                                                                                                                                                        
|------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|       | 
|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).*                                          
|       | 
|10.9.2 |  | Amendment to Employee Stock Purchase Plan (incorporated by reference to Exhibit 4.1.1 to the Companys Registration Statement on form S-8 (File No. 333-107645) as filed with the
Securities and Exchange commission on August 4, 2003.)                                               
|       | 
|10.11  |  | Redemption Agreement, dated October 10, 1995, among the Company and certain stockholders (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).
|       | 
|10.14  |  | 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).*                                                      
|       | 
|10.24  |  | Powerwave Technologies, Inc. 2000 Stock Option Plan (the 2000 Plan) (incorporated by reference to Exhibit 4.1 to the Companys Form S-8 (File No. 333-38568) as filed with the
Securities and Exchange Commission on June 5, 2000).*                                                 
|       | 
|10.25  |  | Form of Stock Option Agreement for the 2000 Plan (incorporated by reference to Exhibit 4.2 to the Companys Form S-8 (File No. 333-38568) as filed with the Securities and Exchange
Commission on June 5, 2000).*                                                                      
|       | 
|10.33  |  | Manufacturing Services and Supply Agreement between the Company and Celestica Corporation dated as of November 1, 2002 (incorporated by reference to Exhibit 10.33 to the Companys form
10-K as filed with the Securities and Exchange Commission on February 24, 2003.)**            
|       | 
|10.34  |  | Powerwave Technologies, Inc. 2002 Stock Option Plan (2002 Plan) (incorporated by reference to Exhibit 4.2 to the Companys Form S-8 (File No. 333-88836) as filed with the
Securities and Exchange Commission on May 5, 2002).*                                                      
|       | 
|10.35  |  | Form of Stock Option Agreement for the 2002 Plan (incorporated by reference to Exhibit 4.1 to the Companys Form S-8 (File No. 333-88836) as filed with the Securities and Exchange
Commission May 5, 2002).*                                                                          
|       | 
|10.36  |  | Manufacturing Services and Supply Agreement between the Company and Venture Corporation Limited dated as of January 13, 2003 (incorporated by reference to Exhibit 10.36 to the Companys
Form 10-Q as filed with the Securities and Exchange Commission on May 7, 2003).**            
|       | 
|10.37  |  | Repair Services Agreement between the Company and VM Services, Inc. dated June 26, 2003 (incorporated by reference to Exhibit 10.37 to the Companys Form 10-Q as filed with the
Securities and Exchange Commission on August 5, 2003)**                                               
|       | 
|10.39  |  | Change in Control Agreement dated as of August 1, 2003, between the Company and Bruce C. Edwards (incorporated by reference to Exhibit 10.39 to the Companys Form 10-Q as filed with the
Securities and Exchange Commission on October 29, 2003).*                                    
|       | 
|10.40  |  | Change in Control Agreement dated as of August 1, 2003, between the Company and Ronald J. Buschur (incorporated by reference to Exhibit 10.40 to the Companys Form 10-Q as filed with the
Securities and Exchange Commission on October 29, 2003).*                                   
|       | 
|10.41  |  | Change in Control Agreement dated as of August 1, 2003, between the Company and Kevin T. Michaels (incorporated by reference to Exhibit 10.41 to the Companys Form 10-Q as filed with the
Securities and Exchange Commission on October 29, 2003).*                                   
|       | 
|10.42  |  | Severance Agreement dated as of August 1, 2003, between the Company and Bruce C. Edwards (incorporated by reference to Exhibit 10.42 to the Companys Form 10-Q as filed with the
Securities and Exchange Commission on October 29, 2003).*                                            
|       | 
|10.43  |  | Severance Agreement dated as of August 1, 2003, between the Company and Ronald J. Buschur (incorporated by reference to Exhibit 10.43 to the Companys Form 10-Q as filed with the
Securities and Exchange Commission on October 29, 2003).*                                           
|       | 
|10.44  |  | Severance Agreement dated as of August 1, 2003, between the Company and Kevin T. Michaels (incorporated by reference to Exhibit 10.44 to the Companys Form 10-Q as filed with the
Securities and Exchange Commission on October 29, 2003).*                                           



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|      |  |                                                                                                                                                                                                                                                                 
|----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      | 
|10.45 |  | Letter Agreement regarding Change of Control Benefits between the Company and Robert Legendre dated August 1, 2003 (incorporated by reference to Exhibit 10.45 to the Companys Form 10-Q
as filed with the Securities Exchange Commission on August 13, 2004).*
|      | 
|14    |  | Code of Ethics (incorporated by reference to Exhibit 14 to the Companys Form 10-K for the fiscal year ended December 28, 2003 as filed with the Securities and Exchange Commission on
February 13, 2004.)                                                      
|      | 
|21.1  |  | Subsidiaries of the registrant.                                                                                                                                                                                                                                 
|      | 
|23.1  |  | Independent Auditors Consent.                                                                                                                                                                                                                                  
|      | 
|24.1  |  | Power of Attorney (included in signature page.)                                                                                                                                                                                                                 
|      | 
|31.1  |  | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.                                                                                                                                              
|      | 
|31.2  |  | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.                                                                                                                                              
|      | 
|32.1  |  | Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.***                                                                                                                              
|      | 
|32.2  |  | Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.***                                                                                                                              

---

|* | Indicates Item 15(a)(3) exhibit (management contract or compensation plan or arrangement).
|- | ------------------------------------------------------------------------------------------

|** | Registrant has sought confidential treatment pursuant to Rule 24b-2 of the Exchange Act for a portion of the referenced exhibit.
|-- | --------------------------------------------------------------------------------------------------------------------------------

|*** | In accordance with Item 601(b)(32)(ii) of Regulation S-K, this exhibit shall not be deemed filed for the purposes of Section 18 of the Securities and Exchange Act of
1934 or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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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 Santa Ana, State of California, on the
9th day of March 2005.



POWERWAVE TECHNOLOGIES, INC.By:

/s/ RONALD J. BUSCHURRonald J. BuschurPresident and Chief Executive Officer




We, the
undersigned directors and officers of Powerwave Technologies, Inc., do hereby constitute and appoint Ronald J. Buschur 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.



|                                         |  |                                                                                                         |  |              
|---------------------------------------- |  | ------------------------------------------------------------------------------------------------------- |  | -------------
|Signature                                |  | Title                                                                                                   |  | Date         
|/S/ RONALD J. BUSCHURRonald J. Buschur   |  | President, Chief Executive Officer and Director (Principal Executive Officer)                           |  | March 9, 2005
|                                         |  |                                                                                                        
|/S/ KEVIN T. MICHAELSKevin T. Michaels   |  | Senior Vice President, Finance and Chief Financial Officer (Principal Financial and Accounting Officer) |  | March 9, 2005
|                                         |  |                                                                                                        
|/S/ BRUCE C. EDWARDSBruce C. Edwards     |  | Chairman of the Board of Directors                                                                      |  | March 9, 2005
|                                         |  |                                                                                                        
|/S/ JOHN L. CLENDENINJohn L. Clendenin   |  | Director                                                                                                |  | March 9, 2005
|                                         |  |                                                                                                        
|/S/ DANIEL A. ARTUSIDaniel A. Artusi     |  | Director                                                                                                |  | March 9, 2005
|                                         |  |                                                                                                        
|/S/ MIKAEL GOTTSCHLICHMikael Gottschlich |  | Director                                                                                                |  | March 9, 2005
|                                         |  |                                                                                                        
|/S/ DAVID L. GEORGEDavid. L. George      |  | Director                                                                                                |  | March 9, 2005
|                                         |  |                                                                                                        
|/S/ EUGENE L. GODAEugene L. Goda         |  | Director                                                                                                |  | March 9, 2005
|                                         |  |                                                                                                        
|/S/ CARL W. NEUNCarl W. Neun             |  | Director                                                                                                |  | March 9, 2005
|                                         |  |                                                                                                        
|/S/ ANDREW J. SUKAWATYAndrew J. Sukawaty |  | Director                                                                                                |  | March 9, 2005



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SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS

(in thousands)



|                                                  |  |                              |        |                               |   |                             |  |            |       |  |                        |         |   |  |   |       
|------------------------------------------------- |  | ---------------------------- | ------ | ----------------------------- | - | --------------------------- |  | ---------- | ----- |  | ---------------------- | ------- | - |  | - | ------
|Description                                       |  | Balance atBeginningof Period |        | BalanceAcquiredfrom LGPAllgon |   | Charges toCosts andExpenses |  | Deductions |       |  | Balance atEnd ofPeriod
|Year ended January 2, 2005:                       |  |                              |        |                               |   |                             |  |            |       |  |                        |         |   |  |   |       
|Allowance for doubtful accounts and sales returns |  | $                            | 2,332  |                               | $ | 4,025                       |  | $          | 822   |  | $                      | (870    | ) |  | $ | 6,309 
|Allowance for excess and obsolete inventory       |  | $                            | 8,586  |                               | $ | 18,467                      |  | $          | 2,249 |  | $                      | (13,633 | ) |  | $ | 15,669
|                                                  |  |                              |        |                               |  
|Year ended December 28, 2003:                     |  |                              |        |                               |   |                             |  |            |       |  |                        |         |   |  |   |       
|Allowance for doubtful accounts and sales returns |  | $                            | 2,505  |                               |   |                            |  | $          | 2,004 |  | $                      | (2,177  | ) |  | $ | 2,332 
|Allowance for excess and obsolete inventory       |  | $                            | 8,998  |                               |   |                            |  | $          | 3,308 |  | $                      | (3,720  | ) |  | $ | 8,586 
|                                                  |  |                              |        |                               |  
|Year ended December 29, 2002:                     |  |                              |        |                               |   |                             |  |            |       |  |                        |         |   |  |   |       
|Allowance for doubtful accounts and sales returns |  | $                            | 3,143  |                               |   |                            |  | $          | 3,967 |  | $                      | (4,605  | ) |  | $ | 2,505 
|Allowance for excess and obsolete inventory       |  | $                            | 11,114 |                               |   |                            |  | $          | 5,797 |  | $                      | (7,913  | ) |  | $ | 8,998 



83