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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

For the fiscal year ended January 2, 2005

OR

For the transition period from              to             

Commission File Number 000-21507

POWERWAVE TECHNOLOGIES, INC.

(Exact name of registrant as specified in its charter)

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

(Address of principal executive offices, zip code)

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

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

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

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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:

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:

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.

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:

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

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.

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:

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:

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:

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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:

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:

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:

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:

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.

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Net Loss

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

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:

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:

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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:

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:

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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):

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:

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

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:

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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.