The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included under Item 1, Financial Statements (Unaudited) of this Quarterly Report on Form 10-Q. 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 Risk Factors, in Part II, Item 1A included herein. Please see "Cautionary Statement Regarding Forward Looking Statements" at the beginning of this report.

Introduction and Overview

Powerwave Technologies, Inc. (the "Company", "we", "us", or "our") is a global supplier of end-to-end wireless solutions for wireless communications networks. Our business consists of the design, manufacture, marketing and sale of products to improve coverage, capacity and data speed in wireless communications networks. Our principal products include antennas, boosters, combiners, cabinets, shelters, filters, radio frequency power amplifiers, remote radio head transceivers, 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 our 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 have also started marketing in new markets such as government, public safety, military and homeland security.

During the last ten years, demand for wireless communications infrastructure equipment has fluctuated dramatically. While demand for wireless infrastructure was strong during 2005, it weakened for us during 2006 and 2007 due to significant reductions in demand by three of our major customers, as well as a general slowdown in overall demand within the wireless infrastructure industry. For 2008, demand for our products once again increased; however, in the fourth quarter of 2008 demand was negatively impacted by the global economic recession. The recession and the ensuing period of economic weakness and uncertainty have significantly impacted demand for our products during the last three years. In particular our revenue in 2009 fell by 36% from 2008 levels, negatively impacting our financial results. In response, during 2008 and 2009, we initiated several cost cutting measures aimed at lowering our manufacturing overhead and operating expenses. During fiscal 2011, our revenue declined by 25% compared to fiscal 2010, and during the second half of 2011 our revenues fell by over 55% as compared to the first half of 2011. For the first half of fiscal 2012, our revenues fell by 72% when compared to the first half of fiscal 2011. We believe that the continued reductions in our revenues in the second half of fiscal 2011 and the first two quarters of fiscal 2012 were due to several factors, including, significant slowdowns in spending by wireless network operators in several of our markets, including North America, Western and Eastern Europe and the Middle East. In addition, we experienced a significant reduction in demand from our original equipment manufacturing customers. In response to these reductions in revenues, we initiated several cost reduction measures to both lower our manufacturing costs and reduce our operating expenses. We cannot predict if such measures will be successful, and we may be required to further reduce operating expenses and manufacturing costs or curtail certain aspects of our business if there is continued reduction in demand by our customers.

In the past, there have been significant deferrals in capital spending by wireless network operators due to delays in the expected deployment of infrastructure equipment and financial difficulties on the part of the wireless network operators who were forced to consolidate and reduce spending to strengthen their balance sheets and improve their profitability. Continuing economic weakness and uncertainty, increasing energy and commodity costs, continued low consumer confidence, reduced property values, constrained credit markets and concerns about sovereign debt in some countries in the European Union have had a negative impact on the availability of financial capital, which has limited capital expenditures by wireless network operators and will likely have a negative impact on such expenditures going forward in the near term. All of these factors can have a significant negative impact on overall demand for wireless infrastructure products, and, we believe, at various times, have directly led to reduced demand for our products and increased price competition within our industry, thereby reducing our revenues and contributing to our reported operating losses.

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 of our products.

Looking back over the last eight years, beginning in fiscal 2004, we focused on cost savings while we expanded our market presence, as evidenced by our acquisition of LGP Allgon. This acquisition involved the integration of two companies based in different countries and was a complex, costly and time-consuming process. During fiscal 2005, we continued to focus on cost savings while we expanded our market presence, as evidenced by our acquisition of selected assets and liabilities of REMEC, Inc.'s wireless systems business (the "REMEC Wireless Acquisition"). We believe that this acquisition further strengthened our position in the global wireless infrastructure market. In October 2006, we completed the Filtronic plc wireless acquisition. We believe that this strategic acquisition provided us with the leading position in transmit and receive filter products, as well as broadened our RF conditioning and base station solutions product portfolio and added significant additional technology to our intellectual property portfolio. For fiscal years 2007, 2008, 2009, and 2010 we completed the integration of these acquisitions, focused on consolidating operations and reducing our overall cost structure. During this same time, we encountered a significant unanticipated reduction in revenues, which caused us to revise our integration and consolidation plans with a goal of further reducing our operating costs and significantly lowering our breakeven operating structure. As has been demonstrated during the last eight years, these acquisitions do not provide any guarantee that our revenues will increase.

We measure our success by monitoring our net sales by product and consolidated gross margins, with a short-term goal of attempting to achieve 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 the Company to benefit from these long-term opportunities in both the traditional commercial market and new markets such as government, public safety, military and homeland security.

Critical Accounting Policies and Estimates

Management's Discussion and Analysis of Financial Condition and Results of Operations is based on our unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q, which have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. On an ongoing basis, we evaluate these estimates and assumptions, including those related to revenue recognition, allowances for doubtful accounts, inventory reserves, warranty obligations, restructuring reserves, asset impairment, income taxes and stock-based compensation expense. We base these estimates on our historical experience and on various other factors which we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the amounts of certain expenses that are not readily apparent from other sources. These estimates and assumptions by their nature involve risks and uncertainties, and may prove to be inaccurate. In the event that any of our estimates or assumptions is inaccurate in any material respect, it could have a material adverse effect on our reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.

For a summary of our critical accounting policies and estimates, see Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, of Part II of our Annual Report on Form 10-K for the fiscal year ended January 1, 2012.

Accruals for Restructuring and Impairment Charges

In the second quarter and first half of fiscal 2012, we recorded restructuring and impairment charges of $5.1 and $13.9 million respectively. Such charges relate to our restructuring plans. See further discussion of these plans in Note 5 of the Notes to Consolidated Financial Statements under Part I, Item I, Financial Information.

Restructuring and impairment accruals related primarily to workforce reductions and facility closure related expenses. 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 the actual amounts incurred or recovered may be substantially different from those based on 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.

In the first quarter of fiscal 2012, we formulated and began to implement a plan to further reduce manufacturing overhead and operating expenses (the "2012 Restructuring Plan"). As part of this plan, we initiated personnel reductions in both our domestic and foreign locations. These reductions were taken in further response to economic conditions and the continued decline in revenue in the first quarter of fiscal 2012. We expect to finalize this plan by the third quarter of 2012; however additional amounts may be accrued in 2012 related to the actions associated with this plan.

In November 2011, we formulated and began to implement a plan to further reduce manufacturing overhead costs and operating expenses (the "2011 Restructuring Plan"). As part of this plan, we initiated personnel reductions of approximately 110 employees in both our domestic and foreign locations, with primary reductions in the U.S., Sweden, Finland, France, China and Canada. These reductions were undertaken in response to economic conditions and the significant decline in revenues in the third quarter of 2011. We finalized this plan in the fourth quarter of 2011; however, additional amounts may be accrued in 2012 related to actions associated with this plan.

Results of Operations

The following table summarizes our results of operations as a percentage of net
sales for the three and six months ended July 1, 2012 and July 3, 2011:



                                          Three Months Ended            Six Months Ended
                                        July 1,        July 3,       July 1,        July 3,
                                         2012            2011          2012           2011
Net sales                                  100.0 %        100.0 %       100.0 %        100.0 %
Cost of sales:
Cost of goods                              117.4           72.0         121.3           72.8
Restructuring and impairment charges        11.7             -           12.3             -

Total cost of sales                        129.1           72.0         133.6           72.8

Gross profit                               (29.1 )         28.0         (33.6 )         27.2
Operating expenses:
Sales and marketing                         11.5            4.7          14.8            5.6
Research and development                    24.9            9.2          27.5           10.5
General and administrative                  24.1            6.7          23.9            7.6
Restructuring and impairment charges         0.4            0.0           4.0            0.0

Total operating expenses                    60.9           20.6          70.2           23.7

Operating income (loss)                    (90.0 )          7.4        (103.8 )          3.5
Other expense, net                          (9.6 )         (2.4 )        (9.5 )         (2.2 )

Income (loss) before income taxes          (99.6 )          5.0        (113.3 )          1.3
Income tax provision                         0.6            0.9           3.9            1.3

Net income (loss)                         (100.2 )%         4.1 %      (117.2 )%         0.0 %

Three Months ended July 1, 2012 and July 3, 2011

Net Sales

Our sales are derived from the sale of wireless communications network products and coverage solutions, including antennas, boosters, combiners, cabinets, shelters, filters, radio frequency power amplifiers, remote radio head transceivers, repeaters, tower-mounted amplifiers and advanced coverage solutions for use in cellular, PCS, 3G and 4G wireless communications networks throughout the world.

The following table presents a further analysis of our sales based upon our various customer groups:

                                                        Three Months Ended
                                                          (in thousands)
     Customer Group                            July 1, 2012            July 3, 2011
     Wireless network operators and other   $ 28,459        67 %    $ 120,780        71 %
     Original equipment manufacturers         13,912        33         49,861        29

     Total                                  $ 42,371       100 %    $ 170,641       100 %

Sales decreased by 75% to $42.4 million for the second quarter of fiscal 2012, from $170.6 million for the second quarter of fiscal 2011. This decrease was due to several factors, including, but not limited to, a continued slowdown in spending by North American network operators coupled with further weakness in several international markets, including Western and Eastern Europe and the Middle East. In addition, we experienced further reductions in demand with our original equipment manufacturing customers both as part of our strategic plan to reduce our dependence on low-margin commodity type original equipment manufacturer business as well as an overall reduction in demand by our original equipment manufacturer customers. In particular, we experienced reductions in demand by Nokia Siemens Networks and Alcatel-Lucent of over 93% when compared to the prior year period. Sales to our direct operator customers decreased by approximately 76% for the second quarter of fiscal 2012 from the second quarter of fiscal 2011. Sales to our original equipment manufacturers decreased by 72% for the second quarter of fiscal 2012 from the second quarter of fiscal 2011. We believe that, among other factors, the current negative global economic environment has caused network operators to reduce or postpone their spending plans for the near term while they evaluate the macro-economic pressures in each individual market. Due to our poor financial position, some of our suppliers have reduced or limited the amount of credit that they allocate to us, which has also impacted our ability to obtain single or limited source components which has caused production and shipment delays that have negatively impacted revenues during the second quarter of 2012.

The following table presents a further analysis of our sales based upon our various product groups:

                                                  Three Months Ended
            Wireless Communications                 (in thousands)
            Product Group                July 1, 2012            July 3, 2011
            Antenna systems           $ 24,876        52 %    $  76,046        45 %
            Base station systems         7,735        25         77,573        45
            Coverage systems             9,761        23         17,022        10

            Total                     $ 42,371       100 %    $ 170,641       100 %

Antenna systems consist of base station antennas and tower-mounted amplifiers. Base station systems consist of 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 VersaFlex cabinets. Coverage systems consist primarily of repeaters and advanced coverage solutions. The decrease in all of our product group sales during the second quarter of fiscal 2012 as compared with the second quarter of fiscal 2011 is due to the previously mentioned significant decrease in demand we experienced from our wireless network operator and original equipment manufacturer customers.

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

                                                Three Months Ended
                                                  (in thousands)
              Geographic Area          July 1, 2012            July 3, 2011
              Americas              $ 16,782        40 %    $  80,207        47 %
              Asia Pacific            10,946        26         41,823        25
              Europe                  10,578        25         46,859        27
              Other International      4,065         9          1,752         1

              Total                 $ 42,371       100 %    $ 170,641       100 %

Revenues decreased in all regions in the second quarter of fiscal 2012 as compared to the second quarter of fiscal 2011, with the exception of Other International, which includes the Middle East region. The decrease is attributable to the significant reductions in demand from our wireless network operator customers, other direct customers and original equipment manufacturers which we believe is due to several factors, including, but not limited to, the current negative global economic environment that has caused network operators to reduce or postpone their equipment spending plans in most all the regions we operate in. Since wireless network infrastructure spending is dependent on individual network coverage and capacity demands, we do not believe that our revenue fluctuations for any geographic region are necessarily indicative of a trend for our future revenues by geographic area.

A large portion of our revenues are generated in currencies other than the U.S. Dollar. During the last year, the value of the U.S. Dollar has fluctuated significantly against many other currencies. We have calculated that, when comparing exchange rates in effect for the second quarter of fiscal 2012 to those in effect for the second quarter of fiscal 2011, the change in the value of foreign currencies as compared with the U.S. Dollar did not have a material impact on our net sales.

For the second quarter of fiscal 2012, one customer, Ericsson, accounted for 12% of our total sales. No other customer accounted for 10% or more of our revenues. For the second quarter of fiscal 2011, total sales to KMM Telecommunications (formerly known as Team Alliance), one of our North American resellers, Nokia Siemens Networks and Raycom, one of our European resellers accounted for approximately 28%, 16% and 15% of total sales respectively.

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 and overhead, which includes equipment depreciation, facility lease expense, transportation costs and warranty costs. Components of our fixed cost structure include test equipment depreciation, facility lease expense, 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 as 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 as 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. 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:

                                                         Three Months Ended
                                                           (in thousands)
                                              July 1, 2012                July 3, 2011
  Net sales                              $  42,371        100.0 %     $ 170,641       100.0 %
  Cost of sales:
  Cost of sales                             49,753        117.4         122,849        72.0
  Restructuring and impairment charges       4,947         11.7              -           -

  Total cost of sales                       54,700        129.1         122,849        72.0

  Gross profit (loss)                    $ (12,329 )      (29.1 )%    $  47,792        28.0 %

Our gross profit decreased during the second quarter of fiscal 2012, compared to the second quarter of fiscal 2011, primarily as a result of our significantly lower revenues. The significant drop in our revenues during the second quarter of fiscal 2012 caused us to be unable to absorb our overhead and manufacturing costs, which resulted in the reduction in our gross margin as a percentage of revenue. Gross margin was also negatively impacted by inventory related charges of approximately $8.0 million associated with excess and obsolete inventory which is included in cost of sales, compared with $0.5 million in the second quarter of fiscal 2011.

In the second quarter of fiscal 2012, the Company recorded a restructuring and impairment charge of approximately $2.8 million related to the impairment of inventory that will be disposed of and will not generate future revenue, as well as vendor cancellation charges of $2.1 million, primarily related to the transactions with Tatfook.

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. 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.

A portion of our coverage solution sales include design, customization, installation and implementation services and the supply of coverage solutions products. We recognize revenue using the percentage-of-completion method for these coverage solution projects. Due to the nature of these types of projects, cost estimates can vary significantly, and the actual cost of such projects can fluctuate significantly during the life of a project. These fluctuations, such as the one which occurred in the first quarter of fiscal 2011 when our gross profit was negatively impacted by a coverage solution project cost estimate adjustment of approximately $3.6 million, can have a negative impact on our . . .