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SECURITIES AND EXCHANGE COMMISSION

Form 10-K

For the transition period from              to            

Commission file number 000-30993

PROXIM CORPORATION

935 Stewart Drive
Sunnyvale, California 94085
(408) 731-2700
(Address, including zip code, and telephone number, including area code, of
registrant’s principal executive offices)

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

Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, par value $.01 per share

     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 o

     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 the registrant’s knowledge, in the definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes x No o

     Based on the closing sale price of the registrant’s Class A Common Stock on the Nasdaq National Market System on June 28, 2002, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of voting and non-voting Class A Common Stock held by non-affiliates of the registrant was $259,484,098.

     The number of shares outstanding of the registrant’s Class A common stock as of March 25, 2003, was approximately 120,335,708.

DOCUMENTS INCORPORATED BY REFERENCE

     The information required by Part III of this Form 10-K, to the extent not set forth herein, is incorporated herein by reference to the registrant’s definitive proxy statement relating to the annual meeting of stockholders to be held in 2003, which definitive proxy statement shall be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this Form 10-K relates.

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PART I

ITEM 1. BUSINESS

     This Annual Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements relate to the financial condition, results of operations, accounting judgments, cash flows, litigation, financing plans, business strategies, operating efficiencies or synergies, budgets, capital and other expenditures, competitive position, growth opportunities for existing products, benefits from new technology, plans and objectives of management and other matters. Statements in this document that are not historical facts are identified as “forward-looking statements” for the purpose of the safe harbor provided by Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933. These forward-looking statements, including statements relating to future business prospects, revenues, working capital, liquidity, capital needs, interest costs and income, wherever they occur in this report, are estimates reflecting the best judgment of the senior management of Proxim. These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. Forward-looking statements should, therefore, be considered in light of various important factors, including those set forth in this report under the caption “Risk Factors” and elsewhere in this report.

     When we use the words “anticipate,” “estimate,” “project,” “intend,” “expect,” “plan,” “believe,” “should,” “likely” and similar expressions, we are making forward-looking statements. These forward-looking statements are found at various places throughout this report and the other documents we incorporate by reference in this report. We caution you not to place undue reliance on these forward-looking statements, which speak only as of the date they were made. We do not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events. All subsequent forward-looking statements attributable to Proxim or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section.

Overview

     We provide broadband, or high-speed, wireless access products and access cards both in the United States and internationally. Our products and systems enable service providers, businesses and other enterprises, consumers and small businesses to deliver wireless data, voice and video services. We believe our fixed and mobile wireless systems address the growing need of our customers and end-users to rapidly and cost effectively deploy high-speed communication networks. During the past ten years, we have developed technologies that have enabled us to introduce what we believe are some of the fastest, longest range and most reliable broadband wireless systems available, including our Tsunami 480, which we believe is currently the industry’s fastest license-exempt point-to-point wireless system. Our wireless local area networking solutions currently support data transmission speeds up to 100 megabits per second.

     We serve the global broadband wireless access market by selling our systems to service providers, businesses and other enterprises, as well as to homes and small businesses directly through our sales force and indirectly through distributors, value-added resellers, products integrators and original equipment manufacturers.

Recent Developments

     On March 17, 2003, we announced a settlement with Intersil Corporation to resolve all pending patent-related litigation between the two companies. Under the terms of the agreement, we agreed with Intersil to dismiss all claims against each other, including lawsuits before the International Trade Commission and Federal Courts in Delaware and Massachusetts.

     As part of the confidential settlement agreement the two companies have entered into a patent cross-license agreement for their respective patent portfolios and Intersil will make a one-time payment of $6 million to us. The two companies have also entered into a product supply agreement defining the terms under which we will be able to purchase 802.11 products that utilize Intersil’s chipsets.

     We expect to continue to pursue licensing agreements related to our wireless local area networking, or WLAN patents and will vigorously defend our intellectual property rights. We expect to record a charge of approximately $3 million in the first quarter of 2003 for legal fees and other litigation-related expenses associated with this settlement and the defense of our intellectual property.

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Recent Significant Business Combinations

     On March 26, 2002, the merger between Western Multiplex Corporation and Proxim, Inc. was completed and the combined company changed its name to Proxim Corporation. We provide broadband, or high speed, wireless access products to service providers, businesses and other enterprises as well as high performance WLAN products based on unlicensed radio frequency technology for enterprises as well as small offices and the homes.

     On August 5, 2002, we acquired the 802.11 WLAN systems business of Agere Systems, including the ORiNOCO^TM product line, for $65 million in cash. To finance the acquisition, Warburg Pincus Private Equity VIII, L.P., Broadview Capital Partners L.P. and affiliated entities agreed to collectively invest $75 million in the Company. The addition of ORiNOCO product line expanded Proxim’s position in all major unlicensed wireless infrastructure markets, from 802.11 enterprise WLAN and public wireless access to distributed broadband and carrier-grade wireless backhaul systems. With this acquisition, Proxim acquired a broad offering of WLAN products for enterprises, service providers, small offices and consumers.

The Proxim Solution

     We believe that our broadband wireless systems address the growing need for bandwidth where digital phone lines or fiber optic cable are either too expensive to deploy in a timely fashion or are unavailable. In addition, our systems extend the reach of wired enterprise networks by providing extended range coverage using standards-based WLAN. Our systems are used in a variety of applications in different markets, including:

	•		Mobile wireless backhaul. Our systems enable cellular and personal communication service providers to connect their base stations to other base stations and to existing wire line networks.
	•		Fiber redundancy and extension. Our systems enable service providers and enterprises to back-up the wire line portions of their networks and to extend the reach of the fiber optic networks with products that combine the high transmission speeds and the reliability of fiber optic cable with the flexibility, cost effectiveness and rapid deployment of wireless technologies.
	•		Enterprise/campus networks. Our systems and products enable enterprises with multiple facilities, including those located in a campus environment, to connect their facilities to expand or establish private computer and communications networks. In addition, our WLAN products extend the reach of wired enterprise networks for mobile and portable connectivity applications.
	•		Last mile access. Our systems and products connect end-users with a service provider’s network backbone and central office, providing high-speed, last mile Internet access. Our WLAN products provide fully-featured access products for the emerging public access or hot spot market.
	•		Home and small business networking. Our products provide Internet gateway and peer-to-peer cordless networking for the home and small office markets.

     The key benefits of our solution include:

     Rapid deployment. Service providers, businesses and other enterprises can rapidly deploy our systems to establish new, or expand existing, network infrastructures. Competing technologies such as digital phone lines and fiber optic cables generally take longer to deploy than our broadband wireless access systems. In addition, our license-exempt systems do not require frequency coordination and regulatory approval. As a result, service providers, businesses and other enterprises can avoid many of the time consuming processes typically required in installing licensed wireless technologies.

     Telecommunications grade availability of service. We have developed proprietary error correction algorithms, fault tolerant systems and comprehensive network management software designed to enable our Lynx^TM and Tsunami point-to-point fixed wireless systems to match or exceed fiber network availability standards. These wireless systems are designed to provide 99.999% availability, or less than five minutes of down time per year. As a result, our systems enable service providers, businesses and other enterprises to provide end-users with telecommunications grade availability which is equal to or better than that offered by most alternative broadband access solutions.

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     High-speed and long distance connections. We have used our engineering expertise and proprietary radio frequency and digital signal processing technologies to design systems that offer an attractive combination of high-speed transmission rates and long-range coverage. During the past ten years, we have introduced what we believe are some of the fastest and longest-range wireless networking systems available, including our Tsunami 480, which we believe is currently the industry’s fastest license-exempt system.

     Cost-effective solutions. Because our technologies enable our systems to transmit over longer distances than competing product designs, service providers, businesses and other enterprises often require fewer units to cover a specified area. As a result, they are able to reduce both their initial and incremental capital expenditures for network deployments.

     Fully integrated end-to-end solution. We offer a broad range of systems that enable service providers, businesses and other enterprises to create complete broadband wireless networks that connect end-users to network backbones, for example fiber optic networks. Our point-to-point systems are primarily used within the backhaul segments of networks and also provide last mile access to large businesses. Our point-to-multipoint systems provide last mile access to campus environments, as well as residential users and small businesses. Our systems use similar radio frequency technology, digital signal processing and network management software. We believe this design commonality offers service providers, businesses and other enterprises higher end-to-end performance, lower equipment costs and lower training and maintenance costs.

     Our broadband wireless access systems have various disadvantages and limitations. For example, the broadband wireless access industry is technology intensive and requires us to continually develop new products or product enhancements in order for us to remain competitive. In addition, in contrast to mobile wireless access solutions, our systems require line-of-sight installation, which often requires the network service provider or enterprise network owner to obtain roof rights from third parties. Our systems may also experience problems due to radio signal interference, which may occur if multiple wireless systems are operating on the same radio frequencies and in the same geographic areas as our systems or, in the case of operating frequencies above 11 GHz, if there is inclement weather. As an increasing number of unlicensed products are deployed over time, whether Proxim systems or systems from our competitors, the possibility of interference between systems that operate in the same frequency increases, and in some cases there may not be sufficient frequency available in a given geographic location to allow further expansion of a customer’s network. Furthermore, our point-to-multipoint systems started shipping in December 2001 and we may not be able to successfully penetrate the emerging markets for these systems.

Strategy

     Our objective is to be a leading global provider of broadband wireless access and networking systems. Our strategy to accomplish this objective is to:

     Capitalize on our technology expertise to rapidly introduce new products. Over the past ten years, we have developed or acquired several core technologies that form the basis of our current product lines and which we intend to use in our future product development. Our dedicated team of engineers has multi-disciplinary technical capabilities, including radio frequency technology, digital signal processing and system software development. We believe integrating these capabilities is highly complex, and we intend to continue to take advantage of our technology expertise to introduce product enhancements and new products in a rapid and cost effective manner. For example, we are currently developing a point-to-point broadband wireless system capable of transmitting data at speeds in excess of 1 gigabit per second and point-to-multipoint systems which will easily integrate with our existing point-to-point systems.

     Utilize existing customer and partner relationships to expand into new market segments. In 2002, we sold our systems to more than 170 customers in 45 countries. Our customers and partners include AT&T Wireless Group, Avaya, Cingular Wireless, Dell Computer, Fujitsu, Hewlett-Packard, Motorola, Telefonica, Telmex, Verizon Wireless, and VoiceStream Wireless. We intend to build upon our relationships with current customers and partners as they continue to expand their networks and enter new market segments, such as fiber extension, campus and other private networks and last mile access. We believe that we will be well-positioned to provide our current customers with broadband wireless access and networking solutions in their new markets.

     Increase our presence in international markets. While our products are currently sold and approved for use in over 50 countries, we intend to increase our presence in these countries and further expand into new international markets where broadband wire line access is currently too expensive or unavailable. In particular, as various governmental authorities make license-exempt spectrum available, we believe our license-exempt systems will be well-positioned for rapid deployment in these international markets. We intend to continue to expand our presence worldwide by expanding our international sales and marketing efforts, obtaining regulatory approvals for deploying our systems in new international markets, increasing our total product offerings in both existing and new international markets and establishing strategic alliances and partnerships.

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     Aggressively market through distributors, value-added resellers and systems integrators. We have established relationships with key distributors, value-added resellers and systems integrators such as Avant Telecoms Inc., Communications Services International, Inc., Comstor, Digital China, Hutton Communication, Inc., Ingram Micro, Somera Communications Inc., Tech Data, Tessco Technologies Incorporated and Westcon Inc. to market and sell our systems. To further accelerate our growth, we intend to build upon our existing relationships and establish new relationships with distributors, value-added resellers and systems integrators that we believe have strong relationships with potential customers for our Lynx, Tsunami and ORiNOCO products. Our marketing group continues to develop materials and programs such as training courses to assist our distributors, value-added resellers and systems integrators in penetrating these markets.

     Expand through strategic transactions. We intend to pursue acquisitions of complementary businesses, technologies, products or services to expand our presence in the broadband wireless access market. On March 24, 2000, we acquired Ubiquity Communication, Inc., a Petaluma, California-based company. Through the acquisition, we acquired development stage point-to-multipoint technology that we have integrated with our core technologies to develop our point-to-multipoint systems. On March 22, 2001, we acquired WirelessHome Corporation, a Long Beach, California-based company. Through this acquisition, we acquired point-to-multipoint technology in the Beta phase that we have used to complete development of our first generation point-to-multipoint systems, Tsunami MP. On March 26, 2002, we completed a merger with Proxim, Inc., a Sunnyvale, California-based company which provides wireless local area networking and building-to-building network products based on radio frequency or RF technology. On August 5, 2002, we acquired the 802.11 WLAN systems business of Agere Systems, including the ORiNOCO product line, to expand our market position for standards-based WLAN products.

Products

     We classify our products into two product lines: Wireless Wide Area Network, or WWAN, product line, and; Wireless Local Area Network, or WLAN, product line. The WWAN product line includes point-to-point Lynx, Tsunami products and point-to-multipoint Tsunami products. The WLAN product line includes 802.11a and ORiNOCO products. We design our products and systems generally to use common features, components and software.

     Our products operate at different transmission speeds, radio frequencies, with different ranges and support different standard interfaces. The table below summarizes the features of our current products:

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WWAN Products

     Each of our point-to-point systems consists of two pieces of equipment at separate locations. Each piece of equipment is first connected to an end-user’s network by a cable and then connected by an antenna cable to an antenna, which is usually mounted on a rooftop or tower. The two antennae are then aimed at one another to create a wireless connection between the two end-user locations. By using multiple systems, end-users can connect more than two locations to form a more extensive network. Our point-to-multipoint system consists of a base station connected to a wire line network which communicates with a multitude of subscriber units that connect remote local area computer networks to the main wire line network.

     Lynx products. Our point-to-point Lynx products are primarily used by wireless operators to connect their base stations to other base stations and to existing wire line networks. These connections comprise the backhaul segments of their networks. In addition, these products are also used to establish campus and private networks and to provide fiber extension and last mile access. Our Lynx products are offered in a variety of frequencies, ranging from 2.4 GHz to 5.8 GHz, which operate in license-exempt spectrum, with a variety of data transmission speeds, ranging from 56 Kbps per second to 155 Mbps per second. Our Lynx products can transmit and receive the maximum data capacity in both directions simultaneously, a feature commonly known as full duplex. Our products have a compact, fully-integrated design and a built-in network management system. They can be linked together within a network and managed with simple network management protocol, or SNMP, software. SNMP is an industry standard set of rules that governs network management and monitors network devices and their functions. Our Lynx products also include a separate control and diagnostic channel which remotely monitors the system’s status and performance without reducing its carrying capacity.

     Tsunami products. Our point-to-point Tsunami products primarily enable service providers, businesses and other enterprises to expand or establish private networks by bridging Internet traffic among multiple facilities. In addition, these products are also used to provide fiber extension and last mile access. Tsunami products are currently offered in frequencies ranging from 2.4 GHz to 5.8 GHz, with a variety of data transmission speeds ranging from 2 Mbps per second to 480 Mbps per second. Like our Lynx products, our Tsunami products offer features including full duplex transmission, fully-integrated design and a separate control and diagnostic channel. In addition, our higher capacity Tsunami systems include one or more additional T1 or E1 connections without reducing the carrying capacity of the system. The additional T1 or E1 connection is a standard telecommunications interface that is not based on Internet Protocol and is typically used for voice and/or video.

     Point-to-Multipoint Products. In December 2001, we began shipping our point-to-multipoint systems to enable service providers, businesses and other enterprises to cost-effectively connect end-users to a central hub. Businesses and other enterprises may also use these systems to cost-effectively connect multiple facilities within their private networks.

     Our point-to-multipoint systems are deployed in a hub and spoke configuration consisting of a single central hub and equipment located at each end-user’s premises. The central hub wirelessly connects to the remote customer premises equipment, prioritizing transmissions and allocating slots of time to each end-user based on a system called time division duplexing. We believe our time division duplexing technology provides a more efficient use of capacity compared to most alternative technologies to accommodate the peaks and lows of traffic between each end-user and the central hub. Central hubs operate in a variety of frequencies, in various geographic configurations and are capable of supporting hundreds of units of customer premises equipment. The hub unit can also

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connect to the central office of a service provider using our point-to-point technology. The customer premises equipment transmits and receives data between the end-user and the central hub at various transmission speeds and frequencies.

WLAN Products

     ORiNOCO Access Point. Our ORiNOCO access points offer solutions for enterprises and public access enabling corporate user access and creation of hot spots in small, medium and large venues. Our ORiNOCO access point is a full featured wireless bridge that extends the range of wired Ethernet networks and enables migration from 802.11b 2.4 GHz WLANs to 802.11a 5 GHz WLANs. With a dual slot architecture, the ORiNOCO AP-2000 access point provides configuration flexibility and increased network capacity through the use of two Network Interface Cards. The ORiNOCO AP-5000 access point is a combination network access point and a broadband gateway. Our ORiNOCO access points also provide high level security including IEEE 802.1x which is a part of the Windows XP operating system. The Wireless Distribution System support enables wireless connection of multiple PC’s, providing for a variety of wireless infrastructure configurations. Web enabled and SNMP network management allow for simple configuration and remote management of each ORiNOCO network. With a high performance 11 Mbps data rate at 2.4 GHz and 54 Mbps at 5 GHz, and a wide coverage range, we believe that the Wi-Fi compliant ORiNOCO access point is an ideal WLAN solution for the enterprise.

     ORiNOCO Client Cards. Our ORiNOCO client cards deliver mobile convenience, easy installation and a configuration utility that allows users to connect quickly and simply. ORiNOCO client cards for notebooks and desktops work together with all ORiNOCO infrastructure products including access points, residential gateways, and access servers. ORiNOCO client cards deliver multiple security levels with various levels of encryption including up to 152-bit WEP, 802.1x security, delivering enterprise-class security. Packaged client adapters include the following form factors: USB, ISA and PCI adapter for desktop computers, cordless ORiNOCO 802.11a/b ComboCard and 802.11 b ORiNOCO PC Card for notebook computers and Ethernet and Serial external adapters.

     ORiNOCO Broadband Gateway. Our ORiNOCO Broadband Gateway Wi-Fi (802.11b) WLAN Access Point and Cable/DSL Internet gateway offering dual Ethernet ports, for simultaneously supporting an Internet connection and a wired Ethernet network for the home and small business. Our ORiNOCO Broadband Gateway enables sharing of files and peripherals such as printers. Advanced features include 128-bit RC4 encryption, access control, built-in firewall with IP/Packet filtering, and remote management tools. Industry-leading radio receiver sensitivity and unique Microwave Interference Robustness (MIR) deliver performance against ambient interference, providing a coverage range of up to 1700 feet in home and small office environments.

     Harmony Products. Harmony was the first wireless networking solution to support multiple WLAN standards, including OpenAir, IEEE 802.11b, IEEE 802.11a, and IEEE 802.11g, in a single, homogeneous architecture. The Harmony product family includes network infrastructure products and client adapter products. Network infrastructure products include Access Point Controllers which centralize communication, configuration, management and security services, Access Points which deliver low-cost radio coverage and may be placed anywhere within the network, and Power Systems that deliver power over Ethernet to Access Points. The Access Point products provide the wireless connectivity used by WLAN standards-based client adapters.

Technology

     Over the past ten years, we have developed a number of core technologies that form the basis of our current product offerings and which we expect to use in our future product development. Our primary areas of technology expertise are radio frequency technology, digital signal processing and system software development.

     Radio frequency technology. Microwave and millimeter-wave technology are the technologies used to wirelessly transmit data, voice and video. Microwave technology uses radio frequencies ranging from 1 GHz up to 20 GHz, and millimeter-wave technology uses frequencies above 20 GHz. We believe we are one of the few wireless equipment manufacturers in the industry that has internally developed integrated microwave circuit board designs. We believe having these design capabilities provides us with higher performance, lower production costs, shorter development cycles and the ability to customize our products so that they can more easily be integrated with our existing products and with the networks of our various customers and end-users.

     Digital signal processing technology. Our products use proprietary digital signal processing technologies and designs that we developed specifically for use in wireless systems. We believe these technologies have enabled us to introduce a number of high-speed wireless products that we may not have been able to produce with generic digital signal processing chip sets. Because our development cycles are not dependent on an external supplier, we believe we can develop flexible, innovative products more quickly than those competitors who do not have similar capabilities. We are currently using our technological expertise in digital signal processing to develop next generation, high-speed wireless systems designed to operate at speeds over 720 megabits per second.

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     System software. Our systems use SNMP-based software that enables remote monitoring and control and facilitates the integration and compatibility of our products with larger communications networks. In addition, we have patented software for bandwidth allocation, which we believe will allow our point-to-multipoint products to use bandwidth more efficiently and to operate at higher speeds than other point-to-multipoint systems.

Sales and Marketing

     We sell our products worldwide to service providers, businesses and other enterprises, and original equipment manufacturers directly through our sales force and indirectly through distributors and value-added resellers. We focus our marketing efforts on supporting our direct sales force, distributors, value-added resellers and systems integrators. We also seek to stimulate market demand by increasing brand awareness and educating potential customers about the advantages of using our products.

     In the United States and Canada, our sales force focuses on key strategic accounts such as service providers, businesses and other enterprises and also develops relationships with end-users that purchase through distributors and value-added resellers. Outside the United States and Canada, sales are generally made through distributors or value-added resellers and original equipment manufacturers. Our sales force, however, develops direct relationships with end-users either independently, in which case the sales representative then brings in the distributor or value-added reseller to complete the sale, or together with the distributors or value-added resellers.

     We have established relationships with large national and international distributors, local and specialized distributors and value-added resellers. The distributors sell our products, and the value-added resellers not only sell our products, but also assist their customers in network design, installation and testing. In some cases, both distributors and value-added resellers also assist their customers with financing, maintenance and the purchase of ancillary equipment necessary for installation of a wireless network.

     Historically, we have not operated with a significant order backlog and a substantial portion of our revenues in any quarter were derived from orders booked and shipped in that quarter. Accordingly, a significant component of our revenue expectations will be based almost entirely on internal estimates of future demand and not on firm customer orders. Planned operating expense levels are relatively fixed in the short term and are based in large part on these estimates. If orders and revenue do not meet expectations, our operating results could be materially adversely affected. In this regard, we did not achieve our revenue targets in the third quarter of 2002, and we incurred a net loss of $35.1 million in that quarter.

Customer Service

     We are committed to providing our customers with high levels of service and support. We provide training, technical assistance and customer support on the installation, management, use and testing of our products. We also provide warranties for our products consistent with industry practices in the WLAN and WWAN markets, and we offer both in-warranty and out-of-warranty repair services. Our repair center is staffed with technicians who work directly with our quality assurance team to identify potential problems and repair equipment. In addition, we have a number of flexible hardware and software maintenance and support programs available for our products.

Customers

     We have a globally diversified base of customers and end-users consisting of service providers, businesses and other enterprises. In 2002, we sold our products to approximately 170 customers in 45 countries.

     The following table summarizes each customer which accounted for more than 10% of the Company’s total revenue each year:

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     During the year ended ending December 31, 2002, international sales accounted for approximately 38% of our total sales. Revenue from shipments by Western Multiplex to customers outside of the United States, principally to a limited number of distributors, represented 24% and 33% of total revenue during the calendar years 2001 and 2000, respectively. Revenue from shipments by Proxim, Inc. to customers outside the United States, principally to a limited number of distributors and OEM customers, represented 33% and 18% of total revenue during the calendar years 2001 and 2000, respectively. Agere’s sales of its ORiNOCO products included sales to a number of international customers, and we expect that we will continue to sell these products to a significant percentage of international customers. We expect that our revenue from shipments to international customers will vary as a percentage of total revenue.

Research and Development

     Our research and development efforts are focused on improving the functionality and performance of our existing products as well as developing new products to meet the changing needs of our diverse base of customers and end-users. We are currently pursuing the following research and development initiatives:

     •     developing our point-to-multipoint systems;

     •     adapting our products to additional frequencies and interfaces;

     •     developing higher speed products;

     •     increasing the performance of our digital signal processing technology; and

     •     designing our products for low-cost, outsourced manufacturing, assembly and testing.

     We are currently developing additional Lynx products, some of which should be capable of operating at speeds exceeding 625 Mbps. In addition, we are currently developing additional Tsunami products that should be capable of operating at speeds exceeding 720 Mbps. These products under development will be additional solutions for fiber extension, last mile access and campus and private networks.

     We devote a substantial portion of our resources to developing new products, enhancing existing products, expanding and improving our core wireless technologies and strengthening our technological expertise. Over the past ten years, we have made and expect to continue to make significant investments in research and development. We invested approximately $29.2 million, $19.1 million and $12.4 million in research and development activities in 2002, 2001, and 2000, respectively.

Manufacturing

     Our ISO 9001 certified manufacturing operation, based in our Sunnyvale, California facility, consists primarily of pilot production, product assembly and product testing. Our strategy is to outsource manufacturing and procurement of component parts to manufacturers with the expertise and ability to achieve the cost reductions associated with volume manufacturing and to respond quickly to orders, while maintaining our quality standards. This allows us to focus our internal resources on developing new products. For our current generation of Lynx and Tsunami products, we rely on two contract manufacturers to produce our printed circuit boards and one contract manufacturer for limited printed circuit board testing. We complete the final assembly and testing of these products at our Sunnyvale facility. We manufacture our ORiNOCO, Tsunami Multipoint, Tsunami outdoor routers and Harmony products through off-shore turnkey contract manufacturers. We intend to have our next generation of Lynx and Tsunami products manufactured by off-shore turnkey contract manufacturers beginning in 2003.

     We depend on single or limited source suppliers for several key components used in our products. Proxim, Inc. and Agere’s WLAN division depended on single sources for proprietary application specific integrated circuits, or ASICs, and assembled circuit boards. Any disruptions in the supply of these components or assemblies could delay or decrease our revenues. In addition, even for components with multiple sources, there have been, and may continue to be, shortages due to capacity constraints caused by high demand. In connection with our acquisition of Agere’s 802.11 WLAN systems business, we have entered into a three-year strategic supply agreement with Agere, pursuant to which Agere will provide us with 802.11 chips, modules and cards. Other than this agreement, we do not have any long-term arrangements with our suppliers. If, for any reason, a supplier fails to meet our quantity or quality requirements, or stops selling components to us or our contract manufacturers at commercially reasonable prices, we could

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experience significant production delays and cost increases, as well as higher warranty expenses and product reputation problems. Because the key components and assemblies of our products are complex, difficult to manufacture and require long lead times, we may have difficulty finding alternative suppliers to produce our components and assemblies on a timely basis. We have experienced shortages of some of these components in the past, which delayed related revenue, and we may experience shortages in the future. In addition, because the majority of our products have a short sales cycle of between 30 and 90 days, we may have difficulty in making accurate and reliable forecasts of product needs. As a result, we could experience shortages in supply, which could delay or decrease revenue because our customers may cancel their orders or choose a competitor for their future needs.

     We have limited manufacturing capability and limited experience in large scale or foreign manufacturing. There can be no assurance that we will be able to develop or contract for additional manufacturing capacity on acceptable terms on a timely basis. In addition, in order to compete successfully, we will need to achieve significant product cost reductions. Although we intend to achieve cost reductions through engineering improvements, production economies, and manufacturing at lower cost locations including outside the United States, there can be no assurance that we will be able to do so. In order to remain competitive, we must continue to introduce new products and processes into our manufacturing environment, and there can be no assurance that any such new products will not create obsolete inventories related to older products. For example, as a part of our restructuring activities in the first quarter of 2002, we increased our provision for obsolete and excess inventory, including purchase commitments, totaling $12.7 million, of which $7.7 million related to excess inventory and $5.0 million related to purchase commitments. We subsequently reclassified this provision to cost of revenue for the first quarter of 2002. The provision related to a decrease in demand for certain products as well as our strategy to discontinue certain products in order to concentrate on selling next generation products.

     Proxim, Inc. produced its 802.11a products for a limited amount of time and Western Multiplex had just begun production of its Tsunami point-to-multipoint product prior to the merger. Agere also had a limited operating history with its 802.11 WLAN products. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in developing industries, particularly companies in relatively new and rapidly evolving markets. These risks include:

	•		an evolving and unpredictable business model;
	•		uncertain acceptance of new products and services;
	•		competition; and
	•		challenges in managing growth.

     We cannot assure you that we will succeed in addressing these risks. If we fail to do so, our revenue and operating results could be materially harmed.

Competition

     The markets for broadband wireless systems and wireless local area networking and building-to-building wireless networking are extremely competitive and we expect that competition will intensify in the future. Increased competition could adversely affect our business and operating results through pricing pressures, the loss of market share and other factors. The principal competitive factors affecting wireless local area networking and fixed wireless markets include the following: data throughput; effective RF coverage area; interference immunity; network security; network scalability; price; integration with voice technology; wireless networking protocol sophistication; ability to support industry standards; roaming capability; power consumption; product miniaturization; product reliability; ease of use; product costs; product features and applications; product time to market; product certifications; changes to government regulations with respect to each country served and related to the use of radio spectrum; brand recognition; OEM partnerships; marketing alliances; manufacturing capabilities and experience; effective distribution channels; and company reputation.

     We could be at a disadvantage to competitors, particularly Alcatel, Business Networks AB, Cisco Systems, D-Link, Intel Corporation and LinkSys (which announced an agreement to be acquired by Cisco Systems on March 20, 2003, subject to regulatory approvals), which have broader distribution channels, brand recognition, extensive patent portfolios and more diversified product lines. We have several competitors in our commercial wireless business, including without limitation, Alvarion (the merger of Breezecom and Floware), Ceragon Networks, Cisco Systems, DMC Stratex Networks, Enterasys Networks, Harris Corporation, Intel Corporation, Intersil Corporation, Nokia Corporation, Symbol Technologies and 3Com Corporation.

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     We also face competition from a variety of companies that offer different technologies in the emerging home networking market, including several companies developing competing wireless networking products. Additionally, numerous companies have announced their intention to develop competing products in both the commercial wireless and home networking markets, including several Asia-based companies offering low-price IEEE 802.11b products. We could also face future competition from companies that offer products which replace network adapters or offer alternative communications solutions, or from large computer companies, PC peripheral companies, as well as other large networking equipment companies. Furthermore, we could face competition from certain of our OEM customers, which have, or could acquire, wireless engineering and product development capabilities, or might elect to offer competing technologies. We can offer no assurance that we will be able to compete successfully against these competitors or those competitive pressures we face will not adversely affect our business or operating results.

     Many of our present and potential competitors have substantially greater financial, marketing, technical and other resources with which to pursue engineering, manufacturing, marketing, and distribution of their products. These competitors may succeed in establishing technology standards or strategic alliances in the WLAN and building-to-building markets, obtain more rapid market acceptance for their products, or otherwise gain a competitive advantage. We can offer no assurance that we will succeed in developing products or technologies that are more effective than those developed by our competitors. Furthermore, we compete with companies that have high volume manufacturing and extensive marketing and distribution capabilities, areas in which we have only limited experience. We can offer no assurance that we will be able to compete successfully against existing and new competitors as wireless markets evolve and the level of competition increases.

Intellectual Property

     We rely on a combination of patents, trademarks, non-disclosure agreements, invention assignment agreements and other security measures in order to establish and protect our proprietary rights. We have been issued eighteen U.S. patents that are important to our current business, and we have several patent applications pending in the U.S. that relate to our core technologies and product designs. We can offer no assurance that patents will issue from any of these pending applications or, if patents do issue, that the claims allowed will be sufficiently broad to protect our technology. In addition, we can offer no assurance that any patents issued to us will not be challenged, invalidated or circumvented, or that the rights granted thereunder will adequately protect us. Since U.S. patent applications are maintained in secrecy until patents issue, and since publication of inventions in the technical or patent literature tends to lag behind such inventions by several months, we cannot be certain that we first created the inventions covered by our issued patents or pending patent applications or that we were the first to file patent applications for such inventions or that we are not infringing on the patents of others. In addition, we have filed, or reserved our rights to file, a number of patent applications internationally. We can offer no assurance that any international patent application will issue or that the laws of foreign jurisdictions will protect our proprietary rights to the same extent as the laws of the United States.

     In addition to our registered intellectual property, we also use proprietary technology in our business. This technology includes internally developed proprietary error correction algorithms, fault tolerant systems and comprehensive network management software. A significant portion of this technology consists of specialized knowledge and technical expertise that has been developed over time by our employees. In order to maintain the confidential nature of this technology, we have chosen to protect it by generally limiting access to it, treating portions of it as trade secrets and obtaining confidentiality or non-disclosure agreements from persons who are given access to it. All of our employees have signed our standard confidentiality agreement, which prohibits them from disclosing our confidential information, technology developments and business practices, as well as any confidential information entrusted to us by other parties. Similarly, all of the consultants who have been given access to our confidential information or proprietary technology have signed an agreement prohibiting them from disclosing that information and technology to others.

     We also have an intellectual property license agreement with Glenayre which we entered into on November 1, 1999. Under the agreement, Glenayre granted us a royalty-free license to use some of its intellectual property, including patents, patent applications, copyrights, software, technology and proprietary information. In addition, Glenayre granted us a license to use its name. Under the agreement, we granted Glenayre a royalty-free license to two patent applications and to use any trademarks we own that relate to inventory held by Glenayre on the date of the license.

     Although we intend to protect our proprietary rights vigorously, there can be no assurance that the measures we have taken or may take to protect our proprietary rights will be successful. We expect that litigation may continue to be necessary to enforce our patents, trademarks or other intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others, to establish the validity of any technology licenses offered to patent infringers, to prevent the importation of infringing products into the United States, or to defend against claims of infringement. Litigation has resulted in and could further continue to result, in substantial costs and diversion of resources and, if determined adversely to us, could materially and adversely affect our business and operating results. Moreover, we can offer no assurance that in the future these rights will be upheld. There can be no assurance that the measures we have taken or may take in the future will prevent misappropriation of our technology or that others will not independently develop similar products, design around our proprietary or patented technology or duplicate our products. For more information regarding our pending patent litigation, see Item 3, Legal Proceedings set forth herein.

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     The results of any litigation matter are inherently uncertain. In the event of any adverse decision in the described legal actions or any other related litigation with third parties that could arise in the future with respect to patents or other intellectual property rights relevant to our products, we could be required to pay damages and other expenses, to cease the manufacture, use and sale of infringing products, to expend significant resources to develop non-infringing technology, or to obtain licenses to the infringing technology. These matters are in the early stages of litigation and, accordingly, we cannot make any assurance that these matters will not materially and adversely affect our business, financial condition, operating results or cash flows.

Government Regulation

     Our products are subject to extensive telecommunications-based regulation by the United States and foreign laws and international treaties. We must conform our products to a variety of regulatory requirements and protocols established to, among other things, avoid interference among users of radio frequencies and to permit interconnection of equipment. Each country has different regulations and a different regulatory process. In order for our products to be used in some jurisdictions, regulatory approval and, in some cases, specific country compliance testing and re-testing may be required. The delays inherent in this regulatory approval process may force us to reschedule, postpone or cancel the installation of our products by our customers, which may result in significant reductions in our sales.

     In the United States, we are subject to various Federal Communications Commission, or FCC, rules and regulations. Current FCC regulations permit license-free operation in certain FCC-certified bands in the radio spectrum. Our spread spectrum wireless products are certified for unlicensed operation in the 902 — 928 MHz, 2.4 — 2.4835 GHz, 5.15 — 5.35 GHz and 5.725 — 5.825 GHz frequency bands. Operation in these frequency bands is governed by rules set forth in Part 15 of the FCC regulations. The Part 15 rules are designed to minimize the probability of interference to other users of the spectrum and, thus, accord Part 15 systems secondary status in the frequency. In the event that there is interference between a primary user and a Part 15 user, a higher priority user can require the Part 15 user to curtail transmissions that create interference. In this regard, if users of our products experience excessive interference from primary users, market acceptance of our products could be adversely affected, which could materially and adversely affect our business and operating results. The FCC, however, has established certain standards that create an irrefutable presumption of noninterference for Part 15 users and we believe that our products comply with such requirements. There can be no assurance that the occurrence of regulatory changes, including changes in the allocation of available frequency spectrum, changes in the use of allocated frequency spectrum, or modification to the standards establishing an irrefutable presumption for unlicensed Part 15 users, would not significantly affect our operations by rendering current products obsolete, restricting the applications and markets served by our products or increasing the opportunity for additional competition.

     The FCC is coordinating discussions between the United States military and the commercial wireless industry regarding the operation and potential interference from unlicensed 5 GHz systems. These discussions are intended to resolve the potential interference issues without a rule change to the operation of unlicensed 5 GHz systems. If a solution cannot be agreed upon by the parties, the FCC could change the regulations related to the operation of unlicensed 5 GHz products. Such a change could have a material adverse affect upon the sale of our unlicensed 5 GHz products.

     Our products are also subject to regulatory requirements in international markets and, therefore, we must monitor the development of spread spectrum and other radio frequency regulations in certain countries that represent potential markets for our products. While there can be no assurance that we will be able to comply with regulations in any particular country, we will design our products to minimize the design modifications required to meet various 2.4 GHz and 5 GHz international spread spectrum regulations. In addition, we will seek to obtain international certifications for our product line in countries where there are substantial markets for wireless networking systems. Changes in, or the failure by us to comply with, applicable domestic and international regulations could materially adversely affect our business and operating results. In addition, with respect to those countries that do not follow FCC regulations, we may need to modify our products to meet local rules and regulations.

     Regulatory changes by the FCC or by regulatory agencies outside the United States, including changes in the allocation of available frequency spectrum, could significantly affect our operations by restricting our development efforts, rendering current products obsolete or increasing the opportunity for additional competition. Several changes by the FCC were approved within the last eight years including changes in the allocation and use of available frequency spectrum, as well as the granting of an interim waiver. These approved changes could create opportunities for other wireless networking products and services. There can be no assurance that new regulations will not be promulgated, that could materially and adversely affect our business and operating results. It is possible that the United States and other jurisdictions will adopt new laws and regulations affecting the pricing, characteristics and quality of broadband wireless systems and products. Increased government regulations could:

	•		decrease the growth of the broadband wireless industry;
	•		hinder our ability to conduct business internationally;

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	•		reduce our revenues;
	•		increase the costs and pricing of our products;
	•		increase our operating expenses; and
	•		expose us to significant liabilities.

     Any of these events or circumstances could seriously harm our business and results of operations.

Employees

     As of December 31, 2002, we had 433 employees, including 64 in manufacturing, 165 in research and development, 161 in sales, marketing and customer service and 43 in finance and administration. We are not a party to any collective bargaining agreement in the United States. We are subject to collective bargaining with 22 employees, based in the Netherlands. We believe that relations with our employees are good.

Executive Officers

     The following information as of March 27, 2003, is provided with respect to each of our executive officers.

     Jonathan N. Zakin has served as our Chief Executive Officer and Chairman of the Board of Directors since November 1, 1999. Mr. Zakin is also currently President of Leeward Technology Partners and Leeward Management Inc., affiliates of Ripplewood Holdings, L.L.C., and he is the Manager of Seaview Holdings, L.L.C. Prior to founding Leeward Technology Partners in 1997, he was Executive Vice President of Business Development and Corporate Strategy of U.S. Robotics, a communications equipment company, from 1995 to 1997, Executive Vice President of Sales and Marketing of U.S. Robotics from 1989 to 1995 and Vice President of Sales from 1987 to 1989. Mr. Zakin was elected a director of U.S. Robotics in 1988. He has also held various executive and management positions, both domestically and internationally, with Winterhalter, Inc., Cosma International, Brisk and Kindle and J. Henry Schroder Corp. Mr. Zakin received an M.B.A. degree from Harvard Business School and a B.A. degree from New York University.

     Keith E. Glover has served as the Vice President of Finance and Administration and Chief Financial Officer since he joined Proxim in September 1993. Upon the closing of the merger between Proxim, Inc. and Western Multiplex Corporation in March 2002, Mr. Glover was appointed Executive Vice President, Chief Financial Officer and Corporate Secretary of Proxim Corporation. From March 1986 to June 1993, Mr. Glover worked for Vitalink Communications Corporation, a LAN internetworking subsidiary of Network Systems Corporation, where he held several financial management positions, most recently as Vice President of Finance.

     David C. King joined Proxim in December 1992 as Vice President of Marketing and acting Chief Financial Officer, in July 1993 was appointed President, Chief Executive Officer and Director, and in January 1996 was named Chairman of the Board of Directors and in December 2002 was named Vice-Chairman of the Board of Directors. From December 1990 to November 1992, Mr. King served in various executive capacities at Vitalink, most recently as Vice President of Marketing and Customer Services. From 1985 to 1990, Mr. King was Senior Manager in the San Francisco office of McKinsey & Company, Inc., an international management consulting firm, where he was a member of the firm’s high technology and health care practices.

     Amir Zoufonoun has served as our Executive Vice President, WAN Strategy and Business Development since March 2002. Prior to the merger with Proxim, Inc. he served as our President and Chief Operating Officer and a member of the Board of Directors since November 1, 1999. He was also our General Manager from 1998 to 1999. Since Mr. Zoufonoun joined Western Multiplex in 1989, he served in various management positions of increasing responsibility, including Vice President of Engineering. From 1979 to 1989, he held various engineering and technical management positions with Harris Corporation. Mr. Zoufonoun received a M.S. degree in electrical engineering from Santa Clara University and a B.S. degree in Electrical Engineering from San Jose State University.

Available Information

     Proxim makes available free of charge on the Proxim website the Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after Proxim files such material with, or furnishes it to, the Securities and Exchange Commission. The address of the Proxim website is www.proxim.com.

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Item 2. Properties

     Our corporate headquarters, primary research and development and manufacturing operations, are located in approximately 139,000 square feet in Sunnyvale, California under leases that expire on August 31, 2009. In addition, we maintain 40,554 square feet of office space in Duluth, Georgia under a lease and sublease that expires September 30, 2009, 40,000 square feet of office space in Mountain View, California under a lease and sublease that expires March 31, 2006, 37,333 square foot facility in Sunnyvale, California under lease that expires in November 2010, 16,000 square feet in Austin, Texas under a lease that expires on March 31, 2005, 11,000 square feet of warehouse space in Santa Clara, California under a lease that expires on September 30, 2005, 10,637 square foot facility in Long Beach, California under lease expires in July 2005, 8,000 square feet of office space in Wakefield, Massachusetts under a lease that expires on May 30, 2004 and 6,930 square feet of office space in Herndon, Virginia under a lease that expires on December 31, 2006. Management considers the above facilities suitable and adequate to meet our current requirements. We also lease sales offices in Atlanta, Georgia; Paris, France; and Tokyo, Japan and a design center in India.

Item 3. Legal Proceedings

     Since March 2001, we have been involved in patent and International Trade Commission litigation with respect to alleged infringement of certain of our United States patent rights related to direct sequence wireless local area networking technology. This litigation has resulted in, and could in the future continue to result in, substantial costs and diversion of management resources. In addition, this litigation, if determined adversely to us, could result in the payment of substantial damages and/or royalties or prohibitions against utilization of essential technologies, and could materially and adversely affect our business, financial condition and operating results.

     On March 8, 2001, Proxim, Inc. filed two lawsuits for infringement of three United States Patents for wireless networking technology: one suit in the U.S. District Court for the District of Massachusetts against Cisco Systems, Incorporated and Intersil Corporation; and one suit in the U.S. District Court for the District of Delaware against 3Com Corporation, SMC, Symbol Technologies and Wayport. These suits sought an injunction against continued infringement, damages resulting from the infringement and the defendants’ conduct, interest on the damages, attorneys’ fees and costs, and such further relief as the respective courts deem just and appropriate.

     On March 9, 2001, Proxim, Inc. filed suit with the International Trade Commission (ITC) in Washington, D.C. asking the ITC to stop the importation of products that infringe its patented wireless networking technology. Eight companies are identified in this action; Acer, Addtron, Ambicom, Compex, D-Link, Enterasys, Linksys and Melco. Proxim, Inc. notified these and other companies that it believed to have been infringing its patents. On May 9, 2001, Proxim, Inc. filed to remove Compex from the ITC complaint as Compex entered into an agreement with Proxim, Inc. to license these patents. Intersil and Agere have filed motions to intervene in the proceedings before the ITC and these motions have been approved by the ITC.

     On or about April 24, 2001, Intersil Corporation and Cisco Systems, Incorporated filed suit in the U.S. District Court for the District of Delaware seeking that Proxim, Inc.’s patents be found invalid, unenforceable and not infringed. Intersil and Cisco sought damages and attorneys’ fees from Proxim, Inc. based upon alleged breach of contract and unfair competition.

     On or about May 1, 2001, Symbol Technologies filed patent infringement counterclaims in the U.S. District Court for the District of Delaware alleging that Proxim, Inc. infringed four Symbol WLAN patents. Symbol is seeking unspecified damages and a permanent injunction against Proxim, Inc. related to these infringement claims.

     On or about May 31, 2001, Agere filed suit in the U.S. District Court for the District of Delaware alleging that Proxim, Inc. infringed three Agere patents. Agere sought unspecified damages and a permanent injunction against Proxim, Inc. related to its infringement claims. On July 9, 2001, Proxim, Inc. filed an amended answer and counterclaim to the Agere suit. Proxim, Inc. sought declaratory judgment for non-infringement, invalidity and unenforceability of certain Agere patents, as well as damages for violation of the antitrust laws of the United States.

     On August 8, 2001, Proxim, Inc. filed an amended answer and counterclaim, and further sought damages for violation of the antitrust laws of the United States. On December 13, 2001, Proxim, Inc. filed a second amended answer and counterclaim, and sought to add Agere’s parent, Agere Guardian Systems Inc., as a party.

     On December 4, 2001, Symbol filed suit in the U.S. District Court for the District of Delaware alleging that Proxim, Inc. infringed four Symbol patents related to systems for packet data transmission. Symbol sought an award for unspecified damages and a

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permanent injunction against Proxim, Inc. based on alleged patent infringement counterclaims. On December 18, 2001, Proxim, Inc. filed an answer and counterclaims seeking declaratory judgments for non-infringement, invalidity and unenforceability of the four asserted Symbol patents, injunctive and monetary relief for Symbol’s infringement of a Proxim, Inc. patent, monetary relief for Symbol’s false patent marking, and injunctive and monetary relief for Symbol’s unfair competition under the Lanham Act, common law unfair competition and tortious interference.

     On August 5, 2002, in connection with our acquisition of the 802.11 WLAN systems business from Agere, we announced that we had entered into a cross-license agreement with Agere whereby, in part, Agere agreed to settle the pending patent-related litigation between the two companies.

     On March 17, 2003, the Company announced a settlement with Intersil Corporation to resolve all pending patent-related litigation between the two companies, as well as Intersil’s customers. Under the terms of the agreement, the Company and Intersil have agreed to dismiss all claims against each other, including lawsuits before the International Trade Commission and Delaware and Massachusetts Federal Courts.

Item 4. Submission of Matters to a Vote of Security Holders

     A special meeting of our stockholders was held on October 8, 2002 for the purpose of considering and voting upon a proposal to approve the conversion of $34 million in outstanding principal amount of our indebtedness into shares of our Series A Preferred Stock, with an initial $34 million liquidation preference, and the issuance of warrants to purchase approximately 5.6 million shares of our Common Stock. Of the total outstanding shares of Common Stock of the Company present in person or by proxy and entitled to vote on the matter, 84,161,582 shares, or approximately 98%, voted in favor of the proposal. A total of 1,423,644 shares of Common Stock of the Company voted against the proposal and 88,040 shares of Common Stock of the Company abstained.

     To finance our acquisition of Agere’s 802.11 WLAN systems business, we entered into a Securities Purchase Agreement with Warburg Pincus Private Equity VIII, L.P., Broadview Capital Partners L.P. and affiliated entities, who agreed to collectively invest $75 million in Proxim. These investors received 1,640,000 shares of redeemable convertible Series A Preferred Stock in the amount of approximately $41 million, with a conversion price of approximately $3.06 per share, and warrants to purchase approximately 6.7 million shares of our Common Stock valued at $12.3 million. The remaining $34 million of the investment was in the form of convertible notes. Pursuant to the Securities Purchase Agreement, we also agreed to hold a special meeting of our stockholders to approve the conversion of the notes and the issuance to the investors of warrants to purchase shares of our Common Stock. Upon receipt of approval of our stockholders at the special meeting, we converted the notes issued to these investors into 1,360,000 shares of our Series A Preferred Stock and we granted to the investors additional warrants to purchase approximately 5.6 million shares of our Common Stock. In total, these investors were granted warrants to acquire 12,271,345 shares of Common Stock for approximately $3.06 per share.

PART II

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

(a) Market Information

     The following table shows the high and low bid prices of the Company’s common stock for the fiscal years ended December 31, 2001 and 2002 as reported on the Nasdaq National Market:

     The closing price of the Company’s common stock on the Nasdaq National Market on January 16, 2003 was $1.24.

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(b) Holders

     Proxim Corporation common stock is quoted on the Nasdaq National Market under the symbol PROX. The Company had 428 stockholders of record as of March 25, 2003.

(c) Dividends

     The Company presently intends to retain its future earnings, if any, to fund the development and growth of its business and, therefore, does not anticipate paying any cash dividends in the foreseeable future. From August 2005 through August 2007, shares of the Company’s Series A Preferred Stock will be entitled to dividends equal to 8% of their liquidation preference per year, payable, at the Company’s election, in cash or shares of the Company’s Common Stock valued at the then-market price.

(d) Equity Plan Information

     The disclosure required by Item 201(d) of Regulation S-K is set forth in the 2003 Proxy Statement under the section “Equity Plan Information” and is incorporated herein by reference.

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Item 6. Selected Financial Data

     You should read the selected consolidated financial data set forth below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Proxim Corporation’s consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. The consolidated statements of operations data for the years ended December 31, 2002, 2001 and 2000 and the consolidated balance sheet data as of December 31, 2002 and 2001 are derived from, and are qualified by reference to, the audited consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. The statement of operations data for the year ended December 31, 1999 and 1998 and the balance sheet data as of December 31, 2000, 1999 and 1998 are derived from audited financial statements not appearing elsewhere in this Annual Report on Form 10-K. Historical results are not necessarily indicative of results that may be expected for any future period.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     Except for any historical information contained herein, the matters discussed in this Annual Report on Form 10-K contain certain “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to the Company’s financial condition, results of operations, cash flows, revenues, financing plans, business strategies and market acceptance of its products. The words “anticipate,” “believe,” “estimate,” “expect,” “plan,” “intend,” and similar expressions, are intended to identify these forward-looking statements. These forward-looking statements are found at various places throughout this Annual Report. We caution you not to place undue reliance on these forward-looking statements, which speak only as of the date they were made. We do not undertake any obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date of this Annual Report or to reflect the occurrence of unanticipated events. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. Factors that might cause such a difference include, but are not limited to those discussed below under “Risk Factors” and elsewhere in this Report.

     The following discussion should be read together with our financial statements and the related notes contained elsewhere in this Annual Report on Form 10-K.

Overview

     Proxim Corporation is the company created by the March 26, 2002 merger of Proxim, Inc. and Western Multiplex Corporation. The results for 2002 include the financial results of Western Multiplex for the period from January 1, 2002 to December 31, 2002, the results of the former Proxim, Inc. for the period from March 27, 2002 to December 31, 2002, and the results of the 802.11 WLAN systems business of Agere for the period from August 6, 2002 to December 31, 2002, in accordance with generally accepted accounting principles for accounting for business combinations. Western Multiplex was founded in 1979 in Sunnyvale, California as a vendor of radio components and related services. In 1992, Western Multiplex changed its strategy, becoming a designer and manufacturer of broadband wireless systems and launched our Lynx broadband wireless products. These point-to-point systems are primarily used by wireless operators to connect their base stations to other base stations and to existing wire line networks. In 1999, Western Multiplex introduced its Tsunami point-to-point broadband wireless systems, which primarily enable service providers, businesses and other enterprises to expand or establish private networks by bridging Internet traffic among multiple facilities. Based on Western Multiplex’s core technologies and the technology acquired through its purchase of WirelessHome Corporation in March 2001, Western Multiplex has developed point-to-multipoint systems that enable service providers, businesses and other enterprises to connect multiple facilities within a geographic area to a central hub. Western Multiplex began shipping its first generation of these products at the end of the fourth quarter of 2001. In March 2002, Western Multiplex merged with Proxim, Inc. located in Sunnyvale, California which designs, manufactures and markets high performance WLAN and building-to-building network products based on RF technology and changed the Western Multiplex name to Proxim Corporation. In April 2002, we acquired nBand Communications Inc., a start-up developer of next generation advanced application specific integrated circuits, or ASICs technology.

     On August 5, 2002, we completed our acquisition of the 802.11 WLAN systems business of Agere Systems, including its ORiNOCO product line, for $65 million in cash. To finance the acquisition, Warburg Pincus Private Equity VIII, L.P., Broadview Capital Partners L.P. and affiliated entities agreed to collectively invest $75 million in the Company. These investors received 1,640,000 shares of redeemable convertible Series A preferred stock (“Preferred Stock”) in the amount of approximately $41 million, with a conversion price of approximately $3.06 per share, and warrants to purchase approximately 6.7 million shares of common stock valued at $12.3 million. The value of the warrants was recorded as a reduction of the Preferred Stock carrying value and recorded as additional paid-in capital. A deemed preferred stock dividend representing the beneficial conversion feature of the Preferred Stock of $2.7 million was reflected in the determination of the loss attributable to common stockholders. The investors were also issued $34 million of convertible notes. Upon the receipt of approval of our stockholders at a special meeting held on October 8, 2002, the notes issued to these investors were converted into 1,360,000 shares of Preferred Stock and warrants to purchase approximately 5.6 million shares of common stock valued at $1.6 million. The warrants were recorded as a reduction of the Preferred Stock carrying value and recorded as additional paid-in capital in the quarter ended December 31, 2002. In total, the investors were granted warrants to acquire 12,271,345 shares of common stock for approximately $3.06 per share valued at $14.0 million. The Preferred Stock and warrants issued to the investors represent approximately 25% of our outstanding common stock on an as-converted and as-exercised basis including dividends. In addition, in connection with the transaction, we entered into a patent cross-license agreement and settled all outstanding patent-related litigation with Agere, and have entered into a three-year strategic supply agreement, pursuant to which Agere will provide 802.11 chips, modules and cards to us at specified prices.

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     The financial statements include the results of acquired subsidiaries from their respective dates of acquisition.

     Revenue. We generate revenue primarily from the sale of our Lynx and Tsunami systems for our WWAN product line, and the sale of 802.11a standards based products, acquired in the Proxim, Inc. acquisition, and ORiNOCO products acquired from Agere, for our WLAN product line. We introduced the Tsunami products during the fourth quarter of 1999. While our Tsunami products and Lynx products have similar pricing for comparable models, our Lynx product line contributes the largest part of our revenue. We began selling our Tsunami point-to-multipoint systems in 2001. We also generate a small percentage of our revenue from the sale of services and parts and rentals of our systems. We sell worldwide to service providers, businesses and other enterprises directly through our sales force and indirectly through distributors, value-added resellers and system integrators. Shipments to certain distributors are made under terms allowing certain rights of return, protection against subsequent price declines on our products held by our distributors and co-op marketing programs.

     Effective June 29, 2002, we began to recognize sales of our WWAN products to distributors with rights of return upon shipment by the distributors to the end user customer. Formerly, we recognized revenue for sales of WWAN products to distributors with rights of return upon shipment to the distributor and provided reserves for the estimated amount of product returns. The combination of the changes resulting from the acquisition of the Agere Systems 802.11 WLAN business and the adoption of one uniform method is consistent with our plans to sell bundled and integrated WLAN and WWAN products. This change in accounting methodology was treated as a change in estimate, and was made on a prospective basis starting in the third quarter of 2002. Revenue from services, such as pre-installation diagnostic testing and product repair services, is recognized over the period for which the services are performed, which is typically less than one month. Revenue from product rentals is recognized over the period of the rental.

     Revenue consists of product revenues, reduced by estimated sales returns and allowances. Provisions for estimated sales returns and allowances, which are based on historical trends, contractual terms and other available information, are recorded at the time revenue is recognized.

     Our sales force focuses on key strategic accounts and also develops relationships with end users that purchase through distributors and value-added resellers. Distributors sell our products to end users, and value-added resellers not only sell our products to end users, but also assist end users in network design, installation and testing. We market our products through strategic relationships we have with systems integrators, which design and install networks that incorporate our systems. Additionally, we sell directly to OEM customers. We sell both design-in products for integration into their wireless computing platforms and branded products as private label models. Any significant decline in direct sales to end users or in sales to our distributors or value-added resellers, or the loss of any of our distributors, value-added resellers or OEM customers, could materially adversely affect our revenue.

     During 2002, we sold our products to approximately 170 customers in 45 countries. In 2002, international sales accounted for approximately 38% of our total revenue. We expect international sales to vary but remain significant as a percentage of overall sales in the future. Currently, all of our sales are denominated in U.S. dollars. Accordingly, we are not directly exposed to currency exchange risks other than the risk that exchange rate fluctuations may make our products more expensive for customers outside the United States and, as a result, could decrease international sales. In addition, we face risks inherent in conducting global business. These risks, which are more fully described herein, include extended collection time for receivables, reduced ability to enforce obligations and reduced protection for our intellectual property.

     As we have increased sales through our distributors and value-added resellers, we have experienced a decline in the average selling prices of our products. This is because the prices of the products that we sell indirectly through distributors and value-added resellers are typically lower than the prices of the products we sell directly through our sales force to end users. We have also lowered our prices for older products as we introduce additional products that provide faster data rates. These newer products have higher prices than our older products. Our international sales also have lower average selling prices when compared to our United States and Canadian selling prices. This is primarily due to our higher reliance on distributors and value-added resellers for international sales, and also because our lower speed products, with significantly lower prices, are being sold in larger quantities internationally than domestically. If indirect sales and sales in our international markets increase, we would expect that our average selling prices to further decline.

     Cost of revenue. Cost of revenue consists primarily of outsourced manufacturing costs, component costs, labor and overhead costs, costs of acquiring finished parts from original equipment manufacturers and original design manufacturers, customer service and warranty costs. We currently outsource the majority of our manufacturing and supply chain management to a limited number of independent contract manufacturers, who obtain components for our products from suppliers. Accordingly, a significant portion of our cost of revenue consists of payments to these contract manufacturers and component suppliers. The remainder of our cost of revenue

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is related to our in-house manufacturing operations, which consist primarily of quality control, final assembly, testing and product integration. We expect to realize lower per unit product costs as we continue to outsource more of our in-house manufacturing as well as have our products produced at lower cost off-shore locations. However, we cannot assure you when or if cost reductions will occur. The failure to achieve these cost reductions could materially adversely affect our gross margins and operating results.

     Gross profit. Our gross profit is affected by both the average selling prices of our systems and our cost of revenue. Historically, decreases in our average selling prices have generally been offset by reductions in our per unit product cost. We cannot assure you, however, that we will achieve any reductions in per unit product cost in the future or that any reductions will offset a reduction in our average selling prices. Gross profit will be affected by a variety of factors, including manufacturing efficiencies, the degree to which our manufacturing is outsourced, the location of manufacturing, cost reduced product designs, future manufacturing licenses of our products, product mix, competitive pricing pressures, the degree of customization of individual products required by OEM customers and component and assembly costs.

     Research and development. Research and development expenses consist primarily of salaries and related personnel expenses, prototype development expenses, consultant fees and allocated overhead related to the design, development, testing and enhancement of our products and underlying technologies. We expense all research and development expenses as incurred. We expect to decrease our research and development expenses as a percentage of revenue during the next two quarters in order to reduce our breakeven point.

     Selling, general and administrative. Selling, general and administrative expenses consist primarily of salaries, commissions, product marketing, sales support functions, advertising, trade show and other promotional expenses and allocated overhead. We intend to decrease our selling, general and administrative expenditures as a percentage of revenue during the next two quarters in order to reduce our breakeven point.

     Stock option programs. We have implemented stock option programs for employees and members of our board of directors to attract and retain highly skilled and qualified business and technical personnel. Prior to our initial public offering, we recorded deferred stock compensation on certain options for the difference between the exercise price and the deemed fair value of our common stock on the date the stock options were granted. This amount is included as a reduction of stockholders’ equity and is being amortized by charges to operations over the vesting period. The amortization expense relates to options awarded to employees in all operating expense categories. As of December 31, 2002, all deferred stock compensation was amortized.

Critical Accounting Policies, Judgments and Estimates

     Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to customer programs and incentives, product returns, bad debts, inventories, equity investments, goodwill, intangible assets, income taxes, financing operations, warranty obligations, excess component order cancellation costs, restructuring, long-term service contracts, pensions and other post-retirement benefits, and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

     We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements.

Revenue Recognition

     Effective June 29, 2002, we began to recognize sales of our WWAN products to distributors with rights of return upon shipment by the distributors to the end user customer. Formerly, we recognized revenue for sales of WWAN products to distributors with rights of return upon shipment to the distributor and provide reserves for the estimated amount of product returns. The combination of the changes resulting from the then proposed acquisition of the Agere System’s 802.11 WLAN business and the adoption of one uniform method was consistent with our plans to sell bundled and integrated WLAN and WWAN products. This change in accounting methodology was treated as a change in estimate, and was made on a prospective basis starting in the third quarter of 2002. Deferred gross profit on these distributors sales at December 31, 2002 was $5.9 million. In addition to the deferral of product revenue identified below, we

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reported accounts receivable net of deferred revenue and carried the value of the related products as consigned inventory. As of December 31, 2002, accounts receivable was reduced by $14.7 million to $30.5 million and we recorded consigned inventory of $8.8 million which increased total inventory to $36.8 million.

Allowance for Doubtful Accounts, Returns and Discounts

     We record estimated reductions to revenue for sales return, customer programs and incentive offerings including special pricing agreements, price protection and promotions. If market conditions were to decline, we may take actions to increase customer incentive offerings possibly resulting in an incremental reduction of revenue at the time the incentive is offered.

     We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

Warranty Provision

     We provide for the estimated cost of product warranties at the time revenue is recognized. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers, our warranty obligation is affected by product failure rates and material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from our estimates, revisions to the estimated warranty liability would be required.

Valuation of Inventories

     We write down our inventory for estimated excess and obsolete or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs, including adverse purchase order commitments, may be required.

Valuation of Minority Interest Investments

     We hold minority interests in companies having operations or technology in areas within our strategic focus, one of which is publicly traded and has highly volatile share prices. We record an investment impairment charge when we believe an investment has experienced a decline in value that is other than temporary. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments that may not be reflected in an investment’s current carrying value, thereby possibly requiring an impairment charge in the future.

Valuation of Deferred Tax Assets

     We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future in excess

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of our recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, should we determine that we would not be able to realize all or part of our net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made.

Restructuring Costs and Impairment of Goodwill and Intangible Assets

     In response to changes in industry and market conditions, we may be required to strategically realign our resources and consider restructuring, disposing of, or otherwise, exiting businesses. Any decision to limit investment in or to dispose of or otherwise, exit businesses may result in the recording of special charges, such as inventory and technology related write-offs and workforce reduction costs, charges relating to consolidation of excess facilities, or claims from third parties who were resellers or users of discontinued products. Estimates relating to the liabilities for excess facilities are affected by changes in real estate market conditions. Estimates with respect to the useful life or ultimate recoverability of our carrying basis of assets, including purchased intangible assets, could change as a result of such assessments and decisions. Additionally, we are required to perform goodwill impairment tests on an annual basis and between annual tests in certain circumstances. There can be no assurance that future goodwill impairment tests will not result in a charge to earnings.

Patent Litigation and Infringement Costs

     We have been involved in litigation in the normal course of business. The results of any litigation matter are inherently uncertain. In the event of any adverse decision in litigation with third parties that was pending as of December 31, 2002 and those that could arise in the future with respect to patents, other intellectual property rights relevant to our products and defective products, we could be required to pay damages and other expenses, to cease the manufacture, use and sale of infringing products, to expand significant resources to develop non-infringing technology, or to obtain licenses to the infringing technology. These charges may occur in any particular quarter resulting in variability in our operating results.

Results of Operations

     The following table provides operations data as a percentage of revenue for the periods presented:

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Comparison of Years Ended December 31, 2001 and 2002

     Revenue, net. We classify our products into two product lines: Wireless Wide Area Network, or WWAN, product line, and; Wireless Local Area Network, or WLAN, product line. The WWAN product line includes point-to-point Lynx and Tsunami products and point-to-multipoint Tsunami products. The WLAN product line includes 802.11a and ORiNOCO products. Prior to the March 26, 2002 merger with Proxim, Inc., we did not have a WLAN product line. Historical WLAN revenue prior to March 26, 2002 of the former Proxim, Inc. and prior to August 5, 2002 for the ORiNOCO products acquired from Agere are not reported in the table below. Revenue information by product line is as follows (in thousands):

     For the year ended December 31, 2001, three distributors, Comstor, Somera Communications, Inc. and Tessco Technologies accounted for 29.4%, 11.4% and 10.5%, respectively, of total revenue. For the year ended December 31, 2002, Comstor accounted for 23.0% of total revenue.

     Revenue increased 36.9% from $105.7 million in 2001 to $144.7 million in 2002. Revenue increased primarily due to the contribution of sales of WLAN products totaling $60.9 million acquired in both the merger with Proxim, Inc. on March 26, 2002 and the acquisition of the ORiNOCO product line from Agere on August 5, 2002. This increase was partially offset by a decrease in WWAN product sales. The decrease in WWAN product sales was attributable, in part, to the adoption of a uniform sell-through revenue recognition methodology for products that are sold through distribution channels with rights of return. This accounting methodology change was implemented on a prospective basis effective June 29, 2002, and resulted in the deferral of $14.7 million of revenue from WWAN products shipped to distributors as of December 31, 2002, that were not sold through to end customers.

     Cost of revenue. Cost of revenue increased 49.7% from $55.9 million in 2001 to $83.7 million in 2002. As a percentage of revenue, cost of revenue increased from 52.9% in 2001 to 57.8% in 2002. The increase in cost of revenue was primarily attributable to increased revenue. The increase in cost of revenue as a percentage of revenue was primarily attributable to the contribution of sales from WLAN products acquired in both the merger with Proxim, Inc. and the acquisition of the 802.11 WLAN systems business from Agere Systems. WLAN products generally carry lower gross margins as a percentage of revenue than WWAN products.

     Provision for Excess and Obsolete Inventory, We recorded a provision for excess and obsolete inventory, including purchase commitments, totaling $12.7 million during 2002 as part of our restructuring charge, of which $7.7 million related to excess and obsolete inventory and $5.0 million related to purchase commitments. To mitigate the component supply constraints that have existed in the past, we built inventory levels for certain components with long lead times and entered into longer-term commitments for certain components. The excess inventory charges were due to the following factors:

	•		A sudden and significant decrease in demand for certain Lynx and Tsunami license-exempt point-to-point products;
	•		Notification from customers that they would not be ordering as much as they had previously indicated;
	•		Management’s strategy to discontinue the Lynx and Tsunami point-to-point licensed products in order to concentrate on the license-exempt products; and
	•		Management’s strategy to discontinue certain Lynx and Tsunami license-exempt products in order to concentrate on selling next generation Lynx and Tsunami license-exempt products.

     Due to these factors, inventory levels exceeded the our requirements based on current 12-month sales forecasts. The additional excess and obsolete inventory charge was calculated based on the inventory levels in excess of the estimated 12-month demand for each specific product family. We do not currently anticipate that the excess inventory subject to this reserve will be used at a later date based on our current 12-month demand forecast. We use a 12-month demand forecast because the wireless communications industry is characterized by rapid technological changes such that if we have not sold a product after a 12-month period it is unlikely that

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the product will be sold. The following is a summary of the movements in the reserve for excess and obsolete inventory during 2002:

     Research and development. Research and development expenses increased 52.6% from $19.1 million in 2001 to $29.2 million in 2002. The increase in research and development expense was primarily attributable to the cost of increased personnel, including employees added as a result of both the Proxim, Inc. merger and the acquisition of the 802.11 WLAN systems business of Agere, prototype spending for the development of new products and enhancements to existing products. As a percentage of revenue, research and development expenses increased from 18.1% in 2001 to 20.2% in 2002 primarily due to increased personnel expenses.

     Selling, general and administrative. Selling, general and administrative expenses increased 28.2% from $38.6 million in 2001 to $49.5 million in 2002. The increase in selling, general and administrative expense was primarily attributable to increases in sales and marketing personnel expenses, including employees added as a result of both the Proxim, Inc. merger and the acquisition of the 802.11 WLAN systems business of Agere, advertising, tradeshow, and public relations expenses. As a percentage of revenue, selling, general and administrative expenses decreased from 36.5% in 2001 to 34.2% in 2002. The percentage decrease was primarily due to efforts to control costs, including the reductions of headcount and discretionary spending.

     Amortization of goodwill and other intangible assets. Amortization of goodwill and other intangible assets increased from $5.4 million in 2001 to $12.5 million in 2002. Amortization of goodwill and other intangible assets increased primarily due to the increased intangible assets from both the merger with Proxim, Inc. on March 26, 2002 and the acquisition of the 802.11 WLAN systems business of Agere offset by the cessation of amortization of goodwill arose from acquisitions completed prior to June 30, 2001 subsequent to the adoption of SFAS No. 142 beginning on January 1, 2002.

     Amortization of deferred stock compensation. Amortization of deferred stock compensation decreased from $5.2 million in 2001 to $0.9 million in 2002. Amortization of deferred stock compensation decreased primarily due to the issuance of stock options at fair value since the completion of our initial public offering in 2000.

     Impairment of goodwill and intangible assets. In December 2002, due to the recent significant decline in forecasted revenue and the cash flows therefrom, we made a complete assessment of the carrying value of all goodwill and other intangibles assets in accordance with SFAS No. 142. First, we determined the fair value of its equity to be less than the carrying value of goodwill. As such, an impairment charge was applicable in accordance with SFAS No. 142 as of December 31, 2002. Then we quantified the goodwill impairment as the amount by which the carrying amount of the asset exceeded the estimated fair value of the asset. The carrying value of goodwill totaling $138.8 million as of December 31, 2002 exceeded the estimated fair value of $9.7 million and, accordingly, we took a charge for the impairment of goodwill of $129.1 million.

     Impairment of loan to officer. Prior to 2002, Proxim, Inc. had guaranteed up to $5 million of obligations of an officer of the Company, with respect to a margin loan with an investment bank. We assumed the guaranty in the merger with Proxim, Inc. and on October 15, 2002, the investment bank called our guaranty of $5 million. We continue to seek repayment from the officer under a Reimbursement and Security Agreement. In this regard, in January 2003, the officer made a cash payment of $0.5 million to us with the proceeds of a second mortgage on his home. We assessed the recoverability of the remaining balance of the loan with respect to the officer’s current financial position and recorded an impairment charge of $4.5 million in the fourth quarter of 2002. This impairment charge does not constitute forgiveness of the officer’s indebtedness to us. Future payments by the officer under the Reimbursement and Security Agreement will be recorded as income in the period cash is received.

     Restructuring charges. During 2002, we recorded $43.2 million of restructuring charges, including $35.4 million, $3.6 million, $2.3 million and $1.9 million in the first, second, third and fourth quarters of 2002, respectively, related to closure of certain facilities, discontinued product lines and severance pay. The charges included $40.8 million of cash provisions, which included severance of $7.4 million for 194 employees, $33.1 million related to excess facilities and for future lease commitments and exit costs related to the closure of four facilities, $0.3 related to consulting fees. The charge also included $2.4 million of non-cash provisions related to fixed assets that will no longer be used at the facilities.

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During 2001, we recorded $1.8 million of restructuring charges related to the closure of our former Ubiquity operations and employee severance. The charges included $1.6 million of cash provisions, which included severance of $1.4 million for 26 employees and $0.2 million for future lease commitments and exit costs related to the Petaluma office facility. The charge also included $0.2 million of non-cash provisions primarily related to fixed assets and other assets that will no longer be used at the facility.

     The following table summarizes the restructuring activity in 2001 and 2002 (in thousands):

     In-process research and development. Purchased in-process research and development (“IPR&D”) consist primarily of acquired technology that has not reached technological feasibility and had no alternative future use as of the date of acquisition. See Note 5 to the consolidated financial statements for additional information regarding the IPR&D projects.

     The $16.1 million expensed to purchased in-process research and development in 2002 related to next generation Enterprise Access Points, Radio Backbone Systems, Broadband Gateways and Network Management products acquired in the acquisition of Agere’s 802.11 WLAN systems business, technology for next generation ASICs acquired in the nBand acquisition and 802.11a and HomeRF 2.0 wireless networking products acquired related to the Proxim, Inc. merger.

     The $6.4 million expensed to purchased in-process research and development in 2001 related to the WirelessHome acquisition for point-to-multipoint technology.

     Merger costs. In the fourth quarter of 2000, we incurred $3.2 million of merger costs in connection with the aborted acquisition of Adaptive Broadband Corporation. Adaptive Broadband Corporation reimbursed us $3.0 million of those costs. The additional $0.2 million in 2000 was recorded in operating expenses. The additional $30,000 in the first quarter of 2001 represented additional merger costs recorded in operating expenses.

     Interest income (expense), net. Interest income (expense), net decreased from income of $1.3 million in 2001 to expense of $85,000 in 2002. The increase in interest expense is mainly attributable to interest on the convertible promissory notes issued in August 2002 and decreased interest income due to lower applicable return rates on cash balances.

     Income tax provision (benefit). The income tax provision for 2002 was primarily the result of establishing a full valuation allowance in the first quarter of 2002 to offset deferred tax assets brought forward from December 31, 2001. In assessing our ability to realize deferred income tax assets, we considered whether it is more likely than not that some or all of the deferred tax assets will be realized. As a result of the losses incurred, there is significant uncertainty, as to the realizability of the deferred tax assets. Accordingly, the Company recorded a valuation allowance of approximately $11.3 million against our deferred tax assets in the year ended December 31, 2002. Our income tax provision was ($4.1) million for the year ended December 31, 2001 as compared to an income tax provision of $3.2 million for the year ended December 31, 2002. Our effective tax rates were (13.8%) for the year ended December 31, 2001 and (1.3%) for the year ended December 31, 2002. The effective rates in 2001 and 2002 were higher than federal statutory rate of 35% plus the state tax rate of 6%, net of federal benefits, primarily due to the increase in valuation allowance, expenses related to charges for goodwill impairment, amortization of goodwill and intangible assets, purchased in-process research and development and equity investments that were not deductible for income tax purposes.

Comparison of Years Ended December 31, 2000 and 2001

     Revenue, net. Revenue was $105.5 million for the year ended December 31, 2000 compared to $105.7 million for the year ended December 31, 2001. For the year ended December 31, 2001, three distributors, Comstor, Somera Communications, Inc. and Tessco Technologies accounted for 29.4%, 11.4% and 10.5%, respectively, of total revenue. For the year ended December 31, 2000, Somera Communications, Inc. and Avant Telecoms, Inc., a value-added reseller, accounted for 21.4% and 11.1%, respectively, of total revenue. In 1999, 2000, and 2001 sales to all distributors, which had certain limited rights of return of the company’s products, accounted for approximately 23.1%, 39.5% and 69.8% of net revenue. In addition, export sales, which were denominated in U.S. dollars

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and consisted of domestic sales to customers in foreign countries accounted for approximately 23.1%, 33.2% and 24.3% of net revenue in 1999, 2000 and 2001, respectively.

     Cost of revenue. Cost of revenue increased 10.7% from $50.5 million for the year ended December 31, 2000 to $55.9 million for the year ended December 31, 2001. As a percentage of revenue, cost of revenue increased from 47.8% for the year ended December 31, 2000 to 52.9% for the year ended December 31, 2001. The increase in cost of revenue and the increase in cost of revenue as a percentage of revenue from the year ended December 31, 2000 to the year ended December 31, 2001 was primarily due to lower than expected increase in revenue and production volume.

     Research and development. Research and development expenses increased 54.4% from $12.4 million for the year ended December 31, 2000 to $19.1 million for the year ended December 31, 2001. The increase in research and development expenses was primarily attributable to the cost of increased personnel and prototype spending for the development of new products and enhancements to existing products. As a percentage of revenue, research and development expenses increased from 11.7% for the year ended December 31, 2000 to 18.1% for the year ended December 31, 2001.

     Selling, general and administrative. Selling, general and administrative expenses increased 71.3% from $22.5 million for the year ended December 31, 2000 to $38.6 million for the year ended December 31, 2001. The increase in selling, general and administrative expenses was primarily attributable to increased personnel in the international sales organization, advertising and marketing programs, tradeshow, and public relations expenses. As a percentage of revenue, selling, general and administrative expenses increased from 21.3% for the year ended December 31, 2000 to 36.5% for the year ended December 31, 2001.

     Amortization of goodwill and other intangible assets. Amortization of goodwill and other intangible assets increased 128.4% from $2.4 million for the year ended December 31, 2000 to $5.4 million for the year ended December 31, 2001. The increase in amortization was attributable to goodwill and other intangible assets related to the WirelessHome acquisition in March 2001.

     In July 2001, the Financial Accounting Standards Board issued SFAS No.’s 141 and 142, “Business Combinations” and “Goodwill and Other Intangibles”, respectively. SFAS No. 141 requires all business combinations initiated after June 30, 2001 to be accounted for using the purchase method. Under SFAS No. 142, effective January 1, 2002, goodwill is no longer subject to amortization over its estimated useful life. Rather, goodwill is subject to at least an annual assessment for impairment, applying a fair-value based test. Additionally, an acquired intangible asset should be separately recognized if the benefit of the intangible asset is obtained through contractual or other legal rights, or if the intangible asset can be sold, transferred, licensed, rented, or exchanged, regardless of the acquirer’s intent to do so. As a result of our adoption of SFAS 142, as of January 1, 2002, we no longer amortize goodwill. Goodwill amortization for the year ended December 31, 2001 was approximately $5.0 million.

     In August 2001, the Financial Accounting Standards Board issued SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 addresses financial accounting and reporting for the long-lived assets to be held and used, and disposed of. The statement will be effective for financial statements issued for fiscal years beginning after December 15, 2001. Although we currently do not expect the adoption of SFAS No. 144 to have a material impact on our financial statements, we will continue to assess any impairment of our long lived assets.

     Amortization of deferred stock compensation. Amortization of deferred stock compensation increased 24.9% from $4.2 million for the year ended December 31, 2000 to $5.2 million for the year ended December 31, 2001. Amortization of deferred stock compensation for both periods includes the sale of stock and issuance of options at prices deemed to be below fair market value. Amortization of deferred stock compensation for the year ended December 31, 2001 also included $2.2 million of stock compensation expense recorded in the fourth quarter in connection with the issuance of 558,950 shares to certain individuals upon WirelessHome meeting certain development milestones.

     Impairment of goodwill and intangible assets. We recorded $4.3 million of impairment of goodwill related to our former Ubiquity operations during the first quarter of 2001. The amount of the charge equaled the unamortized amount of the goodwill as of the date of the closure of the Ubiquity operations, as no future benefit was anticipated since WirelessHome had replaced Ubiquity as the developer of our point-to-multipoint systems.

     Restructuring charges. During the first and second quarter of 2001, we recorded $1.2 million of restructuring charges related to the closure of our former Ubiquity operations. The charges included $1.0 million of cash provisions, which included severance of $0.8 million for 12 employees and $0.2 million for future lease commitments and exit costs related to the Petaluma office facility. As of

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December 31, 2001, approximately $0.8 million of the $1.0 million of cash provisions was incurred. The charge also included $0.2 million of non-cash provisions primarily related to fixed assets and other assets that will no longer be used at the facility.

     In addition, during the second and third quarter of 2001, the Company recorded $0.6 million associated with restructuring the operations at the Company’s headquarters, primarily related to employee severances.

     The following table summarizes the restructuring activity in 2001 (in thousands):

     In-process research and development. At the time of the WirelessHome acquisition in March 2001, the WirelessHome technology was in an early stage of development, and the product’s technical feasibility had not yet been demonstrated. Furthermore, the marketability of the potential future product was unproven. As a result of WirelessHome meeting the development milestones in accordance with the acquisition agreement, we allocated $6.4 million of the final total purchase price to in-process research and development.

     Merger costs. In the fourth quarter of 2000, we incurred $3.2 million of merger costs in connection with the aborted acquisition of Adaptive Broadband Corporation. Adaptive Broadband Corporation reimbursed us $3.0 million of those costs. The additional $0.2 million in 2000 was recorded in operating expenses. The additional $30,000 in the first quarter of 2001 represented additional merger costs recorded in operating expenses.

     Interest expense. Interest expense decreased from $1.5 million for the year ended December 31, 2000 to $137,000 for the year ended December 31, 2001. Interest expense in 2000 represented interest incurred on term loans and a revolving credit line we entered into in November 1999 as part of the recapitalization. Interest expense decreased, because we repaid all borrowings outstanding under this debt in August 2000. Interest expense in 2001 represents agency and commitment fees related to our unused $10 million revolving credit facility.

     Interest income. Interest income decreased from $1.7 million for the year ended December 31, 2000 to $1.5 million for the year ended December 31, 2001. The decrease in interest income was primarily due to the decrease in investments.

     Income tax provision (benefit). Our income tax provision was $6.8 million for the year ended December 31, 2000 as compared to an income tax benefit of $4.1 million for the year ended December 31, 2001. Our effective tax rates were 50.4% for the year ended December 31, 2000 and (13.8%) for the year ended December 31, 2001. The effective rates in 2000 and 2001 were higher than federal statutory rate of 35% plus the state tax rate of 6%, net of federal benefits, primarily due to expenses related to charges for goodwill impairment, amortization of goodwill and intangible assets, purchased in-process research and development and equity investments that were not deductible for income tax purposes.

Liquidity and Capital Resources

     Cash and cash equivalents decreased from $16.6 million at December 31, 2001 to $16.5 million at December 31, 2002. Cash and cash equivalents decreased by $14.5 million from $31.1 million at December 31, 2000 to $16.5 million at December 31, 2001.

     Net cash used in operating activities was $27.5 million for the year ended December 31, 2002, primarily due to the net loss after the effect of non-cash charges, an increase in inventory and other assets and a decrease in accrued liabilities partially offset by a decrease in accounts receivable and an increase in accounts payable. Net cash used in operating activities was $12.0 million for the year ended December 31, 2001, primarily due to the net loss after the effect of non-cash charges, an increase in accounts receivable and inventory and a decrease in account payable and accrued liabilities, partially offset by an increase in other assets. Net cash used in operating activities was $13.1 million for the year ended December 31, 2000, primarily due to an increase in accounts receivable, inventory and other assets, partially offset by net income after the effect of non-cash charges and an increase in account payable and accrued liabilities.

     Net cash used in investing activities was $48.0 million for the year ended December 31, 2002, due to $51.5 million in cash used in

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the merger with Proxim, Inc., the acquisition of the 802.11 WLAN systems business of Agere and the nBand acquisition and by $3.6 million in capital spending, partially offset by $7.0 million in net proceeds from the sale of investment securities. Net cash used in investing activities was $2.6 million for the year ended December 31, 2001 due to capital spending of $4.8 million and $12.7 million of spending associated with the acquisition of WirelessHome, partially offset by the net proceeds from the sale of investment securities of $14.9 million. Net cash used in investing activities was $27.4 million for the year ended December 31, 2000 due to capital spending of $3.8 million, $23.6 million in purchases of investment securities, and $1.5 million in restricted cash, offset by $1.5 million in proceeds from sale of investment securities.

     Net cash provided by financing activities was $75.4 million for the year ended December 31, 2002 due to proceeds from the issuance of Series A preferred stock, convertible promissory notes and the issuance of common stock as a result of the exercise of employee stock options and employee stock purchase plan purchases partially offset by purchases of treasury stock related to employee stock forward sale agreements. Net cash provided by financing activities was $29,000 for the year ended December 31, 2001 due to issuance of common stock as a result of the exercise of employee stock options and the employee stock purchase plan purchases offset by repayment of long-term debt and by purchases of treasury stock. Net cash provided by financing activities was $69.7 million for the year ended December 31, 2000 due to $95.2 million in net proceeds from issuance of shares, partially offset by $22.0 million repayment of long-term debt, $2.5 million in net borrowings on line of credit, and $1.1 million in issuances of stock subscription loans to employees.

     We occupy our facilities under several non-cancelable operating lease agreements expiring at various dates through November 2010, and require payment of property taxes, insurance, maintenance and utilities. Future payments under contractual obligations as of December 31, 2002, were as follows (in thousands):

     For the year ended December 31, 2002, we recorded a restructuring charge related to the committed future lease payments for closed facilities, net of estimated future sublease receipts of $34.3 million was included in the above disclosures. As of December 31, 2002, we had unconditional purchase order commitments of $1.5 million for excess and obsolete inventory, which were included as other current liabilities.

     We are required to redeem all outstanding shares of Series A Preferred Stock for cash in August 2007 if not previously converted into Common Stock.

          In December 2002, we entered into a secured credit facility, and subsequently amended the credit facility in March 2003. Under the secured credit facility we can borrow up to $20 million pursuant to a revolving loan which will mature on April 1, 2004. The amount that we may borrow under the secured credit facility is determined by a borrowing base equal to 80% of eligible accounts receivable from account debtors who are not distributors plus 50% of eligible accounts receivable from account debtors who are distributors. If the outstanding principal amount of the loan exceeds our borrowing base from time to time, we will be required to immediately pay to the lender such excess. We are required to comply with financial covenants that limit our maximum quarterly adjusted net loss and require that we maintain unrestricted cash balances on deposit at the lender in an amount not less than the outstanding principal balance under the credit facility plus $7.5 million until December 31, 2003, increasing to $10 million beginning January 1, 2004. If we fail to comply with these financial covenants, the lender will be entitled to assume collection of our accounts receivable and we will be required to meet a minimum tangible net worth requirement and certain other terms of the facility will change. Obligations under the secured credit facility are secured by a security interest on substantially all of the assets of Proxim, except for intellectual property. If we breach the financial covenants, obligations under the secured credit facility will also be secured by a security interest on our intellectual property.

          The secured credit facility requires the consent of our lender in order to incur debt, grant liens, make acquisitions or merge, make certain restricted payments and sell assets. The events of default under the secured credit facility include the failure to pay amounts due, including principal and interest, within three days after it becomes due, failure to observe or perform covenants (subject to grace periods in certain cases), bankruptcy and insolvency events, defaults under certain of our other obligations and the occurrence of a material adverse change in our business.

     Proxim is seeking to renegotiate a material lease on a building in Sunnyvale, California that is in excess of the requirements of the business for the foreseeable future. This building was vacated in July 2002, and the net expected lease costs were included the restructuring charge recorded in the second quarter of 2002, totaling over $29 million through the term of the lease in 2010, net of expected sublease proceeds. The rent rates of this lease are substantially greater than the current local market lease rates and this unused space represents a negative cash flow of approximately $800,000 per quarter. The Company has not been able to sublease the building since it was vacated in July 2002.

     To date, the building owner has not been responsive to our requests to renegotiate the lease. Since November 2002, we have ceased making direct lease payments and the building owner has been utilizing our cash security deposits to cover the monthly payments. The building owner could elect to stop using our security deposits for this purpose at any time, and the lease further obligates us to replenish the security deposits. These deposits, supplemented by a letter of credit, however, could cover lease rent payments until December 2003. The building owner also has the option to terminate the remaining rent under the lease and sue us for the net present value of the lease less the present value of the amount for which we show the building owner could have leased the building to another party, plus the building owner’s releasing costs. The building owner has notified us of our defaults, but has not elected to terminate the lease at this time. Instead, the building owner has threatened legal action to force us to directly pay the monthly rent since November, as well as interest and penalties. Accordingly, we have an opportunity to cure our breach by restoring the security deposits as required by the lease, paying interest and penalties, and remaining current on future rent obligations under the lease. In the event that the building owner were to terminate the lease and sue us for breach, we would be in breach of the covenants of our Bank Line of Credit, and our borrowing rights could be limited or terminated. In this event, we would not have enough cash available to meet the potential damages sought under the lease, and we could be required to seek protection from the bankruptcy courts. At this time, we cannot determine whether the building owner is willing to renegotiate the current lease or will pursue remedies through the courts.

     We have taken steps to reduce our expenses from operations by decreasing research and development and general and administrative expenses in order to begin generating cash flow from operations in the first quarter of 2003. These steps were taken in October 2002, and we recorded approximately $1.9 million of restructuring charges related primarily to severance payments in the fourth quarter of 2002. We also reduced the amount of consignment inventories held by distributors by reducing manufacturing volumes in the fourth quarter of 2002 and expect to reduce the amount of consignment inventories in the first quarter of 2003 below the expected sell through of products during that periods.

     We believe that our current available cash and investments combined with our available borrowings will be sufficient to finance our working capital and capital expenditure requirements for at least the next 12 months. Our management intends to invest any cash in excess of current operating requirements in interest-bearing investment-grade securities. Our future capital requirements will depend upon many factors, including management of working capital, the success of marketing, sales and distribution efforts, the timing of research and product development efforts and expansion of our marketing efforts.

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     There can be no assurance that additional capital beyond the amounts currently forecasted by us will not be required nor that any such required additional capital will be available on reasonable terms, if at all, at such time or times as required by us. We may need to raise additional funds if our estimates change or prove inaccurate or in order for us to take advantage of unanticipated opportunities or to strengthen our financial position. Our ability to raise funds may be adversely affected by a number of factors relating to Proxim, as well as factors beyond our control, including the continued weakness of the wireless communications industry, volatility and uncertainty in the capital markets, our ability to remain listed on the Nasdaq National Market, our ability to pay obligations as they become due, as well as increased market uncertainty following the terrorist attacks of September 11, 2001, the ongoing U.S. war on terrorism and the war with Iraq. There can be no assurance that any financing will be available on terms acceptable to us, if at all, and any need to raise additional capital through the issuance of equity or convertible debt securities may result in additional, and perhaps significant dilution.

Quarterly Results Of Operations

     The following table presents our operating results for each of the eight quarters in the period ending December 31, 2002. The information for each of these quarters is unaudited and has been prepared on the same basis as our audited financial statements appearing elsewhere in this Annual Report on Form 10-K. In the opinion of management, all necessary adjustments, consisting only of normal recurring adjustments, have been included to present fairly the unaudited quarterly results when read in conjunction with our audited financial statements and related notes. We have experienced and expect to continue to experience fluctuations in operating results from quarter to quarter. Historical operating results are not necessarily indicative of the results that may be expected for any future period.