PROXIM CORP - 10-K Annual Report

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 þ 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. o

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

Based on the closing sale price of the registrant’s Class A Common Stock on the Nasdaq National Market System on June 27, 2003, 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 $166,887,440.

The number of shares outstanding of the registrant’s Class A common stock as of March 5, 2004, was approximately 123,341,837.

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, liquidity, litigation, financing plans and needs, business strategies and prospects, operating efficiencies or synergies, budgets, interest costs, 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, 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 Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, 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.

We are a leader in wireless networking equipment for Wi-Fi and broadband wireless networks. We provide wireless solutions for the mobile enterprise, security and surveillance, last mile access, voice and data backhaul, public hot spots, and metropolitan area networks. We serve these markets by selling our systems to service providers, businesses and other enterprises, directly through our sales force and indirectly through distributors, value-added resellers, products integrators and original equipment manufacturers.

Proxim Corporation is incorporated in Delaware and is the company created by the March 26, 2002 merger of Proxim, Inc. and Western Multiplex Corporation. 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 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. which designed, manufactured and marketed high performance WLAN and building-to-building network products based on RF technology. The combined company 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 acquired the 802.11 WLAN systems business of Agere Systems, including its ORiNOCO product line.

In accordance with accounting principles generally accepted in the United States of America, the results of operations for the periods presented include the results of the merged or acquired businesses beginning on the respective dates of completion of the business combinations.

The Wi-Fi market is composed of three segments: enterprise, consumer and public hot spots. Wi-Fi products allow enterprises and consumers to establish high-speed wireless networks within office buildings, across a corporate campus, in homes or in public areas. These networks consist of access points or bridges that serve as the link between the wire line network and wireless users, and network interface cards for access devices. Wi-Fi networks are currently based on three main standards: 802.11a which operates in the 5 gigahertz band and offers speeds of up to 54 Megabits per second, 802.11b which operates in the unlicensed 2.4 gigahertz band and offers up to 11 Megabits per second, and 802.11g which operates in the 2.4 gigahertz band and delivers data rates of up to 54 Megabits per second.

Proxim’s Wi-Fi access points and network interface cards address both the enterprise and service provider public hot spot market segments and support all three 802.11 networking standards. Both the enterprise and public hot spot markets are experiencing significant growth and intensifying competition, as mobile professionals increasingly require wireless access to corporate information. Enterprise customers for Proxim’s Wi-Fi products span the education, retail, finance, health care, manufacturing, transportation industries as well as government.

The broadband wireless market is comprised of broadband radio frequency (RF) equipment that delivers high speed, high capacity voice and data communications over a wireless medium. The market is divided into two segments — license-exempt and licensed. In each of these segments, products include point-to-point radios for voice and data backhaul or to connect two buildings, and point-to-multipoint radios which are used to connect multiple buildings in an enterprise campus or community as well as for public safety and last mile access applications.

Broadband wireless has quickly established itself as a strong network access alternative and as a complement to leased lines, cable and DSL for the delivery of data, voice, video and multimedia applications to both business and residential customers. The recent adoption of the IEEE 802.16 broadband wireless standards, ease of deployment, relatively low-cost, and the ability to reach areas that do not have broadband infrastructure are increasing the popularity of broadband wireless.

Proxim offers license-exempt broadband wireless products including both point-to-point and point-to-multipoint radios in the 5.8 and 2.4 gigahertz bands. These products are sold to both enterprises and service provider customers.

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 service provider and enterprise networks by providing extended range coverage using our standards-based wireless wide area network or WWAN and wireless local area network or WLAN infrastructure systems. Our products are used in a variety of applications in different markets, including:


	•	Voice and Data 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.

	•	The Mobile Enterprise. 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, which support both voice and data. In addition, our WLAN products extend the reach of wired enterprise networks to enable seamless mobility.


	•	Last Mile Access and Public 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 supporting voice, data and video.

	•	Public Hotspots. Our WLAN products provide fully-featured wireless access products for the emerging public access or hot spot market. In addition, our WWAN products provide cost-effective, broadband access between the hot spots and the service providers existing network infrastructure.

	•	Security and Surveillance. Our WWAN systems enable cost effective deployment of extensive surveillance networks, leveraging the benefits of industry standard Internet Protocol or IP networking products, including new generations of IP digital surveillance cameras. Our systems can also be used to rapidly and cost-effectively extend the coverage of traditional, proprietary coax closed-circuit television or CCTV security systems. Our WWAN products can be solar powered, enabling greater reach for private and public surveillance networks.

	•	Metropolitan Area Networks. Proxim’s WWAN systems enable communities, government entities and private enterprises to rapidly and cost-effectively establish wide-area networks across municipalities, towns or cities, connecting their dispersed facilities to support voice, data and video networks.

Rapid deployment. Service providers, businesses and other enterprises can rapidly and cost-effectively 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 and are more costly 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 error correction algorithms, fault tolerant systems and comprehensive network management software designed to enable our Lynx 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.

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 microwave wireless license-exempt system.

Cost-effective solutions. Because our technologies enable our WWAN systems to transmit over longer distances and WLAN access points offer greater sustained throughput than competing product designs, service providers, and 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 and local wireless networks that connect end-users to network backbones, such as fiber optic networks, and to existing wired enterprise 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 building to building connectivity for enterprise campus environments, as well as enable service providers to provide last mile access to campus, residential and small business users. Our systems use similar radio frequency technology, digital signal processing and network management software. We believe this design commonality offers service providers,

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 cellular wireless access solutions, our WWAN 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. 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, standardization has made the WLAN market very competitive. Our products have shorter lifecycles and require constant, costly investments in innovative research and development to retain or create new competitive advantages.

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 that 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.

Utilize existing customer and partner relationships to expand into new market segments. In 2003, we sold our systems to approximately 614 customers in 96 countries. Some of our main customers and partners include AT&T Wireless Group, Avaya, Cingular Wireless, Dell Computer, Fujitsu, Hewlett-Packard, Motorola, Telefonica, Telmex, Verizon Wireless, China Mobile, China Unicom, and T-Mobile, USA. 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 enterprise mobility, public access, campus connectivity, security and surveillance and other private networks and last mile access.

Increase our presence in international markets. While our products are currently sold and approved for use in more than 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 channels 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.

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 Anixter, 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 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 develops materials

We classify our products into two product lines: WWAN and WLAN product lines. The WWAN product line includes point-to-point Lynx, Tsunami products and point-to-multipoint Tsunami products. The WLAN product line includes ORiNOCO 802.11 access point and client card 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:

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 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. Our point-to-multipoint systems 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 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.

ORiNOCO Access Point. Our family of 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. Each of our ORiNOCO access points 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 802.11g, 2.4 GHz, WLANs or

to 802.11a, 5 GHz, WLANs. With single and dual radio architecture, the ORiNOCO access points provide configuration flexibility and increased network capacity. Our ORiNOCO access points also provide high-level security including IEEE 802.1x, which is a part of the Windows XP operating system. Our Wireless Distribution System feature enables wireless inter-connectivity of multiple ORiNOCO access points, providing for a variety of wireless infrastructure configurations without the use of additional 10/100T cabling. Web enabled and SNMP network management allow for simple configuration and remote management of each ORiNOCO network. Through a strategic alliance with Wavelink, we also offer a Graphic User Interface for remote management of larger, more complex networks., We believe that the high-performance Wi-Fi compliant ORiNOCO family of access points are ideal WLAN solutions 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, ORiNOCO 802.11a,b,g ComboCard and 802.11 b ORiNOCO PC Card for notebook computers and Ethernet and Serial external adapters.

ORiNOCO Broadband Gateway. Our ORiNOCO Broadband Gateway provides Wi-Fi (802.11b) WLAN for the small business or residence. Discontinuation of this product has been announced to our channel partners as this market segment is no longer in line with our strategic focus.

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.

While there are unique methods employed for developing our WWAN and WLAN product lines today, there is an increasing amount of overlap, particularly within the system software area. We anticipate that over time and especially with the emergence of technology such as WiMAX (802.16) that the degree of commonality will be significantly higher.

Radio frequency technology. Microwave technology is the technology used to wirelessly transmit data, voice and video. Microwave technology uses radio frequencies ranging from 1 GHz up to 20 GHz. We have the ability to internally develop microwave circuit board designs as well as qualify, direct and utilize external partners. We believe having both internal and external 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 either proprietary or third-party, standards-based digital signal processing technologies and designs that we either develop specifically for use in wireless systems or adapt to those same wireless systems. Specifically, all of our ORiNOCO WLAN products utilize third-party chipsets that embody the requirements set forth by 802.11a,b,g and ensure that we can achieve Wi-Fi certification. Currently, all of our Tsunami and Lynx, WWAN products are implemented using our internally developed, proprietary ASICs. We believe this combination of technologies has enabled us to introduce a number of high-speed wireless products that we may not have been able to produce otherwise. 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 transcend the indoor and outdoor user domains.

System software. Our products are networking products and follow closely the principles set forth in the OSI 7 Layer Model which is a guideline for the logical partition of functionality within and between

distributed computing machines. Careful consideration is given to when to implement software to run on a host processor and when to implement it in firmware running in the DSP/ ASIC described above. There are industry practices, trade secrets, and specific industrial knowledge that influence our thinking and guide us to create the software architectures that meet the specific system requirements. We strive to leverage common software elements such the VxWorks operating system and other third party components. We have developed certain unique software capabilities that we believe deliver specific market advantage such as our Wireless Outdoor Routing Protocol (WORP). Nearly all of our systems use SNMP-based software that enables remote monitoring and control and facilitate the integration and compatibility of our products with larger communications networks.

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:


	•	advancing 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 lower cost, outsourced manufacturing, assembly and testing.

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 $24.2 million, $29.2 million and $19.1 million in research and development activities in 2003, 2002 and 2001, respectively.

We sell our products worldwide to service providers and enterprise customers, directly through our sales force and indirectly through distributors, system integrators, value-added resellers, and original equipment manufacturers. 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.

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.

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 was 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.

We have a globally diversified base of customers and end-users consisting of service providers, businesses and other enterprises. In 2003, we sold our products to approximately 614 customers in 96 countries.

The following table summarizes each customer, which accounted for more than 10% of the Company’s total revenue in each of the last three years:


*	Customer accounted for less than 10% of total revenue in the respective fiscal year.

During the years ended December 31, 2003 and 2002, international sales accounted for approximately 41% and 38%, respectively, 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% of total revenue during the year ended December 31, 2001. Revenue from shipments by Proxim, Inc. to customers outside the United States, principally to a limited number of distributors and OEM customers, represented 33% of total revenue during the year ended December 31, 2001. 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 to vary but remain significant as a percentage of total revenue 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.

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 offer premium hardware and software support under our ServPak program.

Our manufacturing strategy is to supply high quality products in a timely fashion to our customers, while making efforts to maximize our gross margins. We perform manufacturing tasks internally that cannot be effectively outsourced, but we outsource activities which can be performed more effectively at specialized manufacturing partners. Our ISO 9001-2000 certified manufacturing operation, based in our Sunnyvale, California facility, consists primarily of pilot production, product assembly and product testing for our most complex products. For our higher-volume products, we outsource manufacturing and procurement of

component parts to contract manufacturers with the expertise and ability to achieve the cost reductions and quick response times to orders, while maintaining our quality standards. This allows us to focus our internal resources on developing new products. For our current Lynx and Tsunami products as well as for the new generation of those products, we use contract manufacturing partners in the Bay Area in conjunction with our Sunnyvale facility. We manufacture our ORiNOCO and Tsunami Multipoint products through contract manufacturers in Asia.

We depend on single or limited source suppliers for several key components used in our products. 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. 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 to our contract manufacturers at commercially reasonable prices, we could 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.


	•	an unpredictable customer demand environment;

	•	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.

The markets for broadband wireless access systems and wireless local area 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 broadband wireless access 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

In the markets for wireless local area networks or WLAN, we could be at a disadvantage to competitors, particularly Symbol, Cisco Systems (including Linksys, which was acquired by Cisco Systems), NetGear, and D-Link, which have broader distribution channels, greater brand recognition, more extensive patent portfolios, and more diversified product lines. In the broadband wireless access market, we have several competitors including without limitation, Alvarion, Ceragon Networks, Stratex Networks, and Harris Corporation.

We also face competition from a variety of companies that offer different technologies in the emerging enterprise wireless networking and service provider broadband wireless access markets. As the barriers to entry in the IEEE 802.11 wireless local area networking market continue to erode, numerous companies have announced their intention to develop or have introduced competing products in the enterprise wireless networking markets, including several Asia-based companies offering low-price IEEE 802.11a,b,g products. In addition, wireless functionality is increasingly embedded into client devices such as personal computers, or PCs, and personal digital assistants, which further erodes the market for add-on wireless network adapters. We may face future competition from companies that offer products, which replace network adapters or offer alternative communications solutions, such as large computer companies or PC peripheral 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. While we will continue to innovate in the wireless local area and wireless wide area networking markets, we can offer no assurance that we will be able to compete successfully against these competitors or that competitive pressures we face will not adversely affect our business or operating results.

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 twenty 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 would adequately protect us. Since U.S. patent applications are maintained in secrecy until patents are issued, 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.

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.

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. We cannot make any assurance that these matters will not materially and adversely affect our business, financial condition, operating results or cash flows.

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 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, and we expect they will soon be certified for operation in the recently allocated 5.470-5.725 GHz frequency band. 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 unlicensed status in the frequency band. In the event that there is harmful interference caused by a Part 15 user, the FCC 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 of non-interference 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.

Our products are also subject to regulatory requirements in international markets and, therefore, we must monitor the development of 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, as well as in other frequency bands we may design our products to use. 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 availability of 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 availability of 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;

	•	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.

In December 2002, we entered into a secured credit facility with Silicon Valley Bank (the “Lender”), and then subsequently amended the credit facility in March 2003. On June 13, 2003, in order to secure additional working capital, we entered into a letter agreement (the “Letter Agreement”) and an accounts receivable financing agreement, which effectively amended and restated the existing credit facility in its entirety. On July 25, 2003, we amended the accounts receivable financing agreement. On October 31, 2003, we amended the A/ R Financing Agreement (as amended, the “Amended A/ R Financing Agreement”).

Under the Amended A/ R Financing Agreement, the Lender may agree to accept for collection through a lockbox arrangement up to $20.0 million in accounts receivable from us, and in return we will receive advances from the Lender at a rate equal to 80% of accounts receivable from account debtors who are not distributors, and 50% of accounts receivable from account debtors who are distributors, subject to certain borrowing restrictions on international accounts and the discretion of the Lender. After collection of a receivable, the Lender will refund to us the difference between the amount collected and the amount initially advanced to us, less a finance charge applied against the average monthly balance of all transferred but outstanding receivables at a rate per annum equal to the Lender’s prime rate plus 1.50 percentage points, or 5.75%, whichever is greater. In addition to a facility fee of $100,000, we must pay each month to the Lender a handling fee equal to 0.25% of the average monthly balance of transferred but outstanding receivables. We must repay each advance upon the earliest to occur of (i) the collection of the corresponding financed receivable, (ii) the date on which the corresponding financed receivable becomes an ineligible receivable pursuant to the terms of the Amended A/ R Financing Agreement, or (iii) July 31, 2004.

Obligations under the Amended A/ R Financing Agreement are secured by a security interest on all of our assets, including intellectual property, and are senior in lien priority and right of payment to our obligations

to the funds affiliated with Warburg Pincus and Broadview Capital under the secured promissory notes issued in July 2003 and amended in October 2003 and the senior secured promissory notes issued in December 2003. The Amended A/ R Financing Agreement requires the consent of the Lender in order to incur debt, grant liens and sell assets. The events of default under the secured credit facility include the failure to pay amounts when due, failure to observe or perform covenants, bankruptcy and insolvency events, defaults under certain of our other obligations and the occurrence of a material adverse change in our business. Under the Amended A/ R Financing Agreement, the events of default also include any judgment, restraining order, injunction or any material adverse development in connection with a lawsuit filed by Symbol Technologies before the U.S. District Court for the District of Delaware. Please refer to Item 3, Legal Proceedings for a further description of the litigation with Symbol Technologies. Under the Amended A/ R Financing Agreement, the financial covenants require us to maintain cash and cash equivalents with the Lender and its affiliates in an amount not less than $4.0 million. If we fail to meet this requirement, we may still remain in compliance with the financial covenants by maintaining a ratio of the total of cash, cash equivalents and accounts receivable approved by the Lender to our current liabilities of at least 5.0 to 1. We currently maintain substantially all of our cash, cash equivalents and investments at Silicon Valley Bank and its affiliates. In the event of default under the Amended A/ R Financing Agreement, the Lender has the right to offset such cash, cash equivalents and investments against our obligations owing to the Lender.

In April 2003, our management and board of directors recognized our need to secure additional funding to support our growth objectives and strengthen our balance sheet position. On July 30, 2003, we entered into a securities purchase agreement with Warburg Pincus Private Equity VIII, L.P. (“Warburg Pincus”) and Broadview Capital Partners L.P. and affiliates (“Broadview Capital,” and collectively with Warburg Pincus, the “Investors”) pursuant to which the Investors collectively invested $30 million in exchange for short-term secured exchangeable promissory notes bearing interest at 25% per annum (the “Original Notes”). The Investors also agreed, subject to various conditions, including approval of our stockholders, to make available to us an additional $10 million.

As we announced on September 15, 2003, a jury has rendered a verdict in the first phase of the patent suit between Proxim and Symbol Technologies, Inc., finding that certain of our products infringe on two Symbol patents. A final judgment on this matter has not been entered by the court and proceedings in the case continue. Following the jury verdict, a special committee of members of our board of directors not affiliated with the Investors considered the potential impact of the jury verdict on our financial statements and results of operations for the third quarter of 2003. The special committee considered the possibility that the establishment of a reserve for estimated royalties and interest based on the jury verdict and the ongoing litigation with Symbol Technologies would, in the absence of a settlement, result in a material adverse change and/or an event of default under the Original Notes, causing all outstanding indebtedness in favor of the Investors to become immediately due and payable. In addition, the special committee considered the possibility that the jury verdict prevent us from accessing an additional $10 million investment from the Investors.

On October 21, 2003, we amended and restated our securities purchase agreement (the “Amended Agreement”) with the Investors, modified the terms of the Original Notes and issued the amended notes (the “Amended Notes”), with an aggregate principal amount of $30 million. Pursuant to the Amended Agreement, and subject in part to approval of our stockholders, the Investors also agreed to make available to us the additional $10 million, issuable in exchange for senior secured exchangeable promissory notes (the “New Notes”) with the same terms as, but senior to, the Amended Notes. On December 12, 2003, our stockholders approved the terms of the Amended Agreement, including the Amended Notes and the New Notes. On December 19, 2003 and at our request, the Investors increased their investment by $10 million in accordance with the terms of the Amended Agreement and we issued the New Notes.

The Amended Notes and the New Notes (collectively, the “Notes”) bear interest at 25 percent per annum, subject to an increase to 30% on an event of default or change in control. The Notes are due upon the earliest of:


	•	the occurrence of an event of default, as defined in the Notes (subject to the election by the holders of at least a majority of the aggregate principal amount outstanding, except in the case of an event of default relating to bankruptcy or insolvency or similar proceedings);

	•	any date upon which a holder of a Note demands payment upon the occurrence of a change of control, as defined; and

	•	September 30, 2004.

An event of default triggered by a material adverse change, as defined, includes (i) any adverse ruling or judgment in our pending patent infringement litigation with Symbol Technologies, Inc. that requires us and/or any of our subsidiaries to render payment or post a bond equal to or greater than $10 million (whether or not such payment has been made or bond posted as of such date) and (ii) any other rulings or judgments made against us and/or any of our subsidiaries in the patent infringement litigation with Symbol or any other litigations, the effects of which rulings or judgments are material and adverse to us and our subsidiaries, taken as a whole.

The terms of the July 30, 2003 securities purchase agreement originally provided for automatic exchange of the Original Notes, upon stockholder approval, for shares of Series B redeemable convertible preferred stock (the “Series B preferred stock”). The automatic exchange provisions were modified by the Amended Agreement, which provides for exchange of the Amended Notes, and the New Notes, at the Investors’ sole discretion. The Series B Preferred Stock issuable upon exchange of the Amended Notes and the New Notes, if any, will be convertible into shares of our Class A common stock at a conversion price of $1.15 per share, as previously agreed. In accordance with the Amended Agreement, the Series B Preferred Stock will have rights to a liquidation preference that accretes at 14% per annum compounding quarterly for seven years, with acceleration upon a change of control, as defined, or a material asset sale, as defined. The Series B Preferred Stock, if issued, also will be entitled to weighted average conversion price adjustments for dilutive issuances and subscription rights in certain equity financings. We will have the right to require conversion of the Series B Preferred Stock after five years if the closing price of our common stock exceeds 300% of the conversion price for ninety consecutive trading days.

Pursuant to the terms of the Amended Agreement and upon receipt of stockholder approval on December 12, 2003 for the transactions with the Investors, we issued to the Investors warrants to purchase an aggregate of 18.0 million shares of our common stock with an exercise price of $1.46, and warrants to purchase 6.0 million shares of our common stock with an exercise price equal to $1.53 per share (collectively, the “Warrants”). In the event of certain change of control events, including a liquidation event approved by our stockholders or an acquisition of us by another person or entity, the Investors have the right to require us to purchase the Warrants, at a valuation based on a computation of the option value of the Warrants using the Black-Scholes calculation methodology.

Assuming the exchange of $40 million in aggregate principal amount of the Notes, together with accrued interest, on September 30, 2004, the shares of Series B Preferred Stock to be issued upon exchange of the Notes and the Warrants would be expected to represent approximately 17.5% and 9.5%, respectively, of our outstanding capital stock on an as-converted and as-exercised basis, based on shares outstanding as of March 5, 2004 and excluding outstanding employee options and warrants.

The Investors also invested $75 million in us in August 2002 to finance our acquisition of the 802.11 wireless systems business from Agere. In exchange for this investment, the Investors received shares of our Series A redeemable convertible preferred stock (the “Series A preferred stock”) and warrants to purchase our Class A common stock. Assuming the issuance of the Series B preferred stock upon exchange of the Amended Notes on September 30, 2004, the Series A preferred stock and the Series B preferred stock held by the Investors would be expected to represent an aggregate of approximately 34.6% of our outstanding capital stock on an as-converted basis, based on shares outstanding as of March 5, 2004, and excluding employee

options and warrants, and as adjusted to account for anti-dilution adjustments in connection with the issuance of the Amended Notes. In addition, the warrants issued to the Investors in 2002 and 2003 would be expected to represent an aggregate of approximately 16.7% of our outstanding capital stock on an as-exercised basis, based on shares outstanding as of March 5, 2004, and excluding employee options and warrants, and as adjusted to account for anti-dilution adjustments in connection with the issuance of the Amended Notes.

Additional information regarding the Amended Agreement, the Amended Notes, Series B preferred stock and the Warrants is set forth in our Current Reports on Form 8-K, including the exhibits thereto, filed with the Securities and Exchange Commission on October 21, 2003, December 16, 2003, and December 23, 2003.

As of December 31, 2003, we had 344 employees, including 66 in manufacturing, 120 in research and development, 124 in sales, marketing and customer service and 34 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 20 employees, based in the Netherlands. We believe that relations with our employees are good.

The following information as of March 5, 2004, is provided with respect to each of our executive officers.

Franco Plastina has served as our President and CEO since May 2003 and was elected Chairman of the Board in December 2003. From March 2003 to April 2003, Mr. Plastina served as Executive in Residence for Warburg Pincus. Previously, Mr. Plastina was with Nortel Networks for 15 years and most recently was President, Metro & Enterprise Networks at Nortel Networks. Mr. Plastina joined Nortel Networks in 1987 and held a number of key executive positions, including President of Wireless and Core Networks, President of Carrier Networks, Vice President and COO of Internet and Service Provider Networks, Vice President of Business Development for Carrier Packet Solutions, and Vice President of Global Mergers and Acquisitions. Prior to joining Nortel Networks, Mr. Plastina was with the Toronto office of PriceWaterhouseCoopers. Mr. Plastina received a Bachelor of Commerce degree from the University of Toronto in 1985 and a Chartered Accountant designation in 1987 from the Canadian Institute of Chartered Accountants.

David L. Thompson has served as our Executive Vice President and Chief Financial Officer since August 2003. From September 1999 to April 2003, Mr. Thompson served as Senior Vice President and Chief Financial Officer at Entrust, Inc. From 1979 to 1999. Mr. Thompson held various senior finance positions at Nortel Networks Corporation, most recently as Vice President of Finance, Enterprise Solutions. Mr. Thompson holds a Masters in Business Administration and an Honors Bachelor of Commerce degree, both from the University of Windsor, Ontario, Canada.

Kevin J. Duffy has served as our Senior Vice President of Product Development since April 2003. Mr. Duffy was our Vice President and General Manager of WWAN Products from April 2002 to April 2003. From February 2001, Mr. Duffy was vice president of Home Networking at SIEMENS Information & Communications Mobile. Prior to Siemens, Mr. Duffy held positions with Northern Telecom and Tracor Aerospace and was a non-commissioned officer serving as Avionics Nav/ Com technician in the United States

Deborah Ablahat-Cipriano has served as our Senior Vice President of Sales and Marketing since July 2003. Prior to joining Proxim, Ms. Ablahat-Cipriano was responsible for worldwide sales and marketing for Procket Networks. From November 1997 to November 2000, Ms. Ablahat-Cipriano held several senior management positions at Nortel Networks Corporation, most recently as Vice President, Marketing. From July 1994 to November 1997, Ms. Ablahat-Cipriano held various sales management positions at Cisco Systems, Inc. Ms. Ablahat-Cipriano has also held sales management positions at Data General Corporation and AT&T. Ms. Ablahat-Cipriano holds a BA degree from the University of Illinois.

David E. Olson has served as our Senior Vice President of Operations and Services since April 2003. In late 2002, Mr. Olson served as interim COO for Danger, Inc. From January 2002 to September 2002, Mr. Olson served as President and CEO for iGO, Inc., leading that company’s restructuring and eventual acquisition. From November 1999 to December 2001, Mr. Olson served as Vice President of Sales/ Operations/ Services for Sky Stream Networks. From November 1991 to November 1999, Mr. Olson was General Manager and Senior Vice President of Avid Technology. Prior to that, Mr. Olson held management positions at Sun Microsystems. Mr. Olson holds an MBA from Harvard Business School and a BA and MA from the University of Minnesota.

Ihab Abu-Hakima has served as Senior Vice President of Corporate Development since July 2003. He was our Senior Vice President of International Sales and Operations from January 2002 and has served in various senior management positions since joining us in July 2000. Prior to joining us, Mr. Abu-Hakima served as vice president and general manager, for Silicon Graphics Computer Systems, Inc. (SGI). Prior to SGI, Mr. Abu-Hakima held various management positions at Hewlett Packard. Prior to Hewlett Packard, he held various project management positions at the Bechtel Corporation in the US and overseas. Mr. Abu-Hakima holds an M.B.A. degree from McGill University and a B.Eng. Electrical Engineering degree, with honors, from McGill University.

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.

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. We also lease a design center in India, occupying approximately 10,000 square feet of office space and sales offices in China, Hong Kong, South Korea, Japan, Taiwan, Malaysia, Taiwan, Netherlands, France, Brazil, and Mexico. Management considers the above facilities suitable and adequate to meet our current requirements.

In addition, we closed certain facilities that we were leasing and consequently recorded restructuring charges for future lease commitments, net of estimated future sublease receipts and exit costs related to the closure of these facilities. Please refer to “Results of Operations” and “Liquidity and Capital Resources,” under Part I, Item 7, Managements, Discussion and Analysis of Financial Condition and Results of Operations, for further description of the restructuring charges and our operating lease commitments, respectively. In those facilities that we have closed, we maintain approximately 64,000 square feet of office space in Sunnyvale, California under a lease and sublease that expires August 31, 2009, approximately 41,000 square feet of office space in Duluth, Georgia under a lease that expires September 30, 2009, approximately 39,000 square feet of office space in Mountain View, California under a lease and sublease that expires March 31, 2006, approximately 16,000 square feet in Austin, Texas under a lease and sublease that expires on March 31, 2005, approximately 11,000 square feet of warehouse space in Santa Clara, California

under a lease that expires on October 31, 2005, approximately 11,000 square foot facility in Long Beach, California under lease expires in July 2005, approximately 8,000 square feet of office space in Wakefield, Massachusetts under a lease that expires on May 30, 2004, approximately 7,000 square feet of office space in Herndon, Virginia under a lease and sublease that expires on December 31, 2006, and approximately 4,000 square feet of office space in Petaluma, California under a lease and sublease that expires on July 31, 2005.

Proxim, Inc.’s involvement in patent litigation has resulted in, and could in the future continue to result in, substantial costs and diversion of management resources of our company. 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 and cash flows.

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 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 September 15, 2003, we announced that a jury had rendered a verdict in the first phase of the patent infringement suit with Symbol. On Symbol’s claims of patent infringement, the jury found that certain of our products infringes two of Symbol’s patents and assessed a 6% royalty on our sales of these products from January 1, 1995. Accordingly, we recorded an accrual for estimated past royalties payable of $22.9 million and $2.9 million for interest during the third quarter of 2003. We have not been enjoined from continued sales of these products, and royalty payments, if any, on these sales have not been determined by the court. In November 2003, the court conducted a bench trial on our remaining equitable defenses not addressed by the jury and proceedings in the case continue. We will continue to evaluate and review our estimate of the royalties and interest payable from time to time for any indications that could require us to change our assumptions relating to the amount already recorded. In addition, we did not incur any immediate financial obligation to Symbol as a result of this verdict, pending completion of related proceedings.

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, Proxim, Inc. and Intersil have agreed to dismiss all claims against each other, including lawsuits before the International Trade Commission and Delaware and Massachusetts Federal Courts. As part of the confidential settlement agreement, the two companies entered into a patent cross license agreement for their respective patent portfolios and Intersil agreed to make a one-time payment of $6.0 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. During the first quarter of 2003, we recorded $6 million as licensing revenue and $3 million of legal expense as final settlement of outstanding legal fees and expenses related to the terminated patent litigation.

On March 10, 2003, we were served with a complaint filed on January 15, 2003, by Top Global Technology Limited (“Top Global”), a distributor for Agere Systems Singapore. Our demurrer to Top Global’s complaint was sustained in May 2003. Top Global then filed and served an amended complaint on May 30, 2003. Top Global’s lawsuit was filed against Agere Systems, Inc., Agere Systems Singapore, and Agere Systems Asia Pacific (collectively, “Agere”) and in the Superior Court for the State of California, County of Santa Clara. Top Global claims that it is entitled to return for a credit $1.2 million of products that it purchased from Agere Systems Singapore in June 2002 as a result of our decision to discontinue a product line that we purchased from Agere in August 2002. The amended complaint asks the court to determine whether Agere or we are responsible for accepting the product return and issuing a $1.2 million credit and also

alleges breach of contract. We answered the amended complaint and asserted several defenses to Top Global’s claims. In January 2004, the parties mediated this dispute but were unable to reach a settlement. In March 2004, the Court dismissed the contract claims against Agere but at the same time granted Top Global’s motion for leave to amend its complaint to allege a fraud claim against Agere. Discovery continues and a trial setting conference is scheduled for May 4, 2004.

On February 10, 2004, we received a copy of a complaint filed on February 2, 2004 in Tokyo District Court by Active Technology Corporation, a Japanese-based distributor of our products. The complaint alleges, among other things, that we sold to Active certain defective products, which Active in turn subsequently sold to its customers. Active seeks damages of 559.2 million Japanese yen, which includes the purchase price of the allegedly defective products and replacement costs allegedly incurred by Active. Active seeks to offset the claim of 559.2 million Japanese yen against outstanding accounts payable by Active of 175.3 million Japanese yen to us, resulting in a net claim against Proxim Corporation of 383.9 million Japanese yen. Translated into U.S. dollars on March 5, 2004, Active’s net claim is approximately $3.4 million. This case is in its earliest stages, as discovery has not yet commenced and a trial date has not been established. We intend to defend ourselves vigorously against this lawsuit.

We are party to disputes, including legal actions, with a number of suppliers and vendors. These disputes relate primarily to excess materials and order cancellation claims that resulted from the declines in demand for our products during 2001 and 2002 and the commensurate reductions in manufacturing volumes. We have recorded reserves related to these disputes to the extent that management believes appropriate and intend to defend ourselves vigorously against these claims.

The results of any litigation matters are inherently uncertain. In the event of any adverse decision in the described legal actions or disputes, or any other related litigation with third parties that could arise in the future, we could be required to pay damages and other expenses, and, in the case of litigation related to patents or other intellectual property rights, 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. We cannot make any assurance that these matters will not materially and adversely affect our business, financial condition, operating results or cash flows.

In particular, if the proceedings before the court in our litigation with Symbol are not decided in our favor, we would likely be required to make significant payments to Symbol, including payments for royalties related to past sales of products found to infringe and additional royalties in connection with future sales of these products, or we would be required to post a bond in order to appeal the court’s decision. Any adverse ruling or judgment in this litigation that requires us to render payment or post a bond equal to or greater than $10 million, and any other ruling or judgment in this or any other litigation that is material and adverse to us, triggers an event of default under the Notes issued to Warburg Pincus and affiliates of Broadview Capital. Upon such occurrence, the Investors would have the ability to require us to repay the Notes. In addition, entry of any judgment, restraining order, injunction or any material adverse development in the litigation with Symbol would result in an event of default under the secured credit facility with Silicon Valley Bank. Upon such occurrence, Silicon Valley Bank would have the ability to require us to repay any outstanding amounts under the credit facility and to prohibit us from borrowing any additional amounts.

If we were required to make payments to Symbol, post a bond to the court, and/or repay the Notes and amounts, if any, owed to Silicon Valley Bank, either due to an event of default or otherwise, we would be required to obtain immediate alternative sources of financing. If we were not able to obtain an alternative source of financing, we would most likely have insufficient cash to pay these obligations, be unable to meet our ongoing operating obligations as they come due in the ordinary course of business, and may have to seek protection under applicable bankruptcy laws.

During 2003, Warburg Pincus and Broadview Capital invested an aggregate of $40 million in us in exchange for secured promissory notes, exchangeable for shares of our Series B preferred stock, and warrants to purchase our common stock. Please refer to Part I, Item 1, “Business — Recent Financing Activities”

Pursuant to the Amended Agreement, we agreed to hold a special meeting of our stockholders to approve the conversion of then-outstanding Notes and the issuance of warrants to purchase shares of our common stock. At a special meeting of stockholders held on December 12, 2003, our stockholders approved our ability to issue to the Investors (i) shares of our Series B preferred stock upon exercise of each Investor’s right to exchange then-outstanding promissory notes with an aggregate principal amount of $30 million, plus accrued but unpaid interest, as well as upon each Investor’s exercise of the right to exchange any additional promissory notes issued to the Investors with an aggregate principal amount of $10 million, plus accrued but unpaid interest; and (ii) warrants to purchase an aggregate of 24 million shares of our common stock.

Of the total outstanding shares of common stock, including shares of Series A preferred stock on an as-converted basis, of the company present in person or by proxy and entitled to vote on the matter, 86,314,413 shares were voted in favor of the proposal. A total of 1,684,732 shares of common stock were voted against the proposal, 164,765 shares of common stock of the company abstained and there were no broker non-votes.

The following table shows the high and low sales prices of the Company’s common stock for the fiscal years ended December 31, 2002 and 2003 as reported on the Nasdaq National Market:

The closing price of the Company’s common stock on the Nasdaq National Market on March 12, 2004 was $2.28.

Proxim Corporation common stock is quoted on the Nasdaq National Market under the symbol PROX. The Company had 326 stockholders of record as of March 5, 2004.

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. From September 30, 2004 through September 30, 2011, shares of the Company’s Series B Preferred Stock (if exchanged) will be entitled to dividends equal to 14% 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.

The following table summarizes information as of December 31, 2003 with respect to the shares of the Company’s common stock that may be issued under the Company’s existing equity compensation plans. The table does not include information with respect to shares subject to outstanding options assumed by Proxim in connection with acquisitions of the companies, which originally granted those options. Footnote (5) to the table sets forth the total number of shares of the Company’s common stock issuable upon the exercise of those


(1)	This column does not reflect shares underlying options assumed by Proxim in acquisitions where the plans governing the options will not be used for future awards.

(2)	This column does not reflect the price of shares underlying the assumed options referred to in footnote (1) of this table.

(3)	Includes options to purchase shares outstanding under the Proxim Corporation 1994 Director Option Plan, the Proxim Corporation 1995 Long-Term Incentive Plan, the Proxim Corporation 1999 Stock Incentive Plan and the Proxim Corporation 2000 Stock Option Plan for Non-Employee Directors.

(4)	Includes shares available for future issuance pursuant to future option grants under the Proxim Corporation 1994 Director Option Plan, the Proxim Corporation 1995 Long-Term Incentive Plan, the Proxim Corporation 1999 Stock Incentive Plan and the Proxim Corporation 2000 Stock Option Plan for Non-Employee Directors, and also includes shares available for future purchase at 85% of fair market value under the Proxim Corporation 2001 Employee Stock Purchase Plan. This column does not include shares underlying the assumed options referred to in footnote (1) of this table.

(5)	Includes options to purchase shares outstanding under the Proxim Corporation 2002 Stock Option Merger Plan, the 2002 Nonstatutory Stock Option Acquisition Plan and the Frank Plastina Standalone Stock Option Agreement. The Proxim Corporation 2002 Stock Option Merger Plan and 2002 Nonstatutory Stock Option Acquisition Plan plans were adopted in connection with the Merger and the ORiNOCO Acquisition and have not been approved by our stockholders. This does not include options, as of December 31, 2002, to purchase a total of 5,629,467 shares, at a weighted average exercise price of $4.51, which have been assumed by Proxim in connection with acquisitions of the companies, which originally granted those options. Such options were issued under the following plans, which have not been approved by our stockholders: the Proxim, Inc. 1986 Stock Option Plan, the Proxim, Inc. 1999 Nonstatutory Stock Option Plan, the WirelessHome Corporation 1998 Stock Option Plan, the Ubiquity Communication, Inc. 1997 Stock Option Plan and the Ubiquity Communication, Inc. 1998 Stock Plan. No future grants of options may be made under such plans.

(6)	Includes shares available for future issuance pursuant to option grants under the Proxim Corporation 2002 Nonstatutory Stock Option Merger Plan and the 2002 Nonstatutory Stock Option Acquisition Plan.

The Proxim Corporation 2002 Nonstatutory Stock Option Merger Plan (the “Merger Plan”) was implemented by our Board of Directors in April 2002 in connection with the merger of Western Multiplex Corporation and Proxim, Inc. and is a non-stockholder approved plan. Options may be granted under the Merger Plan to employees, including officers and consultants, of the Company or any parent or subsidiary of

the Company. Options may not be granted under the Merger Plan to our directors. The Board of Directors has authorized and reserved 7,000,000 shares of our common stock for issuance under the Merger Plan. All grants will have an exercise price per share equal to the fair market value per share of our common stock on the date of grant. Each option will vest in installments over the optionee’s period of service with the Company. The options will vest on an accelerated basis in the event the Company is acquired and those options are not assumed or replaced by the acquiring entity. All options are nonstatutory options under applicable Federal tax laws. As of December 31, 2003, 631,389 shares remained available for future option grants, and 6,368,611 shares were subject to issuance pursuant to the exercise of outstanding options.

The Proxim Corporation 2002 Nonstatutory Stock Option Acquisition Plan (the “Acquisition Plan”) was implemented by our Board of Directors in August 2002 in connection with the ORiNOCO Acquisition and is a non-stockholder approved plan. Options may be granted under the Acquisition Plan to employees, including officers and consultants, of the Company or any parent or subsidiary of the Company. Options may not be granted under the Acquisition Plan to our directors. The Board of Directors has authorized and reserved 5,000,000 shares of our common stock for issuance under the Acquisition Plan. All grants will have an exercise price per share equal to the fair market value per share of our common stock on the date of grant. Each option will vest in installments over the optionee’s period of service with the Company. The options will vest on an accelerated basis in the event the Company is acquired and those options are not assumed or replaced by the acquiring entity. All options are nonstatutory options under applicable Federal tax laws. As of December 31, 2003, 3,725,739 shares remained available for future option grants, and 1,274,261 shares were subject to issuance pursuant to the exercise of outstanding options.

Proxim Corporation 2003 Stand-Alone Stock Option Agreement for Franco Plastina

The Proxim Corporation 2003 Stand-Alone Stock Option Agreement for Franco Plastina (the “Stand-Alone Agreement”) was entered into by Proxim Corporation and Mr. Plastina on May 2, 2003 in connection with Mr. Plastina’s appointment as President and Chief Executive Officer of Proxim Corporation. Under the Stand-Alone Agreement, Mr. Plastina was granted a nonstatutory stock option on May 2, 2003 to purchase 3,000,000 shares of the company’s common stock at an exercise price of $0.68 per share, which was the fair market value per share on the date of the grant. One-third of the shares subject to the option vest on the one-year anniversary of the date of grant, and one-twelfth of the shares subject to the option vest each three-month period thereafter, with the option fully vesting three years from the date of grant. The option may be exercised for ninety days after Mr. Plastina ceases to be a service provider to the Company, but in the event of his death or disability, the option may be exercised for one year after he ceases to be a service provider. In no event, however, may the option be exercised later than its expiration date, which is May 2, 2013. In the event of a merger of Proxim Corporation with or into another corporation or the sale of substantially all of the assets of Proxim Corporation and the option is not assumed or substituted by the successor corporation or a parent or subsidiary of the successor corporation, then the option shall fully vest and become exercisable.

During 2003, Warburg Pincus Private Equity VIII, L.P. and Broadview Capital Partners L.P. and affiliates invested an aggregate of $40 million in us in exchange for secured promissory notes, exchangeable for shares of our Series B preferred stock, and warrants to purchase an aggregate of 24 million shares of our common stock. Please refer to Part I, Item 1, “Business — Recent Financing Activities” for a detailed description of our recent transactions with these Investors, the terms of the Notes and warrants, including terms of conversion and exercise thereof, and our Amended Agreement with the Investors.

Proceeds from this $40 million investment are being used for general corporate purposes, including payment of existing liabilities, research and development, the development or acquisition of new products and technologies, equipment acquisitions, general working capital and operating expenses. There were no underwriters employed in connection with the security issuance to the Investors. The issuance was made pursuant to Section 4(2) of the Securities Act of 1933, as amended.

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, 2003, 2002 and 2001 and the consolidated balance sheet data as of December 31, 2003 and 2002 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 years ended December 31, 2000 and 1999 and the balance sheet data as of December 31, 2001, 2000 and 1999 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.

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.

The following is a summary of the discussion of our financial condition and results of operations and is qualified in its entirety by the fuller discussion contained in this Item 7. This summary should be read in conjunction with Part I, Item 1, “Business” and is qualified in its entirety by the risk factors set forth in this Item 7 as described below under “Risk Factors.”

Proxim Corporation was formed in March 2002 as a result of the merger between Western Multiplex Corporation and Proxim, Inc. In August 2002, we acquired Agere Systems’ 802.11 wireless local area networking (WLAN) equipment business, including its market-leading ORiNOCO 802.11b product line. In accordance with accounting principles generally accepted in the United States of America, the results of operations for the periods presented include the results of the merged or acquired businesses beginning on the respective dates of completion of the business combinations. Prior to March 2002, we operated as Western Multiplex Corporation, a designer and manufacturer of broadband wireless systems.

Proxim Corporation is a leader in wireless networking equipment for Wi-Fi and broadband wireless networks. We provide wireless solutions for the mobile enterprise, security and surveillance, last mile access, voice and data backhaul, public hot spots, and metropolitan area networks. We serve these markets by selling our systems to service providers, businesses and other enterprises, directly through our sales force and indirectly through distributors, value-added resellers, products integrators and original equipment manufacturers.

We generate revenue primarily from the sale of our Lynx and Tsunami systems for our WWAN product line, and the sale of 802.11 standards based products, acquired in the Proxim, Inc. acquisition, and 802.11 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.

We started 2003 with $16.5 million in cash and cash equivalents, down $14.5 million from $31.1 million at the beginning of 2002. The effects of an ongoing operating loss and restructuring charges, left us with cash and cash equivalents of $4.5 million at the end of the second quarter of 2003. To address the lack of sufficient working capital and the ongoing negative cash flow, we focused on raising additional financing and restructuring the operations of the business.

Financing. In a two-part transaction, we raised an additional $40 million in 2003. As discussed in Part I, Item 1, “Business” in greater detail, Warburg Pincus Private Equity VIII, L.P. and Broadview Capital Partners L.P. and affiliates signed a securities purchase agreement in July, 2003, later amended in October, 2003, pursuant to which we received $30 million in exchange for issuing demand notes bearing interest at 25% per annum and exchangeable for shares of Series B preferred stock. In December 2003, after stockholder approval of our transactions with the investors, as described in Part 1, Item 4, “Submission of Matters to a Vote of Security Holders,” we exercised our right to draw an additional $10 million from the investors in exchange for additional notes, senior to but otherwise having the same terms as the October notes.

Operational Changes. In May 2003, we hired a new President and Chief Executive Officer, Frank Plastina. Shortly thereafter, we commenced a consolidation of our wireless WAN and wireless LAN divisions and their underlying separate sales, engineering and operating departments with the goal of improving efficiency, reducing headcount and lowering operating costs.

Proxim, Inc. and Western Multiplex merged with the vision of forming a company that has the ability to provide wireless connectivity in any configuration regardless of whether the radios were providing access indoors or outdoors, and regardless of whether or not they were performing a bridging or routing function. This seamless WWAN/WLAN capability is the backbone of our convergence strategy today. We subsequently acquired the ORiNOCO business from Agere Systems to enhance our position in the Enterprise Wireless LAN space.

The resulting company had eight research and development centers and a multitude of product platforms and product variants. In order to realize the benefits of this strategy of converging WLAN/WWAN, in early 2003, we focused on streamlining the product development and manufacturing operations. In this respect, we consolidated all product development activity in two locations; Sunnyvale, California and Bangalore, India. Manufacturing operations were consolidated in Sunnyvale, California and the number of contract manufacturers was substantially reduced.

During the remainder of 2003, we completed the rationalization of the combined portfolio of Western Multiplex, ORiNOCO and Proxim. Central to that effort was the elimination of redundancy between the original ORiNOCO and Proxim product lines. Former Proxim products such as Harmony, Skyline, and Symphony were discontinued, although much of the underlying technology and networking principles were carried forward and embodied in our new advanced products including the ORiNOCO Wireless Switching System. In parallel, we developed new platforms on which to standardize the product development efforts. These platforms will allow us to release enhanced versions of our currently existing product portfolio in 2004 and are providing improved product costs, industry leading functionality, and, in some cases, pioneering new market categories that we believe will enable Proxim to expand our market presence. Our new platforms include the:


	•	GX broadband point to point platform on which we will re-launch all of our Lynx and Tsunami wireless bridge products; and

	•	A WiFi platform on which our new ORiNOCO enterprise class access point products and Tsunami MP.11 point to multipoint products for wireless internet service providers and campus networking are based upon.

We have also recently announced the development of the ORiNOCO Wireless Switching Solution. This product is the cornerstone of a strategic relationship with Motorola and Avaya where the three parties are working to create a converged WiFi/Cellular solution.

We intend to continue to further the WWAN/WLAN converged strategy. Augmenting this basic wireless connectivity strategy we intend to continue to support standards based, interoperable solutions wherever possible and practical. Today, that means producing WiFi compliant solutions for the indoors and in the future that will mean developing WiMAX compliant solutions for the outdoors. We intend to closely watch developments related to available spectrum, unlicensed or licensed, and develop products in those bands that are demanded by our customers and provide us with the most promising returns on R&D investment.


	•	Our total revenue, net for 2003 was $148.5 million, a 2.6% increase over our total revenue, net for 2002, reflecting the first full year of contribution from our acquisition of the ORiNOCO product line of Agere Systems in the third quarter of 2002 and of Proxim in the first quarter of 2002, a one-time patent license fee of $6.0 million resulting from our patent litigation settlement with Intersil, partially offset by a decrease in the WWAN product revenue.

	•	In our two key geographies, North America and International, revenue comprised of 59% and 41%, respectively, of total revenue in 2003 and 62% and 38%, respectively, of total revenue, net in 2002. Year over year, North American revenue decreased by 2.1%, and International revenue increased by 10.4%.

	•	Net loss attributable to common stockholders in 2003 was $133.7 million versus $244.5 million in 2002. Net loss in 2003 was largely driven by restructuring charges for excess and obsolete inventory of $22.5 million, estimated potential royalties and interest charges of $26.9 million accrued for related to the litigation with Symbol Technologies, restructuring charges of $7.3 million, and associated costs of raising $40 million and issuing convertible notes to our investors. The loss incurred in 2002 was largely driven by an impairment of goodwill and intangible assets of $129.1 million recorded due to a significant decline in forecasted revenue, restructuring charge for excess and obsolete inventory of $12.7 million, restructuring charges of $43.2 million, and purchased in-process research and development of $16.1 million related to products acquired in acquisitions.

	•	Gross profit decreased by $34.7 million or 71.9% from $48.3 million in 2003 and $1.5 million or 3.1% in 2002. Gross profit or gross margin for the year ended December 31, 2003 included royalty charges of $23.9 million or 16.1% of total revenue and restructuring provision for excess and obsolete inventory of $22.5 million or 15.2% of total revenue. Gross profit or gross margin for the year ended December 31, 2002 included restructuring provision for excess and obsolete inventory of $12.7 million or 8.7% of total revenue.

Excluding royalty charges and the restructuring provision for excess and obsolete inventory, gross profit or gross margin declined by $1.0 million or 1.8% from $61.0 million or 42.2% in 2002 to $60.0 million or 40.4% in 2003, primarily attributable to the increase in WLAN product sales in 2003, as WLAN products generally carry lower gross margins than WWAN product sales.


	•	Days sales outstanding, or DSOs, year over year improved from 77 days in 2002 to 36 days in 2003, contributing in large part to the decrease in accounts receivable from $30.5 million at December 31, 2002 to $14.0 million at December 31, 2003. Management’s focus on improved collections primarily in the second half of 2003 resulted in DSO improvements. Quarterly DSOs in 2003 were 77, 71, 45 and 33 days in the first, second, third and fourth quarters, respectively.

	•	Inventory decreased from $36.8 million in 2002 to $19.9 million in 2003. Days of inventory improved from 156 days to 77 days from the fourth quarter of 2002 to the fourth quarter of 2003, primarily attributable to our efforts to improve supply chain management and forecasting.

	•	Combined research and development and selling, general and administrative expenses (“Operating Costs”) improved from $78.7 million in 2002 to $73.7 million, primarily attributable to our restructuring activities and cost reduction efforts. These operational activities have shown tangible financial results throughout the year as Operating Costs have declined each quarter. Operating Costs were $20.0 million, $18.7 million, $18.1 million, and $16.9 million for the first, second, third, and fourth quarters, respectively.

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated 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.

Product revenue is generally recognized upon shipment when persuasive evidence of an arrangement exists, the price is fixed or determinable, and collectibility is reasonably assured. A provision for estimated future sales return and warranty costs is recorded at the time revenue is recognized. Proxim has no obligation to provide any modification or customization upgrades, enhancements or other post-sale customer support. Proxim grants certain distributors limited rights of return and price protection on unsold products. Product revenue on shipments to distributors, which have rights of return and price protection, is deferred until shipment to end customers by the distributors.

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, 2003 was $3.9 million. In addition to the deferral of product revenue identified below, we reported accounts receivable net of deferred revenue and carried the value of the related products as consigned inventory. As of December 31, 2003, accounts receivable was reduced by $16.5 million to $14.0 million and we recorded inventory consigned to customers of $6.7 million which increased total inventory to $19.9 million.

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 enhanced service contracts is recognized over the contract period, which ranges from one to three years.

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.

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.

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 to our vendors, may be required.

We hold an investment in a company having operations and technology within our strategic focus. 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.

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 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.

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.

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, 2003 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.

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

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. Prior to June 29, 2002, 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 for price protection. 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.

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):

One distributor, Tech Data Corporation, accounted for 13.9% of total revenue during the year ended December 31, 2003. Another distributor, Comstor, accounted for 23.0% of total revenue during the year ended December 31, 2002.

Total revenue increased 2.6% from $144.7 million in 2002 to $148.5 million in 2003. Total revenue included product revenue and a one-time patent license fee of $6.0 million recorded in the first quarter of 2003, resulting from the patent litigation settlement with Intersil, as described in Note 20 to the consolidated financial statements. In addition to the license revenue of $6.0 million in 2003, total revenue increased primarily due to the increase in WLAN product revenue attributable in part to the acquisition of the ORiNOCO product line of Agere Systems on August 5, 2002, resulting in the contribution of that product line revenue for the full year in 2003 compared to five months in 2002, and in part to the overall growth in Wi-Fi spending in 2003. The increase in WLAN product revenue was partially offset by a decrease in WWAN product revenue primarily attributable to the continued weakness in telecom spending in 2003.

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 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.

Cost of revenue increased 5.7% from $83.7 million in 2002 to $88.5 million in 2003. As a percentage of revenue, cost of revenue increased from 57.8% in 2002 to 59.6% in 2003. The increase in cost of revenue as a percentage of revenue was primarily attributable to the increase in WLAN product sales in 2003, as WLAN products generally carry lower gross margins as a percentage of revenue than WWAN products.

Royalty Charges. On September 15, 2003, we announced that a jury had rendered a verdict in the first phase of the patent infringement suit with Symbol. On Symbol’s claims of patent infringement, the jury found that certain of our products infringe two of Symbol’s patents and assessed a 6% royalty on the revenue of relevant products. While the actual amount of past royalties due has not been finally determined, we recorded an accrual for estimated potential royalty charges of $22.9 million and $2.9 million for interest during the third

Restructuring Provision for Excess and Obsolete Inventory. During the year ended December 31, 2003, we recorded a $22.5 million provision for excess and obsolete inventory as part of our restructuring activities. To mitigate the component supply constraints that have existed in the past, we had 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, 802.11a and Harmony products;

	•	Notification from customers that they would not be ordering as much as they had previously indicated;

	•	Continued decline in the demand for fixed wireless solutions due to the worldwide slowdown in the telecom industry;

	•	Continued increase in competition for wireless networking products, particularly related to home networking and enterprise LANs; and

	•	Management’s strategy to discontinue products, and in certain cases replace those products with newer or redesigned products.

Due to these factors, inventory levels exceeded 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 the product will be sold. The following is a summary of the movements in the reserve for excess and obsolete inventory during the year ended December 31, 2003 (in thousands):

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.

Research and development expenses decreased 16.9% from $29.2 million in 2002 to $24.2 million in 2003. As a percentage of revenue, research and development expense decreased from 20.2% in 2002 to 16.3% in 2003. The decrease in research and development expense in total dollars and as a percentage of revenue was primarily due to the reduction in workforce implemented in the second quarter of 2003, resulting in decreased personnel and related expenses in the final three quarters of 2003 compared to those expenses in the same period of 2002. These expense reductions were partially offset by increased personnel costs in the first quarter of 2003 compared to those expenses in the first quarter of 2002, due to employees added as a result of both the Proxim, Inc. merger and the acquisition of the 802.11 WLAN systems business of Agere.

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. Selling, general and administrative expenses remained relatively unchanged from 2002 to 2003. Selling, general and administrative expenses increased from the first half of 2002 to the first half of 2003 primarily due to increases in sales and marketing personnel expenses, due to

employees added as a result of both the Proxim, Inc. merger and the acquisition of the 802.11 WLAN systems business of Agere. Comparative increases in expenses in the first half of 2003 were offset by decreased expenses in the second half of 2003 compared to those in the second half of 2002, primarily due to the workforce reduction implemented in the second quarter of 2003.

Legal expense for certain litigation. During the year ended December 31, 2003, we incurred litigation expense of $6.8 million primarily in connection with our litigation with Symbol Technologies. Please refer to Item 3, Legal Proceedings for a description of this litigation.

Amortization of goodwill and other intangible assets. Amortization of goodwill and other intangible assets increased from $12.5 million in 2002 to $21.6 million in 2003. Amortization of goodwill and other intangible assets increased primarily due to the intangible assets acquired from both the merger with Proxim, Inc. on March 26, 2002 and the acquisition of the 802.11 WLAN systems business of Agere on August 5, 2002.

Amortization of deferred stock compensation. For the year ended December 31, 2002, we recorded amortization of deferred stock compensation of $855,000 in connection with deferred stock compensation previously recorded for the sale of stock and issuance of options at prices deemed to be below fair market value. As of December 31, 2002, deferred stock compensation was fully amortized.

Impairment of goodwill and intangible assets. In December 2002, due to the 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 our 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. In December 2003, we performed our annual impairment test of goodwill and determined that no further impairment charge was required.

Impairment of loan to officer. Prior to 2002, Proxim, Inc. had guaranteed up to $5 million of obligations of a former 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 former officer under a Reimbursement and Security Agreement. In this regard, in January 2003, the former 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 former 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 former officer’s indebtedness to us. Future payments by the former officer under the Reimbursement and Security Agreement will be recorded as income in the period cash is received.

Bad debt expense. During the year ended December 31, 2003, we recorded $2.3 million of bad debt expense in connection with a customer’s accounts receivable deemed to be uncollectible. These uncollectible accounts relate to products we had previously sold to the customer and that were subsequently discontinued.

Restructuring charges (benefit) for severance and excess facilities. During the year ended December 31, 2003, we recorded restructuring charges of $7.3 million, consisting of $24.8 million of cash provisions and $3.3 million of non-cash provisions for abandoned property and equipment, partially offset by a $20.8 million net reversal of restructuring accruals. The $24.8 million of cash provisions consisted of $12.7 million of operating lease commitments, less estimated future sublease receipts, and exit costs of certain closed facilities, $9.1 million of severance payments for 111 employees, $0.6 million of consulting fees, and $2.4 million of project commitments. The $20.8 million net reversal of restructuring accruals represented the reversal of $27.8 million of previously recorded lease obligation restructuring reserves, partially offset by the write-down of fair value of an asset held for sale of $6.9 million. We reversed a total of $27.8 million of restructuring reserves, of which $26.8 million related to buying and selling a leased property in Sunnyvale, California during

The following table summarizes the restructuring activities during the years ended December 31, 2002 and 2003 (in thousands):

The restructuring reserves are presented on the balance sheet as follows (in thousands):

Purchased in-process research and development. Purchased in-process research and development or IPR&D consists primarily of acquired technology that has not reached technological feasibility and had no alternative future use as of the date of acquisition. See Note 6 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.

No purchased in-process research and development charge was recorded in the year ended December 31, 2003.

Interest income (expense), net. Interest income (expense), net increased from expense of $85,000 in 2002 to expense of $7.3 million in 2003. The increase in interest expense is mainly attributable to interest charges recorded in connection with the estimated, potential royalty charges in connection with our patent infringement litigation with Symbol, the promissory notes issued in July and December 2003, and the deferred financing costs, together with a decrease in interest income as a result of lower applicable return rates.

Loss on early extinguishment of debt. As fully described in Note 1 to the consolidated financial statements, upon stockholders’ approval in December 2003, the convertible promissory notes of $30 million were modified as they now include (1) warrants to purchase 24 million shares of common stock; and (2) a right to convert to Series B preferred stock at the option of the investors. We determined under Emerging Issues Task Force 96-19, “Debtor’s Accounting for a Modification or Exchange of Debt Instruments,” that the modification was made with substantially different terms and a debt extinguishment is resulted. Accordingly, the December note instrument was recorded at fair value and that amount was used to determine the debt extinguishment loss to be recognized and the effective rate of the new instrument. The warrants were also recorded at fair value (See Note 17 to the consolidated financial statements for details). A loss of debt extinguishment of $22.2 million was recorded in the fourth quarter of 2003.

Income tax provision (benefit). The income tax provision for 2002 was primarily due to establishing a full valuation allowance to offset deferred tax assets brought forward from December 31, 2001. We were able to carry back certain losses to prior years, and claim income tax refunds totaling $10.4 million, of which $9.6 million has been received through September 26, 2003. The realization of the remaining deferred tax assets will be dependent on us generating taxable income in the future. As a result of the operating losses incurred in recent periods, we have determined that it is more likely than not that these deferred tax assets will not be realized. Accordingly, we have established a full valuation allowance of approximately $11.3 million, of which $1.3 million was recorded in additional paid in capital as the related asset was related to the recapitalization in 1999.

Deemed Series A preferred stock dividend. In August 2002, in connection with the acquisition of the 802.11 WLAN systems business of Agere Systems, Inc., Warburg Pincus Private Equity VIII, L.P., Broadview Capital Partners L.P. and affiliated entities agreed to collectively invest $75 million in us. These investors received 1,640,000 shares of Series A Mandatorily Redeemable Convertible Preferred Stock (“Series A Preferred Stock”) in the amount of approximately $41 million, with a conversion price of approximately $3.06 per share. Please refer to Note 16 to the consolidated financial statements for a further description of the Series A Preferred Stock. At the time of the conversion in August 2002, a deemed preferred stock dividend representing the beneficial conversion feature of the Series A Preferred Stock of $2.7 million was also recorded to increase the loss attributable to holders of our common stock.

Accretion of Series A preferred stock redemption obligations. The accretion of Series A preferred stock represents the quarterly adjustments to the carrying value of the Series A preferred stock, on an effective-interest basis, so that the carrying value will equal the redemption amount at the earliest redemption date. The accretion was recorded to increase the net loss attributable to common stockholders. The accretion increased from $1.9 million to $6.3 million from the year ended December 31, 2002 to 2003, primarily because the amount represents four months of accretion in 2002 starting in August 2002 and a full year of accretion in 2003.

Revenue, net. Revenue information by product line is as follows (in thousands):

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, 2001. One distributor Comstor accounted for 23.0% of total revenue for the year ended December 31, 2002.

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 802.11 systems business 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.

Restructuring 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.

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 increased revenue and 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. 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 6 to the consolidated financial statements for additional information regarding the IPR&D projects.

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.

Cash and cash equivalents increased from $16.5 million at December 31, 2002 to $19.8 million at December 31, 2003. Cash and cash equivalents decreased from $16.6 million at December 31, 2001 to $16.5 million at December 31, 2002.

Net cash used in operating activities was $29.8 million for the year ended December 31, 2003, primarily attributable to the net loss after the effect of non-cash charges, an increase in inventory and a decrease in accounts payable, partially offset by a decrease in accounts receivable, a decrease in restricted cash and other assets, an increase in other accrued liabilities, and an increase in accrued royalties and interest. 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 investing activities was $8.8 million for the year ended December 31, 2003, attributable to $2.9 million in capital spending and $10.0 million to purchase a building in Sunnyvale, offset by $500,000 of proceeds from the repayment of a loan to a former officer of the Company, $583,0000 in proceeds from the sale of short-term investments, and $3.0 million in proceeds from the sale of the acquired building in Sunnyvale. 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 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 provided by financing activities was $41.8 million for the year ended December 31, 2003 attributable to $1.6 million of borrowings on capital lease obligations, $187,000 in proceeds from repayment of notes receivable from stockholders, $40 million in proceeds from the issuance of convertible promissory notes, and $808,0000 from the issuance of common stock as a result of the exercise of employee stock options and employee stock purchase plan purchases. 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.

We occupy our facilities under several non-cancelable operating lease agreements expiring at various dates through September 2009, and require payment of property taxes, insurance, maintenance and utilities. Future payments under contractual obligations as of December 31, 2003, were as follows (in thousands):

We are required to repay the convertible promissory notes in September 2004 if they have not been exchanged for Series B Preferred Stock.

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.

For the years ended December 31, 2003 and 2002, we recorded restructuring charges of $18.1 million related to the committed future lease payments for closed facilities, net of estimated future sublease receipts and reversal of previously recorded provision, which are included in the operating leases caption above. As of December 31, 2003, we had unconditional purchase order commitments of $1.3 million, which were included as other accrued liabilities.

In December 2002, we entered into a secured credit facility with Silicon Valley Bank (the “Lender”), and then subsequently amended the credit facility in March 2003. On June 13, 2003, in order to secure additional working capital, we entered into a letter agreement (the “Letter Agreement”) and an accounts receivable financing agreement which effectively amended and restated the existing credit facility in its entirety. On July 25, 2003, we amended the accounts receivable financing agreement. On October 31, 2003, we amended the A/R Financing Agreement (as amended, the “Amended A/R Financing Agreement”).

Under the Amended A/R Financing Agreement, the Lender may agree to accept for collection through a lockbox arrangement up to $20.0 million in accounts receivable from us, and in return we will receive advances from the Lender at a rate equal to 80% of accounts receivable from account debtors who are not distributors, and 50% of accounts receivable from account debtors who are distributors, subject to certain borrowing restrictions on international accounts and the discretion of the Lender. After collection of a receivable, the Lender will refund to us the difference between the amount collected and the amount initially advanced to us, less a finance charge applied against the average monthly balance of all transferred but outstanding receivables at a rate per annum equal to the Lender’s prime rate plus 1.50 percentage points, or 5.75%, whichever is greater. In addition to a facility fee of $100,000, we must pay each month to the Lender a handling fee equal to 0.25% of the average monthly balance of transferred but outstanding receivables. We must repay each advance upon the earliest to occur of (i) the collection of the corresponding financed receivable, (ii) the date on which the corresponding financed receivable becomes an ineligible receivable pursuant to the terms of the Amended A/R Financing Agreement, or (iii) July 31, 2004.

Obligations under the amended A/R Financing Agreement are secured by a security interest on all of our assets, including intellectual property, and are senior in lien priority and right of payment to our obligations to the funds affiliated with Warburg Pincus and Broadview Capital under the secured promissory notes issued in July 2003 and amended in October 2003 and the senior secured promissory notes issued in December 2003. The amended A/R Financing Agreement requires the consent of the Lender in order to incur debt, grant liens and sell assets. The events of default under the secured credit facility include the failure to pay amounts when due, failure to observe or perform covenants, bankruptcy and insolvency events, defaults under certain of our other obligations and the occurrence of a material adverse change in our business. Under the Amended A/R Financing Agreement, the events of default also include any judgment, restraining order, injunction or any material adverse development in connection with a lawsuit filed by Symbol Technologies before the U.S. District Court for the District of Delaware. Please refer to Item 3, Legal Proceedings for a further description of the litigation with Symbol Technologies. Under the Amended A/R Financing Agreement, the financial covenants require us to maintain cash and cash equivalents with the Lender and its affiliates in an amount not less than $4.0 million. If we fail to meet this requirement, we may still remain in compliance with the financial covenants by maintaining a ratio of the total of cash, cash equivalents and accounts receivable approved by the Lender to our current liabilities of at least 5.0 to 1. We currently maintain substantially all of our cash, cash equivalents and investments at Silicon Valley Bank and its affiliates. In the event of default under the Amended A/R Financing Agreement, the Lender has the right to offset such cash, cash equivalents and investments against our obligations owing to the Lender.

We had been seeking to renegotiate a material lease on a building in Sunnyvale, California that was 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 in the restructuring charge recorded in the second quarter of 2002, totaling approximately $29.0 million through the expiration of the lease in 2010, net of expected sublease proceeds. The rent rates of this lease were substantially greater than the current local market lease rates, and this unused space represented a negative cash flow of approximately $800,000 per quarter. We were not able to sublease the building since it was vacated in July 2002. Since November 2002, we ceased making direct lease payments, and the building owner utilized our cash security deposit to cover the monthly payments and other lease charges. On July 21, 2003, we entered into a letter agreement (as subsequently amended and restated by that certain Purchase Agreement dated September 11, 2003) to buy the leased property and terminate the lease on or before September 12, 2003. On September 12, 2003, we paid approximately $10.0 million to consummate the transaction. Transaction costs included cash consideration of $6.0 million to the building owner, $3.2 million to pay off the mortgage obligation secured by the leased property, $577,000 for prepayment premium, and a total of approximately $200,000 for closing costs and operating costs incurred by the building owner between the date of the letter agreement and the closing. As a result of consummating the transaction, we reversed $26.8 million of previously recorded lease obligation restructuring reserves that are no longer required. We also reversed an additional $1.0 million of previously recorded restructuring reserves related to another building lease in Sunnyvale as a result of a reduction of the lease commitments agreed to with the lessor.

Subsequent to the purchase, we placed the property on the market for sale. On October 22, 2003, we entered into an agreement to sell the property for $3.5 million. As of September 26, 2003, the property was recorded as an asset held for sale of $3.0 million, representing its estimated net realizable value. On December 30, 2003, we consummated the sale and received $3.0 million cash proceeds, net of broker commissions, property repairs and closing costs.

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. 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 and $8.1 million in the second and third quarters of 2003.

As a result of the reduced demand for our products during the first quarter of 2003 and the limited business visibility, we have taken further actions to reduce our operating expenses during the second and third quarters of 2003, to decrease our quarterly revenue breakeven point. During the second quarter of 2003, we recorded a $22.5 million charge for excess and obsolete inventory for discontinued products and a $12.5 million restructuring charge for consolidation of excess facilities including fixed asset write-offs, workforce reductions and contract termination costs. During the third quarter of 2003, we recorded a $14.6 million restructuring charge associated with additional workforce reductions, restructuring our domestic sales organization to focus on WLAN and WWAN sales and consolidation of excess facilities, offset by a net benefit of $19.8 million resulting from the reversal of previously recorded restructuring reserves, net of various costs associated with buying a leased property in Sunnyvale and terminating the lease. Additionally, we plan to reduce consignment inventories held by distributors by implementing various sales promotions within the sales channel.

Restructuring charges for the year ended December 31, 2003 were $7.3 million resulting from $28.1 million of recorded restructuring charges, offset by a net benefit of $20.8 million recorded as a result of buying a leased property in Sunnyvale, California, terminating the lease, and subsequently selling the property and a $1.0 million reversal of previously recorded restructuring reserves related to another building lease in Sunnyvale as a result of finalizing the lease commitments with the lessor (see Note 1 and Note 19). The net benefit of $20.8 million consisted of a reversal of previously recorded lease obligation restructuring reserve of $26.8 million and net realizable value of the building of $3.0 million, offset by total transaction costs of $10.0 million to purchase the building. We reversed an additional $1.0 million of previously recorded restructuring reserves related to another building in Sunnyvale as a result of a reduction of the lease commitments agreed to with the lessor.

In April 2003, our management and board of directors recognized our need to secure additional funding to support our growth objectives and strengthen our balance sheet position. During 2003, Warburg Pincus Private Equity VIII, L.P. and Broadview Capital Partners L.P. and affiliates invested an aggregate of $40 million in us in exchange for secured promissory notes, exchangeable for shares of our Series B preferred stock, and warrants to purchase an aggregate of 24 million shares of our common stock. Please refer to Part I, Item 1, “Business — Recent Financing Activities” for a detailed description of our recent transactions with these Investors, the terms of the Notes and warrants, including terms of conversion and exercise thereof, and our Amended Agreement with the Investors.

In the event of default or change of control occurs or these Investors decide not to exchange the Amended Notes for Series B Preferred Stock, we may be required to repay the Amended Notes upon the earlier of demand by these investors or the September 30, 2004 maturity date. If we were required to repay the Amended Notes, we would be required to obtain immediate alternative sources of financing. If we were not able to obtain an alternative source of financing, we would most likely have insufficient cash to repay the Amended Notes, be unable to meet our ongoing operating obligations as they come due in the ordinary course of business, and may have to seek protection under applicable bankruptcy laws.

On September 15, 2003, we announced that a jury had rendered a verdict in the first phase of the patent infringement suit with Symbol. On Symbol’s claims of patent infringement, the jury found that certain of our products infringe two of Symbol’s patents and assessed a 6% royalty. While the actual amount of past royalties due has not been finally determined, we recorded an accrual for estimated potential royalty charges of $22.9 million and $2.9 million for interest during the third quarter of 2003 and an accrual for estimated potential royalty charges of $1.0 million and $87,000 for interest during the fourth quarter of 2003. We have not been enjoined from continued sales of these products. We will continue to evaluate and review its estimate of the royalties and interest payable from time to time for any indications that could require us to change our assumptions relating to the amount already recorded. On November 24, 2003, the District Court conducted a

If the proceedings before the court in the litigation with Symbol are not decided in our favor, we would likely be required to make significant payments to Symbol, including payments for royalties related to past sales of products found to infringe and additional royalties in connection with future sales of these products, or we would be required to post a bond in order to appeal the court’s decision. Any adverse ruling or judgment in this litigation that requires us to render payment or post a bond equal to or greater than $10 million, and any other ruling or judgment in this or any other litigation that is material and adverse to us, triggers an event of default under the Notes. Upon such occurrence, the Investors would have the ability to require us to repay the Notes. In addition, any judgment, restraining order, injunction or any material adverse development in this litigation triggers an event of default under the Silicon Valley Bank credit facility. Upon such occurrence, Silicon Valley Bank would have the ability to require us to repay any outstanding amounts under the credit facility and to prohibit us from borrowing any additional amounts.

Depending upon the final ruling of the litigation with Symbol, we may be required to pay royalty charges and interest at the time specified by the court. Our current estimate of approximately $26.9 million for royalties and interest is not included in the above disclosure of future payments under contractual obligations.

We have incurred substantial losses and negative cash flows from operations during the years ended December 31, 2003, 2002 and 2001, and have an accumulated deficit of $397.8 million as of December 31, 2003. If we were required to make payments to Symbol, post a bond to the court, and/or repay the Notes and amounts, if any, owed to Silicon Valley Bank, either due to an event of default or otherwise, we would be required to obtain immediate alternative sources of financing. If we were not able to obtain an alternative source of financing, we would most likely have insufficient cash to pay these obligations, be unable to meet our ongoing operating obligations as they come due in the ordinary course of business, and seek protection under applicable bankruptcy laws. These matters raise substantial doubt about our ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from this uncertainty.

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 to meet our obligations, strengthen our financial position, meet our working capital requirements, or take advantage of market opportunities. Our ability to raise funds may be adversely affected by a number of factors relating to us, such as the terms of the Notes and our other agreements with the Investors, as well as factors beyond our control, including market uncertainty and conditions in the capital markets. 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.

The following table presents our operating results for each of the four quarters in the years ending December 31, 2003 and 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


(a)	Refer to Note 10 to the consolidated financial statements for details.

(b)	Refer to Note 5 to the consolidated financial statements for details.

(c)	Refer to Note 11 to the consolidated financial statements for details.

(d)	Refer to Note 12 to the consolidated financial statements for details.

Our quarterly revenue and loss from operations results have varied and are likely to continue to fluctuate significantly from quarter to quarter.


	•	the effectiveness of our distribution channels and the success in maintaining our current distribution channels and developing new distribution channels;

	•	our ability to effectively manage the development of new business segments and markets;

	•	seasonal factors that may affect capital spending by customers;

	•	the sell-through rate of our ORiNOCO products (acquired in our acquisition of Agere’s 802.11 WLAN systems business) through consumer retail channels;

	•	market adoption of radio frequency, or RF, standards-based products (such as those compliant with the IEEE 802.11b, IEEE 802.11a, IEEE 802.11g, IEEE 802.1b or IEEE 802.20 specifications);

	•	our ability to develop, introduce, ship and support new products and product enhancements and to manage product transitions;

	•	the sell-through rate of our WLAN and WWAN products through commercial distribution channels;

	•	market demand for our point-to-point Lynx and Tsunami systems;

	•	market demand for our Tsunami point-to-multipoint systems;

	•	our ability to effectively manage product transitions to newer product platform designs;

	•	the mix of products sold because our products generate different gross margins;

	•	a decrease in the average selling prices of our products;

	•	our ability to upgrade and develop our systems and infrastructure;

	•	difficulties in expanding and conducting international operations; and

	•	general economic conditions and economic conditions specific to the wireless communications industry.

We have experienced disruptions in our operations from some of the factors listed above and may experience them again. In addition, we are dependent on decisions by service providers, businesses and other enterprises to build wireless networks. These decisions are in turn dependent upon the success and expected demand for the services offered by those service providers, businesses and other enterprises.

Our operating expenses are largely based on anticipated revenue trends, and a high percentage of our expenses are and will continue to be fixed in the short term. As a result, any delay in generating or recognizing revenue could cause significant variations in our operating results from quarter to quarter and could result in substantial operating losses.

Due to the above factors, we believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance. It is likely that in some future quarters, our operating results may be below the expectations of public market analysts and investors. In this event, the price of our common stock may fall.

Historically, our product revenues have been higher in the last two quarters of the fiscal year. In addition, our product revenues have historically been significantly higher in the last month of each quarter. This shift may primarily be attributed to the budgetary constraints of the customers in our industry and weather conditions that make an outdoor installation more difficult during the winter.

This Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks faced by us described below and elsewhere in this Form 10-K.

You should carefully consider the risks described below before making an investment decision. The risks and uncertainties described below are not the only ones facing our company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations.

If any of the following risks actually occur, our business, financial condition or results of operations could be materially adversely affected. In such case, the trading price of our common stock could decline and you could lose all or part of your investment.

We may need additional capital in the future and may not be able to secure adequate funds on terms acceptable to us or to our Investors.

During 2003, Warburg Pincus and Broadview Capital invested $40 million in us in exchange for secured promissory notes, exchangeable for shares of our Series B preferred stock, and warrants to purchase our common stock. Please refer to Part I, Item 1, “Business — Recent Financing Activities” for a detailed description of our recent transactions with Warburg Pincus and Broadview Capital Partners (the “Investors”), the terms of the secured exchangeable promissory notes (the “Notes”), and our amended and restated securities purchase agreement with the Investors (the “Amended Agreement”).

If the Investors decide not to exchange the Notes for our Series B preferred stock, we are required to repay the Notes upon the earlier of the September 30, 2004 maturity date or upon demand by the Investors in connection with an event of default or a change of control of Proxim. In particular, if the proceedings before the court in our litigation with Symbol are not decided in our favor, we would likely be required to make significant payments to Symbol, including payments for royalties related to past sales of products found to infringe and additional royalties in connection with future sales of these products, or we would be required to post a bond in order to appeal the court’s decision. Any additional adverse ruling or judgment in this litigation that requires us to render payment or post a bond equal to or greater than $10 million, and any other ruling or judgment in this or any other litigation that is material and adverse to us, triggers an event of default under the Notes. Upon such occurrence, the Investors would have the ability to require us to repay the Amended Notes. In addition, entry of any judgment, restraining order, injunction or any material adverse development in the litigation with Symbol would result in an event of default under our secured credit facility with Silicon Valley Bank, and Silicon Valley Bank could require us to repay any outstanding amounts owed under the credit facility and prohibit us from borrowing any additional amounts.

In addition, we may need to raise additional funds to meet our obligations, strengthen our financial position, meet our working capital requirements, or take advantage of market opportunities. Our ability to raise funds may be adversely affected by a number of factors relating to us, such as the terms of the Notes and our other agreements with the Investors, as well as factors beyond our control, including market uncertainty and conditions in the capital markets. 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.

For the year ended December 31, 2003 we had a $133.7 million net loss attributable to holders of our common stock. We cannot assure you that our revenue will increase or continue at current levels or growth rates or that we will achieve profitability or generate cash from operations in future periods. In view of the rapidly evolving nature of our business and the limited histories of Western Multiplex, Proxim, Inc. and the Agere 802.11 wireless systems business we acquired, period-to-period comparisons of operating results are not necessarily meaningful and you should not rely on them as indicating what our future performance will be.

We expect that we will continue to incur significant sales, marketing, product development and administrative expenses. As a result, we will need to generate increased revenue to achieve profitability and we cannot assure you that we will achieve profitability in the future. Any failure to significantly increase our revenue or control costs as we implement our product and distribution strategies would harm our ability to achieve profitability and the operating results and financial condition of the business.

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.

The terms of the Notes issued to the Investors may adversely affect our business, financial condition and results of operations.

We have issued Notes with an aggregate principal amount of $40 million to Warburg Pincus and Broadview Capital. These notes are accruing interest at an annual rate of 25%. Please refer to Part I, Item 1, “Business — Recent Financing Activities” for a detailed description of these recent transactions and the terms of the Notes and our Amended Agreement with these Investors. The terms of the Notes and the Amended Agreement may impair our ability to secure additional financing from other sources. While the Notes are outstanding, we may not generally, without the prior written consent of the Investors holding a majority of the principal amount of the Notes:


	•	incur certain liabilities or indebtedness for money borrowed, subject to certain limited exceptions;

	•	grant or permit any liens, pledges or encumbrances on any of our assets, subject to limited exceptions;

	•	sell any material part of our assets, other than in limited circumstances or in the ordinary course of business; or

	•	pay or declare any dividend or distribution.

We have a limited operating history with some of our current product lines, which makes your evaluation of our business difficult and will affect many aspects of our business.

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 our new ORiNOCO, Lynx and Tsunami products;

	•	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.

We may experience fluctuations in operating results and may not be able to adjust spending in time to compensate for any unexpected revenue shortfall which may cause operating results to fall below expectations of securities analysts and investors.

Our operating results may fluctuate significantly in the future as a result of a variety of factors, many of which will be outside our control. We may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. Accordingly, any significant shortfall in revenues in relation to planned expenditures could materially harm our operating results and financial condition, and may cause our operating results to fall below the expectations of securities analysts and investors. If this happens, the trading price of our common stock could decline significantly.


	•	the effectiveness of our distribution channels and the success in maintaining our current distribution channels;

	•	the effectiveness of developing new distribution channels;

	•	our ability to effectively manage the development of new business segments and markets;

	•	seasonal factors that may affect capital spending by customers;

	•	our ability to successfully manage the integration of operations;

	•	market adoption of radio frequency, or RF, standards-based products (such as those compliant with the IEEE 802.11b, IEEE 802.11a, IEEE 802.11g, IEEE 802.16 or IEEE. 802.20 specifications);

	•	our ability to develop, introduce, ship and support new products and product enhancements;

	•	the sell-through rate of our WLAN and WWAN products through commercial distribution channels;

	•	market demand for our point-to-point Lynx and Tsunami systems;

	•	market demand for our point-to-multipoint Tsunami systems;

	•	our ability to effectively manage product transitions from one generation of product platforms to newer product platform designs, including inventories on hand, product certifications, and customer transitions;

	•	the mix of products sold because our products generate different gross margins;

	•	a decrease in the average selling prices of our products;

	•	our ability to upgrade and develop our systems and infrastructure;


	•	difficulties in expanding and conducting international operations; and

	•	general economic conditions and economic conditions specific to the wireless communications industry.

Historically, we do not operate with a significant order backlog and a substantial portion of our revenues in any quarter are 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 first and second quarters of 2003.

Our operating results have been, and could further be, adversely affected as a result of purchase accounting treatment and the impact of amortization and impairment of intangible assets relating to the merger and the Agere asset purchase.

In accordance with generally accepted accounting principles, we accounted for our merger with Proxim, Inc. using the purchase method of accounting. Under the purchase method of accounting, we have recorded the market value of our Common Stock issued in connection with the merger, the fair value of the options to purchase Proxim, Inc. and the Agere asset purchase, the Common Stock that became options to purchase Proxim Corporation Common Stock and the amount of direct transaction costs as the cost of combining with Proxim, Inc. and the Agere asset purchase. We have allocated the cost of the individual assets acquired and liabilities assumed, including various identifiable intangible assets (such as acquired technology and acquired trademarks and trade names) and in-process research and development, based on their respective fair values at the date of the completion of the merger. Intangible assets are required to be amortized prospectively over their estimated useful lives. The purchase price was allocated to deferred compensation, based on the portion of the intrinsic value of the unvested Proxim, Inc. options we have assumed to the extent that service is required after completion of the merger in order to vest. Any excess of the purchase price over those fair market values will be accounted for as goodwill. We are not required to amortize goodwill against income but goodwill and other non-amortizable intangible assets will be subject to periodic reviews for impairment.

In this regard, due to the decline in forecasted revenue in future periods, we took a charge of $129.1 million related to the impairment of goodwill in accordance with SFAS No. 142 in the fourth quarter of 2002. The impairment charged was measured as the amount that the carrying amount exceeded its estimated fair value. If we are required to recognize additional impairment charges, the charge will negatively impact reported earnings in the period of the charge.

Shares eligible for future sale, including shares owned by our principal stockholders, may cause the market price of our common stock to drop significantly, even if our business is doing well.

The potential for sales of substantial amounts of our common stock into the public market may adversely affect the market price of our common stock. Our Investors hold outstanding shares of Series A preferred stock convertible into an aggregate of 41,448,137 shares of common stock as of March 5, 2004. Including additional accretion at an annual rate of 8% through August 5, 2005, the Series A preferred stock will be convertible into an aggregate of 46,314,752 shares of common stock. The Investors also hold Notes exchangeable for shares of our Series B preferred stock, which is then convertible into our common stock. Assuming exchange of the Notes on their maturity date of September 30, 2004, the Investors will receive Series B preferred stock immediately convertible into 44,414,830 shares of our common stock. Including additional accretion at an annual rate of 14% through the seventh anniversary of the date of issuance of the Series B preferred stock, the Series B preferred stock will be convertible into 116,330,766 shares of our common stock. In addition, the Investors currently hold warrants to purchase an aggregate of 18,301,612 shares of our common stock at an exercise price of $2.05 per share, 18,000,000 shares of common

Assuming conversion of the notes, the Series B Preferred Stock issuable upon conversion of the notes, the Series A Preferred Stock, and the warrants held by the Series A and Series B Preferred Stock investors, would be expected to represent approximately 51.3% of our outstanding capital stock on an as-converted and as-exercised basis, based on shares outstanding as of March 5, 2004, and excluding outstanding employee options and warrants to purchase approximately 33,619,407 shares of common stock.

We have agreed to file a registration statement on Form S-1, or, if available, Form S-3, with the Securities and Exchange Commission (the “SEC”) within 30 days following the filing of this annual report on Form 10-K with the SEC. Upon the effectiveness of such registration statement, the investors will have the right to resell any shares of common stock issuable upon conversion of the Series A preferred stock and Series B preferred stock and upon exercise of all of the warrants.

In addition to these securities, as of December 31, 2003, options and warrants to acquire 67,160,733 shares of our common stock were outstanding. Also, as of December 31, 2003, approximately an additional 15,768,514 shares of our common stock were reserved for issuance to our employees under existing and/or assumed stock option plans.

Competition within the wireless networking industry is intense and is expected to increase significantly. Our failure to compete successfully could materially harm our prospects and financial results.

The market for broadband wireless systems and wireless local area networking and building-to-building markets 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 when compared to our competitors, particularly Symbol, Cisco Systems/ Linksys, NetGear and D-Link, that have broader distribution channels, greater brand recognition, more extensive patent portfolios and, in particular, more diversified product lines. In the broadband wireless access market, we have several competitors, including without limitation, Alvarion, Ceragon Networks, Stratex Networks, and Harris Corporation.

We face competition from numerous companies that have developed competing products in both the commercial wireless and home networking markets, including several Asia-based companies offering low-price IEEE 802.11a/b/g products. We are also facing future competition from companies that offer products which replace network adapters or offer alternative communications solutions (such as the integrated wireless functionality on the Intel Centrino computer chip), or from large computer companies, PC peripheral companies, as well as other large networking equipment companies that integrate network adapters into their products. 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.

Wireless networking markets are subject to rapid technological change and to compete, we must continually introduce new products that achieve broad market acceptance.

We have expended substantial resources in developing products that are designed to conform to the IEEE 802.11 standards. There can be no assurance, however, that the IEEE 802.11 compliant products will have an ongoing meaningful commercial impact. Already, even within the 802.11 standard, there have been significant technological changes. The IEEE approved the 2.4 Ghz WLAN standard designated 802.11b. In 2000, the IEEE approved the 5 Ghz WLAN standard designated 802.11a. In 2003, the IEEE approved a new 2.4 Ghz WLAN standard designated 802.11g. IEEE is in the process of establishing additional 802.11 standards, including 802.11e related to quality of service for voice and video transmission, 802.11i related to enhanced security, and 802.11h related to dynamic frequency selection and transmission power control. Furthermore, IEEE has recently committed to developing new wireless WAN standards under two separate initiatives, 802.16 (WiMAX) and 802.20, standards which when finalized will produce transmission distances measured in kilometers.

While we have products based on the 802.11a, 802.11b and 802.11g standards, future standards developments may make these technologies obsolete and require significant additional investment by the company. As an example, in August 2000, the FCC adopted a rule change to Part 15. Based on the rule change, we made significant investments in developing higher-speed frequency hopping technology that allowed for wider band hopping channels and increased the data rate from 1.6 Mbps to up to 10 Mbps based on the HomeRF 2.0 standard. However, widespread adoption of products based on the IEEE 802.11 standard have lead us to discontinue these products. There can be no assurance that a similar future change in industry standards and market acceptance will not require us to abandon our current product lines and invest significantly in research and development of future standards based products.

Given the emerging nature of the WLAN market, there can be no assurance that the products and technology, or our other products or technology, will not be rendered obsolete by alternative or competing technologies, including cellular. Currently, cellular companies are developing 3rd generation technologies designed to transmit data at up to 2 mbps. In particular, Verizon has already announced an initiative based on this technology known as EV-DO. Cellular technology today has an inherent advantage of being more ubiquitous than WLAN hotspot technology. There can be no assurance that the companies current product offerings will be competitive with cellular or other WLAN technologies in the future.

In addition, when we announce new products or product enhancements that have the potential to replace or shorten the life cycle of our existing products, customers may defer purchasing our existing products. These actions could materially adversely affect our operating results by unexpectedly decreasing sales, increasing our inventory levels of older products and exposing us to greater risk of product obsolescence. As the market for our wireless networking products is evolving, we believe our ability to compete successfully in this market is dependent upon the continued compatibility and interoperability of our products with products and architectures offered by other vendors. To remain competitive, we need to introduce products in a timely manner that incorporate or are compatible with these new technologies as they emerge. If we are unable to enter a particular market in a timely manner with internally developed products, we may license technology from other businesses or acquire other businesses as an alternative to internal research and development.

Our revenue may decline and our ability to achieve profitability may be threatened if the demand for wireless services in general and broadband wireless access systems in particular does not continue to grow.

Our success is dependent on the continued trend toward wireless telecommunications and data communications services. If the rate of growth slows and service providers reduce their capital investments in wireless infrastructure or fail to expand into new geographic markets, our revenue may decline. Unlike some competitors such as Cisco Systems (including Linksys), NetGear and 3Com, our principal product offerings rely on wireless technologies. Accordingly, we would experience a greater impact from a decline in the demand for wireless services than some of our most important competitors. In addition, wireless access solutions are unproven in the marketplace and some of the wireless technologies, such as our Tsunami point-to-multipoint technology and 802.11 technologies in which we have invested substantial capital, were only commercially introduced in the last few years. In addition, we are also investing in the development of products that comply with the emerging 802.16 wireless access standard. If wireless access technology turns out to be unsuitable for widespread commercial deployment, it is unlikely we could generate enough sales to achieve and sustain profitability. We have listed below the factors that we believe are key to the success or failure of broadband wireless access technology:


	•	its reliability and security and the perception by end users of its reliability and security;

	•	its capacity to handle growing demands for faster transmission of increasing amounts of data, voice and video;

	•	the availability of sufficient frequencies for network service providers to deploy products at commercially reasonable rates;

	•	its cost-effectiveness and performance compared to other forms of broadband access, whose prices and performance continue to improve;

	•	its suitability for a sufficient number of geographic regions; and

	•	the availability of sufficient site locations for network service providers to install products at commercially reasonable rates.

We have experienced the effects of many of the factors listed above in interactions with customers selecting wireless versus wire line technology. For example, because of the frequency with which individuals using cellular phones experience fading or a loss of signal, customers often hold the perception that all broadband wireless technologies will have the same reliability constraints even though the wireless technology we use does not have the same problems as cellular phones. In some geographic areas, because of adverse weather conditions that affect wireless transmissions, but not wire line technologies, we are not able to sell products as successfully as competitors with wire line technology. In addition, future legislation, legal decisions and regulation relating to the wireless telecommunications industry may slow or delay the deployment of wireless networks.

We may also lose customers to different types of wireless technologies. Many of our products operate in the unlicensed frequency bands, in compliance with various governmental regulations. In addition, many of the emerging wireless standards utilize these unlicensed frequency bands. The proliferation and market acceptance of unlicensed wireless products increases the probability of interference among unlicensed devices. Increasing interference can adversely affect the operation of our unlicensed products, resulting in customers selecting alternative products that do not operate in these unlicensed frequency bands. For example, we have only a limited offering of products that operate in licensed radio spectrums. Some customers, however, may want to operate in licensed radio spectrums because they sometimes offer less interference than license free radio spectrums or have other advantages.

We depend on international sales and our ability to sustain or expand international sales is subject to many risks, which could adversely affect our operating results.

During the years ended December 31, 2003 and 2002, international sales accounted for approximately 41% and 38% of our total sales, respectively. We expect that our revenue from shipments to international


	•	uncertainty of product acceptance by customers in foreign countries;

	•	difficulty in assessing the ability to collect on orders to be shipped in an uncertain economic environment;

	•	difficulty in collecting accounts receivable;

	•	export license and documentation requirements;

	•	unforeseen changes in regulatory requirements;

	•	difficulties in staffing and managing multinational operations;

	•	governmental restrictions on the repatriation of funds into the United States;

	•	foreign currency fluctuations;

	•	longer payment cycles for international distributors;

	•	tariffs, duties taxes and other trade barriers;

	•	difficulties in finding foreign licensees or joint venture partners; and

	•	potential political and economic instability.

There is a risk that such factors will harm our ability to continue to successfully operate internationally and our efforts to expand international operations. In this regard, our revenue levels have been affected, in part, by reduced ability to ship our products to international customers in cases where collectibility, based on a number of factors, could not be reasonably assured.

While we may extend limited credit terms, fluctuations in currency exchange rates could cause our products to become relatively more expensive to customers in a particular country, leading to a reduction in sales or profitability in that country. There can be no assurance that foreign markets will continue to develop or that we will receive additional orders to supply our products to foreign customers. Our business and operating results could be materially adversely affected if foreign markets do not continue to develop or if we do not receive additional orders to supply our products for use by foreign customers.

To successfully expand international sales, we will need to recruit additional international sales and support personnel and expand our relationships with international distributors and value-added resellers. This expansion will require significant management attention and financial resources. We may incur these additional costs and add these management burdens without successfully expanding sales. This failure would harm our operating results.

Uncertainties and heightened security associated with the aftermath of war in Iraq and the ongoing war on terrorism may continue to adversely affect domestic and international demand for our products, result in a further deterioration of global economic conditions, and increase shipment times and costs for our products.

The economic uncertainty resulting from hostilities in Iraq may continue to negatively impact consumer and business confidence. In recent periods, general economic conditions in the U.S. caused and may continue to cause U.S. businesses to slow spending on products and to delay sales cycles. Similarly, global economic conditions could cause foreign businesses to slow or halt spending on our products. We manufacture a substantial portion of our products outside the U.S., and we may experience delays in the delivery of our products or increased shipping costs as a result of increased security measures. This economic uncertainty may make it more difficult to continue to implement our business strategy and could adversely impact future operating results.

Our business will depend on rapidly evolving telecommunications and Internet industries.

Our future success is dependent upon the continued growth of the data communications and wireless industries, particularly with regard to Internet usage. The global data communications and Internet industries are evolving rapidly and it is difficult to predict potential growth rates or future trends in technology development. We cannot assure you that the deregulation, privatization and economic globalization of the worldwide telecommunications market that has resulted in increased competition and escalating demand for new technologies and services will continue in a manner favorable to us or our business strategies. In addition, there can be no assurance that the growth in demand for wireless and Internet services, and the resulting need for high speed or enhanced data communications products and wireless systems, will continue at its current rate or at all.

We may be dependent on and receive a significant percentage of our revenue from a limited number of OEM customers.

A limited number of OEM customers may contribute a significant percentage of our revenue. We expect that sales to a limited number of OEM customers will continue to account for a significant portion of our revenue for the foreseeable future. Sales of many of our wireless networking products depend upon decisions of prospective OEM customers to develop and market wireless solutions that incorporated our wireless technology. OEM customers’ orders are affected by a variety of factors, including the following:


	•	new product introductions;

	•	end user demand for OEM customers’ products;

	•	joint development efforts;

	•	OEM customers’ product life cycles;

	•	inventory levels;

	•	market and OEM customers’ adoption of new wireless standards;

	•	manufacturing strategies;

	•	lengthy design-in cycles;

	•	pricing;

	•	regulatory changes;

	•	contract awards; and

	•	competitive situations.

The loss of one or more of, or a significant reduction in orders from, our major OEM customers could materially and adversely affect our operating results or stock price. In addition, there can be no assurance that we will become a qualified supplier for new OEM customers or that we will remain a qualified supplier for existing OEM customers.

Our WWAN business derives a substantial portion of its revenue from a limited number of distributors. Therefore, a decrease or loss in business from any of them may cause a significant delay or decline in our revenue and could harm our reputation.

Our WWAN business has historically generated a significant amount of revenue from a limited number of distributors. The loss of business from any of these distributors or the delay of significant orders from any of them, even if only temporary, could significantly reduce our revenue, delay recognition of revenue, harm our reputation or reduce our ability to accurately predict cash flow. One distributor accounted for approximately 14% and 23% of our total revenue in 2003 and the year ended 2002, respectively. We do not have long-term contracts with any of these distributors. While we expect to have a more diversified and expansive end customer base, the future success of our business will depend significantly on the timing and size of future

We depend on limited suppliers for key components that are difficult to manufacture, and because we may not have long-term arrangements with these suppliers, we could experience disruptions in supply that could decrease or delay the recognition of revenues.

We depend on single or limited source suppliers for several key components used in our products. Proxim, Inc. and Agere depended on single sources for our 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. We do not have any long-term arrangements with our suppliers and could be at a disadvantage compared to other companies, particularly larger companies, that have contractual rights or preferred purchasing arrangements. 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 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 capabilities and we will need to increasingly depend on contract manufacturers for our manufacturing requirements.

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 part of our restructuring charge in the second quarter of 2003, we increased our provision for excess and obsolete inventory by $22.5 million, primarily related to legacy WWAN products. As a part of our restructuring charge 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, primarily related to legacy WLAN products. These provisions 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.

We rely on contract and subcontract manufacturers for turnkey manufacturing and circuit board assemblies which subjects us to additional risks, including a potential inability to obtain an adequate supply of finished assemblies and assembled circuit boards and reduced control over the price, timely delivery and quality of such finished assemblies and assembled circuit boards. If our Sunnyvale facility were to become incapable of operating, even temporarily, or were unable to operate at or near our current or full capacity for an extended period, our business and operating results could be materially adversely affected.

Changes in our manufacturing operations to incorporate new products and processes, or to manufacture at lower cost locations outside the United States, could cause disruptions, which, in turn, could adversely affect customer relationships, cause a loss of market opportunities and negatively affect our business and

operating results. In addition, our reliance on a limited number of manufacturers involves a number of risks, including the risk that these manufacturers may terminate their relationship with us, may choose not to devote adequate capacity to produce our products or may delay production of our products. If any of these risks are realized, we could experience an interruption in supply, which could have an adverse impact on the timing and amount our revenues. There can be no assurance that we will be able to effectively transition these products, which, in turn, could adversely affect customer relationships, cause a loss of market opportunities and negatively affect our business and operating results.

Our reliance on contract manufacturers could subject us to additional costs or delays in product shipments as demand for our products increases or decreases. Some contract manufacturers have decreased their operations in response to an overall contraction in demand for wireless networking products. There can be no assurance that we will effectively manage our contract manufacturers or that these manufacturers will meet our future requirements for timely delivery of products of sufficient quality and quantity. The inability of our contract manufacturers to provide us with adequate supplies or the loss of a contract manufacturer would result in costs to acquire additional manufacturing capacity and delays in shipments of our products, materially adversely affecting our business and operating results. In addition, cancellations in orders as a result of decreases in demand for products may subject us to claims for damages. In this regard, we are party to disputes, including legal actions, with a number of suppliers and vendors. These disputes relate primarily to excess materials and order cancellation claims that resulted from declines in demand for our products during 2001 and 2002 and the commensurate reductions in manufacturing volumes.

We may be unable to achieve the manufacturing cost reductions and improvements required in order to achieve or maintain profitability.

In general, the average selling prices of our products decline over time. If we do not reduce production costs and other expenses, we may not be able to offset this continuing decline and achieve or maintain profitability. We must also develop and introduce on a timely basis new products and features that can be sold at higher average selling prices or produced at lower costs.

Failure to decrease the cost of our products or to effectively develop new systems would cause our revenue to decline or to increase more slowly.

We expect that average selling prices of our products will continue to decrease because one of our strategies is to increase the percentage of domestic and international sales being made through distributors and value-added resellers, and to OEM customers, which involve lower prices than our direct sales. This risk from declining average selling prices may also intensify because we expect that market conditions, particularly falling prices for competing broadband solutions, will force us to reduce prices over time. Under some circumstances, we may be forced to reduce prices even if it causes us to decrease gross profit or to take a loss on our products. We may also be unable to reduce sufficiently the cost of our products to enable us to compete with other broadband access technologies with lower product costs. In order to remain competitive, we will need to design our products so that they can be manufactured with low-cost, automated manufacturing, assembly and testing techniques. We cannot assure you that we will be successful in designing our products to allow contract manufacturers to use lower-cost, automated techniques. In addition, any redesign may fail to result in sufficient cost reductions to allow us to significantly reduce the price of our products or prevent our gross profit from declining as prices decline.

Because many of our current and planned products are or will be highly complex, they may contain defects or errors that are detectable only after deployment in complex networks and which, if detected, could harm our reputation, result in costs to us in excess of our estimates, adversely affect our operating results, result in a decrease in revenue or result in difficulty collecting accounts receivable.

Many of our complex products can only be fully tested when deployed in commercial networks. As a result, end users may discover defects or errors or experience breakdowns in their networks after the products


	•	failure to achieve market acceptance and loss of market share;

	•	cancellation of orders;

	•	difficulty in collecting accounts receivable;

	•	increased service and warranty costs;

	•	diversion of resources, legal actions by customers and end users; and

	•	increased insurance costs and other losses to our business or to end users.

If we experience warranty failure that indicate either manufacturing or design deficiencies, we may be required to recall units in the field and or stop producing and shipping such products until the deficiency is identified and corrected. In the event of such warranty failures, our business could be adversely affected resulting in reduced revenue, increased costs and decreased customer satisfaction. Because customers often delay deployment of a full system until the products have been tested by them and any defects have been corrected, we expect these revisions to cause delays in orders by our customers for our systems. Because our strategy is to introduce more complex products in the future, this risk will intensify over time. End users have discovered errors in our products in the past and may discover errors in our products in the future. If the costs of remediating problems experienced by our customers exceeds our warranty reserves, these costs may adversely affect our operating results.

To compete effectively, we will need to establish and expand new distribution channels for our point-to-point and point-to-multipoint products and 802.11 WLAN products.

We sell our products through domestic and international distributors. In general, distributors, value-added resellers and retailers offer products of several different companies, including products that may compete with our products. Accordingly, they may give higher priority to products of other suppliers, thus reducing our efforts to sell our products. In addition they often focus on specific markets and we will need to add new distributors and value-added resellers as we expand our sales to new markets. Agreements with distributors and retailers are generally terminable at their option. Any reduction in sales efforts or termination of a relationship may materially and adversely affect our business and operating results. Use of distributors and retailers also entails the risk that they will build up inventories in anticipation of substantial growth in sales. If such growth does not occur as anticipated, they may substantially decrease the amount of products ordered in subsequent quarters. Such fluctuations could contribute to significant variations in our future operating results.

Broadband wireless access solutions have some disadvantages and limitations as compared to other alternative broadband access solutions that may prevent widespread adoption, which could hurt our prospects.

Broadband wireless access solutions, including point-to-point and point-to-multipoint systems, compete with other high-speed access solutions such as digital subscriber lines, cable modem technology, fiber optic cable and other high-speed wire line and satellite technologies. If the market for our Lynx and Tsunami point-to-point and Tsunami point-to-multipoint solutions fails to develop or develops more slowly than we expect due to this competition, our sales opportunities will be harmed. Many of these alternative technologies can take advantage of existing installed infrastructure and are generally perceived to be reliable and secure. As a result, they have already achieved significantly greater market acceptance and penetration than point-to-point and point-to-multipoint broadband wireless access technologies. Moreover, current point-to-point and point-to-multipoint broadband wireless access technologies have inherent technical limitations that may inhibit their widespread adoption in many areas, including the need for line-of-sight installation and, in the case of operating frequencies above 11 GHz, reduced communication distance in bad weather.

We expect point-to-point and point-to-multipoint broadband wireless access technologies to face increasing competitive pressures from both current and future alternative technologies. In light of these factors, many service providers may be reluctant to invest heavily in broadband wireless access solutions.

Broadband wireless access products require a direct line-of-sight, which may limit the ability of service providers to deploy them in a cost-effective manner and could harm our sales.

Because of line-of-sight limitations, service providers often install broadband wireless access equipment on the rooftops of buildings and on other tall structures. Before undertaking these installations, service providers must generally secure roof rights from the owners of each building or other structure on which the equipment is to be installed. The inability to easily and cost-effectively obtain roof rights may deter customers from choosing to install broadband wireless access equipment, which could have an adverse effect on our sales.

Inability to attract and retain key personnel could hinder our ability to operate.

Our success depends to a large extent on the continued services of Mr. Frank Plastina, our President and Chief Executive Officer, Mr. David L. Thompson, our Executive Vice President and Chief Financial Officer, and other members of our senior management team. The loss of the services of any of these management members could harm our business because of the crucial role each of them is expected to play in our operations and strategic development. In order to be successful, we must also retain and motivate key employees, including those in managerial, technical, marketing and sales positions. In particular, our product generation efforts depend on hiring and retaining qualified engineers. Experienced management and technical, sales, marketing and support personnel in the wireless networking industry are in high demand and competition for their talents is intense. This is particularly the case in Silicon Valley, where our headquarters and a majority of our operations are located.

We may have difficulties with our acquisitions and investments, which could adversely affect our growth and financial condition.

From time to time, we may consider new business opportunities and ventures, including acquisitions, in a broad range of areas. Any decision to pursue a significant business expansion or new business opportunity would be accompanied by risks, including, among others:


	•	requiring to invest a substantial amount of capital, which could materially harm our financial condition and ability to implement our existing business strategy;

	•	requiring to issue additional equity interests, which would be dilutive to our stockholders;

	•	placing additional and substantial burdens on our management personnel and financial and operational systems;

	•	the difficulty of assimilating the operations, technology and personnel of the acquired companies;

	•	the potential disruption of our ongoing business;

	•	the possible inability to retain key technical and managerial personnel;

	•	potential additional expenses associated with amortization of purchased intangible assets or the impairment of goodwill;

	•	additional expenses associated with the activities and expansion of the acquired businesses; and

	•	the possible impairment of relationships with existing employees, customers, suppliers and investors.

In addition, we cannot assure you that we will be successful in overcoming these risks or any other problems encountered in connection with any acquisitions or other investments that we may make in the future.

Several of our stockholders beneficially own a significant percentage of our common stock, which will allow them to significantly influence matters requiring shareholder approval and could discourage potential acquisitions of our company.

Warburg Pincus and entities affiliated with Broadview Capital Partners hold outstanding shares of Series A preferred stock convertible into an aggregate of 41,448,137 shares of common stock as of March 5, 2004. Including additional accretion at an annual rate of 8% through August 5, 2005, the Series A preferred stock will be convertible into an aggregate of 46,314,752 shares of common stock. The Investors also hold Notes exchangeable for shares of our Series B preferred stock, which is then convertible into our common stock. Assuming exchange of the Notes on their maturity date of September 30, 2004, the Investors will receive Series B preferred stock immediately convertible into 44,414,830 shares of our common stock. Including additional accretion at an annual rate of 14% through the seventh anniversary of the date of issuance of the Series B preferred stock, the Series B preferred stock will be convertible into 116,330,766 shares of our common stock. In addition, the Investors currently hold warrants to purchase an aggregate of 18,301,612 shares of our common stock at an exercise price of $2.05 per share, 18,000,000 shares of our common stock at an exercise price of $1.46 per share and 6,000,000 shares of our common stock at an exercise price of $1.53 per share.

The Investors are able to exert significant influence over actions requiring the approval of our stockholders, including many types of change of control transactions and any amendments to our certificate of incorporation. The interests of these stockholders may be different than those of other stockholders of our company. In addition, the significant ownership percentage of these stockholders could have the effect of delaying or preventing a change of control of our company or otherwise discouraging a potential acquiror from obtaining control of our company.

As holders of our Series A preferred stock the Investors have rights that are senior to those of our common stock. Upon exchange of the Notes for Series B preferred stock the Investors will have additional rights that are senior to those of our common stock.

Holders of our Series A preferred stock are entitled to receive certain benefits not available to holders of our common stock. In particular:


	•	from August 2005 through August 2007, shares of Series A preferred stock will be entitled to dividends equal to 8% of their liquidation preference per year, payable, at our election, in cash or shares of our common stock valued at the then-market price;

	•	each share of Series A preferred stock will have an initial liquidation preference of $25.00 and the liquidation preference will bear interest at 8%, compounded semi-annually, for three years. The liquidation preference is subject to adjustments in the event we undertake a business combination or other extraordinary transaction, or we are liquidated or dissolved;

	•	in August 2007, we will be required to redeem all outstanding shares of Series A preferred stock, if any, for cash equal to their liquidation preference plus accrued and unpaid dividends;

	•	in the event of a change of control of our company, we will have the right to convert the Series A preferred stock into common stock if upon such conversion the holders of Series A preferred stock would receive liquid securities or cash with a fair market value equal to or greater than 110% of the liquidation preference then in effect. If the consideration is less than 110% of the liquidation preference, we may either modify the conversion price so that the consideration will equal 110% of the liquidation preference then in effect or repurchase the Series A preferred stock for cash at 101% of the liquidation preference then in effect. In addition, in the event of a change of control that occurs prior to


		August 2005, the liquidation preference will increase as necessary to provide for three years of accretion;

	•	holders of Series A preferred stock have rights to acquire additional shares of our capital stock or rights to purchase property in the event of certain grants, issuance or sales;

	•	the conversion price of the Series A preferred stock, which initially was approximately $3.06 per share, and was reduced to approximately $2.24 in connection with the issuance of the Notes, is subject to additional customary weighted average anti-dilution adjustments and other customary adjustments; and

	•	the approval of holders of a majority of the Series A preferred stock is separately required to approve changes to our certificate of incorporation or bylaws that adversely affect these holders’ rights, any offer, sale or issuance of our equity or equity-linked securities ranking senior to or equally with the Series A preferred stock, and any repurchase or redemption of our equity securities (other than from an employee, director or consultant following termination), or the declaration or payment of any dividend on our common stock.

Warburg Pincus and Broadview Capital will have the right to exchange the Notes for shares of Series B preferred stock. Upon exchange of the Notes, holders of our Series B preferred stock will be entitled to receive certain benefits not available to holders of our common stock. In particular:


	•	each share of Series B preferred stock will have an initial liquidation preference of $100.00 and the liquidation preference will bear interest at an annual rate of 14%, compounded quarterly, for seven years from the date of issuance. The liquidation preference is subject to adjustments in the event we undertake a business combination or other extraordinary transaction, or we are liquidated or dissolved;

	•	on the seventh anniversary of the issuance of the Series B preferred stock, we will be required to redeem all outstanding shares of Series B preferred stock, if any, for cash equal to their liquidation preference plus accrued and unpaid dividends;

	•	in the event of a change of control of our company, the holders of the Series B preferred stock will have the right to convert the Series B preferred stock into common stock if upon such conversion the holders of Series B preferred stock would receive liquid securities or cash with a fair market value equal to or greater than 110% of the liquidation preference then in effect. If the consideration is less than 110% of the liquidation preference, we may either modify the conversion price so that the consideration will equal 110% of the liquidation preference then in effect or offer to repurchase the Series B preferred stock for cash at 101% of the liquidation preference then in effect. In addition, in the event of a change of control that occurs prior to the seventh anniversary of the issuance of the Series B preferred stock, the liquidation preference will increase as necessary to provide for seven years of accretion;

	•	holders of Series B preferred stock will have rights to acquire additional shares of our capital stock or rights to purchase property in the event of certain grants, issuance or sales;

	•	the conversion price of the Series B preferred stock, which initially shall be approximately $1.15 per share, will be subject to customary weighted average anti-dilution adjustments and other customary adjustments; and

	•	the approval of holders of a majority of the Series B preferred stock is separately required to approve changes to our certificate of incorporation or bylaws that adversely affect these holders’ rights, any offer, sale or issuance of our equity or equity-linked securities ranking senior to or equally with the Series B preferred stock, any repurchase or redemption of our equity securities (other than from an employee, director or consultant following termination), or the declaration or payment of any dividend on our common stock.

Warburg Pincus has agreed until July 22, 2007 to limit its voting rights to no more than 45% of our issued and outstanding voting stock. In addition, for so long as each of the Investors owns at least 25% of the aggregate principal amount of the Notes issued to each of them or 25% of the shares of Series B preferred

stock issued to them (including as owned and outstanding such shares of common stock issuable upon conversion of the shares of Series B preferred stock and upon exercise of the warrants), and Warburg Pincus owns at least 25% of the shares of Series A referred stock (including as owned and outstanding such shares of common stock issuable upon conversion of the shares of Series A preferred stock and exercise of the existing warrants), the Investors will have the right to hold three out of a possible nine seats on our Board of Directors and Warburg Pincus shall have the right to have one observer attend meetings of the Board of Directors.

We are obligated to register the common stock issuable upon conversion of the Series A preferred stock and Series B preferred stock and upon exercise of all warrants held by the Investors on a resale registration statement with the Securities and Exchange Commission.

Possible third-party claims of infringement of proprietary rights against us could have a material adverse effect on our business, results of operation and financial condition.

The communications industry is characterized by a relatively high level of litigation based on allegations of infringement of proprietary rights. There can be no assurance that third parties will not assert infringement claims against us, that any such assertion of infringement will not result in litigation or that we would prevail in such litigation. Furthermore, any such claims, with or without merit, could result in substantial cost to our business and diversion of our personnel, require us to develop new technology or enter into royalty or licensing arrangements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to us, or at all. In the event of a successful claim of infringement or misappropriation against us, and our failure or inability to develop non-infringing technology or to license the infringed, misappropriated or similar technology at a reasonable cost, our business, results of operations and financial condition would be materially adversely affected. In addition, we may be obligated to indemnify our customers against claimed infringement of patents, trademarks, copyrights and other proprietary rights of third parties. Any requirement to indemnify our customers could have a material adverse effect on our business, results of operations and financial condition.

Should the outcome of our patent or other litigation be unfavorable, we may be required to pay damages and other expenses, or we could be enjoined from selling certain products, which could materially and adversely affect our business, financial condition and operating results.

Proxim, Inc.’s involvement in patent litigation has resulted in, and could in the future continue to result in, substantial costs and diversion of management resources of the Company. 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 September 15, 2003, we announced that a jury had rendered a verdict in the first phase of the patent infringement suit with Symbol. On Symbol’s claims of patent infringement, the jury found that certain of our products infringe two of Symbol’s patents and assessed a 6% royalty on our sales of these products from January 1, 1995. Accordingly, we recorded an accrual for estimated royalties payable of $22.9 million and $2.9 million for interest during the third quarter of 2003. We have not been enjoined from continued sales of these products, and royalty payments, if any, on these sales have not been determined by the court. In November 2003, the court conducted a bench trial on our remaining equitable defenses not addressed by the jury and proceedings in the case continue We will continue to evaluate and review our estimate of the royalties

On or about March 10, 2003, we were served with a complaint filed on January 15, 2003, by Top Global Technology Limited (“Top Global”), a distributor for Agere Systems Singapore. Our demurrer to Top Global’s complaint was sustained in May 2003. Top Global then filed and served an amended complaint on May 30, 2003. Top Global’s lawsuit was filed against Agere Systems, Inc., Agere Systems Singapore, and Agere Systems Asia Pacific (collectively, “Agere”) and us in the Superior Court for the State of California, County of Santa Clara. Top Global claims that it is entitled to return for a credit $1.2 million of products that it purchased from Agere Systems Singapore in June 2002 as a result of our decision to discontinue a product line that we purchased from Agere in August 2002. The amended complaint asks the court to determine whether Agere or we are responsible for accepting the product return and issuing a $1.2 million credit and also alleges breach of contract. We answered the amended complaint and asserted several defenses to Top Global’s claims. In January 2004, the parties mediated this dispute but were unable to reach a settlement. In March 2004, the Court dismissed the contract claims against Agere but at the same time granted Top Global’s motion for leave to amend its complaint to allege a fraud claim against Agere. Discovery continues and a trial setting conference is scheduled for May 4, 2004.

We are party to disputes, including legal actions, with a number of suppliers and vendors. These disputes relate primarily to excess materials and order cancellation claims that resulted from the declines in demand for our products during 2001 and 2002 and the commensurate reductions in manufacturing volumes. We have recorded reserves related to these disputes to the extent that management believes are appropriate. The Company intends to vigorously defend itself in these matters.

related to past sales of products found to infringe and additional royalties in connection with future sales of these products, or we would be required to post a bond in order to appeal the court’s decision. Any adverse ruling or judgment in this litigation that requires us to render payment or post a bond equal to or greater than $10 million, and any other ruling or judgment in this or any other litigation that is material and adverse to us, triggers an event of default under the Notes issued to Warburg Pincus and affiliates of Broadview Capital. Upon such occurrence, the Investors would have the ability to require us to repay the Notes. In addition, entry of any judgment, restraining order, injunction or any material adverse development in the litigation with Symbol would result in an event of default under our secured credit facility with Silicon Valley Bank. Upon such occurrence, Silicon Valley Bank would have the ability to require us to repay any outstanding amounts under the credit facility and to prohibit us from borrowing any additional amounts.

The implementation of a new management information system may disrupt our business.

As a result of the merger between Proxim and Western Multiplex, and the acquisition of Agere Systems’ 802.11 WLAN systems business during 2002, we identified a requirement to consolidate and integrate our management information systems. During the second quarter of 2003, we implemented a new enterprise resource planning and financial accounting and planning system and began to integrate this new system with our customer relationship management system and our product management system, and to create electronic interfaces to certain supply chain partners’ information systems and certain customers’ information systems. Implementation of the new management information system, including the integration with other systems is a very complex process that requires significant financial resources and personnel time, as well as unifying operating policies and procedures to ensure that the total system operates efficiently and effectively. Errors in the implementation could result in additional costs and cause disruptions to our business, which could adversely affect our ability to accurately report our financial results on a timely basis and could have a material adverse effect on our business, financial condition and operating results.

Compliance with governmental regulations in multiple jurisdictions where we sell our products is difficult and costly.

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 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, and we expect soon to have certified products in the newly opened 5.470 - 5.725 GHz band. 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 unlicensed status in the frequency band. In the event that there is interference caused by a Part 15 user, the FCC 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 availability of spectrum, changes in the allowed use 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.

Our products are also subject to regulatory requirements in international markets and, therefore, we must monitor the development of 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 availability of 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 both domestically and internationally;

	•	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.

In accordance with generally accepted accounting principles, we accounted for our merger with Proxim, Inc. using the purchase method of accounting. Under the purchase method of accounting, we have recorded the market value of our Common Stock issued in connection with the merger, the fair value of the options to purchase Proxim, Inc. Common Stock that became options to purchase Proxim Corporation Common Stock and the amount of direct transaction costs as the cost of combining with Proxim, Inc. We have allocated the cost of the individual assets acquired and liabilities assumed, including various identifiable intangible assets (such as acquired technology and acquired trademarks and trade names) and in-process research and development, based on their respective fair values at the date of the completion of the merger. Intangible assets are required to be amortized prospectively over their estimated useful lives. The purchase price was allocated to deferred compensation, based on the portion of the intrinsic value of the unvested Proxim, Inc. options we have assumed to the extent that service is required after completion of the merger in order to vest. Any excess of the purchase price over those fair market values will be accounted for as goodwill. We are not required to amortize goodwill against income but goodwill and other non-amortizable intangible assets will be subject to periodic reviews for impairment.

The price of our common stock may be subject to wide fluctuation, and you may lose all or part of your investment in our common stock.

The trading prices of our common stock have been subject to wide fluctuations, and such trend is likely to continue with respect to the trading price of our common stock. The trading price of our common stock may fluctuate in response to a number of events and factors, including:


	•	quarterly variations in revenues and operating results;

	•	announcements of innovations and new products;

	•	strategic developments or business combinations by us or our competitors;

	•	changes in our expected operating expense levels;

	•	changes in financial estimates and recommendations of financial and industry analysts;

	•	the operating and securities price performance of comparable companies; and

	•	news reports relating to trends in the wireless communications industry.

In addition, the stock market in general, and the market prices for wireless-related companies in particular, have experienced extreme volatility that often has been unrelated to the operating performance of these companies. These broad market and industry fluctuations may influence the trading price of our common stock. These trading price fluctuations may make it more difficult to use our common stock as currency to make acquisitions that might otherwise be advantageous, or to use stock options as a means to attract and retain employees. Accordingly, you may lose all or part of your investment in our common stock.

Provisions of our certificate of incorporation, bylaws and Delaware law could deter takeover attempts.

Some provisions in our certificate of incorporation and bylaws could delay, prevent or make more difficult a merger, tender offer, proxy contest or change of control of our company despite the possibility that such transactions may be viewed to be in the best interest of our stockholders since such transactions could result in a higher stock price than the then-market price of our common stock. Among other things, our certificate of incorporation and bylaws:


	•	authorize our board of directors to issue preferred stock with the terms of each series to be fixed by the board of directors;

	•	divide our board of directors into three classes so that only approximately one-third of the total number of directors is elected each year;

	•	permit directors to be removed only for cause; and

	•	specify advance notice requirements for stockholder proposals and director nominations.

In addition, with some exceptions, the Delaware General Corporation Law will restrict or delay mergers and other business combinations between us and any stockholder that acquires 15% or more of our voting stock.

We are incurring additional costs and devoting more management resources to comply with increasing regulation of corporate governance and disclosure.

We are spending an increased amount of management time and external resources to analyze and comply with changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and Nasdaq Stock Market rules and listing requirements. Devoting the necessary resources to comply with evolving corporate governance and public

The following discussion about our market risk disclosures involves forward-looking statements. Actual results could differ materially from those projected in the forward-looking statements.

We maintain a short-term investment portfolio consisting mainly of corporate bonds purchased with an average maturity of less than one year. These available-for-sale securities are subject to interest rate risk and will decline in value if market interest rates increase. If market interest rates were to increase immediately and uniformly by 10 percent from levels at December 31, 2003, the fair value of the portfolio would decline by an immaterial amount. We generally have the ability to hold our fixed income investments until maturity and therefore do not expect our operating results or cash flows to be affected to any significant degree by the effect of a sudden change in market interest rates on our securities portfolio.

We currently have operations in the United States and several countries in South America, Europe and Asia. The functional currency of all our operations is the U.S. dollar. Though some expenses are incurred in local currencies by our overseas operations, substantially all of our transactions are made in U.S. dollars, hence, we have minimal exposure to foreign currency rate fluctuations relating to our transactions.

While we expect our international revenues to continue to be denominated predominately in U.S. dollars, an increasing portion of our international revenues may be denominated in foreign currencies in the future. As a result, our operating results may become subject to significant fluctuations based upon changes in exchange rates of certain currencies in relation to the U.S. dollar. We will analyze our exposure to currency fluctuations and may engage in financial hedging techniques in the future to attempt to minimize the effect of these potential fluctuations; however, exchange rate fluctuations may adversely affect our financial results in the future.

We are exposed to market risk as it relates to changes in the fair value of our investments. We invested in equity investments in a public company for business and strategic purposes and we have classified these securities as available-for-sale. We have also invested in an equity instrument in a private company, which completed its IPO in January 2004. This equity investment, in a technology company, is subject to significant fluctuations in fair value due to the volatility of the stock market and the industries in which these companies participate. As of February 27, 2004, we had unrealized gain of $2.2 million which was recorded as a separate component of stockholders’ equity. Our objective in managing our exposure to stock market fluctuations is to minimize the impact of stock market declines to our earnings and cash flows. There are, however, a number of factors beyond our control.

Continued market volatility, as well as mergers and acquisitions, have the potential to have a material impact on our results of operations in future periods.

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholders’ equity (deficit) and of cash flows present fairly, in all material respects, the financial position of Proxim Corporation and its subsidiaries at December 31, 2003 and 2002 and the results of their operations and their cash flows for each of the two years in the periods ended December 31, 2003 and 2002 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

The consolidated financial statements of Proxim Corporation as of December 31, 2001 and for the year ended December 31, 2001, were audited by other independent accountants who have ceased operation. Those independent accountants expressed an unqualified opinion on those financial statements in their report dated January 28, 2002.

As discussed above, the consolidated financial statements of Proxim Corporation for the year ended December 31, 2001, were audited by other independent accountants who have ceased operations. As described in Note 5, these consolidated financial statements have been revised to include the transitional disclosures required by Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”, which was adopted by the Company as of January 1, 2002. We audited the transitional disclosures described in Note 5. In our opinion, the transitional disclosures of 2001 in Note 5 are appropriate. However, we were not engaged to audit, review, or apply any procedures to the 2001 consolidated financial statements of the Company other than with respect to such disclosures and, accordingly, we do not express an opinion or any other form of assurance on the 2001 consolidated financial statements taken as a whole.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has incurred substantial losses and negative cash flows from operations, and had an accumulated deficit of $397.8 million as of December 31, 2003. In addition, the Company may be required to repay $40.0 million of exchangeable promissory notes (the Notes) in the event its note holders do not exchange for mandatorily redeemable convertible preferred stock. Such repayment would be required on the earlier of September 30, 2004, the maturity date of the Notes or upon event of default or change in control. In addition, the Company may be required to settle the accrued royalty charges of $26.9 million in connection with the litigation with Symbol Technologies Inc. when the final ruling is made. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

The following report is a copy of a report previously issued by Arthur Andersen LLP and has not been reissued by Arthur Andersen LLP. As discussed in the Summary of Significant Accounting Policies note, in 2002, the Company adopted the provisions of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS No. 142). As discussed in the Summary of Significant Accounting Policies note, the corporation has presented the transitional disclosures for 2001 and 2000 required by SFAS No. 142. The Arthur Andersen LLP report does not extend to these changes to the 2001 and 2000 consolidated financial statements. The adjustments to the 2001 and 2000 consolidated financial statements were reported on by PricewaterhouseCoopers LLP as stated in their report appearing herein.

We have audited the accompanying consolidated balance sheets of Western Multiplex Corporation (a Delaware corporation, formerly known as Glenayre Western Multiplex) and subsidiaries as of December 31, 2000 and 2001, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Western Multiplex Corporation and subsidiaries as of December 31, 2000 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America.

Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed under Item 14(a) is presented for the purposes of complying with the Securities and Exchange Commission’s rules and is not a part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.

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

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY



	Common Stock				Treasury Stock												Notes
											Additional			Deferred			Receivable
	Class A				Class A						Paid-in			Stock			from
	Shares		Amount		Shares			Amount			Capital			Compensation			Stockholders


	(Dollars in thousands, except per share data)
Balance sheet as of December 31, 2000		97,569,419	$	975		(42,000,000	)	$	(21,000	)	$	141,341		$	(4,310	)	$	(1,062	)
Net loss		—		—		—			—			—			—			—
Issuance of Class A common stock pursuant to Employee Stock Purchase Plan		130,266		1		—			—			1,284			—			—
Issuance of Class A common stock in connection with the WirelessHome acquisition		1,649,324		16		—			—			12,089			—			—
Stock options and warrants assumed in connection with the WirelessHome acquisition		—		—		—			—			665			(323	)		—
Common stock redemption related to WirelessHome acquisition		—		—		(107,396	)		(400	)		—			—			—
Stock price protection contingent consideration related to the WirelessHome acquisition		—		—		—			—			2,519			—			—
Deferred stock compensation related to WirelessHome acquisition		558,950		6		—			—			2,198			(2,204	)		—
Compensation expense in connection with employees’ stock forward sale agreements		—		—		—			—			191			(191	)		—
Exercise of stock options		1,328,782		14		—			—			726			—			—
Other deferred stock compensation		88,760		1		—			—			363			(532	)		—
Reversal of deferred compensation in connection with termination employees		—		—		—			—			(1,750	)		1,750			—
Amortization of deferred stock compensation		—		—		—			—			—			5,196			—
Unrealized gain on investments		—		—		—			—			—			—			—
Total comprehensive loss		—		—		—			—			—			—			—
Note receivables from stockholders		—		—		—			—			—			—			144

Balance as of December 31, 2001		101,325,501		1,013		(42,107,396	)		(21,400	)		159,626			(614	)		(918	)
Net loss		—		—		—			—			—			—			—
Issuance of Class A common stock pursuant to Employee Stock Purchase Plan		247,556		2		—			—			575			—			—
Issuance of Class A common stock in connection with Proxim, Inc. acquisition		59,506,503		595		—			—			132,700			—			—
Stock options and warrants assumed in connection with Proxim, Inc. acquisition		—		—		—			—			25,294			—			—
Issuance of Class A common stock in connection with nBand Communications acquisition		180,144		2		—			—			448			—			—
Issuance of Series A preferred stock warrants		—		—		—			—			13,993			—			—
Deemed Series A Preferred Stock dividend		—		—		—			—			2,740			—			—
Accretion of Series A Preferred Stock redemption obligations		—		—		—			—			(1,046	)		—			—
Common Stock repurchase related to stock forward sale agreements		—		—		(78,138	)		(185	)		(433	)		—			—

[Continued from above table, first column(s) repeated]


	Retained
	Earnings			Other
	(Accumulated			Comprehensive					Comprehensive
	Deficit)			Income (Loss)		Total			Income (Loss)


	(Dollars in thousands, except per share data)
Balance sheet as of December 31, 2000	$	6,068		$	12	$	122,024
Net loss		(25,598	)		—		(25,598	)	$	(25,598	)
Issuance of Class A common stock pursuant to Employee Stock Purchase Plan		—			—		1,285
Issuance of Class A common stock in connection with the WirelessHome acquisition		—			—		12,105
Stock options and warrants assumed in connection with the WirelessHome acquisition		—			—		342
Common stock redemption related to WirelessHome acquisition		—			—		(400	)
Stock price protection contingent consideration related to the WirelessHome acquisition		—			—		2,519
Deferred stock compensation related to WirelessHome acquisition		—			—		—
Compensation expense in connection with employees’ stock forward sale agreements		—			—		—
Exercise of stock options		—			—		740
Other deferred stock compensation		—			—		(168	)
Reversal of deferred compensation in connection with termination employees		—			—		—
Amortization of deferred stock compensation		—			—		5,196
Unrealized gain on investments		—			63		63			63

Total comprehensive loss		—			—		—		$	(25,535	)

Note receivables from stockholders		—			—		144

Balance as of December 31, 2001		(19,530	)		75		118,252
Net loss		(239,850	)		—		(239,850	)	$	(239,850	)
Issuance of Class A common stock pursuant to Employee Stock Purchase Plan		—			—		577
Issuance of Class A common stock in connection with Proxim, Inc. acquisition		—			—		133,295
Stock options and warrants assumed in connection with Proxim, Inc. acquisition		—			—		25,294
Issuance of Class A common stock in connection with nBand Communications acquisition		—			—		450
Issuance of Series A preferred stock warrants		—			—		13,993
Deemed Series A Preferred Stock dividend		(2,740	)		—		—
Accretion of Series A Preferred Stock redemption obligations		(1,890	)		—		(2,936	)
Common Stock repurchase related to stock forward sale agreements		—			—		(618	)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY — (Continued)



	Common Stock				Treasury Stock												Notes
											Additional			Deferred			Receivable
	Class A				Class A						Paid-in			Stock			from
	Shares		Amount		Shares			Amount			Capital			Compensation			Stockholders


	(Dollars in thousands, except per share data)
Compensation expense in connection with employees’ stock forward sale agreements		—		—		—			—			241			(241	)		—
Issuance of Class A Common Stock in connection with achievement of Card Access milestones		302,328		3		—			—			(3	)		—			—
Issuance of Class A Common Stock in connection with achievement of WirelessHome milestones		83,330		1		—			—			36			—			—
Exercise of stock options		683,582		7		—			—			384			—			—
Amortization of deferred stock compensation		—		—		—			—			—			855			—
Unrealized gain on investments		—		—		—			—			—			—
Total comprehensive loss		—		—		—			—			—			—			—
Repayment of notes receivable from stockholders		—		—		—			—			—			—			20
Reversal of deferred tax asset recognized upon recapitalization and related tax election		—		—		—			—			1,275			—			—

Balance as of December 31, 2002		162,328,944		1,623		(42,185,534	)		(21,585	)		335,830			—			(898	)
Net loss
Issuance of Class A common stock pursuant to Employee Stock Purchase Plan		283,382		3		—			—			200			—			—
Issuance of Class A common stock in connection with WirelessHome stock price protection contingent consideration		1,246,178		12		—			—			(12	)		—			—
Accretion of Series A Preferred Stock redemption obligations		—		—		—			—			(2,865	)		—			—
Beneficial conversion feature of convertible notes		—		—		—			—			5,565			—			—
Exercise of stock options		1,178,690		12		—			—			593			—			—
Unrealized gain on investments		—		—		—			—			—			—			—
Total comprehensive loss		—		—		—			—			—			—			—
Repayment of notes receivable from stockholders		—		—		—			—			—			—			187

Balance as of December 31, 2003		165,037,194	$	1,650		(42,185,534	)	$	(21,585	)	$	339,311		$	—		$	(711	)

[Continued from above table, first column(s) repeated]


	Retained
	Earnings			Other
	(Accumulated			Comprehensive						Comprehensive
	Deficit)			Income (Loss)			Total			Income (Loss)


	(Dollars in thousands, except per share data)
Compensation expense in connection with employees’ stock forward sale agreements		—			—			—
Issuance of Class A Common Stock in connection with achievement of Card Access milestones		—			—			—
Issuance of Class A Common Stock in connection with achievement of WirelessHome milestones		—			—			37
Exercise of stock options		—			—			391
Amortization of deferred stock compensation		—			—			855
Unrealized gain on investments		—			232			232			232

Total comprehensive loss		—			—			—		$	(239,618	)

Repayment of notes receivable from stockholders		—			—			20
Reversal of deferred tax asset recognized upon recapitalizatio and related tax election		—			—			1,275

Balance as of December 31, 2002		(264,010	)		307			51,267
Net loss		(127,440	)					(127,440	)	$	(127,440	)
Issuance of Class A common stock pursuant to Employee Stock Purchase Plan		—			—			203
Issuance of Class A common stock in connection with WirelessHome stock price protection contingent consideration		—			—			—
Accretion of Series A Preferred Stock redemption obligations		(6,303	)		—			(9,168	)
Beneficial conversion feature of convertible notes		—			—			5,565
Exercise of stock options		—			—			605
Unrealized gain on investments		—			(307	)		(307	)		(307	)

Total comprehensive loss		—			—			—		$	(127,747	)

Repayment of notes receivable from stockholders		—			—			187

Balance as of December 31, 2003	$	(397,753	)	$	—		$	(79,088	)

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

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

Proxim Corporation (the “Company”) is the company created by the merger of Proxim, Inc. and Western Multiplex Corporation, or Western Multiplex. On March 26, 2002, Western Multiplex merged with Proxim, Inc. located in Sunnyvale, California which designs, manufactures and markets high performance wireless local area networking, or WLAN, and building-to-building network products based on radio frequency, or RF, technology and changed its name to Proxim Corporation. On August 5, 2002, the Company completed the acquisition of the 802.11 WLAN systems business of Agere Systems, Inc., or Agere, including its ORiNOCO product line. In accordance with accounting principles generally accepted in the United States of America, the results of operations for the periods presented include the results of the merged or acquired businesses beginning from the respective dates of completion of the business combinations.

Western Multiplex was founded in 1979 in Sunnyvale, California, as a vendor of radio components and related services. In 1992, Western Multiplex became a designer and manufacturer of broadband wireless systems and launched its Lynx broadband wireless systems. 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 data and voice network traffic among multiple facilities. Based on Western Multiplex’s core technologies and the technology acquired through its purchase of WirelessHome Corporation, or WirelessHome, in March 2001, Western Multiplex developed Tsunami point-to-multipoint systems designed to 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.

Amended Exchangeable Promissory Notes. On July 22, 2003, the Company announced that Warburg Pincus Private Equity VIII, L.P. and Broadview Capital Partners L.P. and affiliates (collectively, the “Investors”) had agreed to collectively invest $30 million, and potentially up to $40 million, in the Company. On July 30, 2003, these Investors collectively invested $30 million, and the Company issued short-term secured exchangeable promissory notes bearing interest at 25% per annum pursuant to that certain securities purchase agreement dated July 22, 2003. On October 21, 2003, the Company amended and restated its securities purchase agreement (the “Amended Agreement”) with the Investors and its $30 million short-term secured promissory notes issued to these Investors on July 30, 2003. The amended and restated secured exchangeable promissory notes (the “Amended Notes”) will continue to bear interest at 25% per annum, subject to increase on an event of default or other events. The Amended Notes are due upon the earliest of:


	•	the occurrence of an event of default, as defined in the Amended Notes, subject to election by the holders of at least a majority of the aggregate principal amount outstanding, except in the case of an event of default relating to bankruptcy or insolvency or similar proceedings;

	•	any date upon which a holder of an Amended Note demands payment upon the occurrence of a change of control, as defined in the Amended Agreement; and

	•	September 30, 2004.

An event of default triggered by a material adverse change, as defined in the Amended Agreement, includes (i) any additional adverse ruling or judgment in the Company’s pending patent infringement litigation with Symbol Technologies, Inc. (“Symbol”) that requires the Company and/or any of its subsidiaries to render payment or post a bond equal to or greater than $10 million (whether or not such payment has been made or bond posted as of such date) and (ii) any other additional adverse rulings or judgments made against the Company and/or any of its subsidiaries in the patent infringement litigation with Symbol or any other

litigations, the effects of which rulings or judgments are material and adverse to the Company and its subsidiaries, taken as a whole.

The terms previously providing for automatic exchange of the secured promissory notes, upon stockholder approval, for shares of Series B mandatorily redeemable convertible preferred stock (“Series B Preferred Stock”) were modified to provide for exchange at the Investors’ sole discretion following stockholder approval. The Series B Preferred Stock issuable upon exchange of the Amended Notes, if any, will be convertible into shares of the Company’s Class A common stock at a conversion price of $1.15 per share, as previously agreed. In accordance with the Amended Agreement, the Series B Preferred Stock will have rights to a liquidation preference that accretes at 14% per annum compounding quarterly for seven years, with acceleration upon a change of control, as defined, or a material asset sale, as defined. The Series B Preferred Stock, if issued, also will be entitled to weighted average conversion price adjustments for dilutive issuances and subscription rights in certain equity financings. The Company will have the right to require conversion of the Series B Preferred Stock after five years if the closing price of the Company’s common stock exceeds 300% of the conversion price for ninety consecutive trading days.

The Company agreed, subject to approval of its stockholders, to issue to the Investors warrants to purchase 18 million and 6 million shares of common stock at an exercise price of $1.46 and $1.53 per share, respectively (collectively, the “Series B Warrants”). The Investors also agreed to make available to the Company an additional $10 million, issuable in exchange for senior secured exchangeable promissory notes (the “New Notes”), at the Company’s election (the “Call Right”).

At a special meeting of stockholders held on December 12, 2003, the Company’s stockholders approved the Company’s ability to issue to the Investors: (i) shares of the Company’s Series B Preferred Stock upon exercise of each Investor’s right to exchange the Amended Notes, plus accrued but unpaid interest, as well as upon each Investor’s exercise of the right to exchange any New Notes that the Company may issue to the Investors, plus accrued but unpaid interest; and (ii) the Series B Warrants. Following the receipt of stockholder approval, the Company issued the Series B Warrants to the Investors on December 12, 2003. In accordance with the terms of the Amended Agreement, the Company exercised its Call Right and on December 19, 2003, the Company issued the New Notes to the Investors in exchange for an additional investment of $10 million.

Upon the occurrence of an event of default or change of control occurs or if the Investors decide not to exchange the Amended Notes for Series B Preferred Stock, the Company may be required to repay the Amended Notes upon the earlier of demand by the Investors or the September 30, 2004 maturity date. If the Company were required to repay the Amended Notes, the Company would be required to obtain immediate alternative sources of financing. If the Company were not able to obtain an alternative source of financing, the Company would most likely have insufficient cash to repay the Amended Notes, be unable to meet its ongoing operating obligations as they come due in the ordinary course of business, and may have to seek protection under applicable bankruptcy laws.

Amended Credit Facility. The Company amended and restated its secured financing agreements with Silicon Valley Bank in June and July 2003 and then further amended these agreements in October 2003. The financial covenant requiring the Company to maintain cash and cash equivalents of an amount not less than $8 million, as amended, was reduced to $4 million. As amended, the events of default also include any judgment, restraining order, injunction, any material adverse development in connection with the Company’s litigation with Symbol, or failure of the Company to advise Silicon Valley Bank of all material developments in this litigation. See Note 19 for further description of the amended credit facility.

Litigation with Symbol. On September 15, 2003, the Company announced that a jury had rendered a verdict in the first phase of the patent infringement suit with Symbol. On Symbol’s claims of patent infringement, the jury found that certain of the Company’s products infringe two of Symbol’s patents and

assessed a 6% royalty on the revenue of relevant products. While the actual amount of past royalties due has not been finally determined, the Company recorded an accrual for estimated past royalties payable of $22.9 million and $2.9 million for interest during the third quarter of 2003 and an accrual for estimated royalties payable of $1.0 million and $87,000 for interest during the fourth quarter of 2003. The Company has not been enjoined from continued sales of these products. The Company will continue to evaluate and review its estimate of the royalties and interest payable from time to time for any indications that could require it to change its assumptions relating to the amount already recorded. On November 24, 2003, the District Court conducted a one-day bench trial on the Company’s equitable defenses not addressed by the jury. The District Court has not reached a decision on the equitable defenses.

With respect to the jury verdict in the Company’s litigation with Symbol, as described above, the Company does not incur any immediate financial obligation to Symbol as a result of this verdict, pending completion of related proceedings. The Company intends to continue vigorously defending itself in Symbol’s lawsuit against the Company and to consider all available options after the conclusion of all matters before the court.

If the proceedings before the court in the Company’s litigation with Symbol are not decided in the Company’s favor, the Company would likely be required to make significant payments to Symbol, including payments for royalties related to past sales of products found to infringe on two of Symbol’s patents and additional royalties in connection with future sales of these products, or the Company would be required to post a bond in order to appeal the court’s decision. Any additional adverse ruling or judgment in this litigation that requires the Company to render payment or post a bond equal to or greater than $10 million, and any other ruling or judgment in this or any other litigation that is material and adverse to the Company, triggers an event of default under the Amended Notes. Upon such occurrence, the Investors would have the ability to require the Company to repay the Amended Notes. In addition, any judgment, restraining order, injunction or any material adverse development in this litigation triggers an event of default under the Silicon Valley Bank credit facility. Upon such occurrence, Silicon Valley Bank would have the ability to require us to repay any outstanding amounts under the credit facility and to prohibit us from borrowing any additional amounts.

The Company has incurred substantial losses and negative cash flows from operations during the years ended December 31, 2003, 2002 and 2001, and had an accumulated deficit of $397.8 million as of December 31, 2003. If the Company were required to make payments to Symbol, post a bond to the court, and/or repay the Amended Notes and amounts, if any, owed to Silicon Valley Bank, either due to an event of default or otherwise, it would be required to obtain immediate alternative sources of financing. If the Company were not able to obtain an alternative source of financing, it would most likely have insufficient cash to pay these obligations, be unable to meet its ongoing operating obligations as they come due in the ordinary course of business, and may have to seek protection under applicable bankruptcy laws. These matters raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from this uncertainty.

The Company depends on single or limited source suppliers for several key components used in the Company’s WLAN products. The Company depends on single sources for proprietary application specific integrated circuits, or ASICs, and assembled circuit boards for these products. 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. The Company does not have any long-term arrangements with any suppliers.

The Company relies on contract and subcontract manufacturers for turnkey manufacturing and circuit board assemblies which subjects the Company to additional risks, including a potential inability to obtain an adequate supply of finished assemblies and assembled circuit boards and reduced control over the price, timely

delivery and quality of such finished assemblies and assembled circuit boards. If the Company’s Sunnyvale facility were to become incapable of operating, even temporarily, or were unable to operate at or near the Company’s current or full capacity for an extended period, the Company’s business and operating results could be materially adversely affected.

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America with the instructions to Form 10-K.

The consolidated financial statements include the accounts of Proxim Corporation and all of its subsidiaries. The financial condition and results of operations as of and for the years ended December 31, 2003, 2002 and 2001 include the results of acquired subsidiaries from their respective dates of acquisition. All significant intercompany transactions and balances are eliminated in consolidation.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates and such differences may be material to the financial statements.

The Company considers all highly liquid instruments with an original maturity, or remaining maturity at the date of purchase of three months or less when purchased to be cash equivalents. Cash equivalents consist primarily of market rate accounts and highly rated commercial paper that are stated at cost, which approximate fair value. Investments with maturities greater than three months and less than one year as of the date of the balance sheet are classified as marketable securities. Marketable securities consist of time deposits with original maturities greater than three months and less than one year and corporate debt obligations. Investments with maturities greater than one year are classified as marketable securities, long-term. Marketable securities are classified as available-for-sale as of the balance sheet date in accordance with Statement of Financial Accounting Standard, or SFAS, No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and are reported at fair value, with unrealized gains and losses recorded as other comprehensive income (loss) included in stockholders’ equity.

The Company accounts for derivative financial instruments under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 133 establishes methods of accounting for derivative financial instruments and hedging activities related to those instruments as well as other hedging activities. The Company’s derivatives comprise warrants issued to investors in connection with the issuance of financing and equity instruments. The term of the warrants is seven years. During the year ended December 31, 2003, the Company recorded in other income, gains on derivatives of approximately $0.4 million.

In addition to cash equivalents and marketable securities, the Company’s financial instruments include restricted cash and long-term investments, which are carried at cost. Restricted cash and long-term investments represent funds held at financial institutions as collateral on an irrevocable standby letter of credit and as a security deposit for lease agreements.

Equity investments, representing ownership of less than 20% of the investee in which the Company does not have the ability to exert significant influence, are accounted for using the cost method. The Company reviews its investments on a regular basis and considers factors including the operating results, available evidence of the market value and economic outlook of the relevant industry sector. When the Company concludes that an other-than-temporary impairment has resulted, the difference between the fair value and the carrying value is written off and recorded as an impairment charge in the statement of operations.

Inventories are stated at the lower of cost or market, cost being determined using the first-in, first-out method, less provisions made for excess and obsolete inventory based on management’s estimates.

Property and equipment are stated at cost less accumulated depreciation. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets, ranging from three to five years. Amortization of leasehold improvements is computed using the straight-line method over the shorter of the remaining lease term or the estimated useful lives of the improvements.

The Company reviews long-lived assets and certain identifiable intangibles assets to be held and used for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company evaluates any possible impairment of long-lived assets and certain intangible assets using estimates of undiscounted future cash flows. If an impairment loss is to be recognized, it is measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset. Management evaluates the fair value of its long-lived assets and certain intangibles assets using primarily the estimated discounted future cash flows method. Management uses other alternative valuation techniques whenever the estimated discounted future cash flows method is not appropriate.

Product revenue is generally recognized upon shipment when persuasive evidence of an arrangement exists, the price is fixed or determinable, and collectibility is reasonably assured. A provision for estimated future sales return and warranty costs is recorded at the time revenue is recognized. The Company has no obligation to provide any modification or customization upgrades, enhancements or other post-sale customer support. The Company grants certain distributors limited rights of return and price protection on unsold products. Product revenue on shipments to distributors, which have rights of return and price protection, is deferred until shipment to end customers by the distributors.

Effective June 29, 2002, the Company began to recognize sales of its wireless wide area network, or WWAN, products to distributors with rights of return upon shipment by the distributors to the end user customer. Prior to June 29, 2002, the Company recognized revenue for sales of all WWAN products to distributors with rights of return upon shipment to the distributor and provided reserves for the estimated

amount of product returns at the time that revenue was recognized. The combination of the changes resulting from the acquisition of the ORiNOCO business and the adoption of one uniform method is consistent with the Company’s plans to sell bundled and integrated WLAN and WWAN products. This change in accounting methodology is treated as a change in estimate, and was made on a prospective basis, starting in the third quarter of 2002.

Goodwill is the amount by which the cost of the acquired identifiable net tangible and intangible assets exceeded the fair values of the acquired net tangible and intangible assets on the date of purchase. Goodwill resulting from business acquisitions completed prior to June 30, 2001 is reported at cost, net of accumulated amortization. Amortization was calculated on a straight-line basis over the estimated useful lives of 5 years. Effective January 1, 2002, The Company adopted SFAS No. 142, “Goodwill and Intangible Assets,” and no longer amortizes goodwill that arose from these acquisitions. Goodwill resulting from business acquisitions completed after June 30, 2001 is reported at cost and not subject to amortization in accordance with SFAS No. 142.

The Company tests goodwill for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired, applying a fair-value based test. Examples of such events or circumstances include:


	•	a significant adverse change in legal factors or in the business climate;

	•	an adverse action or assessment by a regulator;

	•	unanticipated competition;

	•	a loss of key personnel;

	•	a more-likely-than-not expectation that a reporting unit or a significant portion of a reporting unit will be sold or otherwise disposed of;

	•	the testing for recoverability under of a significant asset group within a reporting unit; and

	•	recognition of goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit.

The impairment test consists of a comparison of the fair value of the goodwill with its carrying value. If the carrying value of the goodwill exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess.

Intangible assets result from business acquisitions accounted for under the purchase method, and consist of developed technology, core technology, customer relationships, tradename, patents and in-process research and development. Intangible assets are reported at cost, net of accumulated amortization. Identifiable intangible assets other than in-process research and development and tradename are amortized on a straight-line basis over their estimated useful lives ranging from two to five years. In-process research and development is charged to operating expense in the period the acquisition is consummated.

Software development costs are capitalized once technological feasibility is established, which the Company defines as completion of a working model. The capitalized cost is then amortized on a straight-line basis over the estimated product life, or on the ratio of current revenues to total projected product revenues, whichever is greater. To date, the period between achieving technological feasibility and the general availability of such software has been short and software development costs qualifying for capitalization have been insignificant. Accordingly, the Company has not capitalized any software development costs.

The Company accounts for income taxes using the asset and liability method, under which the expected future tax consequences of temporary differences between the book and tax bases of assets and liabilities are recognized as deferred tax assets and liabilities, and for net operating loss and tax credit carryforwards. A valuation allowance is established when necessary to reduce deferred tax assets where it is more likely than not that the deferred tax assets will not be realized. The Company does not record a deferred tax provision on unremitted earnings of foreign subsidiaries to the extent that such earnings are considered permanently invested.

The functional currency of the Company’s operations in all countries is the U.S. dollar. Sales and purchase transactions are generally denominated in U.S. dollars. Foreign currency transaction gains and losses are included in the statement of operations and were not material for each period presented.

Basic net income (loss) per share is computed by dividing net loss available to Common Stockholders by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is calculated using the weighted average number of outstanding shares of common stock plus potential dilutive shares. Potential dilutive shares consist of convertible preferred stock, stock options and warrants, using the treasury stock method based on the average stock price for the period. The calculation of diluted net loss per share excludes potential dilutive shares if the effect is antidilutive.

The carrying value of Preferred Stock is adjusted by quarterly accretions, on the effective-interest basis, so that the carrying amount will equal the redemption amount at the earliest redemption date. These adjustments will be effected through charges against additional paid-in capital and accumulated deficit, as appropriate.

The Company accounts for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion, or APB No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations. The Company provides additional pro forma disclosures as required under SFAS No. 123, “Accounting for Stock-Based Compensation” and SFAS No. 148 “Accounting for Stock-Bases Compensation — Transition and Disclosure.”

In accordance with SFAS No. 148, “Accounting for Stock-based Compensation, Transition and Disclosure,” the Company is required to disclose the effects on reported net loss and basic and diluted net loss per share as if the fair value based method had been applied to all awards.

The weighted average estimated grant date fair value, as defined by SFAS No. 123, for stock options granted under its stock option plans during 2003, 2002 and 2001 was $0.89, $2.02 and $6.06 per share, respectively. The weighted average estimated grant date fair value of stock purchase rights granted pursuant to its employee stock purchase plan during 2003, 2002 and 2001 was $0.67, $1.85 and $2.86 per share, respectively. The estimated grant date fair value disclosed by the Company is calculated using the Black-Scholes option pricing model. The Black-Scholes model, as well as other currently accepted option valuation models, was developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from its stock option and purchase awards. These models also require highly subjective assumptions, including future stock price volatility and expected time until exercise, which greatly affect the calculated grant date fair value.

The following weighted average assumptions are included in the estimated grant date fair value calculations for its stock option and purchase awards:

Had the Company recorded compensation based on the estimated grant date fair value, as defined by SFAS No. 123, for awards granted under its stock option plans and stock purchase plan, the net income (loss) and net income (loss) per share would have been changed to the pro forma amounts below for the years ended December 31, 2003, 2002 and 2001 (in thousands, except per share data):

The pro forma effect on net loss and net loss per share for 2003, 2002 and 2001 is not representative of the pro forma effect on net income (loss) in future years because it does not take into consideration pro forma compensation expense related to grants made prior to 1996.

SFAS No. 130, “Reporting Comprehensive Income” requires that companies report comprehensive income (loss) and its components. Comprehensive income (loss) is defined to include all changes in equity during a period except those resulting from investments by owners and distributions to owners. The Company has the following two items that comprise comprehensive income (loss): (1) net income (loss); and (2) unrealized gain (loss) on investments.

SFAS No. 131, “Disclosures About Segments of an Enterprise and Related Information,” requires that companies report separately in the financial statements certain financial and descriptive information about operating segments’ profit or loss, certain specific revenue and expense items and segment assets. Additionally, companies are required to report information about revenue and assets by geographic areas and about major customers. The Company’s products are grouped into two segments: wireless wide area network, or WWAN, and wireless local area network, or WLAN.

In July 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity.” The principal difference between SFAS No. 146 and EITF Issue No. 94-3 relates to SFAS No. 146’s timing for recognition of a liability for a cost associated with an exit or disposal activity. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under EITF Issue No. 94-3 a liability for an exit cost as generally defined in EITF Issue No. 94-3 was recognized at the date of an entity’s commitment to an exit plan. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The Company adopted SFAS No. 146 beginning on January 1, 2003. SFAS No. 146 is applied prospectively upon adoption.

In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.” FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The Company believes that the adoption of this Interpretation will have no material impact on its consolidated financial statements.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. In October 2003, the FASB decided to defer certain provisions of SFAS No. 150 as they apply to mandatorily redeemable noncontrolling interests. It is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of the Statement and still existing at the beginning of the interim

period of adoption. Restatement is not permitted. The adoption of this Statement is not expected to have a material impact on the Company’s consolidated financial statements.

On December 17, 2003, the Staff of the Securities and Exchange Commission (“SEC” or “the Staff”) issued Staff Accounting Bulletin (“SAB”) No. 104, Revenue Recognition, which supercedes SAB No. 101, Revenue Recognition in Financial Statements. SAB 104’s primary purpose is to rescind accounting guidance contained in SAB No. 101 related to multiple element revenue arrangements, superceded as a result of the issuance of EITF 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables.” Additionally, SAB 104 rescinds the SEC’s Revenue Recognition in Financial Statements Frequently Asked Questions and Answers (the FAQ) issued with SAB 101 that had been codified in SEC Topic 13, Revenue Recognition. As the primary purpose of SAB No. 104 is to rescind accounting guidance contained in SAB No. 101 and the FAQ related to multiple element revenue arrangements, superceded as a result of the issuance of EITF 00-21, the adoption of this bulletin during the year ended December 31, 2003 did not have any material impact on the Company’s consolidated financial statements.

On August 5, 2002, the Company completed its acquisition of the 802.11 WLAN systems business of Agere, including its ORiNOCO product line, for $65.0 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 $75.0 million in the Company. These investors received 1,640,000 shares of Series A Preferred Stock (Note 16) in the amount of $41.0 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 Series A Preferred Stock carrying value and recorded as additional paid-in capital. During the quarter ended September 27, 2002, a deemed Preferred Stock dividend representing the beneficial conversion feature of the Series A Preferred Stock of $2.7 million was reflected in the determination of the loss attributable to Common stockholders. The remaining $34.0 million was in the form of convertible notes. Upon the receipt of approval of the Company’s stockholders at a special meeting held on October 8, 2002, the notes issued to these investors were converted into 1,360,000 shares of Series A Preferred Stock and warrants to purchase approximately 5.6 million shares of Common Stock valued at approximately $1.6 million. The value of the warrants was recorded as a reduction of the Series A 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 approximately $14.0 million. The Series A Preferred Stock and warrants issued to the investors represented approximately 28% of Proxim’s outstanding common stock on an as-converted and as-exercised basis including dividends as of October 22, 2003. In addition, in connection with the transaction, the Company entered into a patent cross-license agreement and settled all outstanding patent-related litigation with Agere, and entered into a three-year strategic supply agreement, pursuant to which Agere will provide 802.11 chips, modules and cards to the Company at specified prices. Total consideration of $70.0 million for the acquisition comprised of $65.0 million in cash and transaction costs of approximately $5.0 million.

The purpose of the acquisition was to gain key technology and establish a leadership position in the broadband wireless access systems market.

The total purchase price was allocated to the tangible and identifiable intangible assets, goodwill acquired and liabilities assumed on the basis of their relative fair values as follows (in thousands):

The liabilities assumed consisted principally of restructuring charges related to severance pay totaling $2.3 million for 55 employees, warranty expense and other current liabilities.

The core and developed technology acquired include Enterprise Access Points, Radio Backbone Systems, Broadband Gateways and Network Management products. These products have already achieved technological feasibility in the marketplace. The fair value assigned to the core technology and developed technology totaled $8.5 million and $17.0 million respectively, and is being amortized over the expected life of its cash flows.

As of the valuation date, it was assumed that there was some value attributable to the ORiNOCO customer base. In valuing the ORiNOCO customer base, the Company employed an income approach similar to that used in valuing the technology. The customer base includes original equipment manufacturers (“OEM”) such as Avaya, Dell Computer, Fujitsu and Hewlett-Packard. The fair value assigned to the ORiNOCO customer base totaled $9.0 million and is being amortized over the expected life of its cash flows.

As of the valuation date, it was assumed that there was some value attributable to the ORiNOCO tradename. In valuing the tradename, the Company utilized the relief from royalty methodology, which assumes that the value of the asset equals the amount a third party would pay to use the asset and capitalize on the related benefits of the asset. Therefore, a revenue stream for the asset was estimated based on the revenue from the technology over the next five years, which represents the developed, core and in-process revenue stream. The Company then applied a 2.0% royalty rate to the forecasted revenue to estimate the pre-tax income associated with the asset. The fair value assigned to the tradename totaled $5.9 million and because the Company will continue to use the ORiNOCO tradename the intangible asset will not be amortized.

Purchased in-process research and development, or IPR&D, consisted of next generation Enterprise Access Points, Radio Backbone Systems, Broadband Gateways and Network Management products, which had not yet reached technological feasibility and had no alternative future use as of the date of acquisition. As of the valuation date, the 802.11 WLAN systems business of Agere was developing next generation Enterprise Access Points, Radio Backbone Systems, Broadband Gateways and Network Management products. These products are under development and require additional hardware and software development. The value of the IPR&D was determined by estimating the net cash flows from potential sales of the products resulting from completion of this project, reduced by the portion of net cash flows from the revenue attributable to core and developed technology. The resulting cash flows were then discounted back to their present value using a discount rate of 50%. The fair value assigned to the IPR&D totaled $10.4 million and was expensed at the time of the acquisition.

Core technology, developed technology and customer relationships are being amortized on a straight-line basis over the following estimated periods of benefit:

On April 18, 2002, the Company acquired nBand Communication, Inc. (“nBand”), a California corporation. nBand is a startup developer of advanced application specific integrated circuits (ASICs) designs that the Company intends to use in the development of next generation ASICs. The purchase price was $1.2 million and comprised of $550,000 in cash, 180,144 shares of Class A common stock valued at approximately $450,000 and transaction expenses of approximately $200,000. In the second quarter of 2002, the Company assigned the entire purchase price of $1.2 million to purchased in-process research and development as the acquired technology had not reached technological feasibility.

On March 26, 2002, the merger between Western Multiplex Corporation and Proxim, Inc. was completed, resulting in Proxim Corporation as the combined company. The combined company provides broadband, or high speed, wireless access products to service providers, businesses and other enterprises as well as high performance WLAN products based on RF technology. The merger was accounted for as a purchase transaction with Proxim, Inc. as the purchased entity. Total consideration of $172.6 million for the merger was adjusted to $175.3 million in the third quarter of 2002 and comprised of the following:


	•	59,506,503 shares of Class A common stock valued at approximately $133.3 million;

	•	options and warrants having an assumed value of approximately $25.3 million; and

	•	transaction costs originally estimated at $14.0 million that were adjusted in the third quarter of 2002 to $16.7 million.

The liabilities assumed consist principally of accounts payable, accrued compensation and benefits and other current liabilities.

The core and developed technology acquired include 900MHz, RangeLAN, Harmony, 802.11a and Skyline products for the enterprise/commercial markets; Symphony HomeRF, HomeRF 2.0 and Netline products for the home/SOHO markets; and Stratum and Stratum MP products for the building-to-building markets. These products have already achieved technological feasibility in the marketplace. The fair value assigned to the core technology and developed technology totaled $18.0 million and $12.0 million respectively, and is being amortized over the expected life of its cash flows.

As of the valuation date, it was assumed that there was some value attributable to patents and patent applications of Proxim, Inc. The Company assumed that the patents and patent applications will continue to be used but will be phased out over time as new technology is developed. To value the patents and patent applications, we utilized the relief from royalty methodology. The relief from royalty methodology assumes that the value of the asset equals the amount a third party would pay to use the asset and capitalize on the related benefits of the asset. Therefore, a revenue stream for the asset is estimated, and then an estimated royalty rate is applied to the forecasted revenue to estimate the pre-tax income associated with the asset. The pre-tax income is then tax-affected to estimate the after-tax net income associated with the asset. Finally, the after tax net income is discounted to the present value using an appropriate rate of return that considers both the risk of the asset and the associated cash flow estimates. The resulting cash flows were then discounted back to their present value using a discount rate of 25%. The fair value assigned to the patents totaled $3.2 million and is being amortized over the expected life of its cash flows.

Purchased IPR&D consisted of 802.11a and HomeRF 2.0 wireless networking products under development, which had not yet reached technological feasibility and had no alternative future use as of the date of acquisition. As of the valuation date, Proxim, Inc. was developing 802.11a WLAN adapters in PCI and Mini PCI form factors and a connectorized access point as well as a HomeRF 2.0 voice data module, voice data gateway and voice data gateway and answer machine. The value of the IPR&D was determined by estimating the net cash flows from potential sales of the products resulting from completion of this project, reduced by the portion of net cash flows from the revenue attributable to core and developed technology. The resulting cash flows were then discounted back to their present value using a discount rate of 30%. The fair value assigned to the IPR&D totaled $4.5 million and was expensed at the time of the acquisition.

Core technology, developed technology and patents are being amortized on a straight-line basis over the following estimated periods of benefit:

On March 22, 2001, the Company acquired WirelessHome located in Long Beach, California in a cash and stock transaction. WirelessHome is a development stage company that designs and develops point-to-multipoint systems. The acquisition was accounted for as a purchase. The Company acquired WirelessHome for a total consideration of $28.2 million comprised of:


	•	1,649,324 shares of Class A common stock valued at $12.1 million;

	•	$10.5 million in cash;


	•	options and warrants having an assumed value of $0.7 million; a stock price protection contingent consideration valued at $2.5 million; and

	•	transaction costs of $2.4 million.

As part of the transaction the Company assumed $2.0 million of net liabilities, which consisted of $0.4 million of current assets, $0.9 million of other assets and $3.3 million of current liabilities. In March 2001, the Company issued an initial consideration of $23.0 million. As a result, the Company recorded the initial purchase price allocation as follows: $24.7 million to goodwill and $0.3 million to deferred compensation.

The initial purchase price, as well as the initial allocation, were subject to adjustments upon WirelessHome meeting certain development milestones and other considerations as defined in the agreement to acquire WirelessHome.

On October 7, 2001, WirelessHome met the development milestones in accordance with the acquisition agreement. This resulted in additional purchase consideration of $5.2 million. We then evaluated and recorded the final purchase price and stock compensation expense arising from the achievement of those milestones. The total purchase price allocation, which consisted of $28.2 million of purchase price and $2.0 million of net liabilities assumed, was as follows: $1.0 million to assembled workforce, $6.4 million to IPR&D $22.5 million to goodwill, and $0.3 million to deferred compensation. In addition, we recorded $2.2 million of stock compensation expense as a result of releasing and issuing 558,950 shares, which were previously held in escrow, to individuals who were directly involved in the completion of the development milestones.

The purchase price allocation and intangible assets valuation were based on management’s estimates of the after-tax net cash flows and gave consideration to the following: (i) the employment of a fair market value premise excluding any consideration specific to the Company which could result in estimates of investment value for the subject assets; (ii) comprehensive due diligence concerning all potential intangible assets including trademarks, tradename, patents, copyrights, non-compete agreements, assembled work force, customer relationships and sales channel; and (iii) the value of existing technology was specifically addressed, with a view toward ensuring that the relative allocations to existing technology and in-process research and development were consistent with the relative contributions of each final product.

In making its purchase price allocation, management considered present value calculations of income, an analysis of project accomplishments and remaining outstanding items and an assessment of overall contributions, as well as project risks. The value assigned to purchased IPR&D was determined by estimating the costs to develop the acquired technology into commercially viable products, estimating the resulting net cash flows from the projects, and discounting the net cash flows to their present value. The revenue projection used to value the IPR&D was based on estimates of relevant market sizes and growth factors, expected trends in technology, and the nature and expected timing of new product introductions by the Company and its competitors. The resulting net cash flows from such projects are based on management’s estimates of cost of revenue, operating expenses, and income taxes from such projects.

On March 24, 2000, the Company acquired Ubiquity Communication, Inc. (“Ubiquity”), located in Petaluma, California. Through the acquisition, the Company acquired technology for use in its development of point-to-multipoint systems. At the time of the acquisition, Ubiquity had seven employees, including six engineers. In connection with the acquisition, the Company issued 692,772 shares of Class A common stock to its former owners and reserved 137,727 shares of our Class A common stock for issuance upon the exercise of the Ubiquity options we assumed. The value of the consideration paid for the acquisition of Ubiquity was $6.4 million. The transaction was accounted for using the purchase method of accounting. In March 2001, the Ubiquity operations were closed due to the acquisition of WirelessHome.

Goodwill and other intangible assets related to the acquisition of Ubiquity totaled $6.8 million. In March 2001, the Company recorded an impairment of the Ubiquity goodwill and other intangible assets of $4.3 million as a result of closing the Ubiquity operations. The amount of the charge equals the unamortized amount of these intangible assets as of the date of closure of the Ubiquity operations as no future benefit is anticipated, since Ubiquity was replaced by WirelessHome as the developer of point-to-multipoint systems. The Ubiquity intangible asset of $229,000 was amortized on a straight-line basis over its estimated useful life of three years, or $76,000, per year.

The following table represents unaudited pro forma financial information for the year ended December 31, 2002 and December 31, 2001 had Proxim Corporation (formerly Western Multiplex Corporation), WirelessHome, Proxim, Inc., nBand and the 802.11 WLAN systems business of Agere been combined as of January 1, 2001. The pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the combined financial position or results of operations of future periods or the results that actually would have resulted had Proxim Corporation, WirelessHome, Proxim, Inc., nBand and the 802.11 WLAN systems business of Agere been a combined company during the specified periods. The pro forma results include the effects of the amortization of identifiable intangible assets and goodwill and adjustments to the income tax provision or benefits and accretion of Preferred Stock. The pro forma combined results for the year ended December 31, 2002 exclude the $4.5 million, $1.2 million and $10.4 million charges for acquired in-process technology from Proxim, Inc., nBand and the 802.11 WLAN systems business of Agere, respectively, because they are non-recurring amounts (in thousands except share data):

The Company paid cash of $51.5 million in connection with its business combinations with Proxim, Inc., nBand and the 802.11 wireless LAN systems business of Agere in the year ended December 31, 2002, described below (in thousands):

In December 2002, due to the significant decline in forecasted revenue and cash flows, the Company made a complete assessment of the carrying value of all goodwill and other intangibles assets in accordance

with SFAS No. 142. The Company first determined the fair value of its equity to be less than the carrying value of goodwill. As such, an impairment charge was recognizable in accordance with SFAS No. 142 as of December 31, 2002. The Company then quantified the goodwill impairment as the amount by which the carrying amount of the asset exceeded the estimated fair value of goodwill. The carrying value of goodwill determined by the discounted cash flow method, totaling $138.8 million as of December 31, 2002, exceeded the estimated fair value of $9.7 million, resulting in a charge for the impairment of goodwill of $129.1 million, which was recorded in December 2002.

In December 2003, the Company performed its annual impairment test of goodwill and determined that no impairment charge was required.

The changes in the carrying amount of goodwill for the year ended December 31, 2002 are as follows (in thousands):

Acquired intangible assets, net of accumulated amortization, consist of the following (in thousands):

Acquired intangible assets by categories as of December 31, 2003 consist of the following (in thousands):

Goodwill represents the excess of cost over the fair market value of net assets acquired. Goodwill pushed down from the 1995 acquisition of the Company by GTI totaled $22.0 million. Prior to January 1, 2002, this goodwill was amortized on a straight-line basis over its estimated useful life of 30 years, or $0.7 million per year. As a result of the Company’s adoption of SFAS No. 142, as of January 1, 2002, the Company no longer amortizes goodwill. Goodwill related to the acquisition of WirelessHome totaled $24.7 million. Prior to December 31, 2001 this goodwill was amortized on a straight-line basis over its estimated useful life of 5 years.

This goodwill was subject to subsequent adjustments upon WirelessHome meeting certain development milestones and other considerations. After WirelessHome met those development milestones, the goodwill was adjusted to $22.5 million in the fourth quarter of 2001. Goodwill related to the merger with Proxim, Inc. totaled $77.2 million and was adjusted to $79.9 million in the third quarter of 2002 as a result of additional unanticipated transaction expenses. Goodwill related to the 802.11 WLAN systems business of Agere totaled $23.1 million.

Assembled workforce related to the acquisition of WirelessHome totaled $1.0 million were reclassified as Goodwill on January 1, 2002. Patents related to the acquisition of Ubiquity totaled $229,000, and are being amortized on a straight-line basis over an estimated useful life of 3 years.

Core technology, developed technology and patents related to the merger with Proxim, Inc. totaled $18.0 million, $12.0 million and $3.2 million respectively, and are being amortized on a straight-line basis over an estimated useful life of 5 years, 3 years and 5 years, respectively.

Core technology, developed technology and customer relationships related to the acquisition of the 802.11 WLAN systems business of Agere totaled $8.5 million, $17.0 million and $9.0 million respectively, and are being amortized on a straight-line basis over an estimated useful life of 5 years, 2 years and 3 years, respectively. The fair value assigned to the tradename totaled $5.9 million and because the Company will continue to use the ORiNOCO tradename the intangible asset will not be amortized.

The Company expects amortization expense of intangible assets to be $17.9 million in fiscal 2004, $8.7 million in fiscal 2005, $5.9 million in fiscal 2006, and $1.9 million in fiscal 2007, at which time intangible assets will be fully amortized assuming no future impairments of those intangible assets or additions as a result of acquisitions.

The following table presents the impact of SFAS No. 142 on net loss as if the standard had been in effect for the year ended December 31, 2001 (in thousands, except per share data):

Purchased in-process research and development consist primarily of acquired technology that has not reached technological feasibility.

The amount expensed to purchased in-process research and development in the third quarter of 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. The amount expensed to purchased in-process research and development in the second quarter of 2002 related to technology for next generation ASICs acquired in the nBand acquisition. The amount expensed to purchased in-process research and development in the first quarter of 2002 related to 802.11a and HomeRF 2.0 wireless networking products acquired in relations to the Proxim, Inc. merger. The following table summarizes the key

assumptions underlying the valuation for the Company’s purchase transactions completed during the year ended December 31, 2002 and 2001 (in thousands):

The discount rates reflect the risk of the respective technology and are representative of the implied transaction rates.

The Company does not expect to achieve a material amount of expense reductions or synergies as a result of integrating the acquired in-process technology. Therefore, the valuation assumptions do not include any anticipated synergies or cost saving associated with the transactions. The Company expected that products incorporating the acquired technology will be completed and begin to generate cash flows between six to nine months after integration. Actual results have been consistent in all material respects, with its assumptions at the effective time of the transactions.

Development of this technology remains a significant risk due to the remaining effort to achieve technological feasibility, rapidly changing customer markets, uncertain standards for new products, and significant competitive threats. The nature of the efforts to develop the acquired technology into commercially viable products consists principally of developing a new operating system, developing a new processor and interface, planning and testing activities necessary to determine that the product can meet market expectations, including functionality and technical requirements. Failure to bring these products to market in a timely manner could result in a loss of market share, or a lost opportunity to capitalize on emerging markets, and could have a material adverse impact on the value of assets acquired.

The following is a summary of the movements in allowance for bad debt, sales returns and discounts and product warranty costs during the year ended December 31, 2003 (in thousands):

Property and equipment includes $2.9 million of computer equipment under capital leases at December 31, 2003. Accumulated amortization of assets under capital leases totaled $215,000.

The Company had guaranteed up to $5 million of obligations of an officer of the Company, with respect to a margin loan with an investment bank that he established prior to 2001. On October 15, 2002, the investment bank called the Company’s guaranty of $5 million. The Company continues to seek repayment from the former officer under a Reimbursement and Security Agreement. In this regard, in January 2003, the former officer made a cash payment of $0.5 million to the Company. The Company assessed the recoverability of the remaining balance of the loan with respect to the former 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 former officer’s indebtedness to the Company. Future payments by the former officer under the Reimbursement and Security Agreement will be recorded as income in the period cash is received.

The Company’s products are grouped into two product lines: WWAN and WLAN product lines. 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 and license revenue. Prior to the March 26, 2002 merger with Proxim, Inc., the Company 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):

The Company sells its products worldwide through a direct sales force, independent distributors, and value-added resellers. It currently operates in two geographic regions: North America and International. Revenue outside of the North America consists primarily of export sales denominated in United States dollars.

Disaggregated financial information regarding the Company’s revenue by geographic region is as follows (in thousands):

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


*	Customer accounted for less than 10% of total revenue in the respective fiscal year.

As of December 31, 2003 and 2002, approximately 57% and 40% of accounts receivable, respectively, were concentrated with ten customers.

During the year ended December 31, 2003, the Company recorded a $22.5 million provision for excess and obsolete inventory as part of the Company’s restructuring activities. To mitigate the component supply constraints that have existed in the past, the Company had 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, 802.11a and Harmony products;

	•	Notification from customers that they would not be ordering as much as they had previously indicated;

	•	Continued decline in the demand for fixed wireless solutions due to the worldwide slowdown in the telecom industry;

	•	Continued increase in competition for wireless networking products, particularly related to home networking and enterprise LANs; and

	•	Management’s strategy to discontinue products, and in certain cases replace those products with newer or redesigned products.

Due to these factors, inventory levels exceeded the Company’s 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. The Company does 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. The Company uses a 12-month demand forecast because the wireless

communications industry is characterized by rapid technological changes such that if the Company has not sold a product after a 12-month period it is unlikely that the product will be sold. The following is a summary of the movements in the reserve for excess and obsolete inventory during the year ended December 31, 2003 (in thousands):

Note 11 — Restructuring Charges (Benefit) for Severance and Excess Facilities

Prior to the Company’s adoption of SFAS No. 146 on January 1, 2003, the Company accounted for restructuring charges under the provisions of Emerging Issues Task Force (“EITF”) No. 94-3 “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)” and Staff Accounting Bulletin (“SAB”) No. 100 regarding the accounting for and disclosure of certain expenses commonly reported in connection with exit activities and business combinations.

During the year ended December 31, 2002, the Company 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 include $40.8 million of cash provisions, which include severance of $7.4 million for 194 employees, $33.1 million for future lease commitments, net of estimated future sublease receipts, and exit costs related to the closure of four facilities and $0.3 related to consulting fees. The charge also includes $2.4 million of non-cash provisions related to fixed assets that will no longer be used at the facilities. The estimated future sublease receipts are based on current comparable rates for leases in the respective markets. If facility rental rates continue to decrease in these markets or if it takes longer than expected to sublease these facilities, the actual costs for closures of facilities could exceed the original estimate of $33.1 million.

During the year ended December 31, 2003, the Company recorded restructuring charges of $7.3 million, consisting of $24.8 million of cash provisions and $3.3 million of non-cash provisions for abandoned property and equipment, partially offset by a $20.8 million net reversal of restructuring accruals. The $24.8 million of cash provisions consisted of $12.7 million of operating lease commitments, less estimated future sublease receipts, and exit costs of certain closed facilities, $9.1 million of severance payments for 111 employees, $0.6 million of consulting fees, and $2.4 million of project commitments. The $20.8 million net reversal of restructuring accruals represented the reversal of $27.8 million of previously recorded lease obligation restructuring reserves, partially offset by the write-down of fair value of an asset held for sale of $6.9 million. The Company reversed a total of $27.8 million of restructuring reserves, of which $26.8 million related to buying, terminating and selling the leased property in Sunnyvale, California during the fourth quarter of 2003. The Company reversed an additional $1.0 million of previously recorded restructuring reserves related to another building lease in Sunnyvale as a result of a reduction of the lease commitments agreed to with the lessor.

The following table summarizes the restructuring activities during the years ended December 31, 2002 and 2003 (in thousands):

The restructuring related asset and reserves were presented on the balance sheet as follows (in thousands):

As fully described in Note 1 to the consolidated financial statements, upon stockholders’ approval in December 2003, the Notes of $30 million were modified as they now include (1) warrants to purchase 24 million shares of common stock; and (2) a right to convert to Series B preferred stock at the option of the investors. The Company determined under Emerging Issues Task Force 96-19, “Debtor’s Accounting for a Modification or Exchange of Debt Instruments,” that the modification was made with substantially different terms and a debt extinguishment resulted. Accordingly, the December Note instrument was recorded at fair value and that amount was used to determine the debt extinguishment loss to be recognized and the effective rate of the new instrument. The warrants were also recorded at fair value (See Note 17 to the consolidated financial statements for details). A loss on debt extinguishment of $22.2 million was recorded in the fourth quarter of 2003.

The Company provides for income taxes under the provisions of SFAS No. 109, “Accounting for Income Taxes.” SFAS No. 109 requires an asset and liability based approach in accounting for income taxes. Deferred income tax assets and liabilities are recorded to reflect the tax consequences on future years of temporary

differences of revenue and expense items for financial statement and income tax purposes. Valuation allowances are provided against assets that are not likely to be realized.

The components of the provision (benefit) for income taxes for the years ended December 31, 2003, 2002, and 2001 are as follows:

The provision for income taxes differs from the amounts, which would result by applying the applicable statutory Federal income tax rate to income before taxes, as follows (in thousands):

The major components of the net deferred tax asset are as follows (in thousands):

As of December 31, 2003, the Company’s federal and state net operating loss carryforwards for income tax purposes were approximately $235 million and $70 million, respectively. If not utilized, these net operating loss carryfowards will begin to expire at various dates between 2006 and 2023. The Company’s federal and state research tax credit carryforwards for income tax purposes are approximately $5.1 million and $3.8 million, respectively. If not utilized the federal tax credit carryforwards will begin to expire in 2012. The Company has a valuation allowance of approximately $127 million as of December 31, 2003 for deferred tax assets because of uncertainty regarding their realization.

Deferred tax assets of approximately $15.7 million as of December 31, 2003 pertain to certain net operating loss carryforwards and credit carryforwards resulting from the exercise of employee stock options. When recognized, the tax benefit of these loss and credit carryforwards are accounted for as a credit to additional paid-in capital rather than a reduction to the income tax provision.

The Internal Revenue Code of 1986, as amended, contains provisions that may limit the net operating loss and credit carryforwards available for use in any given period upon the occurrence of certain events, including a significant change in ownership interests.

Basic and diluted net loss per share attributable to common stockholders are presented in conformity with SFAS No. 128, “Earnings Per Share.” The following is a reconciliation of the numerators and denominators of the basic and diluted net loss per share computations for the years ended December 31, 2003, 2002 and 2001 (in thousands except share data):

For the years ended December 31, 2003, 2002 and 2001, basic net loss per share under SFAS No. 128 was computed using the weighted average number of shares outstanding during the period. Diluted net loss per

share was determined in the same manner as basic earnings per share except that the number of shares was increased assuming dilutive stock options and warrants using the treasury stock method. For the years ended December 31, 2003, 2002 and 2001, the incremental shares from the assumed exercise of stock options and warrants were not included in computing diluted per share amounts as the effect would be antidilutive. For the years ended December 31, 2003, 2002 and 2001 options to purchase 28,238,078, 30,367,748 and 10,258,659 shares of common stock were excluded from the diluted net loss per share calculations. For the years ended December 31, 2003 and 2002 warrants to purchase 38,922,655 and 13,842,655 shares of common stock were excluded from the diluted net loss per share calculations.

As of December 31, 2003, the Company had outstanding Convertible Notes of $40 million. Convertible Notes of $10 million, which were issued on December 19, 2003, rank senior to the Convertible Notes of $30 million originally issued on July 30, 2003. The Company may be required to repay the Notes, plus accrued and unpaid interest, in the event its note holders do not exchange for mandatorily redeemable Convertible Series B preferred stock (“Series B preferred stock”). Such repayment would be required on September 30, 2004, the maturity date of the Notes, or upon an event of default or change in control, whichever is earlier.

The holders of Convertible Notes have various rights and preferences as follows:

At the option of the note holders, the Notes can be exchanged for shares of the Company’s Series B preferred stock with an aggregate initial liquidation preference equal to the principal amount of the exchanged indebtedness, plus accrued but unpaid interest, at the conversion price of $100 per share.

In the event of change in control, 150% of the accrued value of the Convertible Notes, with a cap of $10 million on the accrued interest portion of the Notes, will be immediately due and payable.

The Convertible Notes bear interest at 25% per annum. After the maturity date, the interest rate will increase to 30% per annum.

The Company reserved 540,000 shares of Series B preferred stock for the conversion of the Notes as of December 31, 2003.

As of December 31, 2003, Mandatorily Redeemable Convertible Preferred Stock, Series A (“Series A Preferred Stock”), consisted of the following:

In August 2002, in connection with the acquisition of the 802.11 WLAN systems business of Agere Systems, Inc., 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

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 value of the warrants was recorded as a reduction of the Series A Preferred Stock carrying value and recorded as additional paid-in capital. A deemed preferred stock dividend representing the beneficial conversion feature of the Series A Preferred Stock of $2.7 million was also recorded to increase the loss attributable to holders of the Company’s Common Stock.

Upon receipt of approval of the Company’s stockholders at a special meeting held on October 8, 2002, the notes issued to these investors (Note 3) were converted into 1,360,000 shares of Series A Preferred Stock and the Company granted to these investors additional warrants to purchase approximately 5.6 million shares of our common stock value at $1.7 million. In total, the investors were granted warrants to acquire 12,271,345 shares of Common Stock for approximately $3.06 per share value at $14.0 million. The Series A Preferred Stock and warrants issued to the investors represent approximately 20% of the Company’s outstanding Common Stock on an as-converted and as-exercised basis as of December 31, 2003.

In summary, the issuance of Series A Preferred Stock, convertible notes and related warrants and the subsequent conversion, accretion and interest accrual were recorded through December 31, 2003 as follows (in thousands):

The holders of Series A Preferred Stock have various rights and preferences as follows:

Voting. For so long as Warburg Pincus owns at least 25% of its shares of Series A Preferred Stock or the Common Stock issuable on conversion of its Series A Preferred Stock and exercise of its warrants, Warburg Pincus will have the right to nominate for election one member of the Company’s board of directors, who will sit on all major board committees for so long as such committee membership does not conflict with any applicable law or regulation or any listing requirements of the Nasdaq National Market.

The approval of holders of a majority of the Series A Preferred Stock is separately required to approve changes to the Company’s certificate of incorporation or bylaws that adversely affect these holders’ rights, any offer, sale or issuance of the Company’s equity or equity-linked securities ranking senior to or equally with the Series A Preferred Stock, and any repurchase or redemption of the Company’s equity securities (other than from an employee, director or consultant following termination), or the declaration or payment of any dividend on the Company’s Common Stock.

Redemption. In August 2007, the Company will be required to redeem all outstanding shares of Series A Preferred Stock, if any, for cash equal to their liquidation preference, which bears interest at 8% per annum, compounded semi-annually, for three years, plus accrued and unpaid dividends.

Dividends. From August 2005 through August 2007, shares of Series A Preferred Stock will be entitled to cumulative 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;

Liquidation. Each share of Series A Preferred Stock will have an initial liquidation preference of $25.00 and the liquidation preference will bear interest at 8% per annum, compounded semi-annually, for three years. The liquidation preference is subject to adjustments in the event the Company undertakes a business combination or other extraordinary transaction, or the Company are liquidated or dissolved.

Conversion. In the event of a change of control of the Company, the Company will have the right to convert the Series A Preferred Stock into Common Stock if upon such conversion the holders of Series A Preferred Stock would receive liquid securities or cash with a fair market value equal to or greater than 110% of the liquidation preference then in effect. If the consideration is less than 110% of the liquidation preference, the Company may either repurchase modify the conversion price so that the consideration will equal 110% of the liquidation preference then in effect or change the Series A Preferred Stock for cash at 101% of the liquidation preference then in effect. In addition, in the event of a of control that occurs prior to August 2005, the liquidation preference will increase as necessary to provide for three years of accretion.

Holders of Series A Preferred Stock have rights to acquire additional shares of the Company’s capital stock or rights to purchase property in the event of certain grants, issuance or sales.

The conversion price of the Series A Preferred Stock, which initially was approximately $3.06 per share, is subject to customary weighted average anti-dilution adjustments and other customary adjustments.

The Company’s authorized common stock consists of Class A and Class B common stock. Holders of Class A common stock are entitled to one vote per share. Holders of Class B common stock are entitled to ten votes per share. Each share of Class B common stock is convertible into one share of Class A common stock at the election of the stockholder or, prior to the Company’s initial public offering, upon such event.

In conjunction with the recapitalization transaction in 1999 the Company repurchased 42,000,000 shares of Class B common stock for $21.0 million from Glenayre Technologies Inc. and held these shares as treasury stock.

Simultaneously with the closing of the Company’s initial public offering, all of the Company’s then outstanding 38,000,000 shares of Class B common stock and 42,000,000 shares of Class B treasury stock were automatically converted into 38,000,000 shares of Class A common stock and 42,000,000 shares of Class A treasury stock, respectively.

On March 26, 2002 the Company acquired Proxim, Inc. for 59,506,503 shares of Class A Common Stock.

As of December 31, 2003, the Company had 165,037,194 shares of Class A Common Stock issued and outstanding and 42,185,534 shares of Class A treasury stock.

In connection with a new operating lease entered into in September 2000, the Company issued 25,000 warrants to the lessor in November 2000. Each new warrant is convertible into one share of Class A common stock of the Company at an exercise price of $14.01 per share. These warrants are exercisable during the period beginning on January 1, 2001 and ending on December 1, 2005. The Company has estimated the fair value of the warrants using the Black-Scholes option valuation model and has determined the compensation expense throughout the life of the lease to be immaterial.

In connection with the acquisition of WirelessHome Corporation, the Company assumed a warrant to purchase 4,162 shares of the Company’s Class A common stock at an exercise price of $9.61 per share. These warrants will expire on December 16, 2009.

In connection with the acquisition of Proxim, Inc., the Company assumed warrants to purchase 362,803, 323,930 and 1,542,148 shares of the Company’s Class A common stock at an exercise price of $11.91 and $13.23 and $6.85 per share, respectively. These warrants expire on April 28, 2002, June 2, 2002 and November 27, 2005. As of December 31, 2002 1,542,148 warrants were outstanding.

In connection with the acquisition of the 802.11 WLAN systems business of Agere Systems, Inc., the Company issued 12,271,345 warrants to Warburg Pincus Private Equity VIII, L.P., Broadview Capital Partners L.P. and affiliated entities. Each new warrant is convertible into one share of Class A common stock of the Company at an exercise price of approximately $3.06 per share. The Company has estimated the fair value of the warrants using the Black-Scholes option valuation model totaling $14.0 million. The warrants will expire on August 5, 2007.

In connection with a three-year licensing and distribution agreement entered into with Motorola, Inc. on September 8, 2003, the Company issued to Motorola a fully vested warrant to purchase 1,080,000 shares of the Company’s common stock at an exercise price of $2.34 per share. This warrant will expire on September 8, 2008. The Company has estimated the fair value of the warrant using the Black-Scholes option valuation model at $2.1 million. The fair value of the warrant will be amortized on a straight-line basis over the three-

year term of the commercial arrangement with Motorola with periodic charges against revenue effective beginning in the quarter ending April 1, 2004.

The following assumptions were applied when estimating the fair value of the warrants issued in the year ended December 31, 2002 and 2003 using the Black-Scholes option pricing model:

In connection with additional investments made by Warburg Pincus Private Equity VIII, L.P., Broadview Capital Partners L.P. and affiliated entities during the year ended December 31, 2003, the Company issued to these investors warrants to purchase 18 million and 6 million shares of the Company’s common stock at an exercise price of $1.46 per share and $1.53 per share, respectively (see Note 1 and 15). These warrants were valued by the Company with the assistance of an independent valuation consulting firm at $22.2 million at December 12, 2003 and $21.8 million at December 31, 2003. The fair value of the warrants are recorded as long-term liability, as the warrant holders are entitled to require the Company to purchase the warrants for cash upon the occurrence of a change in control event. The fair value of the warrants will be subject to revaluation adjustments at the end of each reporting period, until they are exercised or expired, whichever is earlier. The resulting gain or loss will be recorded as other income or expense in the corresponding reporting period. These warrants will expire on December 15, 2010.

In connection with the grant of certain stock options and sales of certain stock to employees and directors during fiscal 2000, the Company recorded deferred stock compensation within stockholders’ equity of $8.5 million, representing the difference between the estimated fair value of the common stock and the option exercise price of these options at the date of grant or the stock sale price at the date of sale. Such amount is presented as a reduction of stockholders’ equity. The portion of deferred stock compensation associated with the stock options was amortized over the vesting period of the applicable options using an accelerated method of amortization. Under the accelerated method, each vested tranche of options is accounted for as a separate option grant awarded for past services. Accordingly, the compensation expense is recognized over the period during which the services will be provided; however, the method results in a front-loading of the compensation expense. For the portion of deferred stock compensation associated with stock sales, the Company records the expense over the period the shares are vested using the accelerated method. For the year ended December 31, 2002 the Company recorded amortization of deferred compensation, net of cancellations, of $855,000.

As part of the WirelessHome acquisition, the Company assumed certain vested and unvested options that when exercised would result in approximately 14,400 and 113,000 shares of common stock outstanding, respectively. These options have an average exercise price of $3.01 per share of the Company’s common stock. The unvested options resulted in additional deferred compensation of $0.3 million recorded as of the date of acquisition, which is amortized over the remaining vesting period using the accelerated method.

During the year ended December 31, 2001, the Company reversed approximately $1.8 million of deferred stock compensation previously recorded due to cancellations of unexercised stock options.

During the year ended December 31, 2003, as a result of WirelessHome meeting the development milestones, the Company released and issued 558,950 shares to individuals who were directly involved in the

completion of the development milestones and accordingly recorded $2.2 million of stock compensation expense. As of December 31, 2003, all deferred stock compensation was amortized.

On December 20, 2001 the Company entered into stock forward sale agreements with certain employees. Under these agreements the Company bought back 78,138 shares at $7.91 in March 2002. The Company recorded the difference between the stock price on December 20, 2001, $5.45 and the guaranteed price per share of $7.91 as stock compensation expense for a total of $192,000 in the fourth quarter of 2001. The Company recorded the difference between the stock price on March 25, 2002, $2.37 and the stock price on December 20, 2001, $5.45 as stock compensation expense for a total of $241,000 in 2002.

Employee Stock Purchase Plan. In June 2000, the Company adopted the Western Multiplex Corporation Employee Stock Purchase Plan (“ESPP”), which is intended to qualify as an employee stock purchase plan under Section 423 of the Internal Revenue Code of 1986. An annual increase in shares reserved will occur on the first day of each of the Company’s fiscal years beginning in 2001, 2002, 2003, 2004 and 2005 as defined in the ESPP. As of December 31, 2003, 1.75 million shares of Class A common stock was reserved for issuance under the ESPP.

In August 2000, subsequent to the completion of the Company’s initial public offering, the Company began to administer the plan by enrolling participants in the plan and processing payroll deductions. The first day of the offering period was August 1, 2000. The following table summarizes the Company’s issuances of shares to employees participating in the ESPP:

1999 Stock Incentive Plan. In November 1999, the Company adopted the Western Multiplex Corporation 1999 Stock Incentive Plan (the “1999 Plan”) for key employees, officers, directors, and consultants. The Company has reserved for issuance 13.5 million shares of Class A common stock under the 1999 Plan. The types of awards that may be made under the 1999 Plan are incentive stock options, non-qualified options, stock appreciation rights, and other stock-based awards.

The exercise price for stock options may not be less than 100% of the fair market value of the Company’s Class A common stock on the date of the grant (110% for any option granted to any stockholder who owns more than 10% of the total combined voting power of all classes of stock of the Company or its parent or subsidiary corporation), as determined by the Compensation Committee. An option may not vest at less than 20% per year over five years, and will vest on the specific schedule established by the Compensation Committee.

Ubiquity Communication Plans. In connection with the acquisition of Ubiquity Communication, Inc. on March 24, 2000, the Company assumed the obligations under Ubiquity Communication’s equity incentive plans (“Ubiquity Plans”). As a result, all options granted under the Ubiquity Plans became options to purchase shares of the Company’s common stock. As of March 24, 2000, the Company assumed 137,727

options that had been granted under these plans. As of March 29, 2002, the Company had no options outstanding under the Ubiquity Plans.

Platinum IP Stock Incentive Plan. In connection with the acquisition of WirelessHome on March 22, 2001, the Company assumed obligations under WirelessHome’s Platinum IP Stock Incentive Plan (“WirelessHome Plan”). As a result, all options granted under the WirelessHome Plan became options to purchase shares of the Company’s common stock. As of March 22, 2001, the Company assumed certain vested and unvested options that when exercised would result in approximately 14,400 and 113,000 shares of common stock outstanding. As a result of WirelessHome meeting the development milestones, in the fourth quarter of 2001 the Company issued 75,380 options, which were previously held in escrow to employees who were directly involved in the completion of the development milestones.

Proxim, Inc. Stock Incentive Plans. In connection with the acquisition of Proxim, Inc. on March 26, 2002, the Company assumed obligations under Proxim, Inc. Stock Incentive Plan (“Proxim Plan”). As a result, all options granted under the Proxim Plan became options to purchase shares of the Company’s common stock. As of March 26, 2002, the Company assumed certain vested and unvested options that when exercised would result in approximately 8,679,657 and 7,294,702 shares of common stock outstanding.

2002 Nonstatutory Merger Stock Option Plan. In March 2002, the Company established the 2002 Nonstatutory Merger Stock Option Plan, or the 2002 Plan, and reserved 7.0 million shares of Class A Common Stock for issuance to employees and officers upon exercise of awards granted thereunder. The 2002 Plan provides for the grant of awards in the form of stock options, restricted stock, performance shares, restricted stock units, and stock unit awards to employees and officers at prices not less than 100% of the fair market value of our Common Stock on the date of grant. The options terminate ten years after the date of grant. Unless otherwise provided for by the Board of Directors, the options are exercisable only upon vesting. Options generally vest ratably over a 36-month period.

2002 Acquisition Stock Option Plan. In August 2002, the Company established the 2002 Acquisition Stock Option Plan, or the 2002 Acquisition Plan, and reserved 5.0 million shares of Class A Common Stock for issuance to employees and officers upon exercise of awards granted thereunder. The 2002 Acquisition Plan provides for the grant of awards in the form of stock options, restricted stock, performance shares, restricted stock units, and stock unit awards to employees and officers at prices not less than 100% of the fair market value of our Common Stock on the date of grant. The options terminate ten years after the date of grant. Unless otherwise provided for by the Board of Directors, the options are exercisable only upon vesting. Options generally vest ratably over a 36-month period.

2000 Stock Option Plan for Non-Employee Directors. In June 2000, the Company adopted the 2000 Stock Option Plan for Non-Employee Directors. The Company has reserved for issuance a maximum of 1,500,000 shares of common stock pursuant to the grant of non-qualified stock options to newly elected members of the board of directors who are not employees of our Company.

The exercise price of any option granted under this plan is the per share fair market value of the Company’s common stock on the date the option is granted except with respect to the initial grants made as of June 8, 2000 for which the exercise price is $8.50. An individual who becomes a director will receive an initial grant of an option to purchase 50,000 shares of the Company’s common stock, which option will be immediately vested upon grant as to one-third of the shares subject to the option. The option will then become vested as to one-third of the shares on each of the first and second anniversaries of the date of the initial grant, so long as the director continues to serve on the Company’s board of directors on each vesting date. In addition, so long as a director continues to serve on the Company’s board of directors, the director will receive an additional option to purchase 25,000 shares, the terms of which will be the same as those described above, on the date of each annual meeting of the Company’s stockholders.

As part of the merger with Proxim, Inc., the Company assumed certain vested and unvested options that when converted would result in approximately 8.7 million and 7.3 million shares of common stock outstanding. These options have a weighted average exercise price of $5.75 per share. Additionally, approximately 10.8 million shares were available under Proxim, Inc. plans.

The following table summarizes options outstanding and options exercisable at December 31, 2003 under all the Plans:

The Company occupies its facilities under several non-cancelable operating lease agreements expiring at various dates through September 2009, and requiring payment of property taxes, insurance, maintenance and

utilities. Future minimum lease payments under non-cancelable operating leases at December 31, 2003 were as follows (in thousands):

Total rental expenses related to these operating leases were $5.2 million, $9.2 million and $3.7 million for 2003, 2002 and 2001, respectively.

During the years ended December 31, 2003 and 2002, the Company recorded restructuring charges totaling $18.1 million, representing committed future lease payments for closed facilities, net of estimated future sublease receipts and reversal of previously recorded provisions (see Note 10).

In December 2002, the Company entered into a secured credit facility with Silicon Valley Bank (the “Lender”), and then subsequently amended the credit facility in March 2003. On June 13, 2003, in order to secure additional working capital, the Company entered into a letter agreement (the “Letter Agreement”) and an accounts receivable financing agreement which effectively amended and restated the existing credit facility in its entirety. On July 25, 2003, the Company amended the accounts receivable financing agreement. On October 31, 2003, the Company amended the A/R Financing Agreement (as amended, the “Amended A/R Financing Agreement”).

Under the Amended A/R Financing Agreement, the Lender may agree to accept for collection through a lockbox arrangement up to $20.0 million in accounts receivable from the Company, and in return the Company will receive advances from the Lender at a rate equal to 80% of accounts receivable from account debtors who are not distributors, and 50% of accounts receivable from account debtors who are distributors, subject to certain borrowing restrictions on international accounts and the discretion of the Lender. After collection of a receivable, the Lender will refund to the Company the difference between the amount collected and the amount initially advanced to the Company, less a finance charge applied against the average monthly balance of all transferred but outstanding receivables at a rate per annum equal to the Lender’s prime rate plus 1.50 percentage points, or 5.75%, whichever is greater. In addition to a facility fee of $100,000, the Company must pay each month to the Lender a handling fee equal to 0.25% of the average monthly balance of transferred but outstanding receivables. The Company must repay each advance upon the earliest to occur of (i) the collection of the corresponding financed receivable, (ii) the date on which the corresponding financed receivable becomes an ineligible receivable pursuant to the terms of the Amended A/R Financing Agreement, or (iii) July 31, 2004. No borrowings were outstanding under the Amended A/R Financing Agreement as of December 31, 2003.

Obligations under the amended A/R Financing Agreement are secured by a security interest on all of the assets of the Company, including intellectual property, and are senior in lien priority and right of payment to the Company’s obligations to the funds affiliated with Warburg Pincus and Broadview Capital under the secured promissory notes issued in July 2003 and amended in October 2003. The amended A/R Financing Agreement requires the consent of the Lender in order to incur debt, grant liens and sell assets. The events of

default under the secured credit facility include the failure to pay amounts when due, failure to observe or perform covenants, bankruptcy and insolvency events, defaults under certain of the Company’s other obligations and the occurrence of a material adverse change in the Company’s business. Under the Amended A/R Financing Agreement, the events of default also include any judgment, restraining order, injunction or any material adverse development in connection with the Company’s litigation with Symbol Technologies before the U.S. District Court for the District of Delaware (see Note 19). Under the Amended A/R Financing Agreement, the financial covenants require the Company to maintain cash and cash equivalents with the Lender and its affiliates in an amount not less than $4.0 million. If the Company fails to meet this requirement, the Company may still remain in compliance with the financial covenants by maintaining a ratio of the total of cash, cash equivalents and accounts receivable approved by the Lender to the Company’s current liabilities of at least 5.0 to 1. The Company currently maintains substantially all of its cash, cash equivalents and investments at Silicon Valley Bank and its affiliates. In the event of default under the Amended A/R Financing Agreement, the Lender has the right to offset such cash, cash equivalents and investments against the Company’s obligations owing to the Lender.

In the first quarter of 2003, the Company entered into an equipment and software lease agreement. Under the agreement, the Company may either lease or finance certain equipment, software and related services through a direct leasing or sales and leaseback arrangement with the lessor for up to $3.0 million. The lease term covers a period of 30 months, and the annual implicit interest rate on the lease is approximately 4%. During the second quarter of 2003, the Company installed and placed into service certain equipment, software and related services through both a direct leasing and sales leaseback arrangement and through a direct leasing arrangement during the third and fourth quarters of 2003. As the present value of total future minimum lease payments was greater than 90% of the fair value of the leased assets, the Company accounted for both the direct leasing and sales and leaseback transactions as capital lease transactions. Net book value of the leased assets capitalized in connection with this agreement as of December 31, 2003 was $2.1 million. Future minimum lease payments under noncancellable capital leases at December 31, 2003 were as follows (in thousands):

The Company had been seeking to renegotiate a material lease on a building in Sunnyvale, California that was 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 in the restructuring charge recorded in the second quarter of 2002, totaling approximately $29.0 million through the expiration of the lease in 2010, net of expected sublease proceeds. The rent rates of this lease were substantially greater than the current local market lease rates, and this unused space represented a negative cash flow of approximately $800,000 per quarter. The Company was not able to sublease the building since it was vacated in July 2002. Since November 2002, the Company ceased making direct lease payments, and the building owner utilized the Company’s cash security deposit to cover the monthly payments and other lease charges. On July 21, 2003, the Company entered into a letter agreement (as subsequently amended and restated by that certain Purchase

Agreement dated September 11, 2003) to buy the leased property and terminate the lease on or before September 12, 2003. On September 12, 2003, the Company paid approximately $10.0 million to consummate the transaction. Transaction costs included cash consideration of $6.0 million to the building owner, $3.2 million to pay off the mortgage obligation secured by the leased property, $577,000 for prepayment premium, and a total of approximately $200,000 for closing costs and operating costs incurred by the building owner between the date of the letter agreement and the closing. As a result of consummating the transaction, the Company reversed $26.8 million of previously recorded lease obligation restructuring reserves that are no longer required.

Subsequent to the purchase, the Company placed the property on the market for sale. On October 22, 2003, the Company entered into an agreement to sell the property for $3.5 million. As of September 26, 2003, the property was recorded as an asset held for sale of $3.0 million, representing its estimated net realizable value. On December 30, 2003, the Company consummated the sale and received $3.0 million cash proceeds, net of broker commissions, property repairs and closing costs.

Proxim, Inc.’s involvement in patent litigation has resulted in, and could in the future continue to result in, substantial costs and diversion of management resources of the company. In addition, this litigation, if determined adversely to the Company, could result in the payment of substantial damages and/or royalties or prohibitions against utilization of essential technologies, and could materially and adversely affect the Company’s business, financial condition and operating results and cash flows.

On September 15, 2003, the Company announced that a jury had rendered a verdict in the first phase of the patent infringement suit with Symbol. On Symbol’s claims of patent infringement, the jury found that certain of the Company’s products infringes two of Symbol’s patents and assessed a 6% royalty on the Company’s sales of these products from January 1, 1995. Accordingly, the Company recorded an accrual for estimated past royalties payable of $22.9 million and $2.9 million for interest during the third quarter of 2003. The Company has not been enjoined from continued sales of these products, and royalty payments, if any, on these sales have not been determined by the court. In November 2003, the court conducted a bench trial on the Company’s remaining equitable defenses not addressed by the jury and proceedings in the case continue. The Company will continue to evaluate and review the Company’s estimate of the royalties and interest payable from time to time for any indications that could require the Company to change its assumptions relating to the amount already recorded. In addition, the Company does not incur any immediate financial obligation to Symbol as a result of this verdict, pending completion of related proceedings.

On March 17, 2003, the Company announced a settlement with Intersil Corporation to resolve all pending patent-related litigation between the two companies. Under the terms of the agreement, Proxim, Inc. and Intersil have agreed to dismiss all claims against each other, including lawsuits before the International Trade Commission and Delaware and Massachusetts Federal Courts. As part of the confidential settlement agreement, the two companies entered into a patent cross license agreement for their respective patent portfolios and Intersil agreed to make a one-time payment of $6.0 million to the Company. The two companies have also entered into a product supply agreement defining the terms under which the Company

will be able to purchase 802.11 products that utilize Intersil’s chipsets. During the first quarter of 2003, the Company recorded $6 million as licensing revenue and $3 million of legal expense as final settlement of outstanding legal fees and expenses related to the terminated patent litigation.

On March 10, 2003, the Company was served with a complaint filed on January 15, 2003, by Top Global Technology Limited (“Top Global”), a distributor for Agere Systems Singapore. The Company’s demurrer to Top Global’s complaint was sustained in May 2003. Top Global then filed and served an amended complaint on May 30, 2003. Top Global’s lawsuit was filed against Agere Systems, Inc., Agere Systems Singapore, and Agere Systems Asia Pacific (collectively, “Agere”) and in the Superior Court for the State of California, County of Santa Clara. Top Global claims that it is entitled to return for a credit $1.2 million of products that it purchased from Agere Systems Singapore in June 2002 as a result of the Company’s decision to discontinue a product line that the Company purchased from Agere in August 2002. The amended complaint asks the court to determine whether Agere or the Company are responsible for accepting the product return and issuing a $1.2 million credit and also alleges breach of contract. We answered the amended complaint and asserted several defenses to Top Global’s claims. In January 2004, the parties mediated this dispute but were unable to reach a settlement. In March 2004, the Court dismissed the contract claims against Agere but at the same time granted Top Global’s motion for leave to amend its complaint to allege a fraud claim against Agere. Discovery continues and a trial setting conference is scheduled for May 4, 2004.

On February 10, 2004, the Company received a copy of a complaint filed on February 2, 2004 in Tokyo District Court by Active Technology Corporation, a Japanese-based distributor of the Company’s products. The complaint alleges, among other things, that the Company sold to Active certain defective products, which Active in turn subsequently sold to its customers. Active seeks damages of 559.2 million Japanese yen, which includes the purchase price of the allegedly defective products and replacement costs allegedly incurred by Active. Active seeks to offset the claim of 559.2 million Japanese yen against outstanding accounts payable by Active of 175.3 million Japanese yen to the Company, resulting in a net claim against Proxim Corporation of 383.9 million Japanese yen. Translated into U.S. dollars on March 5, 2004, Active’s net claim is approximately $3.4 million. This case is in its earliest stages, as discovery has not yet commenced and a trial date has not been established. The Company intends to defend ourselves vigorously against this lawsuit.

The Company is a party to disputes, including legal actions, with a number of suppliers and vendors. These disputes relate primarily to excess materials and order cancellation claims that resulted from the declines in demand for the Company’s products during 2001 and 2002 and the commensurate reductions in manufacturing volumes. The Company has recorded reserves related to these disputes to the extent that management believes appropriate and intends to defend ourselves vigorously against these claims.

The results of any litigation matters are inherently uncertain. In the event of any adverse decision in the described legal actions or disputes, or any other related litigation with third parties that could arise in the future, the Company could be required to pay damages and other expenses, and, in the case of litigation related to patents or other intellectual property rights, 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. The Company cannot make any assurance that these matters will not materially and adversely affect the Company’s business, financial condition or operating results.

In particular, if the proceedings before the court in the Company’s litigation with Symbol are not decided in the Company’s favor, the Company would likely be required to make significant payments to Symbol, including payments for royalties related to past sales of products found to infringe and additional royalties in connection with future sales of these products, or the Company would be required to post a bond in order to appeal the court’s decision. Any adverse ruling or judgment in this litigation that requires the Company to render payment or post a bond equal to or greater than $10 million, and any other ruling or judgment in this or any other litigation that is material and adverse to the Company, triggers an event of default under the Notes issued to Warburg Pincus and affiliates of Broadview Capital. Upon such occurrence, the Investors would have

the ability to require the Company to repay the Notes. In addition, entry of any judgment, restraining order, injunction or any material adverse development in the litigation with Symbol would result in an event of default under the secured credit facility with Silicon Valley Bank. Upon such occurrence, Silicon Valley Bank would have the ability to require the Company to repay any outstanding amounts under the credit facility and to prohibit the Company from borrowing any additional amounts.

If the Company were required to make payments to Symbol, post a bond to the court, and/or repay the Notes and amounts, if any, owed to Silicon Valley Bank, either due to an event of default or otherwise, the Company would be required to obtain immediate alternative sources of financing. If the Company were not able to obtain an alternative source of financing, the Company would most likely have insufficient cash to pay these obligations, be unable to meet its ongoing operating obligations as they come due in the ordinary course of business, and seek protection under applicable bankruptcy laws.

The Company adopted an Employees’ Investment 401(k) Plan that covers all employees and provides that the Company match employees’ salary deferrals up to 4% of eligible employee compensation. The amounts charged to continuing operations were $952,000, $936,000 and $795,000 in 2003, 2002 and 2001, respectively.

On March 21, 2002, our Board of Directors, upon recommendation of the Audit Committee, made a determination not to engage Arthur Andersen LLP as the Company’s independent accountants and, on March 26, 2002, engaged PricewaterhouseCoopers LLP to serve as our independent accountants for the fiscal year ended December 31, 2002. Arthur Andersen’s reports on our consolidated financial statements for each of the years ended December 31, 2001 and 2000 did not contain an adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles.

During the years ended December 31, 2001 and 2000 and through the date of our engagement of PricewaterhouseCoopers LLP, there were no disagreements with Arthur Andersen on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which, if not resolved to Arthur Andersen’s satisfaction, would have caused them to make reference to the subject matter in connection with its report on the Company’s consolidated financial statements for such years; and there were no reportable events as specified in Item 304(a)(1)(v) of Regulation S-K.

The information set forth above and additional information relating to our change in accountants for the fiscal year ended December 31, 2002 is included in our Current Report on Form 8-K filed on March 28, 2002.

As of the end of the reporting period, we carried out an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic filings with the Securities and Exchange Commission. It should be noted that the design of any system of controls is based in part upon certain assumptions, and there can be no assurance that any design will succeed in achieving its stated goals.

In addition, we reviewed our internal controls and there have been no significant changes in our internal control over financial reporting or in other factors that could significantly affect our disclosure controls and procedures, nor were there any significant deficiencies or material weaknesses in our internal control over financial reporting, during the last fiscal quarter.

The following information as of March 5, 2004 is provided with respect to each or our directors.

Franco Plastina, Age 41. Mr. Plastina has served as our President and CEO since May 2003 and was elected Chairman of the Board in December 2003. From March 2003 to April 2003, Mr. Plastina served as Executive in Residence for Warburg Pincus. Previously, Mr. Plastina was with Nortel Networks for 15 years and most recently was President, Metro & Enterprise Networks at Nortel Networks. Mr. Plastina joined Nortel Networks in 1987 and held a number of key executive positions, including President of Wireless and Core Networks, President of Carrier Networks, Vice President and COO of Internet and Service Provider Networks, Vice President of Business Development for Carrier Packet Solutions, and Vice President of Global Mergers and Acquisitions. Prior to joining Nortel Networks, Mr. Plastina was with the Toronto office of PriceWaterhouseCoopers. Mr. Plastina received a Bachelor of Commerce degree from the University of Toronto in 1985 and a Chartered Accountant designation in 1987 from the Canadian Institute of Chartered Accountants.

Kenneth E. Westrick, Age 46. Mr. Westrick has served as a member of our Board of Directors since March 2002. From 1997 to 2001, Mr. Westrick served as President and Chief Executive Officer of New Focus, Inc., a supplier of fiber optic components. Prior to 1997, Mr. Westrick spent nine years at Cornerstone Imaging, Inc., where he held positions including Senior Vice President, General Manager of the Display Division and Managing Director of Europe. Mr. Westrick received an M.B.A. from Stanford University and a B.A. from Northwestern University.

Michael P. Ressner, Age 55. Mr. Ressner has served as a member of our Board of Directors since December 2003. Since January 2003, Mr. Ressner has been an Adjunct Professor of Applied Financial Management at North Carolina State University. From January 2001 to December 2002, Mr. Ressner served as Vice President, Nortel Networks. Prior to that time, Mr. Ressner served as Vice President of Finance of Nortel Networks Enterprise Solutions group from February 1999 to January 2001. From May 1994 to January 1999, Mr. Ressner served as Vice President of Finance for the Carrier Solutions business unit of Nortel Networks. Prior to these assignments, Mr. Ressner held a number of senior finance management posts within various business units of Nortel Networks. Mr. Ressner currently serves as a member of the board of directors for the following public companies: Entrust Inc., Magellan Health Services and Riverstone Networks. Mr. Ressner received a B.B.A. in Marketing and an M.B.A. in Finance both from the University of Wisconsin.

Lorenzo A. Bettino, Age 43. Mr. Bettino has served as a member of our Board of Directors since October 2002. Since September 2001, Mr. Bettino has been a Managing Director of Warburg Pincus & Co. From 1996 to 2001, Mr. Bettino was a founding partner at Baker Capital, a private equity firm. From 1989 to 1996, Mr. Bettino was a partner with Dillon Read Venture Capital, where he focused on technology and data communications investments. An experienced engineer, Mr. Bettino held a series of positions at International Business Machines Corporation prior to 1989. Mr. Bettino serves as a director of SS8 Networks, Inc., a telecommunications software provider, and as a director of Elematics, Inc., an optical data communications software provider. Mr. Bettino received an M.B.A. from Harvard Business School and a B.S. in Electrical Engineering in electrical engineering from Rensselaer Polytechnic Institute.

Steven D. Brooks, Age 51. Mr. Brooks has served as a member of our Board of Directors since July 2003. Mr. Brooks has been a general partner of Broadview Capital Partners, a private equity firm, since February 1999. From September 1997 to February 1999, Mr. Brooks was a managing director of Donaldson, Lufkin & Jenrette Securities Corporation, an investment-banking firm. From 1996 to 1997, Mr. Brooks was a private investor and a consultant to technology companies. From 1994 to 1997, Mr. Brooks served as Managing Director and Head of Global Technology Investment Banking at the Union Bank of Switzerland Securities, LLC. Mr. Brooks serves as a director of Cogent Communications Inc., Pharsight Corporation, and VERITAS Software Corporation. Mr. Brooks received a B.A. degree from Yale College and a J.D. degree from the University of Virginia Law School.

Merle L. Gilmore, Age 56. Mr. Gilmore has served as a member of our Board of Directors since March 2002. Since August 2001, Mr. Gilmore has been an industrial partner with Ripplewood Investments LLC, a private equity firm. Since May 2001, he has also been Chairman of the Board of D&M Holdings Inc., the parent company of Japan-based premium audio, video and home theater brands Denon and Marantz. Mr. Gilmore spent 30 years at Motorola, Inc. prior to retiring in 2000, and during this time he held several executive positions in Motorola’s telecommunications businesses. Mr. Gilmore also led Motorola’s acquisition of General Instruments and was President of Europe, Middle East and Africa. Mr. Gilmore received an M.S.E.E. from Florida Atlantic University and a B.S.E.E. from the University of Illinois.

Jeffrey A. Harris, Age 48. Mr. Harris has served as a member of our Board of Directors since July 2003. Since April 1983, Mr. Harris has been a Member and Managing Director, Warburg Pincus LLC and a partner of Warburg Pincus & Co. Mr. Harris serves as a director of Spinnaker Exploration Co. Mr. Harris

Jeffrey D. Saper, Age 55. Mr. Saper has served as a member of our Board of Directors since March 2002. From December 1997 to March 2002, Mr. Saper served as a director of Proxim, Inc. and from February 1997 to March 2002, Mr. Saper served as Proxim, Inc.’s Secretary. Mr. Saper has been a corporate partner in the firm of Wilson Sonsini Goodrich & Rosati, Professional Corporation, since 1980 and is currently also a member of the firm’s Executive Management Committee and Policy Committee. Mr. Saper received a J.D. and a B.A., both from New York University.

Joseph R. Wright, Jr., Age 65. Mr. Wright has served as a member of our Board of Directors since March 2002. Since August 2001, Mr. Wright has also served as President and Chief Executive Officer of PanAmSat, Corp., one of the world’s largest providers of global satellite-based communications services. Mr. Wright is Vice Chairman of Terremark Worldwide, Inc., a developer and operator of network access points (NAP’s) in the United States and Brazil. Previously, he served as Chairman and Director of GRC International, a public company providing advanced IT, Internet and software technologies to government and commercial customers. Mr. Wright also served as deputy director and director of the Federal Office of Management and Budget and a member of the President’s Cabinet during the Reagan Administration from 1982 to 1989 and, from 1981 to 1982, as Deputy Secretary of Commerce. Mr. Wright held positions as President of two Citibank subsidiaries and as a partner of Booz Allen & Hamilton, Inc. Mr. Wright also serves on the board of directors of the following public companies: Fairmarket, Inc., an excess inventory solutions provider; Titan Corporation, an information and communications solutions provider for national security; and Verso Technologies, Inc., a next generation communications solutions provider. Mr. Wright received an M.I.A. from Yale University and a B.S. in Professional Engineering from the Colorado School of Mines.

Information required by this item with respect to our executive officers is included in Part I, Item I above under the caption, “Executive Officers.”

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors and executive officers, and persons who own more than ten percent of a registered class of our equity securities, to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of our common stock and other equity securities. Officers, directors and greater than ten percent stockholders are required by Securities and Exchange Commission regulations to furnish us with copies of all Section 16(a) forms they file.

To our knowledge, based solely on a review of the copies of such reports furnished to us and written representations that no other reports were required, during the fiscal year ended December 31, 2003, all Section 16(a) filing requirements applicable to our officers, directors and greater than ten percent beneficial owners were complied with the exception of one late filing of Form 4 for each of Stephen Brooks, Jeffrey Harris, Merle Gilmore, Jeffrey Saper, Kenneth Westrick and Joseph Wright and two late filings of Form 4 for Lorenzo Bettino, all due to administrative error of the Company.

Proxim has a separately-designated audit committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended. The members of our audit committee are Merle L. Gilmore, Michael P. Ressner and Joseph R. Wright, Jr., with Mr. Ressner serving as Chairman of the committee. Our board of directors has determined that each member of our audit committee is “independent” as that term is defined in Rule 10A-3 promulgated under the Securities Exchange Act of 1934, as amended.

Our board of directors has determined that Mr. Ressner qualifies as an “audit committee financial expert” as that term is defined in Item 401(h) of Regulation S-K and is “independent” as that term is defined in Nasdaq Marketplace Rule 4200(a)(15).

Proxim has adopted a code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. A copy of the code of ethics is filed as an exhibit to this annual report on Form 10-K. Proxim intends to satisfy the disclosure requirement under Item 10 of Form 8-K regarding an amendment to, or waiver from, a provision of our code of ethics by filing a current report on Form 8-K with the Securities and Exchange Commission disclosing such information or by posting such information on our website, at the address specified above, within the period required by Item 10 of Form 8-K and, as applicable, the listing standards of the Nasdaq National Market.

The following table sets forth information regarding executive compensation for services rendered during our fiscal years ended December 31, 2003, 2002 and 2001 by the Company’s chief executive officer, the Company’s former chief executive officer during part of fiscal year 2003 and our other four most highly compensated executive officers who were serving as executive officers as of December 31, 2003 and whose salary and bonus for our last fiscal year exceeded $100,000, and two individuals who would have been included in this list of our most highly compensated executive officers but for the fact that neither such individual was serving as an executive officer as of December 31, 2003. These eight individuals constitute the group referred to elsewhere in this proxy statement as the Named Executive Officers. The compensation summarized in the following table does not include perquisites or other personal benefits that do not in the aggregate exceed the lesser of $50,000 or 10% of the Named Executive Officer’s salary and bonus.


	(1)	Mr. Plastina was appointed President and Chief Executive Officer of the Company in May 2003.

	(2)	Ms. Ablahat-Cipriano joined the Company in July 2003 and was appointed to Senior Vice President, Sales and Marketing in September 2003.

	(3)	Mr. Abu-Hakima was appointed to Senior Vice President, Corporate Development of the Company in September 2003.

	(4)	Mr. Duffy was appointed to Senior Vice President, Product Development of the Company in September 2003.

	(5)	Mr. Olson joined the Company in April 2003 and was appointed to Senior Vice President, Operations and Services in September 2003.

	(6)	Mr. Zakin tendered his resignation from the Company as Chief Executive Officer effective May 2003.

	(7)	Mr. Glover tendered his resignation from the Company as Chief Financial Officer and Executive Vice President in August 2003.

	(8)	This amount represents severance payments of $54,154 in connection with Mr. Glover’s resignation as Chief Financial Officer and Personal Time Off accrual payout of $42,308.

	(9)	Mr. Zoufonoun tendered his resignation from the Company as Executive Vice President, WAN Strategy and Business Development effective August 2003.


(10)	This amount represents automobile allowances paid of $5,492 and gains on the sales of shares acquired upon exercise of nonqualified stock options of $874,439.

(11)	This amount represents severance payments of $91,731 in connection with Mr. Zoufonoun’s resignation as Executive Vice President, WAN Strategy and Business Development and Personal Time Off accrual payout of $69,145.

(12)	This amount represents automobile allowances paid of $8,400 and gains on the sale of shares acquired upon exercise of nonqualified stock options of $537,823.

(13)	This amount represents automobile allowances paid of $8,400 and gains on the sale of shares acquired upon exercise of nonqualified stock options of $3,159,733.

The following table provides information regarding stock options granted to the Named Executive Officers during our fiscal year ended December 31, 2003.


(1)	The 5% and 10% assumed annual rates of compounded stock price appreciated are mandated by the rules of the SEC. The actual value, if any, that an executive officer may realize will depend on the excess of the stock price over the exercise price on the date the option is exercised. There can be no assurance the value realized by an executive officer will be at or near the assumed 5% or 10% levels.

The following table sets forth information regarding the exercise of stock options by the Named Executive Officers and year-end option values as of December 31, 2003.


(1)	Assumes that the value of unexercised options at fiscal year-end was $1.67 per share, the closing price of our common stock on the Nasdaq National Market on December 31, 2003.

For our fiscal year ended December 31, 2003 and for our fiscal year ending December 31, 2004, all non-employee directors of the Company were and will be paid as follows:


	•	an annual retainer of $50,000 for serving on the Board of Directors, payable in cash on a quarterly basis;


	•	an annual retainer of $10,000 for serving on the audit committee of the Board of Directors, payable in cash on a quarterly basis;

	•	an annual retainer of $5,000 for serving on the compensation committee of the Board of Directors, payable in each instance in cash on a quarterly basis;

	•	an annual retainer of $5,000 for serving on the governance and nominating committee of the Board of Directors, payable in each instance in cash on a quarterly basis;

	•	a meeting fee of $2,500 for each meeting of the Board of Directors attended in person;

	•	a meeting fee of $1,250 for each meeting of the Board of Directors attended via telephone or teleconference; and

	•	a meeting fee of $1,200 for each meeting on any special committee of the Board of Directors attended via telephone or teleconference; and

Currently, each non-employee director is entitled to receive an option to purchase 50,000 shares of our common stock under the Proxim Corporation 2000 Stock Option Plan for Non-Employee Directors (the “2000 Plan”) initially upon first becoming elected or appointed as a non-employee director. In addition, each non-employee director who continues to serve on our Board of Directors is entitled to receive an option to purchase 25,000 shares of our common stock under the 2000 Plan on the date of each annual meeting of our stockholders during such term of service. During our fiscal year ended December 31, 2003, we granted to directors options to purchase an aggregate of 275,000 shares of our common stock under the 2000 Plan.

Frank Plastina. In May of 2003, we entered into an agreement with Frank Plastina, appointing him as President and Chief Executive Officer of the Company and as member of the Board of Directors. Under the terms of the agreement, Mr. Plastina receives an annual base salary of $500,000, subject to annual increases at the discretion of the Board, and an annual bonus with a target amount for achieving certain objectives of not less than 100% of his base salary. Mr. Plastina also received options to purchase 3,000,000 shares of the Company’s common stock at an exercise price of $0.68. The options vest over three years and have a maximum term of ten years.

The Company may terminate Mr. Plastina’s employment at any time and Mr. Plastina may terminate his employment upon 90 days’ prior written notice without good reason or upon 30 days’ prior written notice for good reason (“good reason” in each case as defined in the employment agreement). In the event his employment is terminated by the Company without good reason or he terminates his employment for good reason, he is entitled to receive the following benefits, reduced by the present value of any other cash severance benefits payable to Mr. Plastina under any other plans or programs of the Company:


	•	Earned but unpaid base salary and target bonus, pro rated through the date of termination;

	•	Reimbursement for certain business expenses properly incurred;

	•	Any employee benefits to which he is entitled under the Company’s benefit plans;

	•	Continued payment of base salary for the lesser of 12 months or the number of months he had been employed by the company (the “Severance Period”);

	•	His annual bonus target amount, pro rated based on the number of months in the Severance Period in the event he has been employed less than one year;

	•	Acceleration of all unvested options that would have vested during the Severance Period; and

	•	Continued coverage under the Company’s medical insurance plans during the Severance Period at the same cost to him as was provided to him immediately prior to the date of termination.

In the event the Company terminates Mr. Plastina’s employment without cause or he terminates his employment for good reason upon or within 13 months following a change of control (as defined in the employment agreement), Mr. Plastina’s severance benefits as described above shall be modified as follows:


	•	The base salary and target bonus amounts described above shall be paid as a lump sum within 10 business days following termination;

	•	The term “Severance Period” shall mean 12 months; and

	•	All outstanding and unvested options shall vest and remain exercisable during the Severance Period.

Mr. Plastina has agreed not to disclose any confidential information pertaining to the Company’s business and has agreed not to compete with the Company during his employment and for one year following termination of his employment.

Deborah Ablahat-Cipriano. In July of 2003, we entered into an agreement with Deborah Ablahat-Cipriano, naming her Senior Vice President, Sales and Marketing of the Company. Under the terms of the agreement, Ms. Ablahat-Cipriano receives an annual base salary of $240,000, subject to annual increases at the discretion of the Board, and an annual bonus with a target amount for achieving certain objectives of not less than 60% of her base salary.

The Company may terminate Ms. Ablahat-Cipriano’s employment at any time and Ms. Ablahat-Cipriano may terminate her employment upon 30 days’ prior written notice. In the event her employment is terminated by the Company without cause or she terminates her employment for good reason, she is entitled to receive the following benefits, reduced by the present value of any other cash severance benefits payable to Ms. Ablahat-Cipriano under any other plans or programs of the Company:


	•	Earned but unpaid base salary and target bonus, pro rated through the date of termination;

	•	Reimbursement for certain business expenses properly incurred;

	•	Any employee benefits to which she is entitled under the Company’s benefit plans;

	•	Continued payment of base salary for the lesser of 12 months or the number of months she had been employed by the company (the “Severance Period”);

	•	Her annual bonus target amount, pro rated based on the number of months in the Severance Period in the event she has been employed less than one year;

	•	Acceleration of all unvested options that would have vested during the Severance Period; and

	•	Continued coverage under the Company’s medical insurance plans during the Severance Period at the same cost to her as was provided to her immediately prior to the date of termination.

In the event the Company terminates Ms. Ablahat-Cipriano’s employment without cause or she terminates her employment for good reason upon or within 13 months following a change of control (as defined in the employment agreement), Ms. Ablahat-Cipriano’s severance benefits as described above shall be modified as follows:


	•	The base salary and target bonus amounts described above shall be paid as a lump sum within 10 business days following termination;

	•	The term “Severance Period” shall mean 12 months; and

	•	All outstanding and unvested options shall vest and remain exercisable during the Severance Period.

Ms. Ablahat-Cipriano has agreed not to disclose any confidential information pertaining to the Company’s business and has agreed not to compete with the Company during her employment and for one year following termination of her employment.

Ihab Abu-Hakima. In March of 2002, we entered into an agreement with Ihab Abu-Hakima, naming him Senior Vice President, International Sales of the Company. In September of 2003, Mr. Abu-Hakima was

The Company may terminate Mr. Abu-Hakima’s employment at any time and Mr. Abu-Hakima may terminate his employment upon 30 days’ prior written notice. In the event his employment is terminated by the Company without cause or he terminates his employment for good reason, he is entitled to receive the following benefits, reduced by the present value of any other cash severance benefits payable to Mr. Abu-Hakima under any other plans or programs of the Company:


	•	Earned but unpaid base salary and target bonus, pro rated through the date of termination;

	•	Reimbursement for certain business expenses properly incurred;

	•	Any employee benefits to which he is entitled under the Company’s benefit plans;

	•	Continued payment of base salary for the lesser of 12 months or the number of months he had been employed by the company (the “Severance Period”);

	•	His annual bonus target amount, pro rated based on the number of months in the Severance Period in the event he has been employed less than one year;

	•	Acceleration of all unvested options that would have vested during the Severance Period; and

	•	Continued coverage under the Company’s medical insurance plans during the Severance Period at the same cost to him as was provided to him immediately prior to the date of termination.

In the event the Company terminates Mr. Abu-Hakima’s employment without cause or he terminates his employment for good reason upon or within 13 months following a change of control (as defined in the employment agreement), Mr. Abu-Hakima’s severance benefits as described above shall be modified as follows:


	•	The base salary and target bonus amounts described above shall be paid as a lump sum within 10 business days following termination;

	•	The term “Severance Period” shall mean 12 months; and

	•	All outstanding and unvested options shall vest and remain exercisable during the Severance Period.

Mr. Abu-Hakima has agreed not to disclose any confidential information pertaining to the Company’s business and has agreed not to compete with the Company during his employment and for one year following termination of his employment.

David E. Olson. In April of 2003, we entered into an agreement with David E. Olson, naming him Senior Vice President, Operations and Services of the Company. Under the terms of the agreement, Mr. Olson receives an annual base salary of $200,000, subject to annual increases at the discretion of the Board, and an annual bonus with a target amount for achieving certain objectives of not less than 60% of his base salary.

The Company may terminate Mr. Olson’s employment at any time and Mr. Olson may terminate his employment upon 30 days’ prior written notice. In the event his employment is terminated by the Company without cause or he terminates his employment for good reason, he is entitled to receive the following benefits, reduced by the present value of any other cash severance benefits payable to Mr. Olson under any other plans or programs of the Company:


	•	Earned but unpaid base salary and target bonus, pro rated through the date of termination;

	•	Reimbursement for certain business expenses properly incurred;

	•	Any employee benefits to which he is entitled under the Company’s benefit plans;


	•	Continued payment of base salary for the lesser of 12 months or the number of months he had been employed by the company (the “Severance Period”);

	•	His annual bonus target amount, pro rated based on the number of months in the Severance Period in the event he has been employed less than one year;

	•	Acceleration of all unvested options that would have vested during the Severance Period; and

	•	Continued coverage under the Company’s medical insurance plans during the Severance Period at the same cost to him as was provided to him immediately prior to the date of termination.

In the event the Company terminates Mr. Olson’s employment without cause or he terminates his employment for good reason upon or within 13 months following a change of control (as defined in the employment agreement), Mr. Olson’s severance benefits as described above shall be modified as follows:


	•	The base salary and target bonus amounts described above shall be paid as a lump sum within 10 business days following termination;

	•	The term “Severance Period” shall mean 12 months; and

	•	All outstanding and unvested options shall vest and remain exercisable during the Severance Period.

Mr. Olson has agreed not to disclose any confidential information pertaining to the Company’s business and has agreed not to compete with the Company during his employment and for one year following termination of his employment.

Kevin J. Duffy. In December of 2002, we entered into an agreement with Kevin J. Duffy, naming him Senior Vice President and General Manager of the Company. In September of 2003, Mr. Duffy was named Senior Vice President of Product Development. Under the terms of the agreement, Mr. Duffy receives an annual base salary of $200,000, subject to annual increases at the discretion of the Board, and an annual bonus with a target amount for achieving certain objectives of not less than 60% of his base salary.

The Company may terminate Mr. Duffy’s employment at any time and Mr. Duffy may terminate his employment upon 30 days’ prior written notice. In the event his employment is terminated by the Company without cause or he terminates his employment for good reason, he is entitled to receive the following benefits, reduced by the present value of any other cash severance benefits payable to Mr. Duffy under any other plans or programs of the Company:


	•	Earned but unpaid base salary and target bonus, pro rated through the date of termination;

	•	Reimbursement for certain business expenses properly incurred;

	•	Any employee benefits to which he is entitled under the Company’s benefit plans;

	•	Continued payment of base salary for the lesser of 12 months or the number of months he had been employed by the company (the “Severance Period”);

	•	His annual bonus target amount, pro rated based on the number of months in the Severance Period in the event he has been employed less than one year;

	•	Acceleration of all unvested options that would have vested during the Severance Period; and

	•	Continued coverage under the Company’s medical insurance plans during the Severance Period at the same cost to him as was provided to him immediately prior to the date of termination.

In the event the Company terminates Mr. Duffy’s employment without cause or he terminates his employment for good reason upon or within 13 months following a change of control (as defined in the employment agreement), Mr. Duffy’s severance benefits as described above shall be modified as follows:


	•	The base salary and target bonus amounts described above shall be paid as a lump sum within 10 business days following termination;


	•	The term “Severance Period” shall mean 12 months; and

	•	All outstanding and unvested options shall vest and remain exercisable during the Severance Period.

Mr. Duffy has agreed not to disclose any confidential information pertaining to the Company’s business and has agreed not to compete with the Company during his employment and for one year following termination of his employment.

Jonathan N. Zakin. In May 2001, we entered into an agreement with Jonathan N. Zakin, our former Chief Executive Officer and Chairman of our Board of Directors, to amend his employment agreement, dated as of October 1999. Pursuant to this amendment, Mr. Zakin became employed full-time, his annual base salary was increased from $50,000 to $500,000 and he became eligible to receive an incentive bonus equal to 75% of his annual base salary based on the achievement of performance targets established by our Board of Directors. Mr. Zakin also received options to purchase 900,000 shares of our common stock at an exercise price of $7.00 per share under the terms of the 1999 Plan. Upon the completion of the Merger and effective March 26, 2002, these 900,000 options vested and became fully exercisable.

Under the terms of the agreement, the Company could terminate Mr. Zakin’s employment at any time for cause or upon 60 days’ written notice without cause, and Mr. Zakin could terminate his employment upon 60 days’ prior written notice. Mr. Zakin agreed not to disclose any confidential information pertaining to the Company’s business. Furthermore, he agreed not to compete with the Company during his employment and for one year following the termination of his employment.

Amir Zoufonoun. In November of 1999 we entered into an agreement with Amir Zoufonoun, who was then serving as our President and Chief Operating Officer. In connection with the merger of Western Multiplex Corporation and Proxim Inc, Mr. Zoufonoun’s title and responsibilities as an employee of the Company changed and, from March 26, 2002 through the consummation of the ORiNOCO Acquisition on August 5, 2002, he served as our Executive Vice President, Technology. In August 2002, Mr. Zoufonoun’s title and responsibilities were modified and he became our Executive Vice President, WAN Strategy and Business Development. Mr. Zoufonoun’s annual base salary was $250,000 and provided that he was eligible to receive an annual incentive cash bonus of up to 60% of his base salary, based on his achievement of certain performance targets established by the Board of Directors.

Under the terms of Mr. Zoufonoun’s employment agreement, the Company could terminate Mr. Zoufonoun’s employment at any time, and Mr. Zoufonoun could terminate his employment on 90 days’ prior written notice. On August 8, 2003, Mr. Zoufonoun resigned for good reason as defined in the employment agreement and we provided Mr. Zoufonoun the related severance benefits described below in the section entitled “Termination of Employment and Change-in-Control Arrangements.”

Mr. Zoufonoun has agreed not to disclose any confidential information pertaining to the Company’s business. Furthermore, he has agreed not to compete with the Company during his employment and for one year following the termination of his employment.

Jonathan Zakin. In August of 2003, we entered into a severance agreement with Mr. Zakin pursuant to which the Company and Mr. Zakin agreed to the following:


	•	Mr. Zakin’s service to the Company as an executive ended effective June 5, 2003;

	•	During a transition period from June 5, 2003 until August 5, 2003, Mr. Zakin would serve as a non-executive employee and Chairman of the Board of Directors of the Company and would continue to receive his base salary and employee benefits;

	•	Mr. Zakin’s termination was without cause;

	•	Mr. Zakin would resign from all positions with the Company effective August 5, 2003.


	•	All options under Mr. Zakin’s stock option agreement would be fully vested and would be exercisable for a period of one year from August 5, 2003; and

	•	Mr. Zakin would be entitled to reimbursement for reasonable business expenses properly incurred prior to August 5, 2003.

Keith E. Glover. On October 17, 2003, Keith Glover, the Company’s Executive Vice President and Chief Financial Officer until August 2003, terminated his employment in all remaining capacities with the Company. Under the terms of the Company’s change of control and severance agreement with Mr. Glover, he is entitled to receive:


	•	Cash payments equal to 100% of his annual compensation (as defined in the agreement) paid over the 12 months following termination;

	•	Company-provided health, dental, vision and life insurance at the same level of coverage as was provided to him immediately prior to termination for a period of 12 months following termination;

	•	Acceleration of all unvested options to purchase shares of the Company’s common stock exercisable for a period of one year from the date of termination and the lapse of any repurchase right the Company may have with respect to stock held by him; and

	•	Six months of outplacement assistance, not to exceed a cost of $10,000.

In connection with the resignation by Mr. Glover, options to purchase 93,894 shares of our common stock held by Mr. Glover on the date his employment terminated, vested and became fully exercisable.

Amir Zoufonoun. On August 8th, 2003, Amir Zoufonoun, the Company’s former Executive Vice President of WAN Strategy and Business Development resigned from the Company. Under the terms of the Company’s employment agreement with Mr. Zoufonoun, he is entitled to receive:


	•	Cash payments equal to his base salary paid and pro-rated bonus, if any, over the 12 months following termination;

	•	Company-provided health, dental, vision and life insurance for a period of 12 months following termination;

Messrs. Gilmore and Westrick served as members of the compensation committee of our board of directors from January 1, 2003 through December 31, 2003. Former director Michael J. Boskin served as a member of the compensation committee from January 1, 2003 until his resignation from our board of directors on March 5, 2003. Mr. Harris served as a member of the compensation committee from September 4, 2003 through December 31, 2003. Mr. Harris is a partner of Warburg Pincus & Co. and a member and managing director of Warburg Pincus LLC, affiliates of Warburg Pincus Private Equity VIII, L.P. Please refer to Item 13, “Certain Relationships and Related Transactions — Transactions with Management and Others — Recent Financing Activities” for additional information regarding Mr. Harris’ relationship with Warburg Pincus Private Equity VIII, L.P. and related transactions with Warburg Pincus Private Equity VIII, L.P. and other Investors. As of the date of this report, Mr. Harris is not serving as a member the compensation committee of our board of directors.


	•	none of the members of our compensation committee was an officer (or former officer) or employee of employer any of its subsidiaries;

	•	none of the members of the compensation committee entered into (or agreed to enter into) any transaction or series of transactions with the Company or any of its subsidiaries in which the amount involved exceeds $60,000;


	•	none of the Company’s executive officers served on the compensation committee (or other board committee with similar functions or, if there was no such committee, the entire board of directors) of another entity where one of that entity’s officers served on the Company’s board of directors or as member of the compensation committee; and

	•	none of the Company’s executive officers was a director of another entity where one of that entity’s officers served on the Company’s compensation committee.

The following table sets forth certain information with respect to the beneficial ownership of the Company’s common stock and Series A preferred stock as of March 5, 2004 by (i) each stockholder that we know is the beneficial owner of more than 5% of the common stock and each beneficial owner of our Series A preferred stock, (ii) each executive officer of the Company named in the Summary Compensation Table in the section above entitled “Executive Compensation,” (iii) each director (iv) all executive officers and directors of the Company as a group. Unless otherwise indicated below, the address for each listed 5% stockholder, director and executive officer is c/o Proxim Corporation, 935 Stewart Drive, Sunnyvale, California 94085.

Beneficial ownership is determined in accordance with the rules of the SEC. Shares issuable upon exercise or exchange of outstanding convertible securities, including our Series A preferred stock, promissory notes and outstanding options and warrants are not deemed outstanding for the purposes of computing the percentage ownership of any other person. Except as otherwise indicated in the footnotes to the table, we believe that the beneficial owners listed in this table, based on information provided by them, have sole voting and investment power over the number of shares listed opposite their names, subject to community property laws where applicable.


(1)	Amount of beneficial ownership includes accretion of the liquidation preference of our Series A preferred stock as of March 5, 2004 and antidilution adjustments to the Series A preferred stock and certain warrants for common stock in connection with the issuance of promissory notes.

(2)	Percentages for each person are based on 123,341,837 shares of common stock outstanding on March 5, 2004, plus the total number of outstanding options or warrants held by such person that are exercisable within 60 days of March 5, 2004.

(3)	Amount of beneficial ownership includes accretion of the liquidation preference of our Series A preferred stock as of March 5, 2004 and antidilution adjustments to the Series A preferred stock and certain warrants for common stock in connection with the issuance of promissory notes, plus the number of shares of common stock issuable upon conversion of shares of Series B preferred stock issuable upon exchange of outstanding promissory notes, including accrued but unpaid interest, as of March 5, 2004.

(4)	Percentages for each person are based on 123,341,837 shares of common stock outstanding on March 5, 2004, plus the number of shares of common stock which holders of our Series A preferred stock would have been entitled to receive upon conversion of the Series A preferred shares held by such person as of March 5, 2004, plus the number of shares of common stock which holders of our promissory notes would be entitled to receive upon exchange of the promissory notes held by such person as of March 5, 2004 (assuming conversion of the shares of Series B preferred stock issuable on exchange of the promissory notes), plus the total number of outstanding options or warrants held by such person that are exercisable within 60 days of March 5, 2004.

(5)	Constitutes 36,661,396 shares of common stock issuable upon the exercise of warrants exercisable within 60 days of March 5, 2004. Warburg Pincus & Co. is the sole general partner of Warburg Pincus Private Equity VIII, LP. Warburg Pincus Private Equity VIII, LP is managed by Warburg Pincus LLC. The address of Warburg Pincus & Co. and Warburg Pincus LLC is 466 Lexington Avenue, New York, New York 10017.

(6)	Constitutes 682,466 shares of common stock issuable upon the exercise of warrants exercisable within 60 days of March 5, 2004.

(7)	Constitutes 4,939,137 shares of common stock issuable upon the exercise of warrants exercisable within 60 days of March 5, 2004.

(8)	Constitutes 18,611 shares of common stock issuable upon the exercise of warrants exercisable within 60 days of March 5, 2004.

(9)

Based on the Schedule 13G/ A filed by such beneficial owner with the SEC on January 30, 2004 and reflects common stock beneficially held as of December 31, 2003, including 16,065,257 shares as to which Kopp Investment Advisors, Inc. has shared dispositive power, 5,000,000 shares as to which Kopp Investment Advisors, Inc. has sole dispositive power and 17,444,896 shares as to which Kopp Investment Advisors, Inc. has sole voting power.


(10)	Constitutes 1,000,000 shares of common stock issuable upon the exercise of options exercisable within 60 days of March 5, 2004.

(11)	Constitutes 614,170 shares of common stock issuable upon the exercise of options exercisable within 60 days of March 5, 2004.

(12)	Includes 197,919 shares of common stock issuable upon the exercise of options exercisable within 60 days of March 5, 2004.

(13)	Constitutes 83,336 shares of common stock issuable upon the exercise of options exercisable within 60 days of March 5, 2004.

(14)	Constitutes 41,668 shares of common stock issuable upon the exercise of options exercisable within 60 days of March 5, 2004.

(15)	Constitutes 16,667 shares of common stock issuable upon the exercise of options exercisable within 60 days of March 5, 2004.

(16)	Constitutes 75,001 shares of common stock issuable upon the exercise of options exercisable within 60 days of March 5, 2004.

(17)	Constitutes 16,667 shares of common stock issuable upon the exercise of options exercisable within 60 days of March 5, 2004.

(18)	Constitutes 16,667 shares of common stock issuable upon the exercise of options exercisable within 60 days of March 5, 2004.

(19)	Includes 207,273 shares of common stock issuable upon the exercise of options exercisable within 60 days of March 5, 2004.

(20)	Constitutes 75,001 shares of common stock issuable upon the exercise of options exercisable within 60 days of March 5, 2004.

(21)	Constitutes 75,001 shares of common stock issuable upon the exercise of options exercisable within 60 days of March 5, 2004.

(22)	Includes 1,900,000 shares of common stock issuable upon the exercise of options exercisable within 60 days of March 5, 2004 and 3,920,061 shares of common stock held in the name of Seaview Holdings, 303,235 shares of common stock in the name of Zakin 2002 Investment Trust and 270,349 shares of common stock in the name of Jonathan N. Zakin Revocable Trust.

(23)	Includes 1,349,893 shares of common stock issuable upon the exercise of options exercisable within 60 days of March 5, 2004.

(24)	Includes 5,669,263 shares of common stock issuable upon the exercise of options held by all directors and executive officers exercisable within 60 days of March 5, 2004. Included in this group are the Named Executive Officers listed in the section below entitled “Summary Compensation Table” and current directors of the Company.

Except for the compensation agreements and other arrangements that are described under the sections above entitled “Director Compensation,” “Employment Contracts, Termination of Employment and Change-in-Control Arrangements,” and the agreements and transactions described under the subsections below entitled “Transactions with Management and Others,” “Certain Business Relationships” and “Indebtedness of Management” there was not since the beginning of our fiscal year ended December 31, 2003, nor is there currently proposed, any transaction or series of similar transactions to which the Company was or is to be a party in which the amount involved exceeds $60,000 and in which any director, executive officer, 5%

Recent Financing Activities. During 2003, Warburg Pincus Private Equity VIII, L.P. and Broadview Capital Partners L.P. and affiliates invested an aggregate of $40 million in us in exchange for secured promissory notes, exchangeable for shares of our Series B preferred stock, and warrants to purchase an aggregate of 24 million shares of our common stock. Please refer to Part I, Item 1, “Business — Recent Financing Activities” for a detailed description of our recent transactions with these Investors, the terms of the Notes and warrants, including terms of conversion and exercise thereof, and our Amended Agreement with the Investors. Prior to the investment, Warburg Pincus Private Equity VIII, L.P. held approximately 87% of our Series A preferred stock, and Broadview Capital Partners L.P. and affiliates held approximately 13% of our Series A preferred stock.

In connection with the investment and pursuant to the terms of the Amended Agreement, we appointed Jeffrey A. Harris and Steven D. Brooks as members of our board of directors effective as of July 30, 2003. In addition, Lorenzo A. Bettino has served as a member of our board of directors since September 2002. These directors may have an indirect financial interest in the investment as a result of positions held with the Investors. Messrs. Bettino and Harris are partners of Warburg Pincus & Co. and members and managing directors of Warburg Pincus LLC, affiliates of Warburg Pincus Private Equity VIII, L.P. Mr. Brooks is a member and managing director of Broadview Capital Partners Management LLC, an affiliate of Broadview Capital Partners L.P. In addition, in connection with services provided as members of our board of directors, each of Messrs. Harris and Brooks received an initial option grant to purchase 50,000 shares of our common stock under the Proxim Corporation 2000 Stock Option Plan for Non-Employee Directors, and Mr. Bettino received an annual option grant to purchase 25,000 shares of our common stock under the same plan, as well as certain other remuneration disclosed in the section above entitled “Director Compensation”.

Legal Services. During the year ended December 31, 2003, the law firm of Wilson Sonsini Goodrich & Rosati, Professional Corporation, served, and in the current fiscal year continues to serve, as outside general corporate counsel to the Company. Mr. Saper, a director of the Company, is a member of Wilson Sonsini Goodrich & Rosati, Professional Corporation. We believe that the services performed by Wilson Sonsini Goodrich & Rosati, Professional Corporation, have been provided on terms no more favorable than those with unrelated parties.

Promissory Note Issued by Amir Zoufonoun. On January 31, 2000, Mr. Zoufonoun issued a promissory note to us in the amount of $465,500 in connection with his purchase of 950,000 shares of our common stock. The principal amount of the promissory note is payable on the earlier of (i) the thirtieth day after we exercise a right to repurchase Mr. Zoufonoun’s shares of our common stock and under the related stock purchase agreement with him, or (ii) the tenth anniversary of the promissory note. Mr. Zoufonoun was serving as an executive officer of the Company at the time the note was issued to us and was serving as an executive officer of the Company during a portion of the year ended December 31, 2003. As disclosed above in the section entitled “Executive Compensation — Summary Compensation Table”, Mr. Zoufonoun tendered his resignation from the Company effective as of August 8, 2003.

The note accrues interest at a rate of 8% per year, compounded annually. The aggregate amount of indebtedness outstanding in respect of the note during the year ended December 31, 2003 was $611,399.

Mr. Zoufonoun also entered into a pledge agreement pursuant to which we hold a first priority security interest in the shares of our common stock purchased by him in connection with his respective note, the options to purchase shares of our common stock granted by the Company to him, the shares received pursuant to the exercise of any such options, and the proceeds received upon sale of any such shares purchased or

received in connection with the foregoing. Under the pledge agreement with Mr. Zoufonoun, we have the right to reclaim such collateral in the event of default under the terms of the respective note. In the event any amounts outstanding under the note are not satisfied following any such reclamation of the collateral and our use of related proceeds to offset amounts outstanding under the note, we are entitled to seek recourse from Mr. Zoufonoun’s other personal assets or income for up to half of the principal amount of the loan.

The aggregate fees PricewaterhouseCoopers LLP billed us for each of the last two fiscal years for professional services for the audits of our annual financial statements and review of financial statements included in our Reports on Form 10-Q or services normally provided by PricewaterhouseCoopers LLP in connection with filings or engagements for those years were $375,000 in 2002 and $410,000 in 2003. We engaged PricewaterhouseCoopers LLP as our principal accountants on March 26, 2002. Additional information relating to our predecessor principal accountants is included in Part II, Item 9 above under the caption “Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.”

The aggregate fees PricewaterhouseCoopers LLP billed us in each of the last two fiscal years for assurance and related services that are reasonably related to the performance of the audit or review of the Company’s financial statements and are not reported above under the caption “Audit Fees” were $270,000 in 2002, all of which was for audit-related services in connection with our merger with Proxim, Inc. and our acquisition of the 802.11 wireless LAN systems business of Agere, and the related financing transactions, and $89,000 in 2003 for audit-related services in connection with consultations regarding restructuring activities, royalty charges, and filing of registration statements and compliance with the Sarbanes-Oxley Act of 2002.

Aggregate fees billed for all other services rendered by PricewaterhouseCoopers LLP for the fiscal year ended December 31, 2002 and 2003 were approximately $160,000 and $415,000, respectively. These fees are related to tax compliance, advisory and planning services. The audit committee has determined that the provision of such non-audit services is compatible with the independent accountants maintaining their independence.

PricewaterhouseCoopers LLP did not bill us any additional fees in the last two fiscal years for products and services provided by PricewaterhouseCoopers LLP, other than the services reported above.

The Audit Committee has adopted an Audit Committee Charter, which sets forth the procedures and policies pursuant to which services to be performed by the independent auditor are to be pre-approved. Under the Charter, proposed services either may be pre-approved by agreeing to a framework with descriptions of allowable services with the Audit Committee (“general pre-approval”), or require the specific pre-approval of the Audit Committee. Unless a type of service has received general pre-approval, it requires specific pre-approval by the Audit Committee if it is to be provided by the independent auditor.

The Audit Committee will annually review and pre-approve the services that may be provided by the independent auditor that are subject to general pre-approval. Under the Charter, the Audit Committee may delegate pre-approval authority one or more designated members of the Audit Committee the authority to pre-approve audit and permissible non-audit services, provided such pre-approval decision is presented to the full Audit Committee at its scheduled meetings. The member to whom such authority is delegated must

All other schedules have been omitted because the required information is included in the consolidated financial statements or the notes thereto, or is not applicable or required.

The exhibits listed on the accompanying Exhibit Index are filed or incorporated by reference as part of this report and such Exhibit Index is incorporated by reference herein. Management contracts or compensatory plans or arrangements are identified in the accompanying Exhibit Index and such identification listing is incorporated by reference herein.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on our behalf by the undersigned, thereunto duly authorized, in the City of Sunnyvale, State of California, on the 15th day of March, 2004.


	By:	/s/ DAVID L. THOMPSON



	David L. Thompson
	Executive Vice President and
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Franco Plastina and David L. Thompson, jointly and severally, his attorneys-in-fact, each with full power of substitution, for him in any and all capacities, to sign on behalf of the undersigned any amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, and each of the undersigned does hereby ratify and confirm all that each of said attorneys-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed by the following persons in the capacities and on the dates indicated:


(Mark One)
þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

		For the fiscal year ended December 31, 2003

or

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

		For the transition period from to


Delaware		52-2198231
(State of Incorporation)		(I.R.S. Employer Identification No.)


		Page

PART I
ITEM 1.	BUSINESS		2
ITEM 2.	PROPERTIES		18
ITEM 3.	LEGAL PROCEEDINGS		19
ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS		20

PART II
ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS		22
ITEM 6.	SELECTED FINANCIAL DATA		25
ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		26
ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		68
ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA		69
ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE		116
ITEM 9A.	CONTROLS AND PROCEDURES		116

PART III
ITEM 10.	DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT		116
ITEM 11.	EXECUTIVE COMPENSATION		119
ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS		128
ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS		130
ITEM 14.	PRINCIPAL ACCOUNTANT FEES AND SERVICES		132

PART IV
ITEM 15.	EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K		133
SIGNATURES			135
EXHIBIT 3.2
EXHIBIT 4.13
EXHIBIT 10.27
EXHIBIT 10.39
EXHIBIT 10.54
EXHIBIT 10.55
EXHIBIT 10.64
EXHIBIT 21
EXHIBIT 23.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2


	Transmission Speeds
	(Kilobits per second
	(Kbps)) (Megabits per	Radio Frequency
Product Name	second (Mbps))	(Gigahertz (GHz))	Range	Standard Interface

WWAN Products
Point-to-Point Systems
LYNX	56 Kbps to 155 Mbps	2.4 GHz and 5.8 GHz (License- exempt)	Beyond 50 miles	Fractional, T1, E1 DS3 and OC3
TSUNAMI	2 Mbps to 480 Mbps	2.4 GHz and 5.8 GHz (License- exempt)	Beyond 40 miles	T1, E1, 10/100T
TSUNAMI Quickbridge	11 Mbps to 60 Mbps	2.4 GHz and 5.8 GHz (License- exempt)	Up to 6 miles	T1, E1, 10/100T
Point-to- Multipoint Systems
TSUNAMI Multipoint (MP)	20 Mbps to 60 Mbps/sector	5.8 GHz (License- exempt)	Up to 6 miles	10/100T
TSUNAMI MP.11	11 Mbps to 54 Mbps	2.4 GHz and 5 GHz (License-exempt)	Up to 16 miles	10/100T


	Transmission Speeds
	(Kilobits per
	second(Kbps))
	(Megabits per second	Radio Frequency
Product Name	(Mbps))	(Gigahertz (GHz))	Range	Standard Interface

WLAN Products
ORiNOCO Access Points	11 Mbps to 108Mbps	2.4 GHz and 5 GHz (License-exempt)	Up to 1700 feet	802.11a, b, g, 10/100T
ORiNOCO Client Cards	11 Mbps to 108Mbps	2.4 GHz and 5 GHz (License-exempt)	Up to 1700 feet	802.11a, b, g, 10/100T


Name	Age		Current Title and Position

Franco Plastina		41	President, Chief Executive Officer and Chairman of the Board of Directors
David L. Thompson		50	Executive Vice President, Chief Financial Officer
Kevin J. Duffy		41	Senior Vice President, Product Development
Deborah Ablahat-Cipriano		49	Senior Vice President, Sales and Marketing
David E. Olson		54	Senior Vice President, Operations and Services
Ihab Abu-Hakima		48	Senior Vice President, Corporate Development


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


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


	High		Low

First Quarter (ended 3/29/02)	$	5.97	$	1.82
Second Quarter (ended 6/28/02)	$	3.70	$	2.90
Third Quarter (ended 9/27/02)	$	3.21	$	1.70
Fourth Quarter (ended 12/31/02)	$	1.89	$	0.40
First Quarter (ended 3/28/03)	$	1.35	$	0.45
Second Quarter (ended 6/27/03)	$	2.49	$	0.47
Third Quarter (ended 9/26/03)	$	2.47	$	0.95
Fourth Quarter (ended 12/31/03)	$	2.04	$	1.25


							Number of Securities Remaining
		Number of Securities to be			Weighted-Average		Available for Future Issuance
		Issued upon Exercise of			Exercise Price of		under Equity Compensation
		Outstanding Options,			Outstanding Options,		Plans (Excluding Securities
Plan Category		Warrants and Rights(1)			Warrants and Rights(2)		Reflected in Column(a))

		(a)			(b)		(c)
Equity compensation plans approved by security holders			11,980,739	(3)	$	4.75		12,484,787	(4)
Equity compensation plans not approved by security holders			10,642,872	(5)	$	1.60		4,357,128	(6)
	Total		22,623,611		$	3.27		16,841,915



			Year Ended December 31,

			2003			2002			2001			2000			1999


			(In thousands, except share data)
Statement of operations data:
Total revenue, net			$	148,466		$	144,660		$	105,730		$	105,508		$	44,750
Cost of revenue				88,471			83,685			55,887			50,466			22,470
Royalty charges				23,869			—			—			—			—
Restructuring provision for excess and obsolete inventory				22,549			12,659			—			—			—

		Gross profit		13,577			48,316			49,843			55,042			22,280

Operating expenses:
	Research and development			24,241			29,159			19,114			12,379			5,925
	Selling, general and administrative			49,431			49,491			38,603			22,531			8,192
	Legal expense for certain litigation			6,800			—			—			—			—
	Amortization of goodwill and other intangible assets			21,593			12,467			5,440			2,382			737
	Amortization of deferred stock compensation			—			855			5,196			4,161			—
	Recapitalization costs			—			—			—			—			3,050
	Impairment of goodwill and intangible assets			—			129,108			4,331			—			—
	Impairment of loan to officer			—			4,500			—			—			—
	Bad debt expense			2,305			—			—			—			—
	Restructuring charges			7,279			43,177			1,816			—			—
	In-process research and development			—			16,100			6,400			—			—
	Merger costs			—			—			30			185			—

		Total operating expenses		111,649			284,857			80,930			41,638			17,904

		Income (loss) from operations		(98,072	)		(236,541	)		(31,087	)		13,404			4,376
Interest income (expense), net				(7,168	)		(85	)		1,393			85			(368	)
Loss on early extinguishment of debt				(22,200	)		—			—			(394	)		—

		Income (loss) before income taxes		(127,440	)		(236,626	)		(29,694	)		13,489			4,008
Income tax provision (benefit)				—			3,224			(4,096	)		6,800			2,831



	December 31,

	2003			2002		2001		2000		1999

Balance Sheet Data:
Cash and short-term investments	$	19,756		$	17,048	$	23,290	$	51,727	$	1,913
Working capital (deficit)		(35,164	)		53,975		65,083		84,686		4,481
Total assets		120,108			177,423		134,398		140,877		43,322
Accrued royalties and interest		26,906			—		—		—		—
Convertible promissory note		34,735			—		—		—		—
Restructuring accruals and long term debt		8,761			26,680		—		28		19,153
Common stock warrants		21,800			—		—		—		—
Mandatory redeemable convertible preferred stock		73,580			64,412		—		—		—
Total stockholders’ equity (deficit)	$	(79,088	)	$	51,267	$	118,252	$	122,024	$	11,006


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


	*Allowance for Doubtful Accounts, Returns and Discounts*


	*Restructuring Costs and Impairment of Goodwill and Intangible Assets*


ITEM 1.	*Business*


	*WWAN Products*


	*WLAN Products*


	*Credit Facilities*



		Year Ended December 31,

Product Line		2003		2002

WWAN product revenue		$	74,658	$	83,799
WLAN product revenue			67,808		60,861
WLAN license revenue			6,000		—

	Total revenue	$	148,466	$	144,660


Balance as of December 31, 2002	$	32,845
Additional reserve for excess and obsolete inventory		22,549
Inventory scrapped		(50,322	)

Balance as of December 31, 2003	$	5,072


							Asset Held
	Severance			Facilities			for Sale			Other			Total

Balance as of December 31, 2001	$	198		$	52		$	—		$	180		$	430
Reclassifications among categories		—			180			—			(180	)		—
Balance acquired with Proxim, Inc.		—			1,066			—			—			1,066
Provision charged to operations		7,395			33,080			—			2,702			43,177
Non-cash charges utilized		—			—			—			(2,405	)		(2,405	)
Cash payments		(7,593	)		(3,928	)		—			(297	)		(11,818	)

Balance as of December 31, 2002		—			30,450			—			—			30,450
Provision charged to operations		9,071			12,743			6,925			3,904			32,643
Reversal of previously recorded provision		—			(27,764	)		—			—			(27,764	)
Non-cash charges utilized		—			—			—			(3,304	)		(3,304	)
Cash payments		(5,451	)		(3,845	)		(9,966	)		—			(19,262	)
Proceeds from sale of asset held for sale, net		—			—			3,041			—			3,041

Balance as of December 31, 2003	$	3,620		$	11,584		$	—		$	600		$	15,804


Balance as of December 31, 2001	$	3,021
Additional reserve for excess and obsolete inventory		7,686
Balance acquired with Proxim, Inc.		45,114
Inventory scrapped		(22,976	)

Balance as of December 31, 2002	$	32,845


	Severances			Facilities			Other			Total

Balance as of December 31, 2000	$	—		$	—		$	—		$	—
Provision charged to operations		1,382			208			226			1,816
Charges utilized		(1,184	)		(156	)		(46	)		(1,386	)

Balance as of December 31, 2001		198			52			180			430
Reclassifications among categories		—			180			(180	)		—
Balance acquired with Proxim, Inc.		—			1,066			—			1,066
Provision charged to operations		7,395			33,080			2,702			43,177
Charges utilized		(7,593	)		(3,928	)		(2,702	)		(14,223	)

Balance as of December 31, 2002	$	—		$	30,450		$	—		$	30,450



	Payments Due by Period


			Year Ending December 31,
	Total Amounts
	Committed		2004		2005		2006		2007		2008		Thereafter

Severance pay	$	3,620	$	3,620	$	—	$	—	$	—	$	—	$	—
Repayment of convertible notes		50,753		50,753		—		—		—		—		—
Operating leases		39,545		7,854		7,741		6,708		6,372		6,436		4,434
Capital leases		2,190		1,257		901		32		—		—		—
Project commitments		1,284		1,284		—		—		—		—		—
Redemption of Series A Preferred Stock		106,899		—		—		—		106,899		—		—

	$	204,291	$	64,768	$	8,642	$	6,740	$	113,271	$	6,436	$	4,434


			Q1 2003			Q2 2003			Q3 2003			Q4 2003			Q1 2002			Q2 2002			Q3 2002			Q4 2002


			(Unaudited)

			(In thousands, except per share data)
Revenue, net			$	40,029		$	34,805		$	35,058		$	38,574		$	25,414		$	45,177		$	24,118		$	49,951
Cost of revenue				20,928			21,701			22,041			23,801			14,662			25,977			14,091			28,955
Royalty charges				—			—			22,869			1,000
Restructuring provision for excess and obsolete inventory(a)				—			22,549			—			—			12,659			—			—			—

		Gross profit (loss)		19,101			(9,445	)		(9,852	)		13,773			(1,907	)		19,200			10,027			20,996

Operating expenses:
	Research and development			7,883			6,234			4,915			5,209			4,549			7,295			8,699			8,616
	Selling, general and administrative			12,095			12,446			13,179			11,711			8,750			11,647			15,220			13,874
	Legal expense for certain litigation			3,000			1,000			1,700			1,100			—			—			—			—
	Amortization of goodwill and other intangible assets			5,500			5,365			5,364			5,364			144			2,209			4,606			5,508
	Amortization of deferred stock compensation			—			—			—			—			245			180			316			114
	Impairment of goodwill and intangible assets(b)			—			—			—			—			—			—			—			129,108
	Impairment of loan to officer			—			—			—			—			—			—			—			4,500
	Bad debt			—			—			2,305			—			—			—			—			—
	Restructuring charges (benefit)(c)			—			12,492			(5,194	)		(19	)		35,378			3,582			2,335			1,882
	In-process research and development			—			—			—			—			4,536			1,200			10,364			—
	Merger costs			—			—			—			—			—			—			—			—

		Total operating expenses		28,478			37,537			22,269			23,365			53,602			26,113			41,540			163,602

		Loss from operations		(9,377	)		(46,982	)		(32,121	)		(9,592	)		(55,509	)		(6,913	)		(31,513	)		(142,606	)
Interest income (expense), net				99			(192	)		(4,434	)		(2,641	)		131			240			(355	)		(101	)
Loss on early extinguishment of debt(d)				—			—			—			(22,200	)		—			—			—			—

		Loss before income taxes		(9,278	)		(47,174	)		(36,555	)		(34,433	)		(55,378	)		(6,673	)		(31,868	)		(142,707	)
Income tax provision (benefit)				—			—			—			—			3,224			—			—			—

		Net loss		(9,278	)		(47,174	)		(36,555	)		(34,433	)		(58,602	)		(6,673	)		(31,868	)		(142,707	)
Deemed Series A Preferred Stock dividend				—			—			—			—			—			—			(2,740	)		—
Accretion of Series A Preferred Stock redemption Obligations				(1,525	)		(1,560	)		(1,596	)		(1,622	)		—			—			(476	)		(1,414	)

Net loss attributable to common stockholders — basic and diluted			$	(10,803	)	$	(48,734	)	$	(38,151	)	$	(36,055	)	$	(58,602	)	$	(6,673	)	$	(35,084	)	$	(144,121	)

Net loss per share attributable to common stockholders — basic and diluted			$	(0.09	)	$	(0.40	)	$	(0.31	)	$	(0.29	)	$	(0.96	)	$	(0.06	)	$	(0.29	)	$	(1.20	)

Shares used to compute net loss per share — basic and diluted				120,274			121,714			121,985			122,674			61,275			119,215			119,557			120,134


Item 7A.	*Quantitative and Qualitative Disclosures About Market Risk*


Item 8.	*Financial Statements and Supplementary Data*


	Page

Report of Independent Auditors		70
Report of Independent Public Accountants		71
Consolidated Balance Sheets		72
Consolidated Statements of Operations		73
Consolidated Statements of Stockholders’ Equity		74
Consolidated Statements of Cash Flows		76
Notes to Consolidated Financial Statements		78



				Year Ended December 31, 2002

				2003			2002			2001


				(In thousands)
Cash flows from operating activities:
	Net loss			$	(127,440	)	$	(239,850	)	$	(25,598	)
	Adjustments to reconcile net loss to net cash used in operating activities:
	Deferred tax assets				—			12,624			(6,211	)
	Depreciation and amortization				24,646			17,215			12,692
	Impairment of goodwill and other intangible assets				—			129,108			4,331
	Impairment of loan to officer				—			4,500			—
	In-process research and development				—			16,100			—
	Restructuring provision for excess and obsolete inventory				22,549			12,659			6,400
	Provision for bad debts, sales returns and price protection				10,590			—			7,331
	Bad debt expense				2,305			—			—
	Restructuring charges (benefit)				(2,687	)		43,177			1,816
	Gain on disposal of short-term investments				(377	)		—			—
	Loss on early extinguishment of debt				22,200			—			—
	Amortization of debt discount on convertible notes				300			469			—
	Revaluation of common stock warrants				(400	)		—			—
	Changes in assets and liabilities, net of effect of business combinations:
		Accounts receivable, net			3,679			5,775			(435	)
		Inventory, net			(5,689	)		(11,188	)		(8,957	)
		Restricted cash and other assets, current and non-current			1,908			(5,156	)		2,433
		Accounts payable and other accrued liabilities			(8,283	)		(12,890	)		(5,748	)
		Accrued royalties and interest			26,906			—			—
		Payable to parent company			—			—			(35	)

			Net cash used in operating activities		(29,793	)		(27,457	)		(11,981	)

Cash flows from investing activities:
	Purchase of property and equipment				(2,912	)		(3,556	)		(4,812	)
	Purchase of an asset held for sale				(9,966	)		—			—
	Proceeds from repayment of loan to officer				500			—			(10,771	)
	Purchase of investment securities				—			—			25,659
	Proceeds from sale of short-term investments, net				583			7,043			—
	Proceeds from sale of asset held for sale, net				3,041						—
	Net cash used in acquisitions				—			(51,454	)		(12,666	)

	Net cash used in investing activities				(8,754	)		(47,967	)		(2,590	)

Cash flows from financing activities:
	Repayment of long-term debt				—			—			(1,703	)
	Borrowings on capital lease obligations				1,605			—			—
	Principal payments on capital lease obligations				(832	)		—			—


	*Mandatorily Redeemable Convertible Preferred Stock (“Preferred Stock”)*


	*Pro Forma Fair Value Disclosure Under SFAS No. 123 and 148*



		Years Ended December 31,

		2003			2002			2001

Net loss attributable to common stockholders as reported		$	(133,743	)	$	(244,480	)	$	(25,598	)
	Add: Stock-based compensation expense included in reported net loss		—			855			5,196
	Less: Stock-based compensation expense determined under fair value method		(9,163	)		(16,211	)		(24,267	)

	Pro forma net loss attributable to common stockholders	$	(142,906	)	$	(259,836	)	$	(44,669	)

As reported:
	Basic and diluted net loss attributable to common stockholders per share	$	(1.10	)	$	(2.33	)	$	(0.44	)

Pro forma:
	Basic and diluted net loss attributable to common stockholders per share	$	(1.17	)	$	(2.47	)	$	(0.78	)


	*Acquisition of the 802.11 WLAN Systems Business of Agere Systems, Inc.*


Inventory, net	$	557
Property and equipment		163
Core technology		8,521
Developed technology		16,994
Customer relationships		8,995
Tradename		5,909
Liabilities assumed		(4,589	)
Acquired in-process research and development		10,364
Goodwill		23,086

	$	70,000


Core technology			5 years
Developed technology			2 years
Customer relationships			3 years


Cash and cash equivalents	$	35,961
Marketable securities		991
Accounts receivable, net		8,914
Inventory, net		12,834
Other current assets		1,150
Other long-term assets		2,000
Plant and equipment		3,958
Core technology		18,010
Developed technology		12,042
Patents		3,210
Liabilities assumed		(8,199	)
Acquired in-process research and development		4,536
Goodwill		79,847

	$	175,254


Purchase price	$	246,454
Common stock issued		(159,039	)
Accrued transactions costs		—
Cash paid		87,415
Less: cash acquired		(35,961	)

Net cash used in business combinations	$	51,454


Balance as of December 31, 2001	$	35,901
Goodwill acquired during the year		102,933
Impairment charge		(129,108	)

Balance as of December 31, 2002	$	9,726