PROXIM CORP - 10-Q Quarterly 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o

The number of shares outstanding of the Company’s Class A common stock, par value $.01 per share, as of May 5, 2004, was 123,407,287. No shares of the Company’s Class B common stock, par value $.01 per share, are outstanding.

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,” and together with the Amended Notes, the “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 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 Notes for Series B Preferred Stock, the Company may be required to repay the Notes upon the earlier of demand by the Investors or the September 30, 2004 maturity date. If the Company were required to repay the 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 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 16 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 and future royalties due has not been finally determined, as of April 2, 2004, the Company has recorded an accrual for potential estimated royalties payable of $24.7 million and $3.1 million for interest. 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’s cash flows will not be immediately affected by 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 Notes. Upon such occurrence, the Investors would have the ability to require the Company 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.

The Company’s revenue declined from $38.6 million in the fourth quarter of 2003 to $26.7 million in the first quarter of 2004. The decline in quarter over quarter revenue and ongoing negative cash flows from operations is expected to have a negative impact on our future cash position. In addition, the Company has incurred substantial losses and negative cash flows from operations during the first quarter ended April 2, 2004 and the years ended December 31, 2003, 2002 and 2001, and had an accumulated deficit of $415.2 million as of April 2, 2004. The Company believes that it needs to obtain additional financing to provide sufficient working capital for the business. In the event that such additional financing is not available, the Company may need to seek protection under applicable bankruptcy laws. 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, which may be owed to Silicon Valley Bank, either due to an event of default or otherwise, it will be required to obtain immediate alternative sources of financing in excess of the additional financing required to provide sufficient working capital for the business. If the Company were not able to obtain such alternative sources of financing, it will 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. These 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 unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The condensed consolidated balance sheet as of April 2, 2004, the condensed consolidated statements of operations for the three months ended April 2, 2004 and March 28, 2003 and the condensed consolidated statements of cash flows for the three months ended April 2, 2004 and March 28, 2003, are unaudited, but include all adjustments (consisting of normal recurring adjustments), which the Company considers necessary for a fair presentation of the financial position, operating results and cash flows for the periods presented.

The balance sheet at December 31, 2003 has been derived from Proxim Corporation’s audited consolidated financial statements as of that date. Certain information and footnote information normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Results for any interim period are not necessarily indicative of results for any future interim period or for the entire year. The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

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 condensed consolidated financial statements include the financial statements of Proxim Corporation and all of its subsidiaries. The financial condition and results of operations for the three months ended April 2, 2004 and March 28, 2003 include the results of acquired subsidiaries from their effective dates. All significant intercompany transactions and balances are eliminated in consolidation.

In April 2004, the Emerging Issues Task Force issued Statement No. 03-06, Participating Securities and the Two — Class Method Under FASB Statement No. 128, Earnings Per Share, (“EITF 03-06”). EITF 03-06 addresses a number of questions regarding the computation of earnings per share by companies that have

issued securities other than common stock that contractually entitle the holder to participate in dividends and earnings of the company when, and if, it declares dividends on its common stock. EITF 03-06 also provides further guidance in applying the two-class method of calculating earnings per share, clarifying what constitutes a participating security and how to apply the two-class method of computing earnings per share once it is determined that a security is participating, including how to allocate undistributed earnings to such a security. EITF 03-06 is effective for fiscal periods beginning after March 31, 2004. The Company is currently evaluating the effect of adopting EITF 03-06 on its results of operations.

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 Mandatorily Redeemable Convertible Series A Preferred Stock (“Series A Preferred Stock”) (Note 13) 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 April 2, 2004. 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 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:

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

Acquired intangible assets by categories as of April 2, 2004 consist of the following (in thousands):

The Company expects amortization expense of intangible assets to be $12.5 million in the remaining 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, other than Tradename, will be fully amortized assuming no future impairments of those intangible assets or additions as a result of acquisitions.

The following is a summary of certain of our condensed consolidated balance sheets (in thousands):

The following is a summary of the movements in allowance for bad debt, sales returns and price protection and product warranty costs during the three months ended April 2, 2004 (in thousands):

The following is a summary of the changes in the reserve for excess and obsolete inventory during the three months ended April 2, 2004 (in thousands):

Property and equipment includes $2.9 million of computer equipment under capital leases at April 2, 2004. Accumulated amortization of assets under capital leases totaled $371,000.

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 ORiNOCO 802.11 access point and client card products. Total revenue during the three months ended March 28, 2003 also includes one-time license revenue of $6.0 million related to the patent infringement legal settlement agreement with Intersil (see Note 17). 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 North America is primarily export sales denominated in United States dollars. Disaggregated financial information regarding the Company’s revenue by geographic region is as follows (in thousands):

Two customers accounted for 14.3% and 12.5% of total revenue for the first quarter of 2004. One customer accounted for 15.0% of total revenue, net for the first quarter of 2003.

During the three months ended April 2, 2004, the Company recorded restructuring charges of $2.2 million, consisting of $2.0 million of cash provisions and $0.2 million of non-cash provisions for abandoned property and equipment. The $2.0 million of cash provisions consisted of $1.4 million of operating lease commitments, less estimated future sublease receipts and exit costs related to a portion of the Sunnyvale facility, which was closed in the first quarter of 2004, and $0.6 million of severance payments for five employees.

The following table summarizes the restructuring activities 2003 and the three months ended April 2, 2004 (in thousands):

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

The income tax benefit recorded during the three months ended April 2, 2004 represents the reversal of the valuation allowance of deferred tax assets to offset the deferred tax liability arising from the revaluation of short-term investments.

Basic and diluted net loss per share attributable to common stockholders is 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 three months ended April 2, 2004 and March 28, 2003 (in thousands except share data):

For the three months ended April 2, 2004 and March 28, 2003, 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 three months ended April 2, 2004 and March 28, 2003, 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.

The total comprehensive loss for the three months ended April 2, 2004 and March 28, 2003 is as follows (in thousands):

As of April 2, 2004, the Company had outstanding Notes with an aggregate principal amount of $40 million and accrued interest of $5.8 million. New Notes of $10 million, which were issued on December 19, 2003, rank senior to the Amended 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 the Notes for mandatorily Series B Preferred StockSeries 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. In addition, in connection with the financing, the note holders also received warrants to purchase common stock as described in Note 14.

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

At the option of the holder of Series B Preferred Stock, if and when issued, 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 $100.00 per share. The liquidation preference accretes at 14% per year, compounded quarterly, through the seventh anniversary of the date on which we will first issue shares of our Series B Preferred Stock, or the Series B Preferred Stock original issue date.

At the option of the note holders, the Series B Preferred Stock can be exchanged for shares of the Company’s common stock at an initial conversion price of $1.15 per share. The Company has the right to require conversion of the Series B Preferred Stock after five years if the closing price of its common stock exceeds 300% of the conversion price for ninety consecutive trading days. The Series B Preferred Stock is convertible at any time, in whole or in part, into that number of shares of common stock equal to the liquidation preference then in effect divided by the then current conversion price.

The conversion price will be subject to customary weighted average anti-dilution adjustments and other customary adjustments upon some transactions that affect our capital stock.

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 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 April 2, 2004.

Pursuant to stockholder approval of the terms of the Amended Agreement, including the Amended Notes and the New Notes, on December 12, 2003 (see Note 1), the Company issued to the Investors warrants as described in Note 14.

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 would be expected to represent approximately 26.5% of the Company’s outstanding common stock on an as-converted and as-exercised basis, based on 123,393,201 shares outstanding as of April 2, 2004 and excluding outstanding employee options, warrants and Series A Preferred Stock.

As of April 2, 2004, 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 1) 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 issued to the investors represents approximately 21% of the Company’s outstanding Common Stock on an as-converted and as-exercised basis as of April 2, 2004.

The issuance of Series A Preferred Stock, convertible notes and related warrants and the subsequent conversion, accretion and interest accrual were recorded through April 2, 2004 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 is 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, and has been reduced to $2.049 per share.

In connection with the acquisition of the 802.11 WLAN systems business of Agere Systems, Inc., the Company also issued warrants as described in Note 14.

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 is being amortized on a straight-line basis over the three-year term of the commercial arrangement with Motorola with quarterly charges against revenue of $174,000 effective beginning in the first quarter of 2004.

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 18.0 million and 6.0 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 14). 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 a long-term liability, as the warrant holders are entitled to require the Company to purchase the warrants for cash, as defined in the agreement, 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.

As of April 2, 2004, the Company had issued warrants to purchase 44,952,918 shares of the Company’s common stock as of April 2, 2004.

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 the three months ended April 2, 2004 and March 28, 2003 was $1.67 and $0.60 per share, respectively. The weighted average estimated grant date fair value of stock purchase rights granted pursuant to its employee stock purchase plan during the three months ended April 2, 2004 and March 28, 2003 was $0.76 and $1.26 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.

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 loss attributable to common stockholders and net loss per share attributable to common stockholders would have been (in thousands, except per share data):

The pro forma effect on net loss and net loss per share for the three months ended April 2, 2004 and March 28, 2003 is not representative of the pro forma effect on net loss in future years because it does not take into consideration pro forma compensation expense related to grants made prior to 1996.

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 April 2, 2004 were as follows (in thousands):

For the three months ended April 2, 2004 and the years ended December 31, 2003 and 2002, the Company recorded restructuring charges relating to the committed future lease payments for closed facilities, net of estimated future sublease receipts, of $19.5 million, which are included in the above disclosures.

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 Accounts Receivable Financing Agreement (as amended, the “Amended A/R Financing Agreement”).

Under the Amended A/R Financing Agreement, the Company may borrow up to $20 million in total. First, the Company may borrow up to $10 million by financing a portion of its eligible accounts receivable, primarily limited to customers in the United States. Under this arrangement, the Lender may agree to accept for collection through a lockbox arrangement 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 borrowing restrictions on most international accounts and at 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. Second, the Company may borrow up to an additional $10 million, under which the Company is required to maintain a compensating cash balance equal to such borrowings.

Under the A/R Financing Agreement, the Company may receive temporary advances from the Lender in excess of the availability otherwise applicable under the A/R Financing Agreement (“Temporary Overadvances”), in an amount equal to $4.0 million for advances relating to letters of credit and in an amount equal to $4.0 million to be used for working capital purposes. The Company may receive Temporary Overadvances under this arrangement through May 31, 2004. This Temporary Overadvances arrangement

may be renewed upon agreement by both the Company and the Lender. Borrowings outstanding under Temporary Overadvances are subject to a finance charge of 1.5% per week.

As of April 2, 2004, no borrowings were outstanding under the Amended A/R Financing Agreement.

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 totaling $40 million 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 17). 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. In addition, we are required to maintain restricted cash balances to the extent that our outstanding letters of credit exceed $4.0 million. 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 April 2, 2004 was $2.5 million. Future minimum lease payments under non-cancelable capital leases at April 2, 2004 were as follows (in thousands):

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 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, 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. As of April 2, 2004, the Company has recorded an accrual for potential estimated royalties payable of $24.7 million and $3.1 million for interest. 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’s cash flows will not be immediately affected by 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. The parties are currently conducting discovery. A trial date has not been set.

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 May 5, 2004, Active’s net claim is approximately $3.5 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 itself 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, operating results or cash flows.

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.

Except for any historical information contained herein, the matters discussed in this Quarterly Report on Form 10-Q contain certain “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995 with respect to our financial condition, results of operations, cash flows, revenues, financing plans, business strategies and market acceptance of its products. The words “anticipate,” “believe,” “estimate,” “expect,” “plan,” “intend,” and similar expressions, are intended to identify these forward-looking statements. These forward-looking statements are found at various places throughout this Quarterly 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 Quarterly Report or to reflect the occurrence of unanticipated events. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. Factors that might cause such a difference include, but are not limited to those discussed below under “Risk Factors” and elsewhere in this Report.

The following discussion should be read together with our financial statements, notes to those financial statements included elsewhere in this Quarterly Report on Form 10-Q, our financial statements, notes to those financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K filed with the Securities and Exchange Commission.

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. In a two-part transaction, we raised an additional $40.0 million in 2003. 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. (See Note 1 to the condensed consolidated financial statements for a detailed description of the Series B Financing). In December 2003, after stockholder approval of our transactions with the investors, 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. The amounts owed on these demand notes, including accreted interest, will total $51 million when due on September 30, 2004. In the event that the term of these notes is not extended or that these notes are not converted into Series B stock or common stock by the investors, or additional financing were not available to retire the notes, we would need to seek protection under applicable bankruptcy laws. We are in discussions with the investors regarding the terms of the notes and their effect on our ability to raise additional capital. However, there can be no assurance that the terms of the notes or the securities issuable upon exchange thereof will be modified.

Our revenue for the first quarter of 2004 was $26.7 million compared to $38.6 million for the fourth quarter of 2003. Our cash and cash equivalents decreased by $3.6 million from $19.8 million at December 31, 2003 to $16.1 million at April 2, 2004. We believe that the decline in revenue was primarily due to a pronounced seasonal decline in its WWAN business and issues associated with our transition to our next generation ORiNOCO WLAN platform. The decline in quarter over quarter revenue and ongoing negative cash flow is expected to have a negative impact on our future cash position. We believe that we need to obtain additional financing to provide sufficient working capital for the business. In the event such additional financing is not available, we may need to seek protection under applicable bankruptcy laws. In addition, almost all of the shares of common stock we are authorized to issue pursuant to our certificate of incorporation are either outstanding or reserved for future issuance upon the exchange, conversion or exercise of outstanding securities. We may need to seek approval of our stockholders to amend our certificate of incorporation to provide us with sufficient authorized shares for any new equity or convertible debt financing.

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


	•	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 the first quarter of 2004 was $26.7 million, a 33.3% decrease over our total revenue, net for the first quarter of 2003. Factors contributing to the revenue decrease included lower than expected carrier units sold resulting from carrier consolidation and delayed deployments. In addition, revenue declined due to sales order flow materializing later than expected in the first quarter of 2004, product availability issues arising from the introduction of a new family of ORiNOCO access point products, and in the first quarter of 2003 a one-time patent license fee of $6.0 million, resulting from the patent litigation settlement with Intersil, as described in Note 17 to the condensed consolidated financial statements.

	•	In our two geographies, North America and International, revenue comprised of 50.4% and 49.6%, respectively, of total revenue, net in the first quarter of 2004 and 57.8% and 42.2%, respectively, of total revenue, net in first quarter of 2003.

	•	Net loss attributable to common stockholders in the first quarter of 2004 was $17.5 million versus $10.8 million in the first quarter of 2003. The increase from the 2003 quarter to the 2004 quarter is primarily attributable to the decrease in gross profit by $10.6 million, as described below, restructuring charges of $2.2 million recorded in the 2004 quarter, and a decrease in interest income and (expense), net of $1.0 million, partially offset by a decrease in combined research and development and selling, general and administrative expenses of $4.1 million, as described below, and an income tax benefit of $0.7 million.

	•	Gross profit or gross margin decreased by $10.6 million or 55.5% from $19.1 million or 47.8% in the first quarter of 2003 to $8.5 million or 31.8% in the first quarter of 2004. Gross profit for the first quarter of 2004 included royalty charges of $0.8 million. Gross profit for the first quarter of 2003 included the one-time license revenue of $6.0 million resulting from the patent litigation settlement with Intersil.


		Excluding royalty charges and the one-time license revenue, gross profit or gross margin declined by $3.8 million or 29.0% from $13.1 million or 38.5% in the first quarter of 2003 to $9.3 million or 34.8% in the first quarter of 2004, primarily attributable to lower overhead absorption resulting from lower than expected production volumes, partially offset by a higher percentage of WWAN product sales in the first quarter of 2004 compared to those sales in the first quarter of 2003. WWAN products generally carry higher product gross margins than WLAN products.


	•	Combined research and development, selling, general and administrative expenses, and legal expenses for certain litigation improved from $23.0 million in the first quarter of 2003 to $16.7 million in the first


		quarter of 2004, partially attributable to our restructuring activities and cost reduction efforts implemented in 2003. Legal expenses for certain litigation included $3.0 million of litigation fees associated with our patent lawsuit with Intersil during the first quarter of 2003 and $745,000 of legal fees associated with our litigation with Symbol Technologies during the first quarter of 2004.

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 collectability 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.

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,

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 April 2, 2004 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 results of operations data as a percentage of revenue for the periods presented:

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 ORiNOCO 802.11 access point and client card products. Total revenue, net during the three months ended March 28, 2003 also includes one-time license revenue of $6 million related to the settlement agreement with Intersil during the first quarter of 2003 (see Note 17 of the condensed consolidated financial statements). 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.

We sell our products worldwide through a direct sales force, independent distributors, and value-added resellers. We currently operate in two geographic regions: North America and International. Revenue outside of North America are primarily export sales denominated in United States dollars. Disaggregated financial information regarding our revenue by geographic region is as follows (in thousands):

Two customers accounted for 14.3% and 12.5% of total revenue for the first quarter of 2004, respectively. One customer accounted for 15.0% of total revenue for the first quarter of 2003.

Total revenue, net decreased 33.3% from $40.0 million in the first quarter of 2003 to $26.7 million in the first quarter of 2004. The decrease was attributable to lower than expected carrier units sold resulting from carrier consolidation and delayed deployments. In addition, revenue declined due to sales order flow materializing later in the 2004 quarter, product availability issues arising from the introduction of a new family of ORiNOCO access point products, and in the 2003 quarter a one-time patent license fee of $6.0 million, resulting from the patent litigation settlement with Intersil, as described in Note 17 to the condensed consolidated financial statements.

Cost of revenue decreased 17.0% from $20.9 million in the first quarter of 2003 to $17.4 million in the first quarter of 2004. As a percentage of total revenue, net, cost of revenue increased from 52.3% in the first quarter of 2003 to 65.1% in the first quarter of 2004. Included in total revenue, net in the first quarter of 2003 was the $6.0 million license revenue in connection with the patent litigation settlement with Intersil. Excluding the $6.0 million license revenue, cost of revenue as a percentage of product revenue increased from 61.5% in the first quarter of 2003 to 65.1% in the first quarter of 2004. The decrease was primarily attributable to lower overhead absorption resulting from lower than expected production volumes, partially offset by a

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 $23.9 million and $3.0 million for interest as of December 31, 2003. During the first quarter of 2004, we recorded an accrual for estimated potential royalty charges of $828,000 and $85,000 for interest. See Note 17 of the consolidated financial statements for further description of the Symbol litigation.

Research and development expenses decreased 42.2% from $7.9 million or 19.1% of total revenue, net in the first quarter of 2003 to $4.6 million or 17.1% of total revenue, net in the first quarter of 2004. The decrease in research and development expense was primarily attributable to the reduction in workforce implemented in 2003, resulting in decreased personnel expenses. Severance pay associated with the workforce reduction was included in the restructuring charges recorded in 2003.

Selling, general and administrative expenses decreased 6.0% from $12.1 million or 30.1% of total revenue, net in the first quarter of 2003 to $11.4 million or 42.6% of total revenue, net in the first quarter of 2004. The decrease in selling, general and administrative expenses from the first quarter of 2003 to the first quarter of 2004 was primarily attributable to the workforce reduction implemented in 2003, resulting in reduced personnel expenses.

Legal expenses for certain litigation of $3.0 million incurred in the first quarter of 2003 represented litigation fees associated with our patent lawsuit with Intersil. As described in Part II, Item 1, Legal Proceedings, we settled our lawsuit with Intersil and recorded license revenue of $6.0 million in the first quarter of 2003. Legal expenses for certain litigation of $745,000 incurred in the first quarter of 2004 represented legal fees in connection with our litigation with Symbol Technologies. Please refer to Part II, Item 1, Legal Proceedings for a description of our litigation.

Amortization of intangible assets was $5.5 million in the first quarter of 2003 compared to $5.4 million in the first quarter of 2004.

During the three months ended April 2, 2004, the Company recorded restructuring charges of $2.2 million, consisting of $2.0 million of cash provisions and $0.2 million of non-cash provisions for abandoned property and equipment. The $2.0 million of cash provisions consisted of $1.4 million of operating lease commitments, less estimated future sublease receipts and exit costs related to a portion of a Sunnyvale facility, which was closed during the first quarter of 2004, and $0.6 million of severance payments for five employees.

The following table summarizes the restructuring activities in 2003 and the three months ended April 2, 2004 (in thousands):

Interest income (expense), net decreased from income of $99,000 in the first quarter of 2003 to expense of $858,000 in the first quarter of 2004. The following table summarizes interest income (expense), net (in thousands):

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.

Cash and cash equivalents decreased by $3.7 million from $19.8 million at December 31, 2003 to $16.1 million at April 2, 2004.

Net cash used in operating activities for the three months ended April 2, 2004 was $3.5 million, attributable to the net loss after the effect of non-cash charges and a decrease in accounts payable and other accrued liabilities, partially offset by a decrease in accounts receivable, a decrease in inventory excluding restructuring charges, a decrease in restricted cash and other assets, current and non-current, and an increase in accrued royalties and interest. Net cash used in operating activities for the three months ended March 28, 2003 was $1.4 million and was attributable to the net loss after the effect of non-cash charges and an increase in inventory, partially offset by a decrease in accounts receivable, a decrease in restricted cash and other assets, current and non-current, and an increase in accounts payable and other accrued liabilities.

Net cash used in investing activities for the three months ended April 2, 2004 was $292,000 and represented capital spending. Net cash provided by investing activities for the three months ended March 28, 2003 was $150,000, attributable to proceeds from repayment of a portion of a loan to a former officer, offset by capital spending of $350,000. As discussed in Note 6 to the condensed consolidated financial statements, we intend to continue to seek repayment on the outstanding loan balance from this former officer.

Net cash provided by financing activities for the three months ended April 2, 2004 was $138,000 and was attributable to the issuance of common stock, net of $437,000, offset by principal payments on capital lease obligations of $299,000. Net cash provided by financing activities for the three months ended March 28, 2003 was $136,000 and represented the issuance of common stock, net.

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 April 2, 2004 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 they have not been previously converted into common stock.

For the three months ended April 2, 2004 and the years ended December 31, 2003 and 2002, we recorded restructuring charges of $19.5 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 April 2, 2004, we had unconditional purchase order commitments of $815,000, which are included as 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, we may borrow up to $20 million in total. First, we may borrow up to $10 million by financing a portion of our eligible accounts receivable, primarily to our customers in the United States. Under this arrangement, we may accept for collection through a lockbox arrangement 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 borrowing restrictions on most international accounts and at 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. Second, we may borrow up to an additional $10 million, under which we are required to maintain a compensating cash balance equal to such borrowings.

Under the A/ R Financing Agreement, the Company may receive temporary advances from the Lender in excess of the availability otherwise applicable under the A/ R Financing Agreement (“Temporary Overadvances”), in an amount equal to $4.0 million for advances relating to letters of credit and in an amount equal to $4.0 million to be used for working capital purposes. The Company may receive Temporary Overadvances under this arrangement through May 31, 2004. This Temporary Overadvances arrangement may be renewed upon agreement by both the Company and the Lender. Borrowings outstanding under Temporary Overadvances are subject to a finance charge of 1.5% per week.

As of April 2, 2004, no borrowings were outstanding under the Amended A/ R Financing Agreement.

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 Part II, Item 1, 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. In addition, we are required to maintain restricted cash balances to the extent that our outstanding letters of credit exceed $4.0 million. 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 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. Restructuring charges related primarily to severance payments.

Restructuring charges for the three months ended April 2, 2004 were $2.2 million, consisting of $2.0 million of cash provisions and $0.2 million of non-cash provisions for abandoned property and equipment. The $2.0 million of cash provisions consisted of $1.4 million of operating lease commitments, less estimated future sublease receipts and exit costs related to a portion of a Sunnyvale facility, which was closed during the first quarter of 2004, and $0.6 million of severance payments for five employees.

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 Note 1 to the condensed consolidated financial statements 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 Notes for Series B Preferred Stock and/or common stock or extend their maturity date, we may be required to repay the Notes upon the earlier of demand by these investors or the September 30, 2004 maturity date. If we were required to repay the 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 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. We are in discussions with the investors regarding the terms of the Notes and their effect on our ability to raise additional capital. However, there can be no assurance that the terms of the notes or the securities issuable upon exchange thereof will be modified.

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. While the actual amount of past royalties due has not been finally determined, as of April 2, 2004, we have recorded an accrual for potential estimated royalties payable of $24.7 million and $3.1 million for interest.. 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 one-day bench trial on our equitable defenses of laches and estoppel not addressed by the jury. The District Court has not reached a decision on the equitable defenses.

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,

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 $27.8 million for royalties and interest is not included in the above disclosure of future payments under contractual obligations.

Our revenue declined from $38.6 million in the fourth quarter of 2003 to $26.7 million in the first quarter of 2004. The decline in quarter over quarter revenue and ongoing negative cash flows from operations is expected to have a negative impact on our future cash position. In addition, we have incurred substantial losses and negative cash flows from operations during the first quarter ended April 2, 2004 and the years ended December 31, 2003, 2002 and 2001, and had an accumulated deficit of $415.2 million as of April 2, 2004. We believe that we need to obtain additional financing to provide sufficient working capital for the business. 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. In addition, almost all of the shares of common stock we are authorized to issue pursuant to our certificate of incorporation are either outstanding or reserved for future issuance upon the exchange, conversion or exercise of outstanding securities. We may need to seek approval of our stockholders to amend our certificate of incorporation to provide us with sufficient authorized shares for any new equity or convertible debt financing. 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. In the event that such additional financing is not available, we may need to seek protection under applicable bankruptcy laws. If we were required to make payments to Symbol, post a bond to the court, and/or repay the Notes and amounts, if any, which may be owed to Silicon Valley Bank, either due to an event of default or otherwise, we will be required to obtain immediate alternative sources of financing in excess of the additional financing required to provide sufficient working capital for the business. If we were not able to obtain such alternative sources of financing, we 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 our ability to continue as a going concern. These consolidated financial statements do not include any adjustments that might result from this uncertainty.

In April 2004, the Emerging Issues Task Force issued Statement No. 03-06, Participating Securities and the Two — Class Method Under FASB Statement No. 128, Earnings Per Share, (“EITF 03-06”). EITF 03-06 addresses a number of questions regarding the computation of earnings per share by companies that have issued securities other than common stock that contractually entitle the holder to participate in dividends and earnings of the company when, and if, it declares dividends on its common stock. The issue also provides further guidance in applying the two-class method of calculating earnings per share, clarifying what constitutes a participating security and how to apply the two-class method of computing earnings per share once it is determined that a security is participating, including how to allocate undistributed earnings to such a security. EITF 03-06 is effective for fiscal periods beginning after March 31, 2004. The Company is currently evaluating the effect of adopting EITF 03-06 on its results of operations.

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.

This Form 10-Q also 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-Q.

We believe that we need to obtain additional financing to provide sufficient working capital for the business. 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. In addition, almost all of the shares of common stock we are authorized to issue pursuant to our certificate of incorporation are either outstanding or reserved for future issuance upon the exchange, conversion or exercise of outstanding securities. We may need to seek approval of our stockholders to amend our certificate of incorporation to provide us with sufficient authorized shares for any new equity or convertible debt financing. 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. In the event that such additional financing is not available, we may need to seek protection under applicable bankruptcy laws.

During 2003, Warburg Pincus and Broadview Capital invested $40 million in us in exchange for the Notes Series B Preferred Stock and warrants to purchase our common stock. Please refer to Note 1 to the condensed consolidated financial statements 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 and/or common stock, or the term of the notes is extended, 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 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.

provide sufficient capital for the business. 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.

For the three months ended April 2, 2004 and the year ended December 31, 2003 we had a net loss attributable to holders of our common stock of $17.5 million and $133.7 million, respectively. 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 Note 1 to the condensed consolidated financial statements 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 is 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 and the first quarter of 2004.

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 41,997,119 shares of common stock as of May 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 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.

Assuming conversion of the notes on their maturity date of September 30, 2004, 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 May 5, 2004, and excluding total outstanding employee options and other warrants to purchase approximately 30,892,084 shares and 2,651,306 shares, respectively, 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”) by June 15, 2004. 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 issued in connection with the Series A Preferred Stock and Series B Preferred Stock.

In addition to these securities, as of May 5, 2004, options and warrants to acquire 30,892,084 and 2,651,306 shares, respectively, of our common stock were outstanding. Also, as of May 5, 2004, approximately an additional 11,770,369 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 Company’s 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 three months ended April 2, 2004 and years ended December 31, 2003 and 2002, international sales accounted for approximately 49%, 41% and 38% of our total sales, respectively. We expect that our


	•	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.

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. Two distributors accounted for 14.3% and 12.5% of our total revenue for the three months ended April 2, 2004, and one distributor accounted for approximately 14% and 23% of our total revenue for the years ended December 31, 2003 and 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 purchase orders, if any, from a limited number of distributors. In addition, as we continue the development of our distribution channels, we may consolidate demand through fewer, larger distributors in order to effectively manage a growing base of VARs, resellers and sub-distributors.

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. 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. In addition, during periods of capacity constraint, we are disadvantaged compared to better capitalized companies, as suppliers have in the past and may in the future choose not to do business with us, or may require letters of credit guaranteeing our obligations, as a result of our financial condition. 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 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. As demand for wireless products increases, our contract manufacturers are experiencing increasing lead times for many components increasing the possibility that they will be unable to satisfy our product requirements in a timely fashion. 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 have been deployed. The occurrence of any defects or errors in these products, including defects or errors in components supplied by our contract manufacturers, could result in:


	•	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 they have tested the products 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 future. If the costs of remediating problems experienced by our customers exceed 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. Kevin Duffy, our Executive Vice President and Chief Operating Officer, Mr. Michael D. Angel, 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 41,997,199 shares of common stock as of May 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.

Assuming conversion of the notes on their maturity date of September 30, 2004, 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 May 5, 2004, and excluding outstanding employee options and warrants to purchase approximately 30,892,084 shares and 2,651,306 shares, respectively, of common stock.

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 acquirer 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 or 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 infringes two of Symbol’s patents and assessed a 6% royalty. As of April 2, 2004, we recorded an accrual for potential estimated royalties payable of $24.7 million and $3.1 million for interest. 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, our cash flows will not be immediately affected by this verdict, pending completion of related proceedings.

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. The parties are currently conducting discovery. A trial date has not been set.

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 May 5, 2004, Active’s net claim is approximately $3.5 million. This case is in its earliest stages, as discovery has not yet commenced and a trial date has not been established.

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.

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 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.

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.

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.

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


	•	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.

Changes in stock option accounting rules may adversely impact our reported operating results prepared in accordance with generally accepted accounting principles, our stock price and our competitiveness in the employee marketplace.

Technology companies like ours have a history of using broad based employee stock option programs to hire, incentivize and retain our workforce in a competitive marketplace. Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”) allows companies the choice of either using a fair value method of accounting for options, which would result in expense recognition for all options granted, or using an intrinsic value method, as prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25), with a pro forma disclosure of the impact on net income (loss) of using the fair value option expense recognition method. We have elected to apply APB 25 and accordingly we generally do not recognize any expense with respect to employee stock options as long as such options are granted at exercise prices equal to the fair value of our common stock on the date of grant.

During March 2004 the FASB issued a proposed Statement, “Share-Based Payment, an amendment of FASB Statements No. 123 and 95”. The proposed statement eliminates the treatment for share-based transactions using APB 25 and generally would require share-based payments to employees be accounted for using a fair-value-based method and recognized as expenses in our statements of operations. The proposed standard would require the modified prospective method be used, which would require that the fair value of new awards granted from the beginning of the year of adoption plus unvested awards at the date of adoption be expensed over the vesting term. In addition, the proposed statement encourages companies to use the “binomial” approach to value stock options, as opposed to the Black-Scholes option pricing model that we currently use for the fair value of our options under SFAS 123 disclosure provisions.

The effective date the proposed standard is recommending is for fiscal years beginning after December 15, 2004. Should this proposed statement be finalized, it will have a significant impact on our consolidated statement of operations as we will be required to expense the fair value of our stock options rather than disclosing the impact on our consolidated result of operations within our footnotes in accordance with the disclosure provisions of SFAS 123 (see Note 14 of the notes to condensed consolidated financial statements). This will result in lower reported earnings per share which could negatively impact our future stock price. In addition, should the proposal be finalized, this could impact our ability to utilize broad based employee stock plans to reward employees and could result in a competitive disadvantage to us in the employee marketplace.

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 disclosure standards may result in increased general and administrative expenses and a diversion of management time and attention to these compliance activities.

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 have invested in an equity instrument in a private company, which completed its initial public offering in February 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 April 2,

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.

Evaluation of disclosure controls and procedures. Our Chief Executive Officer and our Chief Financial Officer, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934, as amended (the “Exchange Act”) Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by this quarterly report, have concluded that our disclosure controls and procedures are effective based on their evaluation of these controls and procedures required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15.

Changes in internal control over financial reporting. There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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. As of April 2, 2004, we recorded an accrual for potential, estimated royalties payable of $24.7 million and $3.1 million for interest. 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, our cash flows will not be immediately affected by 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 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. The parties are currently conducting discovery. A trial date has not been set.

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.

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.

On April 6, 2004, the corporate governance and nominating committee (“CGNC”) of the Company’s Board of Directors adopted a Director Nomination and Stockholder Communications Policy which, among other things, sets forth a list of minimum qualifications for directors and formalizes the procedure by which the Company’s stockholders can recommend to the CGNC potential nominees for election to the Company’s Board of Directors.

Pursuant to the Director Nomination and Stockholder Communications Policy adopted by the CGNC, the Company’s stockholders may submit names of prospective candidates for election to the Board of Directors by sending an email to the Secretary of the Company at secretary@proxim.com for referral to the CGNC. Alternatively, stockholders may submit such recommendations by mail to the following address: Board of Directors, c/o Corporate Secretary, Proxim Corporation, 935 Stewart Drive, Sunnyvale, California 94085. Any stockholder recommendations should include the candidate’s name and qualifications for membership on the Board of Directors. The CGNC will consider persons properly recommended by the Company’s stockholders in the same manner as persons recommended by the Board of Directors, individual directors or management.

Any stockholder who wishes to make a nomination for election to the Board of Directors at an annual or special meeting for the election of directors must comply with procedures set forth in the Company’s bylaws.

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	By:	/s/ MICHAEL D. ANGEL



	Michael D. Angel
	Executive Vice President and
	Chief Financial Officer
	(Principal Financial and Accounting Officer)


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

		For the quarterly period ended April 2, 2004
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.)
935 Stewart Drive Sunnyvale, California 94085 (408) 731-2700
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)


		Page

PART I FINANCIAL INFORMATION
Item 1	Financial Statements		2
	Condensed Consolidated Balance Sheets at April 2, 2004 and December 31, 2003 (unaudited)		2
	Condensed Consolidated Statements of Operations for the three months ended April 2, 2004 and March 28, 2003 (unaudited)		3
	Condensed Consolidated Statements of Cash Flows for the three months ended April 2, 2004 and March 28, 2003 (unaudited)		4
	Notes to Condensed Consolidated Financial Statements (unaudited)
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations		27
Item 3	Quantitative and Qualitative Disclosures About Market Risk		60
Item 4	Controls and Procedures		61

PART II OTHER INFORMATION
Item 1	Legal Proceedings		61
Item 5	Other Information		63
Item 6	Exhibits and Reports on Form 8-K		63
Signature			64
EXHIBIT 10.65
EXHIBIT 10.66
EXHIBIT 10.67
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2


				April 2,			December 31,
				2004			2003


				(In thousands, except share
				and per share data)
				(Unaudited)
ASSETS
Current assets:
	Cash and cash equivalents			$	16,132		$	19,756
	Short-term investments				3,864			—
	Accounts receivable, net				9,945			13,961
	Inventory				19,358			19,939
	Other current assets				3,871			5,301

		Total current assets			53,170			58,957
Property and equipment, net					6,761			7,522
Goodwill					9,726			9,726
Intangible assets, net					34,968			40,333
Restricted cash					618			1,254
Other assets					316			2,316

		Total assets		$	105,559		$	120,108


LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
	Accounts payable			$	8,673		$	10,500
	Capital lease obligations, current				1,176			1,176
	Accrued royalties and interest				27,819			26,906
	Other accrued liabilities				24,137			20,804
	Convertible promissory note				36,435			34,735

		Total current liabilities			98,240			94,121
Capital lease obligations, long-term					635			934
Long-term debt					101			101
Restructuring accruals, long-term					9,084			8,660
Common stock warrants					16,700			21,800

		Total liabilities			124,760			125,616

Commitments and contingencies (Notes 15 and 17) Mandatorily redeemable convertible preferred stock: 25,000,000 shares authorized; Series A, par value $.01; 3,000,000 shares issued and outstanding at April 2, 2004 and December 31, 2003, respectively					75,937			73,580

Stockholders’ equity (deficit):
	Common stock, Class A, par value $.01; authorized 390,000,000 shares:
			165,578,735 and 165,037,194 shares issued and outstanding at April 2, 2004 and December 31, 2003, respectively		1,655			1,650
	Common stock, Class B, par value $.01; authorized 10,000,000 shares: no shares issued and outstanding at April 2, 2004 and December 31, 2003, respectively				—			—
	Additional paid-in capital				339,618			339,311
	Treasury stock, at cost; 42,185,534 shares at April 2, 2004 and December 31, 2003				(21,585	)		(21,585	)
	Notes receivable from stockholders				(711	)		(711	)
	Accumulated deficit				(415,234	)		(397,753	)
	Accumulated other comprehensive income				1,119			—

		Total stockholders’ deficit			(95,138	)		(79,088	)

		Total liabilities, mandatorily redeemable convertible preferred stock and stockholders’ deficit		$	105,559		$	120,108



			Three Months Ended

			April 2,			March 28,
			2004			2003


			(In thousands, except per
			share data)
			(Unaudited)
Product revenue, net			$	26,697		$	34,029
License revenue				—			6,000

		Total revenue, net		26,697			40,029
Cost of revenue				17,377			20,928
Royalty charges				828			—

		Gross profit		8,492			19,101
Operating expenses:
	Research and development			4,554			7,883
	Selling, general and administrative			11,371			12,095
	Legal expense for certain litigation			745			3,000
	Amortization of intangible assets			5,365			5,500
	Restructuring charges			2,167			—

		Total operating expenses		24,202			28,478

Loss from operations				(15,710	)		(9,377	)
Interest income (expense), net				(858	)		99

Loss before income taxes				(16,568	)		(9,278	)
Income tax benefit				(745	)		—

Net loss				(15,823	)		(9,278	)
Accretion of Series A preferred stock obligations				(1,658	)		(1,525	)

Net loss attributable to common stockholders			$	(17,481	)	$	(10,803	)

Net loss per share attributable to common stockholders — basic and diluted			$	(0.14	)	$	(0.09	)

Shares used to compute net loss per share — basic and diluted				123,182			120,274


	*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


		Gross
		Carrying		Accumulated
		Amounts		Amortization

Amortized intangible assets:
	Core Technology	$	26,531	$	10,045
	Developed Technology		29,036		22,190
	Customer Relationships		8,995		4,997
	Patents		3,439		1,710

	Total	$	68,001	$	38,942

Unamortized intangible assets:
	Tradename	$	5,909


	Allowance for Bad Debt,			Product
	Sales Returns			Warranty
	and Discounts			Costs

Balance as of December 31, 2003	$	9,785		$	1,395
Additional provision		5,218			42
Settlements made during the period		(4,033	)		(71	)

Balance as of April 2, 2004	$	10,970		$	1,366


Balance as of December 31, 2003	$	5,072
Provision for excess and obsolete inventory		300
Inventory scrapped		(1,526	)

Balance as of April 2, 2004	$	3,846


Note 7 —	Revenue Information and Concentration of Credit Risks


Note 8 —	Restructuring Charges for Severance and Excess Facilities


							Asset Held
	Severance			Facilities			for Sale			Other			Total

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
Provision charged to operations		601			1,447			—			119			2,167
Non-cash charges utilized		—			—			—			(119	)		(119	)
Cash payments		(2,424	)		(856	)		—			—			(3,280	)

Balance as of April 2, 2004	$	1,797		$	12,175		$	—		$	600		$	14,572


Item 1.	*Financial Statements*


	*Liquidity and Significant Events*


	*Risks and Uncertainties*


	*Basis of Presentation*


Note 10 —	Loss Per Share Attributable to Common Stockholders


Note 13 —	Mandatorily Redeemable Convertible Series A Preferred Stock


							Additional
	Convertible			Preferred			Paid-In			Accumulated
	Notes			Stock			Capital			Deficit

Issuance of Series A Preferred Stock	$	—		$	41,000		$	—		$	—
Issuance of convertible notes		34,000			—			—			—
Issuance of warrants		—			(13,993	)		13,993			—
Conversion of convertible notes		(34,000	)		34,000			—			—
Deemed Preferred Stock dividend		—			—			2,740			(2,740	)
Accretion of Preferred Stock redemption obligations		—			2,936			(1,046	)		(1,890	)
Accrued interest on convertible notes payable in Preferred Stock		—			469			—			—

Balance as of December 31, 2002		—			64,412			15,687			(4,630	)
Accretion of Preferred Stock redemption obligations		—			9,168			(2,865	)		(6,303	)

Balance as of December 31, 2003	$	—		$	73,580		$	12,822		$	(10,933	)
Accretion of Preferred Stock redemption obligations		—			2,357			(1,658	)		(699	)

Balance as of April 2, 2004	$	—		$	75,937		$	11,164		$	(11,632	)


	*Pro Forma Fair Value Disclosure Under SFAS No. 123 and 148*


Nine months ending December 31, 2004	$	5,894
Year ending December 31:
2005		7,740
2006		6,708
2007		6,371
2008		6,435
Thereafter		4,434

Total minimum lease payments	$	37,582


Nine months ending April 2, 2004	$	937
Year ending December 31:
2005		901
2006		32

Total minimum lease payments		1,870
Less: amounts representing interest		59

Present value of future minimum lease payments		1,811
Less: current portion		1,176

Capital lease obligations, long-term portion	$	635


Item 2.	*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*



	Payments Due By Period


			Year Ending December 31,
	Total Amounts
	Committed		2004		2005		2006		2007		2008		Thereafter

Severance pay	$	1,797	$	1,797	$	—	$	—	$	—	$	—	$	—
Repayment of convertible notes		50,753		50,753		—		—		—		—		—
Operating leases		37,582		5,894		7,740		6,708		6,371		6,435		4,434
Capital leases		1,870		937		901		32		—		—		—
Project commitments		815		815		—		—		—		—		—
Redemption of Series A Preferred Stock		106,899		—		—		—		106,899		—		—

	$	199,716	$	60,196	$	8,641	$	6,740	$	113,270	$	6,435	$	4,434


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


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


Item 3.	*Quantitative and Qualitative Disclosures About Market Risk*


Exhibit
Number			Description

	10	.65	Amendment to Loan Documents and Waiver, dated as of October 31, 2003, between the Registrant and Silicon Valley Bank.
	10	.66	Amended Overadvance LC Rider, dated as of October 31, 2003, between the Registrant and Silicon Valley Bank.
	10	.67	Amendment to Overadvance LC Rider, dated as of March 31, 2004, between the Registrant and Silicon Valley Bank.
	31	.1	Section 302 Certification of Principal Executive Officer
	31	.2	Section 302 Certification of Principal Financial Officer
	32	.1	Section 906 Certification of Principal Executive Officer
	32	.2	Section 906 Certification of Principal Financial Officer


Date		Item Reported

January 27, 2004		On January 27, 2004, the Registrant issued a press release announcing financial results for the quarter and fiscal year ended December 31, 2003 and furnished its press release on Form 8-K.