AIRNET COMMUNICATIONS CORP - 10-K Annual Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM [ ] TO [ ]

COMMISSION FILE NUMBER: 000-28217

AIRNET COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)

DELAWARE 59-3218138
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3950 DOW ROAD, 32934
MELBOURNE, FLORIDA
(Address of principal executive offices) (Zip Code)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(321) 984-1990

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.001 PER SHARE
(TITLE OF CLASS)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

As of March 20, 2002, 23,789,865 shares of the Registrant's Common Stock
were outstanding, and the aggregate market value of such shares held by
non-affiliates of the Registrant on such date was $21,750,699 (based on a
closing price on March 20, 2002 on Nasdaq of $1.55 per share).

DOCUMENTS INCORPORATED BY REFERENCE:
NONE
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TABLE OF CONTENTS

1

TRADEMARK AND TRADE NAMES

AirNet(TM), AdaptaCell(R), AirSite(R) Backhaul Free(TM) and Super
Capacity(TM) are trademarks and/or service marks of AirNet Communications
Corporation.

All other trademarks, service marks and/or trade names appearing in this
document are the property of their respective holders.

In this document, the words "we," "our," "ours," and "us" refer only to
AirNet Communications Corporation and not any other person or entity.

2

PART I

ITEM 1. BUSINESS

OVERVIEW

We were incorporated in Delaware in 1994 as Overture Systems, Inc. and
changed our name to AirNet Communications Corporation later that year.

We began marketing our GSM base stations in the beginning of 1996 and
shipped our first GSM base station in May 1997. Through December 31, 2001, our
base stations were being used in twenty-one deployed systems. We currently sell
and market our products in the U.S. through our direct sales force.
Internationally, we sell our products through our direct sales force, as well as
through agents and original equipment manufacturers (OEMs).

From our inception in January 1994 through May 1997, our operations
consisted principally of start-up activity associated with the design,
development, and marketing of our products. We did not generate significant
revenues until 1998 and generated only $75.2 million in net revenues from our
inception through December 31, 2001. We have incurred substantial losses since
commencing operations, and as of December 31, 2001, we had an accumulated
deficit of $207 million. We have not achieved profitability on a quarterly or
annual basis. As we continue to build our customer and revenue base we expect to
continue to incur net losses at least through the next several quarters. We will
need to generate significantly higher revenues in order to support research and
development, sales and marketing and general and administrative expenses, and to
achieve and maintain profitability.

We provide base stations and other wireless telecommunications
infrastructure products designed to support the GSM, or Global System for Mobile
Communications, system of mobile voice and data transmission. We market our
products worldwide to operators of wireless networks and to certain military and
public safety organizations. A base station is a key component of a wireless
network that receives and transmits voice and data signals over radio
frequencies. We designed our base stations to be easier to deploy and upgrade
and to have lower capital and operating costs than other existing base stations.

Our system features two innovative base station products: Our AdaptaCell(R)
base station is a software-defined base station, meaning it uses software to
control the way it encodes or decodes wireless signals. Our AdaptaCell(R) base
station incorporates a proprietary radio architecture that is designed to enable
operators to upgrade their wireless networks to offer high-speed data and
Internet services by changing software with few, if any, hardware modifications
rather than deploying new base stations. Our AdaptaCell base station also
incorporates a broadband architecture, meaning that it uses only one radio to
process a large number of radio channels.

Our AirSite(R) Backhaul Free(TM) base station carries voice and data
signals back to the wireline network without using a physical communications
link. Our AirSite Backhaul Free base station uses an operator's existing radio
frequencies as the medium to provide the necessary connection to the wireline
network. Unlike our competitors' base stations, our AirSite Backhaul Free base
station does not require an expensive physical communications link, usually
through a digital T-1/E-1 telephone line, to the wireline network. As a result,
an operator's fixed network operating costs may significantly decrease.

Like other wireless infrastructure suppliers, we have experienced the
adverse effects of the global downturn in telecommunications infrastructure
spending. We have historically relied upon an integrated suite of infrastructure
products for all our sales -- a product line that was optimized to meet the
needs of the initial-coverage and coverage-limited segments of the wireless
infrastructure market. These are market segments where we believe our products
enjoy a competitive advantage. Unfortunately, the slowdown in infrastructure
spending has adversely affected demand in all segments of the infrastructure
market.

In response, we undertook a major restructuring starting in June of 2001 to
better leverage our technology base and entrepreneurial culture to target new
market opportunities for our GSM products, particularly in the military and
public safety segments. Under new leadership we reorganized much of our trade
payables with a

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voluntary vendor settlement program and we changed our focus and strategic
direction. We have redirected our activities to focus in three interrelated
areas: the growing market for secure, adaptable wireless infrastructure for
governmental and public safety applications; the rapidly emerging market for
IS-136 high-speed data transitional infrastructure; and, our traditional GSM
infrastructure market.

The government and public safety market includes radio communications needs
for local, state, and federal government agencies, foreign governments and
military communications. Our software-defined radio (SDR) products provide
flexible and unique communications platforms capable of supporting these
applications.

The IS-136 technology is the basis of the TDMA cellular and Personal
Communications Services (PCS) air interface. The IS-136 systems allow
telecommunications companies to offer advanced personal wireless communications
features and services to subscribers while maintaining backward compatibility
for their existing analog (AMPS) system customer bases. It will also provide a
cost effective migration path from AMPS through the use of dual-mode operation.
Service operators that provide IS-136 air interface services are compelled to
transition their networks to 2.5 or 3G services such as General Packet Radio
System (GPRS) or Enhanced Data rates for GSM Evolution (EDGE) and WideBand CDMA
in order to provide high-speed data services and to remain compatible with
Cingular and ATT Wireless, which have announced plans to migrate their IS-136
networks to GSM/GPRS/EDGE. In order to continue to share in roaming revenues
offered by users of these nationwide networks, other IS-136 operators must
follow suit. We offer customers two methods to migrate their IS-136 networks.
The first is to overlay the cost effective coverage value proposition of the
Software Defined BTS and AirSite Base Stations to provide an alternate GSM
network that shares the spectrum of existing IS-136 networks. The second and
more novel migration technique is to commission us to create software that will
allow IS-136 and GSM/GPRS/EDGE to operate simultaneously on the same BTS radio.
In the first case, our equipment can be deployed alongside existing
infrastructure and eventually phase it out. In the latter case, the our solution
can simply replace existing equipment and the IS-136 standard can be phased out
by gradually allocating more spectrum to the GSM family of protocols. In either
case, the new equipment that the service provider buys from us can be migrated
to future high-speed data standards that are software defined. We will enter
this market as funding becomes available to support research and development and
marketing activities.

Our portfolio of broadband SDR technology and our entrepreneurial tradition
lend themselves to exploiting numerous new opportunities in the wireless arena.
We believe these new opportunities -- driven by recent developments both inside
and outside the company -- offer a tremendous potential for immediate growth and
success. SDR technology allows us to readily "reprogram" our wireless
infrastructure products to address new markets and new opportunities in a cost
effective manner. The development and acceptance of SDR technology in the
marketplace has created new opportunities for us outside our core industry. Due
to our significant portfolio of basic SDR intellectual property, it is now
possible for us to explore licensing our technology in a variety of applications
to third parties. Previously, the only potential licensees for our technology
were our wireless infrastructure competitors.

As of December 31, 2001, we had 43 domestic patents granted, and 28 patent
applications pending. We received the 1998 GSM World Award for Best Technical
Innovation from the GSM Association, an international body with members from
over 150 countries, in recognition of our innovative infrastructure.

PRODUCTS

Our base station subsystem products currently support the GSM system for
wireless voice and data communications services. We chose to develop products
based on this standard because the interfaces, or connections, between the
various pieces that make up the GSM base station subsystem are well defined and
publicly documented. One of these interfaces, the connection between the mobile
switching center (MSC) and the base station controller, and ultimately the base
stations that compose the base station subsystem, is referred to as the
A-interface. This A-interface allows wireless operators to attach our base
station subsystem equipment to an existing operator's mobile switching center.
It is this standard interface that makes any existing GSM operator a potential
customer for our base station subsystem equipment. We are currently

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marketing the base station subsystem in four standard configurations, the
GSM-850, GSM-900, GSM-1800 and GSM-1900, operating at 850 MHz, 900 MHz, 1800 MHz
and 1900 MHz respectively. Our products have been deployed with customers using
the following MSC providers: Nortel, Alcatel, Lucent, Nokia, Siemens, Tecore,
and Telos.

Our base station subsystem features two unique base station products: the
AdaptaCell broadband, software-defined GSM base station and the AirSite Backhaul
Free base station. We also offer a Base Station Controller, a Transcoder Rate
Adaptation Unit and an Operations and Maintenance Center (radio).

The AdaptaCell wireless base station supports up to 12 GSM radio frequency
carriers (96 total channels including 92 voice/data channels and four control
channels) for up to 4 pairs of antennas (sectors). The AdaptaCell base station
differs from our competitors' base stations in that its operation is defined by
software, not hardware. This means that as subscribers demand new services from
operators, specifically new high-speed data and Internet services, it will be
possible to upgrade the AdaptaCell base station to support those services via a
change of software and few, if any, hardware modifications. Operators using our
competitors' equipment will likely have to install new equipment, and
potentially a completely new base station, for each new wireless standard they
adopt.

We previously announced plans to introduce the AdaptaCell Super
Capacity(TM) base station. This new base station is built on our current
software-defined AdaptaCell base station platform using adaptive array
technology. Adaptive array technology dramatically increases the operators'
spectral efficiency -- resulting in tremendous increases in network
performance -- by focusing radio signals on individual handset antennas instead
of spreading them over the entire cell. The new base station is designed to
benefit operators in the transition from current wireless standards to the new
GPRS (providing high-speed wireless data in packet format) and Enhanced Data
rates for GSM Evolution (or EDGE, providing yet higher speed) standards. When
our development work is completed, the new base station will provide increased
capacity and higher data rates without the need to deploy additional base
stations, while avoiding decreases in cell coverage area.

AirSite Backhaul Free Base Station: The AirSite Backhaul Free base station
is a compact wireless base station that includes its own wireless backhaul
system. By contrast, other existing base stations must be connected to the rest
of the system using expensive physical communications links, usually digital
T-1/E-1 telephone lines. The AirSite Backhaul Free base station is a full
featured GSM base station, meaning it has a unique site ID for billing and "911"
emergency identification purposes, offers the same geographic coverage as other
existing base stations, and has fault and error detection integrated into the
Operations and Maintenance Center (radio). The AirSite Backhaul Free base
station operates by receiving a subscriber's wireless telephone signal and
transmitting it to the AdaptaCell base station. The AdaptaCell base station then
sends the signal over a T-1/E-1 line to the base station controller and on to
the mobile switching center. In reverse, digitized voice signals come from the
mobile switching center to the base station controller and then to the serving
AdaptaCell base station, which then transmits the signal to the AirSite Backhaul
Free base station. The AirSite Backhaul Free base station then transmits the
signal to the subscriber.

Base Station Controller: Our base station controller coordinates the
activities of the AdaptaCell base stations physically attached to it and all the
AirSite Backhaul Free base stations served by those AdaptaCell base stations.
Among other things, the base station controller monitors handset signal levels
and the operational status of each of its attached base stations, controls
handset transmit power, and orchestrates handoffs between base stations.

Transcoder Rate Adaptation Unit: In most telecommunications systems,
digitized voice requires 64 Kbps of bandwidth to accurately convey human speech.
Our transcoder rate adaptation unit compresses a standard 64 Kbps voice stream
to a GSM-standardized 13 Kbps. This means that the digital T-1/E-1 telephone
line used to connect the base station controller to the mobile switching center
can carry four times as many voice conversations as it normally would. This
makes it less expensive to attach a base station subsystem to its associated
mobile switching center. Additionally, AirNet is developing a software upgrade
to support adaptive multirate (AMR) speech coding. This feature increases voice
capacity of GSM networks while maintaining the current high levels of voice
quality.

5

Operations and Maintenance Center (Radio): The operations and maintenance
center-radio provides the network management facility for one or more of our
base station subsystems. Our operations and maintenance center (radio) provides
a comprehensive graphical user interface for maintenance personnel.

CUSTOMERS

Each of the following five customers accounted for 10% or more of our
revenues for the fiscal year ended December 31, 2001:

TMP Corporation (Adam's Telecommunications)
Comtel PCS Mainstreet Limited Partnership
Cross Communications
Marconi Communications SPA
TECORE Wireless Systems

Together these customers accounted for approximately 69% of our revenues
for the period ending December 31, 2001. See Note 14 of Notes to Financial
Statements for financial information regarding our customers.

SALES AND MARKETING

We sell and market our products in the U.S. through our direct sales force.
Our international sales and marketing efforts are conducted through a network of
original equipment manufacturers, or OEMs, agents, distributors and our direct
sales force. We have developed programs to attract and retain high quality,
motivated sales representatives who have the technical skills and sales
experience necessary to sell our infrastructure solutions.

We have established a marketing communications organization that is
responsible for the branding and marketing of our products and services and for
distinguishing the AirSite Backhaul Free base station and AdaptaCell base
station as branded product offerings. The marketing organization is responsible
for all new product launches to ensure both internal execution and marketplace
acceptance.

RESEARCH AND PRODUCT DEVELOPMENT

We spent $25,512,516 in 2001, $29,457,209 in 2000 and $15,752,943 in 1999
on research and product development. As of December 31, 2001, 61 of our 128
employees were engaged in research and product development, including hardware
and software engineering. We do not expect to hire more employees to engage in
research and product development during 2002 unless such research and
development is funded by strategic partners, customers or new investments.

Our current product development plans focus on the adaptive array
technology for our AdaptaCell Super Capacity base station, EDGE, product cost
reductions and features for major operators. We also plan to take advantage of
the evolution of digital signal processors and other digital components to
reduce the cost of our base stations. In addition, we expect to develop an EDGE
high-speed data upgrade package.

Ultimately, we expect to develop one or more 3G upgrade packages. We may
not be able to introduce these or any other products as scheduled. In addition,
market conditions may not necessitate developing upgrade packages to support one
or more of these emerging 3G high-speed data standards.

Our product development strategy has been to concentrate our engineering
resources on our core technology while making maximum use of third-party vendors
and products for everything else. As a result, our engineering resources are
focused on broadband, software-defined base station technology and backhaul free
base stations.

MANUFACTURING AND BACKLOG

We currently use a limited number of third-party contractors to manufacture
all of our primary components and subassemblies for our products. As a result,
our in-house manufacturing operations consist
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primarily of quality control, final assembly, and testing and product
integration. Circuit boards, electronic and mechanical parts, and other
component assemblies are purchased from OEMs and other selected vendors. An
in-house staff that sets standards and manages our manufacturing contractors
maintains quality control.

Our product backlog was approximately $5.7 million at December 31, 2001 as
compared to $15.1 million at December 31, 2000. We include a contract in backlog
when it is signed by the customer and by us.

The amount of our backlog is subject to fluctuation based on the timing of
the receipt and completion of orders. The amount generally consists of orders
shippable within one year and deferred revenue from products that have been
shipped to customers but have not yet satisfied all significant terms and
conditions of the customer contract as well as revenue from contracts with
vendor financing arrangements which extend beyond one year. Such conditions
include completion of installation and customer acceptance of product technical
performance. See Note 1 of Notes to Financial Statements for a description of
our revenue recognition policy.

Our backlog at any particular date is not necessarily indicative of future
revenues.

COMPETITION

The wireless telecommunications infrastructure market is highly
competitive. The market for our products is characterized by rapidly changing
technology, evolving industry wireless standards and frequent new product
introductions and enhancements. Failure to keep pace with these changes could
seriously harm our competitive position and prospects for growth. Our ability to
compete depends on many factors including product and standard flexibility,
price, and reliability.

Current and potential competitors consist primarily of major domestic and
international companies, most of which have longer operating histories; larger
installed customer bases; higher volumes; substantially greater name
recognition; and greater financial, technical, manufacturing, marketing, sales
and distribution resources. Competing base station vendors can be divided into
two groups: existing large equipment manufacturers who supply a complete range
of wireless base station systems to wireless service operators and smaller
companies that typically market components of wireless systems to system
suppliers or directly to operators. Our current competitors include Alcatel
S.A., LM Ericsson Telephone Company, Lucent Technologies Inc., Motorola, Inc.,
NEC Corporation, Nokia Corporation, Nortel Networks Corporation and Siemens AG.
We face actual and potential competition not only from these established
companies but from start-up and smaller companies that develop and market new
wireless telecommunications products and services.

PROPRIETARY RIGHTS

We consider our technologies proprietary and seek to protect our
intellectual property rights. As of December 31, 2001, we had 43 domestic
patents granted, and 28 domestic patent applications pending. In addition, we
are seeking patent protection for our inventions in foreign countries. One of
the allowed domestic patents was based upon proprietary rights originally
obtained from Harris Corporation, one of our stockholders, and is subject to a
non-exclusive cross license to a third party. We also obtained from Harris
Corporation a royalty-free, worldwide, non-exclusive right and license to use
six other patents in the manufacture and sale of products covered by these
patents. Our patents cover the basic architecture of the system, sub-components,
and frequency reuse planning schemes.

Simultaneously with Motorola's equity investment in January 1995, we signed
an agreement granting Motorola the right to obtain a non-exclusive, royalty-free
license under any two of our patents. With respect to possible infringement of
our respective digital base station patents, each of us agreed not to enjoin the
other and to attempt dispute resolution, including negotiation of nonexclusive
license agreements in good faith, before resorting to litigation.

While we believe that our patents will render it more difficult for
competitors to develop and market similar products, our patents may be
invalidated, circumvented, or challenged. Our patent rights may fail to provide
us with competitive advantages. Any pending or future patent applications,
whether or not being currently challenged by applicable governmental patent
examiners, may not be issued with the scope we seek.

7

We also rely upon copyright and trade secret laws. Source code for our own
proprietary software is protected as an unpublished copyrighted work and as a
trade secret. In addition, we generally enter into confidentiality or licensing
agreements with employees, consultants, vendors, customers, and licensees, and
generally limit access to the details of proprietary designs, software,
documentation, and other confidential information.

Notwithstanding our efforts to protect our rights, it may be possible for a
third party to copy or to obtain and use our intellectual property without our
authorization. We may have to pursue litigation in the future to enforce our
proprietary rights or to defend against claims of infringement and such
litigation could result in substantial costs and diversion of resources and
could seriously harm our business, operating results, and financial condition.
We are not engaged in any legal proceedings concerning matters of patent
infringement or enforcement; however, we are presently involved in a few minor
legal proceedings involving rights in our AirNet trademark. In addition, others
may develop technologies superior to our technology, duplicate our technology,
or design around our patents.

GOVERNMENT REGULATION

Our products must conform to a variety of requirements and protocols. In
order for our products to be used in certain jurisdictions, regulatory approval
may be necessary. The delays inherent in this regulatory approval process may
cause the rescheduling, postponement or cancellation of the installation of
telecommunications systems by our customers, which, in turn, may significantly
reduce sales of products to such customers. The failure to comply with current
or future regulations or changes in the interpretation of existing regulations
in a particular country could result in the suspension or cessation of sales in
that country, restrictions on our development efforts and those of our
customers, render current products obsolete, or increase the opportunity for
additional competition. Such regulations or such changes in interpretation could
require us to modify our products and incur substantial costs to comply with
such regulations and changes. Products to support new services can be marketed
only if permitted by frequency allocations and regulations. In most cases, we
only plan to qualify our products in a foreign country once we have a purchase
order from a customer located there, and this practice may deter customers or
contribute to delays in receiving or filling orders.

EMPLOYEES

As of December 31, 2001, we had 128 employees. Of these individuals, 61
were in research and product development, 18 were in manufacturing, 11 were in
sales and marketing, 28 were in customer service and technical support, and 10
were in administration. We also had one independent contractor in manufacturing.

None of our employees is represented by a labor union, and we believe that
our relations with our employees are good.

ITEM 2. PROPERTIES

Our headquarters consist of approximately 41,000 square feet of space
leased through December 31, 2004, located at 3950 Dow Road in Melbourne,
Florida. The space also houses the primary manufacturing and product engineering
operation. Additional space of approximately 20,000 square feet at the Trio
Complex in Melbourne, Florida, is leased through December 31, 2004 for final
assembly and testing. Each of these leases gives us the right to terminate any
time after June 2002 with a six-month notice. We believe that these facilities
will be adequate to meet our requirements for the foreseeable future and that
suitable additional or substitute space will be available if needed.

ITEM 3. LEGAL PROCEEDINGS

On October 23, 2000, we filed a complaint against Lucent Technologies, Inc.
et al. in the Circuit Court for the 18th Judicial Circuit in Brevard County,
Florida, alleging, among other claims, tortious interference with a business
relationship and misappropriation of trade secrets in connection with the
purported

8

cancellation of certain phase II purchase orders by Carolina PCS. We are seeking
more than $10 million in damages and injunctive relief and have offered to
mediate the dispute.

On August 14, 2001, our vendor MC Test Service, Inc. d/b/a MC Assembly and
Test filed an action against us in the Circuit Court for the 18th Judicial
Circuit in Brevard County, Florida alleging, among other things, breach of
contract and seeking damages in the amount of $1,300,000. We filed an answer
raising affirmative defenses and a counterclaim seeking damages from MC Assembly
and Test in excess of $5,000,000. We believe MC Assembly and Test shipped
defective products, which caused damage from settlement of our accounts
receivables and resulted in lost business opportunities. We intend to defend the
claim vigorously and to pursue the counterclaim aggressively.

On August 29, 2001, Comsys Communications & Signal Processing Ltd. d/b/a
Comsys filed a lawsuit against us in the United States District Court, Western
District of New York, alleging breach of contract and seeking damages in the
amount of $5,000,000. We dispute the amount of damages claimed. On January 2,
2002, we executed a settlement agreement with Comsys that calls for the revival
and reinstatement of the EDGEware License Agreement with Comsys together with
amended dates for milestone deliveries and related payments, with no damage or
penalty payments by us.

The Company, the members of the underwriting syndicate involved in our
initial public offering and two of our former officers have been named as
defendants in a class action lawsuit filed on November 16, 2001 in the United
States District Court for the Southern District of New York. The action, number
21 MC 92 (SAS), alleges that the defendants violated federal securities laws and
seeks unspecified monetary damages and certification of a plaintiff class
consisting of all persons and entities who purchased, converted, exchanged or
otherwise acquired shares of our common stock between December 6, 1999 and
December 6, 2000, inclusive. Specifically, the complaint charges the defendants
with violations of Sections 11, 12 and 15 of the Securities Act of 1933 and
Section 10(b) of the Securities Exchange Act of 1934. In substance, the
allegations are that the underwriters of our initial public offering charged
commissions in excess of those disclosed in the initial public offering
materials and that these actions were not properly disclosed. We do not know
whether the claims of misconduct by the underwriters have merit but at this time
we believe the claims against us are without merit and we intend to defend this
matter when appropriate. Under the terms of our Underwriting Agreement, we have
claims against the underwriters of our initial public offering for
indemnification and reimbursement of all of our costs and any damages incurred
in connection with this lawsuit and we intend to pursue those claims vigorously.

In addition to the items listed above we are also involved in various
claims and litigation matters arising in the ordinary course of business. With
respect to these matters, we believe that we have adequate legal defenses and/or
provided adequate accruals for related costs such that the ultimate outcome will
not have a material adverse effect on the Company's future financial position or
results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

During the fourth quarter of the fiscal year covered by this report, no
matter was submitted to a vote of security holders.

9

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

Our common stock has been listed on the Nasdaq National Market System under
the symbol ANCC since December 7, 1999. There is no established trading market
for our Series B preferred stock and related warrants. The following table sets
forth the high and low sales prices for our common stock as reported by Nasdaq
for the periods indicated:

YEAR ENDED DECEMBER 31, 2000
First Quarter............................................. $30.00 $62.00
Second Quarter............................................ $10.88 $35.00
Third Quarter............................................. $20.75 $39.88
Fourth Quarter............................................ $ 5.00 $23.50

We had 405 stockholders of record as of March 20, 2002. This number does
not include the number of persons whose stock is in nominee or in "street name"
accounts through brokers.

We have not paid dividends and do not anticipate paying cash dividends in
the foreseeable future. We have a retained earnings deficit, and we expect to
retain future earnings for use in our businesses. We are accruing dividends at a
rate of 8% annually on our Series B Convertible Preferred Stock, which is not
publicly traded. See Note 8 to the Financial Statements for a complete
explanation of this security.

USE OF PROCEEDS OF INITIAL PUBLIC OFFERING

The effective date of our registration statement on Form S-1 filed under
the Securities Act of 1933 (No. 333-87693) relating to the initial public
offering of our common stock was December 6, 1999.

Through the fiscal quarter ended June 30, 2001, we applied all of the $80.4
million net proceeds from our initial public offering primarily to general
corporate purposes including working capital, expansion of our engineering
organization, product development programs, sales and marketing capabilities and
general and administrative functions.

10

ITEM 6. SELECTED FINANCIAL DATA

You should read the following selected financial information in conjunction
with our financial statements and related notes and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this report.

11

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

RESULTS OF OPERATIONS

OVERVIEW

We provide base stations and other wireless telecommunications
infrastructure products designed to support the GSM system of mobile voice and
data transmission. We have substantial intellectual experience in the wireless
industry and products and market our products worldwide to operators of wireless
networks. A base station is a key component of a wireless network and is used to
receive and transmit voice and data signals over radio frequencies. Our products
include the AdaptaCell base station, a software-defined base station, meaning it
uses software to control the way it encodes and decodes voice and data wireless
signals, and the AirSite Backhaul Free base station, which carries voice and
data signals back to the wireline network without using a physical
communications link. These products are continually evolving.

From our inception in January 1994 through May 1997, our operations
consisted principally of start-up activity associated with the design,
development, and marketing of our products. We did not generate significant
revenues until 1998 and generated only $75.2 million in net revenues from our
inception through December 31, 2001. We have incurred substantial losses since
commencing operations, and as of December 31, 2001, we had an accumulated
deficit of $207 million. We have not achieved profitability on a quarterly or
annual basis. As we continue to build our customer and revenue base we expect to
continue to incur net losses at least through 2002. We will need to generate
significantly higher revenues in order to support research and development,
sales and marketing and general and administrative expenses, and to achieve and
maintain profitability.

We began marketing our GSM base stations in the beginning of 1996 and
shipped our first GSM base station in May 1997. Through December 31, 2001, our
base stations were being used in twenty-one deployed systems. We currently sell
and market our products in the U.S. through our direct sales force.
Internationally, we sell our products through our direct sales force, as well as
through agents and OEMs. Our revenues are derived from sales of a product line
based on the GSM standard. We generate a substantial portion of our revenues
from a limited number of customers, with five customers accounting for 69% of
our net revenues during the fiscal year ended December 31, 2001. Through
year-end 1999, all of our sales were to domestic customers. For the fiscal years
ending December 31, 2000 and 2001, 11.8% and 19.2% of our revenues were from
international deployments, respectively. We expect our percentage of
international revenues to increase as a result of our expansion of international
sales and distribution activities.

During 2001, we experienced a significant period of transition. In
mid-2001, management undertook a strategic review of the business and
established the following objectives for the future: simplify the business,
reduce the cost structure and move towards the path to long-term sustainable
profitability. In connection with these objectives, we took action during the
second and third quarters to reduce costs and discretionary expenditures,
negotiated settlements with vendors on existing accounts payable balances,
undertook efforts to better leverage our technology base and entrepreneurial
culture to target new market opportunities, and redirected our activities to
focus in three interrelated areas: the growing market for secure, adaptable
wireless infrastructure for governmental and public safety applications; the
rapidly emerging market for IS-136 high-speed data transitional infrastructure;
and, our traditional GSM infrastructure market. While market demand continues to
be uncertain, we believe our strategy and new direction offer the most stable
and attractive opportunities for us. These three areas are interrelated and
address the same basic market, that is, the wireless infrastructure market.

We have had and expect to continue to experience, significant fluctuations
in our quarterly revenues as a result of our long and variable sales cycle.
Historically, our sales cycle, which is the period from the time a sales lead is
generated until the recognition of revenue, has ranged up to eighteen months in
time. The length and variability of our sales cycle is influenced by a number of
factors beyond our control, including our customers' build out and deployment
schedules; our customers' access to product purchase financing; our customers'
degree of familiarity with our products; the need for functional demonstrations
and field trials; the manufacturing lead time for our products; delays in final
acceptance of products following shipments;

12

regulatory developments; and our revenue recognition policies. The effect of our
potentially long sales cycle on our results is compounded by our current
dependency on a small number of customers.

In general, our gross margins will be affected by the following factors:

- Demand for our products and services;

- New product introductions, both by us and our competitors;

- Changes in our pricing policies and those of our competitors;

- The mix of base stations and other products sold;

- The mix of sales channels through which our products are sold;

- Engineering cost reduction successes;

- Access to the best vendors from a cost and technology viewpoint;

- The mix of domestic and international sales; and

- The volume pricing we are able to obtain from contract manufacturers and
third party vendors.

We currently obtain all of our primary components and subassemblies for our
products from a limited number of independent contract manufacturers and
purchase circuit boards, electronic and mechanical parts and other component
assemblies from a limited number of OEMs and other selected vendors.
Accordingly, a significant portion of our cost of revenues consists of payments
to these suppliers. The remainder of our cost of revenues is related to our
in-house manufacturing operations, which consist primarily of quality control,
procurement and material management, final assembly, testing, and product
integration.

Research and development expenses consist primarily of expenses incurred in
the design, development and support of our proprietary technology. We expect
research and development expenses to stabilize as we complete the development of
our core technology. Research and development associated with future products
will depend on customer requirements. We may, however, incur costs in connection
with the development of the software needed to upgrade our base stations to
support emerging wireless high-speed data transmission standards. The cost
incurred for the software development performed by third parties through
development agreements are carried on the balance sheet as an intangible asset
until the product is deployed. At that time the cost will be amortized over the
life of the product.

Sales and marketing expenses consist primarily of salaries, commissions,
consulting fees, trade show expenses, advertising, marketing expenses and
general support costs. We intend to maintain expenditures for selling and
marketing in order to support distribution channels, strategic relationships,
sales and marketing personnel, a 24x7 customer service center, RF services,
field service support, and marketing programs.

General and administrative expenses consist primarily of expenses for
finance, office operations, administrative and general management activities,
including legal, accounting, human resources, and other professional fees and
reserves for receivables and bad debts.

RELATED PARTY TRANSACTIONS

See Item 13 regarding a description of related party transactions during
2001.

YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000

Net revenues: Net revenues decreased $19.8 million or 57.7% from $34.3
million for the year ended December 31, 2000 to $14.5 million for the year ended
December 31, 2001. This decrease in revenues was a result of the deterioration
in global telecommunications market conditions and a reduction in capital
spending by service providers, leading to a reduction in orders received from
active customers and difficulties in obtaining orders from potential new
customers.

13

Gross Profits: Gross profit decreased $14.0 million or 451.6% from $3.1
million for the year ended December 31, 2000 to a loss of $10.9 million for the
year ended December 31, 2001. The gross profit margin was 9.0% for 2000 and
(75%) for 2001. The decrease in the gross profit margin was primarily
attributable to an increase in inventory related charges, including write-downs
for certain obsolete and excess inventory of $9.3 million and the decrease in
revenue volume during 2001 discussed above. In addition, warranty expense
increased by $1.6 million due to the AirSite warranty replacement program
whereby we replaced defective parts in over 400 AirSites. The expense was
incurred during the first six months of 2001 and is not expected to continue. We
expect our gross margin percentage to improve from our year ended December 31,
2001 level. Based upon our estimated view that the telecommunications market
will experience a turnaround in the future, our improved product mix, a
reduction of one-time charges, successful implementation of cost reductions
initiated in fiscal year 2001, and the refocus of our efforts in the new
directions discussed previously, we expect our gross margin percentage to
improve in the future. However, future market conditions and economic conditions
could affect the achievement of this objective.

Research and development: Research and development expenses decreased $4.0
million or 13.6% from $29.5 million for the year ended December 31, 2000 to
$25.5 million for the year ended December 31, 2001. This decrease resulted from
the actions taken during the fiscal year ended December 31, 2001 to limit
discretionary spending. These actions included focusing development in the areas
with the greatest near-term revenue potential.

Sales and marketing: Sales and marketing expenses increased $1.5 million
or 14.4% from $10.4 million for the year ended December 31, 2000 to $11.9
million for the year ended December 31, 2001. This increase was attributable to
costs associated with an expansion in the first half of 2001 for anticipated
international orders and distribution activities and support of large operator
trials. One of these trials resulted in revenue booked during 2001.

General and administrative: General and administrative expenses decreased
$0.9 million or 7.1% from $12.6 million for the year ended December 31, 2000 to
$11.6 million for the year ended December 31, 2001. This decrease was primarily
due to a decrease in the provision for bad debts, and our directed savings
initiatives limiting and focusing discretionary spending. The savings
initiatives were accomplished through a reduction in the aggregate workforce of
the Company, consolidation of facilities, and an adjustment in certain business
functions streamlining the organization. These savings initiatives are reflected
in a greatly reduced level of general and administrative expenses as a percent
of revenue generated in the fourth quarter of 2001. In light of this significant
reduction in our costs, we believe our projected revenues will be sufficient to
sustain our business through the first half of 2003.

YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999

Net revenues: Net revenues increased $16.5 million or 93.3% from $17.8
million for the year ended December 31, 1999 to $34.3 million for the year ended
December 31, 2000. This increase in revenues was a result of higher shipments
to, and installations by, new and existing customers as they expand their
commercial networks. Additionally, we completed development and began shipping
international versions of our product during 2000, which accounted for 11.8% of
the net revenues or $4.1 million.

Gross Profits: Gross profit decreased $3.4 million or 52.3% from $6.5
million for the year ended December 31, 1999 to $3.1 million for the year ended
December 31, 2000. The gross profit margin was 36.7% for 1999 and 9% for 2000.
The decrease in the gross profit margin was mainly attributable to increased
inventory related charges, including write-downs for certain product
obsolescence, of $7.3 million and low sales volume in the fourth quarter of
2000.

Research and development: Research and development expenses increased
$13.7 million or 86.7% from $15.8 million for the year ended December 31, 1999
to $29.5 million for the year ended December 31, 2000. This increase was due to
recruitment and additional new hires and contract labor as well as the purchase
of additional engineering lab equipment and supplies. These increased expenses
were the result of an effort to accelerate product development and was driven by
an increased demand by our larger customers for advanced features and a rapid
increase in the adoption of wireless Internet services by subscribers.
14

Sales and marketing: Sales and marketing expenses increased $5.7 million
or 121% from $4.7 million for the year ended December 31, 1999 to $10.4 million
for the year ended December 31, 2000. Expenses increased for the recruitment and
acquisition of additional new hires to expand our international sales and
distribution activities and sales support functions. Travel, trade show and
public relations expenses and the opening of our new customer training center
also contributed to the increase.

General and administrative: general and administrative expenses increased
$9.6 million or 320% from $3 million for the year ended December 31, 1999 to
$12.6 million for the year ended December 31, 2000. This increase was primarily
due to a $6.9 million increase to the provision for bad debts. Additionally,
expenses in recruitment, accounting and legal services contributed to the
increase.

LIQUIDITY AND CAPITAL RESOURCES

Prior to our initial public offering in December 1999, which raised net
proceeds of $80.4 million, we funded our operations primarily through the
private sales of equity securities and through capital equipment leases. At
December 31, 2001, our principal source of liquidity was $4.7 million of cash
and cash equivalents. We have no credit facilities.

On May 16, 2001, we issued and sold 955,414 shares of preferred stock to
three existing stockholders, SCP Private Equity Partners, L.P., Tandem PCS
Investments, L.P. and Mellon Ventures L.P., at $31.40 per share for a total face
value of $30 million. The preferred stock is redeemable at any time after May
31, 2006 out of funds legally available for such purposes and initially each
share of preferred stock is convertible, at any time, into ten shares of our
common stock. Dividends accrue to the preferred stockholders, whether or not
declared, at 8% cumulatively per annum. The preferred stockholders are entitled
to votes equal to the number of shares of common stock into which each share of
preferred stock converts and collectively to designate two members of the Board
of Directors. Upon liquidation of the Company, or if a majority of the preferred
stockholders agree to treat a change in control or a sale of all or
substantially all of our assets (with certain exceptions) as a liquidation, the
preferred stockholders are entitled to 200% of their initial purchase price plus
accrued but unpaid dividends before any payments to any other stockholders. In
association with this preferred stock investment, we issued immediately
exercisable warrants to purchase 2,866,242 shares of our common stock for $3.14
per share, which expire on May 14, 2011. The proceeds from the sale of the
preferred stock were used to fund our operations from May 2001 into 2002. We
have entered into discussions with one of our stockholders concerning an
additional investment.

The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business; and, as a consequence, the
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classifications of liabilities that might be necessary should we be unable to
continue as a going concern. We have experienced net operating losses and
negative cash flows since inception and, as of December 31, 2001, we had an
accumulated deficit of $207 million. Cash used in operations for the years ended
December 31, 2001 and 2000 was $48.2 million and $62.6 million, respectively. At
December 31, 2001, our principal source of liquidity was $4.7 million of cash
and cash equivalents. Such conditions raise substantial doubt that we will be
able to continue as a going concern for a reasonable period of time. Subsequent
to the end of the year, we have collected approximately $10.6 million in cash
from both existing contracts and deposits on new contracts. As of March 11, 2002
our cash balance was $9.7 million and we had a revenue backlog of $17.0 million.
Our current 2002 operating plan projects that cash available from planned
revenue combined with the $4.7 million on hand at December 31, 2001 will be
adequate to defer the requirement for additional funding until no earlier than
the first half of 2003. This plan is dependent upon the collection of revenues
from one customer who accounts for approximately 50% of the 2002 projected
revenue. The projected revenue from this customer draws products from inventory,
thereby leveraging the cash flow associated with fulfillment of the order. As of
March 11, 2002 this customer has released and provided deposits to us of $4.7
million for $9.4 million of purchase orders for product we are to deliver during
2002. However, there can be no assurance that we will be successful in
accomplishing our operating plan as projected.

15

Our future results of operations involve a number of significant risks and
uncertainties. The worldwide market for telecommunications products such as
those we sell has seen dramatic reductions in demand in 2001 as compared to the
late 1990's and 2000. It is uncertain as to when or whether market conditions
will improve. We have been negatively impacted in 2001 by such global demand
reductions. Factors that could affect our future operating results and cause
actual results to vary materially from expectations include, but are not limited
to, dependence on key personnel, dependence on a limited number of customers,
ability to design new products, product obsolescence, ability to generate
consistent sales, ability to finance research and development, government
regulation, technological innovations and acceptance, competition, reliance on
certain vendors and credit risks. Our historical sales results and current
backlog do not give us sufficient visibility or predictability to indicate that
the required higher sales levels might be achieved. We currently believe that
sales will increase from fourth quarter of 2001 levels in the first and second
quarters of 2002, and continue to increase in the third and fourth quarters of
2002. If such third and fourth quarter sales do not materialize, we will have to
reduce our expenses to maintain cash levels necessary to sustain our operations.
Our future success will depend on us increasing our revenues and reducing our
expenses to reach profitability. To conserve cash, we took measures in the
second and third quarters of 2001 to reduce operating expenses for the remainder
of the year. During the fiscal year ended December 31, 2001, we entered into
agreements with certain vendors to settle outstanding payables totaling
$11,280,221 at varying discounts from the recorded liability. The vendors
agreed, in exchange for the settlement, to release us from future liability
related to the settled balances. The total gain realized as a result of these
settlements was $1,921,605, net of expenses of $342,835, which is recorded as an
extraordinary gain ($0.08 per share), in the accompanying statements of
operations. In addition, we negotiated modified payment terms relating to
accounts payable totaling approximately $6,882,700 with certain other vendors.
These restructured terms included a partial payment of approximately $2,132,146
with remaining payments to be paid over a thirty-month period. (See Note 15 of
Notes to Financial Statements for a complete description of the Vendor
Settlement Program.)

We believe that additional funding will be required prior to reaching
profitability and several alternatives are possible, including subordinated
notes and private placement financing. We currently have a nonexclusive
investment banking relationship with Keybridge Partners. However, no assurances
can be given that additional equity or debt financing can be arranged on terms
acceptable to us, if at all.

If near term sales do not meet expectations, we may have to further reduce
our discretionary spending to maintain cash levels necessary to sustain our
operations through the fourth quarter of 2002. It is unlikely that we will
achieve profitable operations in the near term and therefore it is likely our
operations will continue to consume cash in the foreseeable future. We have
limited cash resources and therefore we must reduce our negative cash flows in
the near term to continue operations, or we will need to secure additional
funding. However, there can be no assurances that we will succeed in achieving
our goals, and failure to do so in the near term will have a material adverse
effect on our business, prospects, financial condition and operating results and
our ability to continue as a going concern. As a consequence, we may be forced
to seek protection under the bankruptcy laws. In that event, it is unclear
whether we could successfully reorganize our capital structure and operations,
or whether we could realize sufficient value for our assets to satisfy fully our
debts or our liquidation preference obligations to the preferred stockholders.
Accordingly, should we file for bankruptcy there is no assurance that any value
would be received by our stockholders.

On December 15, 2000 we entered into an agreement to purchase from a vendor
(TECORE Wireless Systems) ten integrated switch products through December 31,
2002. Alternatively, we may buy-out the commitment by purchasing $3.0 million of
TECORE common stock. Additionally, TECORE has an agreement with us dated
December 13, 2001 to purchase products from us under a reseller agreement dated
October 31, 2001. As of December 31, 2001 we had purchased six of the original
ten products from TECORE. As of December 31, 2001, TECORE placed orders with us
for $2.5 million resulting in revenue in 2001 for us of $2.0 million. Each
agreement was negotiated at arm's length and no terms in either agreement are
dependent upon terms in the other agreement. Subsequent to December 31, 2001
additional orders for $9.4 million have been placed by TECORE with us to provide
base stations and other equipment for a network in Central Asia.

16

NET CASH USED IN OPERATING ACTIVITIES

Net cash used in operating activities was approximately $15.1 million in
1999, $62.6 million in 2000 and $48.2 million in 2001. The significant use of
cash by operating activities was the result of the net losses during all
reported periods together with the reduction in accrued expenses associated with
a reduction in workforce and the reduction in accounts payable resulting from
the vendor settlements discussed previously. Except for sales to OEMs or to
customers under agreements providing for acceptance concurrent with shipment,
our customers are billed as contractual milestones are met. Deposits ranging
between 10% and 50% of the contracted amount typically are received at the
inception of the contract and an additional percentage of the contracted amount
is generally billed upon shipment. The terms vary from contract to contract but
are always agreed to in the initial contract. Most of the remaining unbilled
amounts are invoiced after a customer has placed the products in service,
completed specified acceptance testing procedures or has otherwise accepted the
product. Collection of the entire amounts due under our contracts to date have
lagged behind shipment of our products due to the time period between shipment
and fulfillment of all of our applicable post-shipment contractual obligations,
the time at which we bill the remaining balance of the contracted amount. This
lag will require an increase in investments in working capital as our revenues
increase. As of December 31, 2001, our accounts receivable balance was $5.8
million. Of this balance 54% was attributable to two customers, and receivables
from one of these customers accounted for approximately 43% of the total amount
outstanding. This customer is making payments against the outstanding balance to
demonstrate their commitment to pay the balance. In some instances, we have
offered vendor financing to certain customers where it assists us in entering a
strategic market or where it is an initial part of a larger order. As of
December 31, 2001, our total notes receivable balance was $2.0 million, of which
one customer owed approximately 77%.

NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES

We used net cash for capital expenditures of approximately $1.5 million,
$8.7 million, and $3.1 million for the years ended December 31, 1999, 2000, and
2001, respectively. These expenditures reflect our investments in computer
equipment, software development tools and test equipment, and other capital
equipment, which was required to support our business.

We lease our primary manufacturing and office facilities under long-term
non-cancelable operating leases. We also have operating leases for certain other
furniture, equipment and computers. We used net cash for operating leases of
approximately $1.0 million, $1.2 million and $1.3 million for the years ended
December 31, 1999, December 31, 2000 and December 31, 2001, respectively. Future
minimum payments for operating leases (including payments under our new lease
for final assembly and testing facilities in Melbourne, Florida) aggregated
through the year 2005 were approximately $0.6 million as of December 31, 2001
and we expect to spend approximately $464,156 for those leases in 2002.

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

Net cash provided by financing activities for the year ended December 31,
2001 was $27.2 million and was due to net proceeds received from the sale of
convertible preferred stock in May 2001 of $30.0 million (a portion of which was
used to reduce accounts payable in our vendor settlement program). We currently
have no debt facilities outstanding.

Net cash used by financing activities for the year ended December 31, 2000
of $0.3 million resulted primarily from the payments on capital leases of $0.9
million offset by the cash provided from the exercise of stock options raising
$0.7 million.

Net cash provided by financing activities for the year ended December 31,
1999 of $109.4 million resulted primarily from the initial public offering in
December 1999 raising $80.4 million.

We lease certain computer and test equipment under capital lease
arrangements. We used net cash for capital leases of approximately $0.6 million,
$0.9 million and $1.3 million for the years ended December 31, 1999, December
31, 2000 and December 31, 2001, respectively. Future minimum payments for
capital leases aggregated through the year 2005 were approximately $0.4 million
as of December 31, 2001.

17

CRITICAL ACCOUNTING POLICIES AND ESTIMATES.

The preparation of 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, product returns, bad debts, inventories, warranty obligations,
long-term service contracts, and contingencies. 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 are most affected by
significant judgments and estimates in the preparation of its financial
statements.

Revenue Recognition -- Revenue from product sales is recognized after
delivery after determination that the fee is fixed and determinable,
collectibility is probable and after resolution of any uncertainties regarding
satisfaction of all significant terms and conditions of the customer contract.
If subsequent to delivery, the customer should reject the product or the
customer's financial condition deteriorates so that they are unable to pay the
Company, provisions for bad debts or adjustments to revenue recognized will have
to be made in the current or subsequent period.

Allowance for Doubtful Accounts -- We maintain allowances 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.

Warranties -- 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 its component suppliers, our warranty obligation is affected by product
failure rates and material usage and service delivery costs incurred in
correcting a product failure. Should actual product failure rates, material
usage or service delivery costs differ from our estimates, revisions to the
estimated warranty liability would be required.

Inventories -- We write down our inventories for estimated obsolescence 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 may be required.

STATUS OF OUR COMMON STOCK LISTING ON NASDAQ NATIONAL MARKET

Stock traded on the Nasdaq National Market System must meet certain listing
requirements, including requirements with respect to a company's net tangible
assets, the minimum bid price of its stock and the market value of its public
float. As reported in our Quarterly Report on Form 10-Q for the quarter ended
September 30, 2001, we fell out of compliance with certain of the listing
requirements during the third quarter of 2001. However, Nasdaq issued a
de-listing moratorium effective September 27, 2001 until January 2, 2002. We
received a letter from Nasdaq dated February 14, 2002, notifying us that our
stock price had not met the minimum bid price of $1.00 for the previous 30 days,
and, as a result, Nasdaq would begin de-listing proceedings if our stock price
did not trade above $1.000 for a minimum of ten consecutive trading days before
May 15, 2002 (90 days after the date of the letter). As of March 21, 2002, our
stock price had traded at/or above the minimum bid price of $1.00 for 10
consecutive trading days. Nasdaq informed us on March 25, 2002 that we regained
compliance with Nasdaq Rule 4450(a)(5) governing the maintenance criteria for
listing on the Nasdaq National Market, and the matter is now closed.

FORWARD-LOOKING STATEMENTS; RISKS AND UNCERTAINTIES

This report contains forward-looking statements, including statements under
the captions "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and elsewhere in this
18

report, concerning our expectations of future sales, gross profits, earnings,
research and development expenses, selling, general and administrative expenses,
product development and introductions and cash requirements. Forward-looking
statements often include words or phrases such as "will likely result,"
"expect," "will continue," "anticipate," "estimate," "intend," "plan,"
"project," "outlook" or similar expressions. These statements are only
predictions and are not guarantees of future performance. They are subject to
certain risks, uncertainties and other factors, some of which are beyond our
control, are difficult to predict and could cause actual results to differ
materially from those expressed in the forward-looking statements. Actual
results may vary materially from those expressed in forward-looking statements.
We caution you not to place undue reliance on these forward-looking statements,
which reflect our management's view only as of the date of this report. We are
not obligated to update these statements or publicly release the results of any
revisions to them to reflect events or circumstances occurring after the date of
this report or to reflect the occurrence of unanticipated events.

Certain risk factors, which could cause actual results to differ from
expectations, are set forth below. We cannot assure you that one or more of
these factors will not adversely affect our results of operations.

RISK FACTORS

You should consider each of the following factors as well as the other
information in this Annual Report in evaluating our business and our prospects.
The risks and uncertainties described below are not the only ones we face.
Additional risks and uncertainties not presently known to us or that we
currently consider immaterial may also impair our business operations. If any of
the following risks actually occur, our business and financial results could be
harmed. In that case the trading price of our common stock could decline. You
should also refer to the other information set forth in this Annual Report,
including our financial statements and the related notes.

A long-lasting downturn in the global economy that impacts the wireless
communications industry could negatively affect our revenues and operating
results. The global economy is in the midst of a slowdown that

19

has had wide-ranging effects on markets that we serve, particularly wireless
communications equipment manufacturers and network operators. This downturn has
had a negative effect on our revenues. We cannot predict the depth or duration
of this downturn, and if it grows more severe or continues for a long period of
time, our ability to increase or maintain our revenues and operating results may
be impaired. In addition, because we intend to continue to invest in research
and development during this downturn and to maintain ongoing customer service
and support capability, any decline in the rate of growth of our revenues will
have a significant adverse impact on our operating results.

Current economic conditions affecting the wireless communications industry
may lead prospective and existing customers to postpone their purchasing
decisions. The industry wide decrease in demand for wireless telecommunications
infrastructure has adversely affected us. We cannot predict when the demand will
increase or when many of our customers and potential customers will start to
make significant purchases of our products.

We have incurred significant losses since we began doing business. We
anticipate continuing losses and may never achieve or sustain profitability. We
have accumulated losses of $207 million since we began doing business in 1994
through December 31, 2001, and we may never achieve or sustain profitability. We
will need to generate significantly higher revenues to achieve and sustain
profitability. Since we began doing business in 1994, we have generated only
$75.2 million in net revenues through December 31, 2001. We have been marketing
our GSM base stations since 1996, and to date the majority of our sales have
been to a small number of start-up domestic wireless operators. We have never
reported a profit. We will continue to incur significant research and product
development, sales and marketing, materials and general administrative expenses,
and we expect our expenses to increase as compared to prior periods, as we
expand our sales force and our international operations. We anticipate a net
loss for the year 2002 and we may continue to incur losses beyond 2002. We
cannot be certain that we will realize sufficient revenues or margins to sustain
our business.

We may not be able to obtain additional capital to fund our operations on
reasonable terms and this could hurt our business and negatively impact our
stockholders. If adequate funds in the form of equity or debt are not available
on reasonable terms or terms acceptable to us, we may be unable to continue as a
going concern. If we raise additional funds through the issuance of convertible
debt or additional equity securities, the percentage ownership of our existing
stockholders may be reduced, the securities issued may have rights, preferences
and privileges senior to those of holders of our common stock, and the terms of
the securities may impose restrictions on our operations. While the vendors
holding a security interest in our assets have agreed to subordinate their liens
to a secured lender who loans at least $6 million to us, until these vendors are
paid in full, we may not be able to borrow secured financing of less than $6
million.

We have a limited operating history. You should not rely on our recent
results as an indication of our future results. Our base stations are being used
in twenty-one commercially deployed systems. We had net revenues of $17.8
million, $34.3 million and $14.5 million in 1999, 2000 and 2001, respectively.
Unless we can achieve significant increases in market acceptance of our
products, we may never advance beyond our market penetration phase. Due to our
limited operating history, it is difficult or impossible for us to predict
future results and you should not expect future revenue growth based on our
recent results. You should consider our business and prospects in light of the
risks and problems faced by technology companies in the early stages of
development.

Our operating results are subject to substantial quarterly and annual
fluctuations and to market downturns. Our revenues, earnings and other
operating results have fluctuated significantly in the past and may fluctuate
significantly in the future. General economic or other conditions causing a
downturn in the market for our products or technology, affecting the timing of
customer orders or causing cancellations or rescheduling of orders could also
adversely affect our operating results. Moreover, our customers may change
delivery schedules or cancel or reduce orders without incurring significant
penalties and generally are not subject to minimum purchase requirements.

20

Our future operating results will be affected by many factors, including
the following:

Changes in the growth rate of the wireless communications industry;

Consolidation in the wireless communications industry;

The collectibility of our trade receivables;

Our ability to retain existing or secure anticipated customers or
orders, both domestically and internationally;

The availability and cost of products and services from our
third-party suppliers;

Our ability to develop, introduce and market new technology, products
and services on a timely basis;

Foreign currency fluctuations, inflation and deflation;

Decreases in average selling prices or demand for our products;

Intellectual property disputes and litigation;

Government regulations;

Product defects;

Management of inventory in response to shifts in market demand; and

Changes in the mix of technology and products developed, produced and
sold.

The foregoing factors are difficult to forecast and these, as well as other
factors, could harm our quarterly or annual operating results. If our operating
results fail to meet the expectations of investment analysts or investors in any
period, the market price of our common stock may decline.

Our lengthy and variable sales cycle makes it difficult for us to predict
if and when a sale will be made and could cause us operating difficulties and
cash flow problems. Our sales cycle, which is the period from the generation of
a sales lead until the recognition of revenue, can be long and is unpredictable,
making it difficult to forecast revenues and operating results. Our inability to
accurately predict the timing and magnitude of our sales could cause a number of
problems:

We may have difficulty meeting our customers' delivery requirements in
the event many large orders are received in a short period of time because
we have limited production capacity and generally do not carry materials in
inventory;

We may expend significant management efforts and incur substantial
sales and marketing expenses in a particular period that do not translate
into orders during that period or at all; and

We may have difficulty meeting our cash flow requirements and
obtaining credit because of delays in receiving orders and because the
terms of many of our customer contracts defer certain billings until post-
shipment contractual milestones are met.

The problems resulting from our lengthy and variable sales cycle could
impede our growth, harm our stock price, and restrict our ability to take
advantage of new opportunities.

Our stock price is volatile. The stock market in general, and the stock
prices of technology-based companies in particular, have experienced extreme
volatility that often has been unrelated to the operating performance of any
specific public company. The market price of our common stock has fluctuated in
the past and is likely to fluctuate in the future as well. Factors that may have
a significant impact on the market price of our stock include:

Announcements concerning us or our competitors;

Receipt of substantial orders for base stations;

21

Quality deficiencies in services or products;

Announcements regarding financial developments or technological
innovations;

International developments, such as technology mandates, political
developments or changes in economic policies;

New commercial products;

Changes in recommendations of securities analysts;

Government regulations;

Acts of terrorism or war;

Proprietary rights or product or patent litigation; or

Strategic transactions, such as acquisitions and divestitures.

Our future earnings and stock price may be subject to significant
volatility, particularly on a quarterly basis. Shortfalls in our revenues or
earnings in any given period relative to the levels expected by securities
analysts could immediately, significantly and adversely affect the trading price
of our common stock.

Our stock price may decline significantly if we are delisted from the
Nasdaq National Market. Our common stock currently is quoted on the Nasdaq
National Market System. For continued inclusion on the Nasdaq National Market
System, we must meet certain tests, including a minimum bid price of $1.00. We
currently are in compliance with the bid price requirement, although our stock
price traded below $1.00 from July 11, 2001 until March 8, 2002. If we fail to
satisfy the listing standards in the future, Nasdaq may de-list our common stock
from its National Market System. If this occurs, trading of our common stock may
be conducted on the Nasdaq SmallCap Market, if we qualify for listing at that
time, the OTC Bulletin Board or in the over-the-counter market on the "Pink
Sheets." In any of those cases, investors could find it more difficult to buy or
sell, or to obtain accurate quotations as to the value of our common stock. The
trading price per share of our common stock likely would be reduced as a result.

Intense competition in the market for wireless telecommunications equipment
from many larger, more established companies with greater resources could
prevent us from increasing our revenue and achieving profitability. The
wireless telecommunications infrastructure market is highly competitive. We
compete with large infrastructure manufacturers, systems integrators, and base
station subsystem suppliers, as well as new market entrants. Most of our current
and potential competitors have longer operating histories and presence in key
markets, larger installed customer bases, substantially greater name
recognition, and more financial, technical, manufacturing, marketing, sales,
distribution and other resources than we do. We may not be able to compete
successfully against current and future competitors, including companies that
develop and market new wireless telecommunications products and services. These
competitive pressures may result in price reductions, reduced gross margins,
longer sales cycles and loss of customers.

Competition in the telecommunications market is based on varying
combinations, including:

Comprehensiveness of product and technology solutions;

Manufacturing capability;

Scalability and the ability of the system solution to meet customers'
immediate and future network requirements;

Product performance and quality;

Design and engineering capabilities;

Compliance with industry standards;

Time to market;

22

System cost; and

Customer support.

We anticipate that additional competitors will enter our markets as a
result of growth opportunities in wireless telecommunications, the trend toward
global expansion by foreign and domestic competitors, technological and public
policy changes and relatively low barriers to entry in selected segments of the
industry.

As a result of these factors, these competitors may be more successful that
us. In addition, we anticipate additional competitors will enter the market for
products based on 3G standards. These competitors may have more established
relationships and distribution channels in markets not currently deploying
wireless communications technology. These competitors also have established or
may establish financial or strategic relationships among themselves or with our
existing or potential customers, resellers or other third parties. These
relationships may affect customers' decisions to purchase products from us.
Accordingly, new competitors or alliances among competitors could emerge and
rapidly acquire significant market share to our detriment.

Our comparative inability to provide financing for our customers is a
competitive disadvantage and could result in a loss of sales and/or customers to
competitors with greater resources. We do not typically offer financing to our
customers, which could cause us to lose business to our larger competitors. Our
future success may depend upon our continuing ability to help arrange financing
for our customers. If we cannot assist in arranging financing for our customers,
we may lose sales and customers to competitors that directly provide financing.

Credit risk problems resulting from customer financing could hurt our
results and require us to raise additional capital. Many of our customers and
potential customers are start-up and small companies with a limited operating
history. In some instances, we have provided and will continue to provide
customer financing. We face credit risks, including slow payments or
non-payments from customers, and we may need to raise additional capital to
support financed sales and to deal with related credit risk problems.

Our lawsuit against Lucent Technologies relating to a purported
cancellation of a purchase order by a large customer could be expensive, could
divert management's time and resources, and may not be successful. On October
23, 2000, we filed a complaint against Lucent Technologies, Inc. et. al. in the
Circuit Court for the 18th Judicial Circuit in Brevard County, Florida,
alleging, among other claims, tortious interference with a business relationship
and misappropriation of trade secrets in connection with the purported
cancellation of certain Phase II purchase orders by Carolina PCS. We are seeking
more than $10 million in damages and injunctive relief. Lucent has filed a
number of pre-trial motions, which we are vigorously opposing.

The cost of pursuing this litigation could be high and could divert the
attention of our management's time and resources. This type of interference with
our customers could result in the loss of orders from other customers in the
future.

A small number of customers account for substantially all of our revenues
and the loss of any of these customers could hurt our results and cause our
stock price to decline. Our customer base has been and may continue to be
concentrated with a small number of customers. The loss of any of these
customers or the delay, reduction or cancellation of orders by or shipments to
any of these customers could hurt our results and cause a decline in our stock
price. The effect of these risks on our operating results is compounded by our
lengthy sales cycle. In 2001, sales to five customers accounted for 68.6% of our
total revenue. In 2000 and 1999, sales to three customers accounted for 61.0%
and 78.6% of total revenue, respectively.

23

The chart below shows the breakout by fiscal year of the concentration of
revenue:

We have a concentrated customer base and the failure of any of our
customers to pay us or to pay us on time could cause significant cash flow
problems, hurt our results and cause our stock price to decline. Our
concentrated customer base significantly increases the credit risks associated
with slow payments or non-payments by our customers. These risks are also higher
for us since many of our customers are start-up and small companies. Two
customers accounted for 73% of our outstanding accounts receivable as of
December 31, 2001, with one customer representing 43%. Three customers accounted
for 62% of our combined outstanding accounts and notes receivable as of December
31, 2000, with one customer, Carolina PCS, representing 37%. Two customers
represented 70% of our outstanding accounts receivable as of December 31, 1999,
with one customer, Carolina PCS, representing 45%. In the past and for the year
ending December 31, 2001, we have incurred bad debt charges and we may be
required to do so in the future. The failure of any of our customers to pay us,
or to pay us on time, causes significant cash flow problems, hurts our results
and could cause our stock price to decline.

As we continue to expand into international markets, we will become subject
to additional business risks. We have begun marketing and selling our products
internationally in Africa, the Middle East, Asia and Latin America. Our business
plan contemplates that a majority of our sales over the next several years will
be in international markets. Our revenues from international customers as a
percentage of total revenues were 19.2% in fiscal 2001, 11.8% in fiscal 2000 and
0% in fiscal 1999. In many international markets, barriers to entry are created
by long-standing relationships between our potential customers and their local
providers and protective regulations, including local content and service
requirements. In addition, our pursuit of international growth opportunities may
require significant investments for an extended period before we realize
returns, if any, on our investments.

Our international operations could be adversely affected by a variety of
uncontrollable and changing risks and uncertainties, including:

Difficulties and costs associated with obtaining foreign regulatory
approval for our products;

Unexpected changes in regulatory requirements;

Difficulties and costs associated with complying with a wide variety
of complex foreign laws and treaties;

Legal uncertainties regarding, and timing delays and expenses
associated with, tariffs, export licenses and other trade barriers;

Inadequate protection of intellectual property in foreign countries;

Increased difficulty in collecting delinquent or unpaid accounts;

Lack of suitable export financing;

24

Adverse tax consequences;

Dependence upon independent sales representatives and other indirect
resellers who may not be as effective and reliable as our employees;

Difficulties and costs associated with staffing and managing
international operations, overcoming cultural, linguistic and nationalistic
barriers and adapting to foreign business practices;

Political and economic instability; and

Currency fluctuations, including a decrease in the value of foreign
currencies relative to the U.S. dollar which could make our products less
competitive against those of foreign competitors.

In addition to general risks associated with our international sales and
operations, we are subject to risks specific to the individual countries in
which we do business. A portion of our international sales efforts will be
targeted to service operators who plan to deploy wireless communications
networks in developing countries where risks ordinarily associated with
international operations are particularly acute, including developing countries
in Africa, Asia, the Middle East and Latin America.

Any of these factors could impair our ability to expand into international
markets and could prevent us from increasing our revenues and achieving
profitability.

Our business and operating results may be harmed by inflation and
deflation. Inflation has had and may continue to have adverse effects on the
economies and securities markets of certain countries and could have adverse
effects on our customers, including their ability to obtain financing and repay
debts. Brazil and Mexico, for example, have periodically experienced relatively
high rates of inflation and currency devaluation. Significant inflation or
deflation could have a material adverse effect on our business, operating
results, liquidity and financial position.

If we do not succeed in the development of new products and product
features in response to changing technology and standards, customers will not
buy our products. We need to develop new products and product features in
response to the evolving demands for better technology or our customers will not
buy our products. The market for our products is characterized by rapidly
changing technology, evolving industry standards, emerging wireless transmission
standards, and frequent new product introductions and enhancements. If we fail
to develop our technology, we will lose significant potential market share to
our competitors.

Our failure to comply with evolving industry standards could delay our
introduction of new products. An international consortium of standards bodies
has established the specifications for the third generation (3G) wireless
standard, and is further working to establish the specifications of a future
wireless standard and its interoperability with existing standards. Any failure
of our products to comply with 3G or future standards could delay their
introduction and require costly and time-consuming engineering changes. After
the future standard is adopted, any delays in our introduction of next
generation products could impair our ability to grow revenues in the future. As
a result, we may be unable to achieve or sustain profitability. Even if we do
develop our technology and products to work with these new standards, consumer
demand for advanced wireless services may not be sufficient to justify network
operators upgrading to them.

A reduction or interruption in component supply or a significant increase
in component prices could have a material adverse effect on our business or
profitability. Our ability to meet customer demands depends, in part, on our
ability to obtain timely and adequate delivery of parts and components from our
suppliers and internal manufacturing capacity. We have experienced component
shortages in the past, including components for our integrated circuit products,
that have adversely affected our operations. Although we work closely with our
suppliers to avoid these types of shortages, we may continue to encounter these
problems in the future. A reduction or interruption in component supply or a
significant increase in the price or one or more components could have a
material adverse effect on our business.

We may not be able to adequately protect or defend our proprietary rights,
which would hurt our ability to compete. Although we attempt to protect our
intellectual property rights through patents, trademarks, trade secrets,
copyrights, confidentiality and nondisclosure agreements and other measures,
intellectual

25

property is difficult to evaluate and these measures may not provide adequate
protection for our proprietary rights and information. Patent filings by third
parties, whether made before or after the date of our filings, could render our
intellectual property less valuable. Competitors may misappropriate our
proprietary rights and information, disputes as to ownership of intellectual
property may arise, and our proprietary rights and information may otherwise
become known or independently developed by competitors. The failure to protect
our proprietary rights could seriously harm our business, operating results and
financial condition. We have not been granted any foreign patents and presently
have only a relatively low number of patent applications pending
internationally. If we do not obtain sufficient international protection for our
intellectual property, our competitiveness in international markets could be
significantly impaired, which would limit our growth and future revenues.

Others may bring infringement claims against us that could be
time-consuming and expensive to defend. In the future, claims of infringement of
other parties' proprietary rights, invalidity claims or claims for
indemnification resulting from infringement claims may be asserted or prosecuted
against us. Even if none of these claims were valid or successful, we would be
forced to incur significant costs and divert important resources to defend
against them. Any claim of infringement, whether or not successful, could cause
us considerable expense and place a significant burden on our management.

A significant decrease in the cost of digital T-1/E-1 phone lines will
diminish one of our competitive advantages. Existing base stations require an
expensive physical communications link, usually through a digital T-1/E-1 phone
line, to the wireline network. Any significant decrease in the cost of digital
T-1/E-1 phone lines used to connect base stations to the wireline network,
especially in less populated areas, will diminish a cost advantage that we
currently use to market our products. The cost of T-1/E-1 facilities has
recently declined significantly in urban areas because of increased competition.

If we fail to expand our customer base beyond the smaller operators, we may
not be able to significantly grow our revenues. We will only be able to
significantly grow our revenues if we can expand our customer base beyond the
smaller operators. There are a limited number of such operators and most of them
have limited resources. These operators are less stable and more susceptible to
delays in their buildouts and deployments than more established operators. We
plan on expanding our sales to include the larger domestic operators and
international operators. However, as a result of the rapid consolidation of
larger domestic GSM operators, there are only a few larger domestic operators
remaining. To date we have not had any sales to the larger domestic operators,
and we may not be successful in those markets in the future.

Our reliance on a limited number of suppliers could lead to delays,
additional costs, problems with our customers and potential customers, and loss
of revenue. We plan to continue utilizing only one or a small number of
suppliers for each of the components of our base station systems. We have no
long-term contracts or arrangements with any of our suppliers that guarantee
product availability or the continuation of particular payment or credit terms.
If, for any reason, a supplier fails to meet our quality and quantity
requirements or stops selling products to us at commercially reasonable prices,
we could experience significant production delays and cost increases, as well as
higher warranty expenses and product image problems. Any of these problems could
damage relationships with current or prospective customers, which could
seriously harm our operating results in a given period and impair our ability to
generate future sales.

From time to time, we must replace some of the components of our products
when the supplier of that component is discontinuing production. While we
generally do not maintain an inventory of components, sometimes we do purchase
an inventory of these discontinued components so that we can maintain production
while finding new suppliers or developing substitute components ourselves. We
face the risk that we may deplete that inventory before finding an adequate
substitute, and that could cause the loss of significant sales opportunities.
Alternatively, we could purchase too many of the components and may be left with
excess inventory on our hands. We generally do not maintain an inventory of
finished goods and many components have long lead times, with some taking 12 to
16 weeks from the time of entry of the order to delivery. We cannot guarantee
that alternative sources of supply can be arranged on short notice or that
components will be available from alternative sources on satisfactory terms.

26

If we lose key personnel or are unable to hire additional qualified
personnel, we may not be able to operate our business successfully. Our future
success largely depends on our ability to attract and retain highly skilled
hardware and software engineers, particularly call processing engineers and
digital signal processing engineers. If we cannot continue to attract and retain
quality personnel, that failure would significantly limit our ability to compete
and to grow our business. Our success also depends upon the continuing
contributions of our key management, research, product development, sales and
marketing and manufacturing personnel, many of whom would be difficult to
replace. Except for an employment and severance agreement we have with Glenn
Ehley, our CEO and President, we do not have employment or noncompetition
agreements with any of our key officers. We also do not have key man life
insurance policies covering any of our employees.

If we fail to manage our operations efficiently, our business and prospects
could be seriously harmed. The need to develop and offer our products and
implement our business plan in a difficult market will significantly challenge
our planning and management capabilities. We may not be able to implement
management information and control systems in an efficient and timely manner. If
we are unable to manage our operations efficiently, our business and prospects
could be seriously harmed. To manage our operations and personnel, we will need
to:

Improve financial and operational controls, as well as our reporting
systems and procedures;

Install new management information systems; and

Train, motivate and manage our sales and marketing, engineering,
technical, finance and customer support employees.

We have an agreement with Motorola, Inc. to grant them rights, which could
harm our business. When Motorola purchased $10.0 million of our Series B
Preferred Stock in 1995, we granted Motorola the right to acquire a worldwide,
nonexclusive, royalty-free license under any two of our patents. Motorola is a
large telecommunications and technology company with significant resources and
could exercise this right at any time and begin using these licenses to compete
against us. With respect to any possible infringement of our respective digital
base station patents, Motorola has agreed with us not to enjoin the other and to
attempt dispute resolution, including negotiation of nonexclusive license
agreements in good faith, before resorting to litigation.

We expect the prices of our products to decline due to competitive
pressures, and this decline could reduce our revenues and gross margins. We
anticipate that the prices of our products will decrease in the future due to
competitive pricing pressures, increased sales discounts, new product
introductions or other factors. If we are unable to offset these factors by
increasing our sales volumes, our revenues will decline. In addition, to
maintain our gross margins, we must develop and introduce new products and
product enhancements, and we must continue to reduce the manufacturing costs of
our products. We cannot guarantee that we will be able to do these things
successfully. Our failure to do so would cause our revenue and gross margins to
decline, which could seriously harm our operating results and cause the price of
our common stock to decline.

We may make future acquisitions that dilute our stockholders' percentage
ownership, cause us to incur debt or assume contingent liabilities and subject
us to other risks. We expect to review opportunities to buy other businesses or
technologies that would complement our current products, expand the breadth of
our markets, enhance our technical capabilities, help secure critical sources of
supply or that may otherwise offer growth opportunities. While we have no
current agreements or negotiations underway, we may buy businesses, products or
technologies in the future. In the event of any future purchases, we could:

Issue stock that would dilute our current stockholders' percentage
ownership;

Incur debt; or

Assume liabilities.

27

These purchases also involve numerous risks, including:

Problems combining the purchased operations, technologies or products;

Unanticipated costs;

Diversion of management's attention from our core business;

Adverse effects on existing business relationships with suppliers and
customers;

Risks associated with entering markets in which we have no or limited
prior experience; and

Potential loss of key employees of purchased organizations.

Our industry is subject to extensive government regulation that could cause
significant delays and expense. Wireless telecommunications are subject to
extensive regulation by the U.S. and foreign governments. If we fail to conform
our products to regulatory requirements or experience any delays in obtaining
regulatory approvals, we could lose sales. Moreover, in most cases, we only plan
to qualify our products in a foreign country once we have a purchase order from
a customer located there, and this practice may deter customers or contribute to
delays in receiving or filling orders.

Continuing regulatory compliance could be expensive and may require
time-consuming and costly modifications of our products. Any failure of domestic
and international regulatory authorities to allocate suitable frequency spectrum
could limit our growth opportunities and our future revenues.

Because our products are highly complex and are deployed in complex
networks, they may have errors or defects that we find only after deployment,
which if not remedied could harm our business. Our products are highly complex,
are designed to be deployed in complex networks and may contain undetected
defects, errors or failures. Although our products are tested during
manufacturing and prior to deployment, they can only be fully tested when
deployed in commercial networks. Consequently, our customers may discover errors
after the products have been deployed. The occurrence of any defects, errors or
failures could result in installation delays, product returns, diversion of our
resources, increased service and warranty costs, legal actions by our customers,
increased insurance costs and other losses to us or to our customers or end
users. Any of these occurrences could also result in the loss of or delay in
market acceptance of our products, which would harm our business and adversely
affect our operating results and financial condition.

Directors' and officers' insurance may be difficult or cost prohibitive to
obtain. Our current directors' and officers' insurance policy was difficult and
expensive to obtain. The policy will expire on December 6, 2002. It will be
expensive and may be difficult to secure a replacement policy. If we are unable
to renew or secure a replacement policy, we could lose our officers and
directors and it will be extremely difficult to recruit qualified replacements
for our management team and board of directors, which would have a material
adverse affect on our business.

Control by our existing stockholders could discourage the potential
acquisition of our business. As of March 20, 2002, 5% or greater stockholders
and their affiliates owned 9.6 million shares of our common stock or
approximately 40.5% of our outstanding shares of common stock. In addition,
three of these stockholders hold the rights to conversion of another 13.8
million shares of common stock. Acting together, these stockholders would be
able to control all matters requiring approval by stockholders, including the
election of directors. This concentration of ownership could have the effect of
delaying or preventing a change in control of our business or otherwise
discouraging a potential acquirer from attempting to obtain control of us, which
could prevent our stockholders from realizing a premium over the market price
for their shares of common stock.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have no derivative financial instruments or derivative commodity
instruments in our cash and cash equivalents. We invest the proceeds from our
financing activities in interest bearing, investment grade securities that
mature within 24 months. Our transactions are generally conducted, and our
accounts are

28

denominated, in United States dollars. Accordingly, these funds were not exposed
to significant foreign currency risk at December 31, 2001.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

FINANCIAL STATEMENTS

Our balance sheet as of December 31, 2001 and 2000 and the related
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 2001 and the report of Deloitte &
Touche LLP, Independent Auditors, are included as an annex to this report
beginning on page F-1.

29

SELECTED QUARTERLY RESULTS OF OPERATIONS

The following table sets forth unaudited quarterly financial data for the
four quarters in 2000 and 2001 and such information expressed as a percentage of
our net revenues. This unaudited quarterly information has been prepared on the
same basis as the audited financial information presented elsewhere in this
report and, in management's opinion, includes all adjustments, consisting only
of normal recurring adjustments, that we consider necessary for a fair
presentation of the information for the quarters presented.

There were no material fourth quarter adjustments to cost of revenue or
expenses.

We have experienced and expect to continue to experience significant
fluctuations in quarterly operating results as a result of many factors. We
believe that period-to-period comparisons of our operating results are not
meaningful and should not be relied upon as any indication of future
performance. It is likely that future quarterly operating results from time to
time will not meet the expectations of market analysts or investors, which may
have an adverse effect on the price of our common stock.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The directors and executive officers of the Company are:

- ------------

(1) Member of Audit Committee

(2) Member of Compensation Committee
31

Glenn A. Ehley has served as President and Chief Executive Officer since
August 2001 and as a director of the Company since January 2002. Prior to August
2001, he served as Senior Vice President of Worldwide Sales and Marketing
beginning February 2000 and from August 1997 until February 2000 as Vice
President of Sales and Marketing. Mr. Ehley joined the Company in July 1995 as
Director of Marketing. Prior to joining the Company, Mr. Ehley served in several
positions at Siemens and Lucent Bell Laboratories in the Marketing and
Engineering organizations. Mr. Ehley received an M.B.A. and M.S. in Computer
Engineering from Florida Atlantic University and received a B.S. in Computer
Science from Illinois Benedictine College.

James W. Brown has served as a director since November 1997 as the designee
of SCP Private Equity Partners, LP, one of the Company's stockholders, and as
Chairman since October 1999. Mr. Brown has been a Partner of SCP Private Equity
Management, L.P., which manages a private equity investment fund, since its
inception in 1996. Mr. Brown has also been a Managing Director of CIP Capital
Management, Inc. since 1994. From 1989 until 1994, Mr. Brown was Chief of Staff
to the Governor of Pennsylvania. Mr. Brown received a J.D. from the University
of Virginia and a B.A. from Villanova University's Honors Program.

Darrell Lance Maynard has served as a director of the Company since January
2002. Since 1996, he has been the President and Chairman of Southeast Telephone
(SET), of which he was a founder, in Pikeville, Kentucky. SET is a
telecommunications provider of long distance, local service, Internet service
and paging. Mr. Maynard attended Michigan Technological University in Houghton,
Michigan.

Susannah Tam has served as a director of the Company since January 2002.
Since January 2002, she has served as Director of Investments for CDP Capital.
From May 2001 to September 2001, she was Senior Director of Corporate Finance
for TIW Asia, a telecom venture capital fund. From January 1998 to May 2001, she
was Director of Strategy and Development at Bell Canada International ("BCI").
BCI focuses on developing and operating communications companies in markets
outside of Canada with an emphasis in Latin America. Prior to joining BCI, Ms.
Tam held various positions at Dominion Textile, Inc., Canada's largest textile
manufacturing company. Ms. Tam obtained a B.A. in Mathematics from Mills College
in Oakland, California and has an M.B.A. from Concordia University in Montreal.

George M. Calhoun has served as a director of the Company since March 2002.
He currently serves as Chairman and CEO of Illinois Superconductor (Nasdaq:
ISCO). He has been CEO of Illinois Superconductor since November 1999 and
Chairman since November 2000. He has more than 20 years of experience in
high-tech wireless systems development, beginning in 1980 as the co-founder of
InterDigital Communications Corporation (Nasdaq: IDCC), where he participated in
the development of the first commercial application of digital TDMA radio
technology, and introduced the first wireless local loop system to the North
American telecommunications industry. Dr. Calhoun was a Director and
Vice-Chairman of Geotek (which filed for reorganization under Chapter 11 of the
Federal Bankruptcy Code in 1998), and served as the Chairman of the company's
engineering joint venture in Israel, PowerSpectrum Technologies, Ltd. until
1998. In 1998, Dr. Calhoun founded Davinci Solutions, LLC, a consulting firm
focused on wireless and Internet technology companies. Dr. Calhoun is also
Chairman of ExpertCall LLC, an Internet start-up focused on B2B customer care
applications. Dr. Calhoun holds a Ph.D. in Systems Science from the Wharton
School at the University of Pennsylvania, as well as a B.A. from the same
university.

Joseph F. Gerrity has served as Vice President of Finance and Chief
Financial Officer since June 2001. Prior to June 2001, he served as Director of
Strategic Planning beginning 1999. Prior to 1999, Mr. Gerrity served with Harris
Corporation, most recently as Controller of the Military and Space Division of
Harris Semiconductor. Mr. Gerrity also served as CFO of COREdata. Mr. Gerrity
holds an M.S. in Management from the University of Wisconsin and a B.S. in
Management from Marquette.

Stuart P. Dawley has served as Vice President, General Counsel, Investor
Relations Officer and Secretary since September 2001. Prior to that, he was
General Counsel to the Company between July 2000 and September 2001. Prior to
that, he served as Executive Vice President and General Counsel at Exigent
International, Inc. from July 1997 until April 2000. Before joining Exigent, Mr.
Dawley was General Counsel of AirNet from November 1996 until July 1997 and
served as Director of Marketing and Strategic Alliances from June 1995 until
November 1996. Mr. Dawley received his Juris Doctor Degree from the University
of Iowa.
32

Timothy J. Mahar has served as Vice President of Worldwide Sales since
August 2001. Prior to that, he served as Vice President of Marketing and
Business Development from February 2000 to August 2001. Prior to joining the
Company, Mr. Mahar served in several sales and marketing management positions at
Siemens Information and Communications Networks since 1992. From October 1998 to
February 2000 he served as Vice President of Sales and Business Development and
from October 1997 to October 1998 as Vice President of Business Solutions. Mr.
Mahar holds an M.S. in Electrical Engineering and a B.S. in Computer Engineering
from the University of Wisconsin -- Milwaukee.

Thomas R. Schmutz has served as Vice President of Engineering since August
2001. Prior to being elected as Vice President of Engineering, he served as the
Company's Director of Engineering beginning in 1995. Mr. Schmutz holds a MSEE
from the Georgia Institute of Technology and a BS from the United States
Military Academy. He holds ten U.S. patents in the wireless technology field.

William J. Lee has served as Vice President of Operations since October
1999. Prior to that, he served as the Company's Vice President of Services
beginning October 1999. Mr. Lee joined the Company in June 1999 as Director of
Services. From January 1985 to June 1999, Mr. Lee served in several capacities
with Siemens Information and Communications Networks, most recently as Director
of Systems Integrations Services. Prior to joining Siemens, Mr. Lee was a
Lecturer at the Midwest College of Engineering in Northern Illinois and held
various positions with AT&T Network Systems. Mr. Lee holds a B.S. in Computer
Science from Northern Illinois University.

Patricio X. Muirragui has served as Vice President of Quality since January
2001. Prior to January 2001, for 16 years Mr. Muirragui served in several
capacities with Siemens Information and Communications Networks, where his last
position was Director of Quality. Mr. Muirragui studied for his BSEE degree at
the University of California (Berkeley) and holds a BSEE from Purdue University
and an MSEE from the University of California (Berkeley).

Bennet Wong has served as Vice President of Technical Sales & Business
Development since August 2001. Prior to August 2001, Mr. Wong held several
positions in marketing and technical sales for the Company beginning in
September 1998. Prior to September 1998, Mr. Wong was employed by Ericsson
Communications of Canada where he was a Product Manager for approximately four
years. He holds an MSEE and BSEE from Ohio State University.

Terry L. Williams has served the Chief Technical Officer since August 2001
having joined the Company as its co-founder in 1994. Prior to that, he served at
Harris Corporation and GE Aerospace on numerous government/commercial projects
focusing on communications, signal processing and advanced radar technology. Mr.
Williams is the architect of the Company's broadband SDR radio and holds ten
U.S. patents in the wireless field. Mr. William holds an MSEE from the Georgia
Institute of Technology and a B.S. from Mississippi State University.

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Based solely on our review of copies of reports filed by persons
("reporting persons") required to file such reports pursuant to Section 16(a) of
the Exchange Act, we believe that all filings required to be made by reporting
persons with respect to the year ended December 31, 2001 were timely made in
accordance with the requirements of the Exchange Act.

ITEM 11. EXECUTIVE COMPENSATION

The following summary compensation table sets forth information concerning
compensation awarded to, earned by, or paid to (i) our Chief Executive Officer,
(ii) the four highest compensated executive officers who were serving as
executive officers at December 31, 2001, and (iii) the former chief executive
officer

33

(collectively, the "named executive officers") for services rendered in all
capacities with respect to the fiscal years ended December 31, 1999, 2000 and
2001:

- ---------------

(1) Figures in this column show the number of options to purchase shares of our
common stock that were granted during the respective fiscal year,
notwithstanding the fact that the options may have been granted for services
performed in a prior fiscal year. We did not grant any restricted stock
awards or stock appreciation rights to any of the named executive officers
during the years shown.

(2) Represents performance-based sales commissions.

(3) Represents a matching contribution to a defined contribution plan.

(4) Dr. Hamilton resigned from his positions as an officer and director of the
Company on August 17, 2001.

34

OPTION GRANTS IN LAST FISCAL YEAR

The following table sets forth information concerning individual grants of
stock options to the named executive officers during the fiscal year ended
December 31, 2001:

- ---------------

(1) Options vest in four equal annual installments. The options in this table
expire ten years after grant.

(2) These columns show the hypothetical value of the options granted at the end
of the option terms if the price of our common stock were to appreciate
annually by 5% and 10%, respectively, based on the grant date value of our
common stock.

(3) Options held by this former officer have expired.

AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES

The following table sets forth certain information regarding stock option
exercises by the named executive officers during the fiscal year ended December
31, 2001, and stock options held by the named executive officers at December 31,
2001:

- ---------------

(1) Calculated based on the fair market value of our common stock on the date of
exercise minus the exercise price, multiplied by the number of shares issued
upon exercise of the options.

(2) Calculated by determining the difference between the exercise price of the
options and $0.42, the closing price of our common stock on December 31,
2001.

(3) Options held by this former officer have expired.

35

COMPENSATION OF DIRECTORS

Non-employee directors are entitled to receive option grants and other
awards under the 1999 Equity Incentive Plan. Non-employee directors are
currently entitled to receive an award of nonqualified stock options every three
years, the amount of which is determined by the Board of Directors in its sole
discretion. These director options will have an exercise price equal to the fair
market value of our common stock when granted and will vest in 36 equal monthly
installments provided the director has attended at least 75% of Board of
Director meetings in the 12 months preceding each vesting date, with exception
for special circumstances. Unvested options for a particular year will vest on a
pro rata basis if a director leaves or is removed from office, provided he or
she met the attendance requirement for the portion of the year he or she served
as a director. All directors will be reimbursed for expenses incurred in
attending meetings of the Board of Directors and its committees.

EMPLOYMENT AND OTHER COMPENSATORY ARRANGEMENTS

In October 1999, the Company entered into an Employee Noncompete and
Post-Termination Benefits Agreement with R. Lee Hamilton, Jr. Pursuant to this
Agreement, Dr. Hamilton agreed that he will not compete with the Company for a
period of one year following any termination of his employment, and the Company
agreed to continue to provide him with his regular weekly salary and benefits
during the one-year noncompetition period, provided that his termination was not
for "cause" (as defined in the agreement). Notwithstanding the foregoing, Dr.
Hamilton had the right to elect to terminate the noncompetition period after
nine months, in which case his right to continue receiving salary and benefits
would also terminate. The Agreement also provided for accelerated vesting and an
extended exercise period with respect to stock options held by Dr. Hamilton at
the time of termination of his employment without "cause" or for "good reason"
(each as defined in the agreement). The agreement with Dr. Hamilton expired in
April 2001 and was not renewed. Dr. Hamilton resigned from his positions with
the Company in August 2001.

In addition, the Company and each of Mr. Ehley and Dr. Hamilton entered
into an Amendment of the Incentive Stock Option Agreements to which each named
executive officer was a party (the "Amendment"). Upon the occurrence of a
"termination event" or a "change in control" (each as defined in the Amendment),
the Amendment provided in each case for accelerated vesting and an extended
exercise period with respect to the stock options held by each such executive
officer. The terms provided under Dr. Hamilton's Amendment terminated upon his
resignation.

During August 2001, the Company entered into an employment agreement with
Glenn A. Ehley, President and Chief Executive Officer, that contains change of
control and severance provisions. Should Mr. Ehley be terminated without "cause"
(as defined in the employment agreement), the agreement provides for special
severance (six months of pay) plus benefits payable in a lump sum within three
days after termination and accelerated vesting of stock options that would have
vested within two years after termination. In addition, Mr. Ehley has the right
to participate in the Acquisition Bonus Program adopted by the Board of
Directors on August 24, 2001 to compensate employees in the event of a change in
control of the Company. This program gives the CEO the authority to set aside a
certain percentage of the net proceeds associated with an acquisition or merger
constituting a change in control of the Company. The percentage varies depending
on the amount of the proceeds. The CEO would then allocate this pool to all
employees in his discretion.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

No interlocking relationship exists between the Board of Directors or the
Compensation Committee and the board of directors or compensation committee of
any other company, nor has any such interlocking relationship existed in the
past. During the year ended December 31, 2001, Messrs. Brown, and Joel P. Adams
served as members of the Compensation Committee. Mr. Adams resigned as a
director and member of the Compensation Committee on April 19, 2001. Messrs.
Brown and Adams are affiliated with SCP Private Equity Partners, L.P. ("SCP"),
and Adams Capital Management, Inc. ("Adams Capital"), respectively,

36

which each holds more than 5% of the outstanding and issued shares of our common
stock acquired in the following financings:

1999 BRIDGE FINANCING

In early June 1999, we closed on loans in an aggregate amount of $800,000
from certain existing stockholders or related affiliates. SCP and Adams Capital
each participated in this bridge financing in the amount of $200,000. The loans
were evidenced by demand promissory notes and accrued interest at the prime rate
plus 2% per annum. The demand notes were canceled and exchanged for convertible
promissory notes as part of the initial closing of our convertible promissory
notes and warrant offering.

In mid-June 1999, we closed on $6.0 million of convertible promissory notes
along with warrants to purchase approximately 490,663 shares of our common
stock. In July and August 1999, we closed on an additional $338,187 of
convertible promissory notes along with warrants to purchase approximately
27,656 shares of our common stock. All of the warrants have an exercise price of
$3.67 per share. Among the purchasers of the convertible promissory notes and
warrants were SCP ($2,500,000), and Adams Capital ($600,000). The principal and
accrued interest under the outstanding convertible promissory notes totaling
$6,485,985 were automatically converted into shares of our Series G preferred
stock upon the closing of the Series G financing.

SERIES G FINANCING

In September 1999, we raised $30.0 million in gross proceeds from the sale
of Series G preferred stock to 45 investors, at a per share purchase price of
$0.13, including conversion of principal and accrued interest under $6.5 million
of the convertible promissory notes issued in the 1999 bridge financing. Among
the investors in the Series G offering were Adams Capital ($490,045), and SCP
($1,860,034.25). Shares of Series G preferred stock were automatically converted
into shares of common stock upon the closing of our IPO.

REDEEMABLE, CONVERTIBLE SERIES B PREFERRED FINANCING

On May 16, 2001, we issued 955,414 shares of preferred stock to three
existing stockholders, SCP, Tandem PCS Investments, L.P. and Mellon Ventures,
L.P., at $31.40 per share for a total face value of $30 million. The preferred
stock is redeemable at any time after May 31, 2006 out of funds legally
available for such purposes. Dividends accrue to the preferred stockholders,
whether or not declared, at 8% cumulatively per annum. Initially, each share of
preferred stock was convertible, at any time, into ten shares of common stock.
Holders of preferred stock are entitled to votes equal to the number of shares
of common stock into which each preferred stockholding converts and collectively
the right to designate two members of the Board of Directors. In the event of
any liquidation, dissolution or winding up of the company, the preferred
stockholders are entitled to 200% of their initial purchase price plus accrued
but unpaid dividends before any payments to any other stockholders. In
association with this preferred stock investment, we issued immediately
exercisable warrants to purchase 2,866,242 shares of our common stock for $3.14
per share, which expire on May 14, 2011.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information with respect to the
ownership of our common stock, of which 23,789,865 shares were outstanding as of
March 20, 2002, and preferred stock, of which 955,414 shares were outstanding as
of March 20, 2002, by (i) persons known by us to be beneficial owners of more
than 5% of

37

its common stock and more than 5% of the preferred stock, (ii) our directors,
(iii) the named executive officers, and (iv) all executive officers and
directors as of March 20, 2002 as a group:

- ---------------

* Indicates less than 1%

(1) Unless otherwise indicated, each beneficial owner has sole voting and
investment power with respect to the shares listed in the table.

(2) Information is as of March 20, 2002.

(3) As reported in the Schedule 13D (the "SCP Schedule 13D") filed 5/25/2001 on
behalf of SCP Private Equity Partners II, L.P. ("SCP II"), or otherwise, of
this amount 318,471.33 shares of Preferred Stock, which, for voting
purposes, is convertible at a conversion price of $3.14 into 3,184,713
shares of Common Stock, and 955,414 shares of Common Stock issuable upon
exercise of a warrant are beneficially held by SCP II, 3,437,687 shares of
Common Stock and 214,988 shares of Common Stock issuable upon exercise of a
warrant (adjusted from 204,443 shares upon the sale of Series B Preferred
Stock) are beneficially held by SCP Private Equity Partners, L.P. ("SCP")
and 169,799 shares of Common Stock are beneficially held by CIP Capital
L.P. ("CIP").

(4) As reported in the Schedule 13D filed 6/20/2001 on behalf of Tandem PCS
Investments, L.P. ("Tandem"), or otherwise, of this amount 2,145,465 shares
of Common Stock and 318,471.33 shares of Preferred Stock, which for voting
purposes, is convertible at a conversion price of $3.14 into 3,184,713
shares of Common Stock, are beneficially held by Tandem, and 1,127,405
shares of Common Stock issuable upon exercise of warrants (171,991 shares
of which were adjusted from 163,555 shares upon the sale of Series B
Preferred Stock) are beneficially held by Tandem.

38

(5) As reported in the Schedule 13D filed 5/29/2001 on behalf of Mellon
Ventures, L.P., ("Mellon"), or otherwise, of this amount 478,315 shares of
Common Stock and 318,471.33 shares of Preferred Stock which, for voting
purposes, is convertible at a conversion price of $3.14 into 3,184,713
shares of Common Stock, are beneficially held by Mellon, and 955,414 shares
of Common Stock issuable upon exercise of warrants are beneficially held by
Mellon.

(6) As reported in the Schedule 13G/A filed 11/8/2000 on behalf of Harris
Corporation, and VFC Capital, a wholly-owned subsidiary of Harris, of this
amount 3,401,828 shares of Common Stock and 213,032 shares of Common Stock
issuable upon exercise of a warrant (43,859 shares of which were adjusted
from 41,707 shares upon the sale of Series B Preferred Stock) are
beneficially held by VFC Capital, Inc., a wholly owned subsidiary of Harris
Corporation.

(7) As reported in the SCP Schedule 13D, or otherwise, of this amount
318,471.33 shares of Preferred Stock, which, for voting purposes, is
convertible into 3,184,713 shares of Common Stock, and 955,414 shares
issuable upon exercise of a warrant and beneficially held by SCP II,
3,437,687 shares of Common Stock and 214,988 shares of Common Stock
issuable upon exercise of a warrant (adjusted from 204,443 shares upon the
sale of Series B Preferred Stock) are beneficially held by CIP. Mr. Brown
is affiliated with each of SCP, SCP II and CIP. Includes an option to
purchase Common Stock held by Mr. Brown exercisable immediately for 6,277
shares, and options that are exercisable within 60 days after March 20,
2002 for 418 shares.

(8) Includes 41,301 shares held by Mr. Ehley and options exercisable
immediately for 103,424 shares.

(9) Includes 2,000 shares held by Mr. Lee and options exercisable immediately
for 51,153 shares.

(10) Includes options held by Mr. Mahar exercisable immediately for 32,500
shares.

(11) The executive officers and directors of the Company as a group consist of
Glenn A. Ehley, Stuart P. Dawley, Joseph F. Gerrity, William J. Lee,
Timothy J. Mahar, Patricio X. Muirragui, Thomas R. Schmutz, Terry L.
Williams, Bennett Wong, R. Lee Hamilton, James W. Brown, Darrell Lance
Maynard, Susannah Tam and Dr. George M. Calhoun.

(12) For additional information and further description of the Series B
Convertible Preferred Stock, see "Certain Relationships and Related
Transactions" below. Unless otherwise indicated, each beneficial owner has
sole voting and investment power with respect to the shares listed in the
table. The Series B convertible preferred stock is convertible immediately
into common stock at the "current conversion price" as that term is defined
in the Series B Convertible Preferred Stock Certificate of Designation.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Pursuant to a consulting agreement with us, Mr. Ehley's father-in-law,
Richard Blake, provides consulting services with respect to evolving
telecommunications standards and business development opportunities in the
military, public safety, law enforcement and government sectors. The agreement
provides for a payment not to exceed $5,000 per month, exclusive of expenses,
and is terminable at will by either party with thirty days' notice.

On November 9, 2000, the Company loaned a former officer of the Company,
Dr. R. Lee Hamilton Jr., $112,660, payable in full on November 9, 2005 at 6.01%
interest, payable semiannually. The loan was made to reimburse the officer for
an amount paid by him to exercise an option to purchase 113,274 shares of the
Company's common stock in February 2000 and is accordingly classified in
stockholders' equity. The note is collateralized by the underlying value of the
stock and the Company has full recourse against the officer in the event of a
default. The unpaid principal amount of the note, together with all accrued and
unpaid interest and any other sums owing under the note, are payable on November
9, 2005, the fifth anniversary of the date of the note. Interest was payable on
November 9, 2001 and semi-annually thereafter. As of December 31, 2001 this note
was in default and therefore the payment of principal and interest is currently
due in full. The Company has been notified that the collateral stock was sold in
quarter 1 of 2002 and that the proceeds will be transmitted to the Company. The
Company intends to vigorously pursue collection of the balance due on the note.

39

On March 14, 2001, the Company loaned a former officer of the Company, Dr.
R. Lee Hamilton, Jr., $995,133 at an interest rate of 5.0% per annum secured by
his pledge of stock under an Account Control Agreement dated as of March 14,
2001 among the officer, Salomon Smith Barney, Inc. and the Company. The
principal represents the amount that the Company loaned to the officer to
satisfy the alternative minimum tax liability incurred in connection with the
exercise of options in February 2000. The unpaid principal amount of the note,
together with all accrued and unpaid interest and any other sums owing under the
note, is payable on March 14, 2006, the fifth anniversary of the date of the
note. As of the date of this report, the entire principal amount of the note is
outstanding. An allowance of $995,133 was recorded during 2001 for the estimated
loss on this loan. The Company is not accruing any interest associated with this
note.

On March 16, 2001, the Company loaned another officer of the Company, Mr.
Glenn A. Ehley $221,977 at an interest rate of 5.07% per annum. The note is
secured by the pledge of the officer's stock under an Account Control Agreement
dated as of March 16, 2001 among the officer, Salomon Smith Barney Inc. and the
Company. The principal represents the amount the Company loaned to the officer
to satisfy the alternative minimum tax liability incurred in connection with the
exercise of options to purchase 25,261 shares of Common Stock in March 2000. The
unpaid principal amount of the note, together with all accrued and unpaid
interest and any other sums owing under the note, is payable on March 16, 2006,
the fifth anniversary of the date of the note. As of the date of this report,
the entire principal amount and accrued interest of the note is outstanding. The
note was valued at a market rate of interest (9%) and accordingly a discount of
$43,040 was recorded against the note. The Company is not recognizing any
interest income associated with this note.

On May 16, 2001, the Company issued 955,414 shares of series B preferred
stock to three existing stockholders, SCP Private Equity Partners II, L.P.,
Tandem PCS Investments, L.P. and Mellon Ventures, L.P., at $31.40 per share for
a total face value of $30 million. The preferred stock is redeemable at any time
after May 31, 2006 out of funds legally available for such purposes. Dividends
accrue to the Preferred Stockholders, whether or not declared, at 8%
cumulatively per annum. The preferred stockholders are entitled to votes equal
to the number of shares of common stock into which each share of preferred stock
converts and collectively to designate two members of the Board of Directors.
Initially, each share of preferred stock was convertible, at any time, into ten
shares of our common stock. Upon liquidation of the company, or if a majority of
the preferred stockholders agrees to treat a change in control or a sale of all
or substantially all of our assets (with certain exceptions) as a liquidation,
the preferred stockholders are entitled to 200% of their initial purchase price
plus accrued but unpaid dividends before any payments to any other stockholders.
In association with this preferred stock investment, we issued immediately
exercisable warrants to purchase 2,866,242 shares of our common stock for $3.14
per share, which expire on May 14, 2011. The preferred stockholders have the
right to designate two members of the Board of Directors. Mr. Brown representing
SCP Private Equity Partners II, L.P., and Ms. Tam, representing Tandem PCS
Investments, L.P., an affiliate of CDP Capital, currently serve as
representatives of the preferred stockholders on the Board of Directors.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

a. We have filed the following documents as part of this report, except as
otherwise noted:

1. Financial Statements

See Index to Financial Statements on page F-1 of this report.

2. Financial Statement Schedules Financial Statement Schedules have
been omitted because of the absence of conditions under which they would be
required or because the required information has been included in the
financial statements.

40

3. Exhibits

3.1(4) Seventh Amended and Restated Certificate of Incorporation.
3.2(1) Second Amended and Restated Bylaws.
3.3(2) Amendment to Second Amended and Restated Bylaws.
4.1(1) Specimen Certificate evidencing shares of Common Stock.
4.2(1) Second Amended and Restated Shareholders' and Registration
Rights Agreement dated as of April 16, 1997.
4.3(1) First Amendment to Second Amended and Restated Shareholders'
and Registration Rights Agreement dated as of September 20,
1999.
4.4(1) Second Amended and Restated Agreement Among Series E, Series
F and Series G Second Amended and Restated Preferred
Stockholders and Senior Registration Rights Agreement dated
as of September 7, 1999.
4.5(1) First Amendment to Second Amended and Restated Agreement
Among Series E, Series F and Series G Preferred Stockholders
and Senior Registration Rights Agreement dated as of
September 20, 1999.
4.6(6) Rights Agreement dated January 9, 2001 between AirNet
Communications Corporation and Continental Stock Transfer &
Trust Company.
4.7(6) Certificate of Designation of Series A Junior Participating
Preferred Stock of AirNet Communications Corporation.
10.1(1) AirNet Communications Corporation 1999 Equity Incentive
Plan.
10.2(1) OEM and Patent License Option Agreement dated January 27,
1995 between Motorola, Inc. and AirNet Communications
Corporation.
10.3(1) Employee Noncompete and Post-Termination Benefits Agreement
dated October 26, 1999 between AirNet Communications
Corporation and R. Lee Hamilton, Jr.
10.6(3) Amendment to Incentive Stock Option Agreements dated
February 11, 2000 between AirNet Communications Corporation
and William J. Lee.
10.8(3) Amendment to Incentive Stock Option Agreements dated
February 11, 2000 between AirNet Communications Corporation
and Glenn A. Ehley.
10.9(3) Amendment to Incentive Stock Option Agreements dated
February 11, 2000 between AirNet Communications Corporation
and Timothy Mahar.
10.11(5) First Amendment To 1999 Equity Incentive Plan of Airnet
Communications Corporation.
10.12(7) Account Control Agreement among R. Lee Hamilton, Jr.,
Salomon Smith Barney Inc. and AirNet Communications
Corporation dated as of October 2, 2000.
10.13(7) Promissory Note dated November 9, 2000 in the amount of
$112,600.00 made by R. Lee Hamilton, Jr. in favor of AirNet
Communications Corporation.
10.14(7) Agreement to Loan Funds dated as of December 22, 2000 by and
between AirNet Communications Corporation and R. Lee
Hamilton, Jr.
10.15(7) Agreement to Loan Funds dated as of December 22, 2000 by and
between AirNet Communications Corporation and Glenn Ehley.
10.16(7) Non-Recourse Promissory Note dated March 14, 2001 in the
amount of $995,133.00 made by R. Lee Hamilton, Jr. in favor
of AirNet Communications Corporation.
10.17(7) Non-Recourse Promissory Note dated March 16, 2001 in the
amount of $221,997.00 made by Glenn Ehley in favor of AirNet
Communications Corporation.
10.18(7) Account Control Agreement among Glenn Ehley, Salomon Smith
Barney Inc. and AirNet Communications Corporation
10.19 Security Agreement dated as of November 15, 2001 between
AirNet Communications Corporation and Force Computers, Inc.,
Sanmina Corporation and Brooktrout, Inc.
23.1 Consent of Deloitte & Touche LLP.

41

- ---------------

(1) Incorporated by reference to Registration Statement No. 333-87693 on Form
S-1 as filed with the Securities and Exchange Commission on September 24,
1999, as amended.

(2) Incorporated by reference to Annual Report on Form 10-K as filed with the
Securities and Exchange Commission on March 29, 2000.

(3) Incorporated by reference to Quarterly Report on Form 10-Q as filed with the
Securities and Exchange Commission on May 15, 2000.

(4) Incorporated by reference to Quarterly Report on Form 10-Q as filed with the
Securities and Exchange Commission on August 14, 2000.

(5) Incorporated by reference to Schedule 14A as filed with the Securities and
Exchange Commission on December 7, 2000.

(6) Incorporated by reference to Exhibit 4.1 of the Company's Current Report on
Form 8-K filed with the Securities and Exchange Commission on January 17,
2001.

(7) Incorporated by reference to the Annual Report on Form 10-K as filed with
the Securities and Exchange Commission on April 3, 2001.

b. Reports on Form 8-K

The Company filed a Current Report on Form 8-K with the Securities and
Exchange Commission on November 20, 2001 reporting one event under Item 8,
Other Events, and filing one exhibit under Item 7, Exhibits.

42

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

AIRNET COMMUNICATIONS CORPORATION

By: /s/ GLENN A. EHLEY
------------------------------------
Glenn A. Ehley
President and Chief Executive
Officer

Date: April 1, 2002

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities indicated on April 1, 2002.

/s/ GLENN A. EHLEY Director, President and Chief Executive Officer
- ------------------------------------------------ (Principal Executive Officer)
Glenn A. Ehley

/s/ JOSEPH F. GERRITY Vice President of Finance, Chief Financial
- ------------------------------------------------ Officer, and Treasurer
Joseph F. Gerrity (Principal Financial and Accounting Officer)

/s/ JAMES W. BROWN Director
- ------------------------------------------------
James W. Brown

/s/ DARRELL LANCE MAYNARD Director
- ------------------------------------------------
Darrell Lance Maynard

/s/ SUSANNAH TAM Director
- ------------------------------------------------
Susannah Tam

/s/ GEORGE M. CALHOUN Director
- ------------------------------------------------
George M. Calhoun

43

EXHIBIT INDEX

- ---------------

(1) Incorporated by reference to Registration Statement No. 333-87693 on Form
S-1 as filed with the Securities and Exchange Commission on September 24,
1999, as amended.

(2) Incorporated by reference to Annual Report on Form 10-K as filed with the
Securities and Exchange Commission on March 29, 2000.

(3) Incorporated by reference to Quarterly Report on Form 10-Q as filed with the
Securities and Exchange Commission on May 15, 2000.

(4) Incorporated by reference to Quarterly Report on Form 10-Q as filed with the
Securities and Exchange Commission on August 14, 2000.

(5) Incorporated by reference to Schedule 14A as filed with the Securities and
Exchange Commission on December 7, 2000.

(6) Incorporated by reference to Exhibit 4.1 of the Company's Current Report on
Form 8-K filed with the Securities and Exchange Commission on January 17,
2001.

(7) Incorporated by reference to the Annual Report on Form 10-K as filed with
the Securities and Exchange Commission on April 3, 2001.

AIRNET COMMUNICATIONS CORPORATION

INDEX TO FINANCIAL STATEMENTS

F-1

INDEPENDENT AUDITORS' REPORT

To the Board of Directors of
AirNet Communications Corporation:

We have audited the accompanying balance sheets of AirNet Communications
Corporation (the Company) as of December 31, 2001 and 2000, and the related
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 2001. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

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

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

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company's recurring losses from operations, negative
cash flows, and accumulated deficit raise substantial doubt about its ability to
continue as a going concern. Management's plans concerning these matters are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

/s/ DELOITTE & TOUCHE LLP

Certified Public Accountants

Orlando, Florida
March 27, 2002

F-2

AIRNET COMMUNICATIONS CORPORATION

CONSOLIDATED BALANCE SHEETS

See notes to financial statements.
F-3

AIRNET COMMUNICATIONS CORPORATION

STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

See notes to financial statements.
F-4

AIRNET COMMUNICATIONS CORPORATION

STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

See notes to financial statements.
F-5

AIRNET COMMUNICATIONS CORPORATION

STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

See notes to financial statements.
F-6

AIRNET COMMUNICATIONS CORPORATION

NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

1. NATURE OF OPERATIONS, BUSINESS OPERATIONS AND GOING CONCERN

Nature of Operations -- AirNet Communications Corporation (the Company or
AirNet) is engaged in the design, development, manufacture, and installation of
broadband, software-defined base stations, base station controllers, and related
wireless infrastructure components for wireless telecommunications in the Global
Systems for Mobile Communications (GSM) market. This product and service line
represents the Company's one reportable segment as defined by Statement of
Financial Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information. The Company was founded in 1994 and is
incorporated in the state of Delaware.

Business Operations and Going Concern -- The accompanying financial
statements have been prepared on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business; and, as a consequence, the financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or the amounts and classifications of liabilities that might be
necessary should the Company be unable to continue as a going concern. The
Company has experienced net operating losses and negative cash flows since
inception and as of December 31, 2001 had an accumulated deficit of $207
million. Cash used in operations for the years ended December 31, 2001 and 2000
was $48.2 million and $62.6 million, respectively. At December 31, 2001, the
Company's principal source of liquidity is $4.7 million of cash and cash
equivalents. Such conditions raise substantial doubt that the Company will be
able to continue as a going concern for a reasonable period of time. Subsequent
to the end of the year, the Company has collected approximately $10.6 million in
cash from both existing contracts and deposits on new contracts.

As of March 11, 2002 the cash balance was $9.7 million with a revenue
backlog of $17.0 million. The current 2002 operating plan projects that cash
available from planned revenue combined with the $4.7 million on hand at
December 31, 2001 will be adequate to defer the requirement for additional
funding until no earlier than the first half of 2003. This plan is dependent
upon the collection of revenues from one customer who accounts for 50% of the
2002 projected revenue. The projected orders also draw products from inventory
thereby leveraging the cash flow associated with this customer. As of March 11,
2002 this customer has released and provided deposits of $4.7 million for $9.4
million of purchase orders to AirNet for product the Company is to deliver
during 2002. However, there can be no assurance that the Company will be
successful in accomplishing its operating plan as projected.

The Company's future results of operations involve a number of significant
risks and uncertainties. The worldwide market for telecommunications products
such as those the Company sells has seen dramatic reductions in demand in 2001
as compared to the late 1990's and 2000. It is uncertain as to when or whether
market conditions will improve. The Company has been negatively impacted in 2001
by such global demand reductions. Other factors that could affect the future
operating results and cause actual results to vary materially from expectations
include, but are not limited to, ability to raise capital, dependence on key
personnel, dependence on a limited number of customers, ability to design new
products, product obsolescence, ability to generate consistent sales, ability to
finance research and development, government regulation, technological
innovations and acceptance, competition, reliance on certain vendors and credit
risks. The ultimate ability of the Company to continue as a going concern for a
reasonable period of time will depend on increasing the revenues and/or reducing
expenses and securing enough additional funding to enable it to reach
profitability. The Company's historical sales results and current backlog do not
give sufficient visibility or predictability to indicate that the required
higher sales levels might be achieved. To conserve cash, the Company took
measures in the second and third quarters of 2001 to reduce operating expenses
for the remainder of the year. During the year that ended December 31, 2001 the
Company entered into agreements with certain vendors to settle outstanding
payables totaling $11,280,221 at varying discounts from the recorded liability.
The vendors agreed, in exchange for the settlement, to release the Company from
future liability

F-7

AIRNET COMMUNICATIONS CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

related to the settled balances. The total gain realized as a result of these
settlements was $1,921,605, net of expenses of $342,835, which is recorded as an
extraordinary gain ($0.08 per share), in the accompanying statements of
operations. In addition, the Company negotiated modified payment terms relating
to accounts payable totaling approximately $6,882,700 with certain other
vendors. These restructured terms included a partial payment of approximately
$2,132,146 with remaining payments to be paid over a thirty-month period of
time. (See Note 15 for a complete breakdown of the Vendor Settlement Program.)

The Company believes that additional funding will be required prior to
reaching profitability and several alternatives are possible, including
subordinated notes and private placement financing. The Company currently has a
nonexclusive investment banking relationship with Keybridge Partners, however,
no assurances can be given that additional equity or debt financing can be
arranged on terms acceptable to the Company, if at all.

If near term sales do not meet expectations, the Company may have to
further reduce discretionary spending to maintain cash levels necessary to
sustain operations through the fourth quarter of 2002. It is unlikely that the
Company will achieve profitable operations in the near term and therefore it is
likely that operations will continue to consume cash in the foreseeable future.
The Company has limited cash resources and therefore must reduce the negative
cash flows in the near term to continue operations, or the Company will need to
secure additional funding. However, there can be no assurances that the Company
will succeed in achieving this goal, and failure to do so in the near term will
have a material adverse effect on its business, prospects, financial condition
and operating results and its ability to continue as a going concern. As a
consequence, the Company may be forced to seek protection under the bankruptcy
laws. In that event, it is unclear whether the Company could successfully
reorganize the capital structure and operations, or whether it could realize
sufficient value for its assets to satisfy fully the debts or liquidation
preference obligations to the preferred stockholders. Accordingly, should the
Company file for bankruptcy there is no assurance that any value would be
received by its stockholders.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Stock Split -- In October 1999, the Board of Directors approved a reverse
stock split of common stock of 1 share for 66.38 shares. All common stock and
per share information was retroactively restated to reflect this reverse split
for all periods presented.

Use of Estimates -- 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, the disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from those estimates.

Vulnerability Due to Certain Concentrations and Other Risks -- The Company
performs ongoing credit evaluations of its customers' financial conditions and
generally does not require collateral on accounts receivable; hence, the
accounts receivable are unsecured and the Company is at risk to the extent such
amounts become uncollectible. Customers are billed as contractual milestones are
met, including deposits of up to 50% of the contracted amount at the inception
of the contract. However, collection of the entire amounts due under the
Company's contracts to date have lagged behind shipment of products due to the
substantial time period between shipment and the fulfillment of post-shipment
contractual obligations. As of December 31, 2001 and 2000, the total due from
two customers represented 54% and 51%, respectively, of accounts and notes
receivable, with one customer representing 43% and 37%, respectively, of
accounts and notes receivable.

The Company's customers are comprised primarily of cellular service
providers. To date, the majority of the Company's sales have been to customers
in the United States, wherein communications are subject to the

F-8

AIRNET COMMUNICATIONS CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

regulations imposed by the U.S. Federal Communications Commission. Total sales
outside the U.S. commenced in 2000 and totaled approximately $2.8 million in
2001.

Long-Lived Assets -- The Company periodically reviews long-lived assets and
certain identifiable intangibles to be held and used for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. If the estimated future cash flows (undiscounted and
without interest) attributable to the assets, less estimated future cash
outflows, are less than the carrying amount, an impairment loss is required to
be recognized. The amount of the loss is measured by the difference between the
asset carrying value and its fair value less costs to sell. No impairment losses
were recorded in 2001, 2000, or 1999.

Comprehensive Income (Loss) -- Comprehensive income (loss) includes all
changes in equity during a period except those resulting from investments by
owners and distributions to owners. There were no changes in equity during the
years presented herein exclusive of investments by owners and losses from
operations. As such, the comprehensive loss for all periods presented is equal
to the amount shown on the statement of operations as net loss.

Stock-Based Compensation -- Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation (Statement 123) requires
disclosures of stock-based compensation arrangements and encourages (but does
not require) compensation cost to be measured based on the fair value of the
equity instrument awarded. Companies are permitted, however, to continue to
apply Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25), which recognizes compensation cost based on the intrinsic
value of the equity instrument awarded. The Company applied APB 25 to its
employee stock-based compensation awards. (See Note 9 for the effect on net loss
if the Company had applied the fair value method as prescribed by Statement
123.)

Financial Instruments -- The carrying amounts reported in the balance sheet
under cash and cash equivalents, accounts receivable, accounts payable and
capital lease obligations approximate fair value due to the immediate or
short-term maturity of these financial instruments.

Fair value estimates are made at a specific point in time and are based on
relevant market information and information about the financial instrument; they
are subjective in nature and involve uncertainties and matters of judgment and,
therefore, cannot be determined with precision. These estimates do not reflect
any premium or discount that could result from offering for sale at one time the
Company's entire holdings of a particular instrument. Changes in assumptions
could significantly affect these estimates.

Cash Equivalents -- The Company considers all highly liquid investments
with maturity of three months or less when purchased to be cash equivalents. The
Company's policy is to invest excess funds with only well-capitalized financial
institutions.

Inventories -- Inventories are valued at the lower of cost (determined by
the first-in, first-out basis) or market. Inventories are reviewed periodically
and items considered to be slow moving or obsolete are written down to their
estimated net realizable value. Finished goods delivered to customers are
recorded in inventories until the related revenue is recognized.

Property and Equipment -- Property and equipment is stated at cost.
Depreciation is computed by the straight-line method over the estimated useful
lives of the related assets, which ranges from two to five years. Assets held
under capital leases and leasehold improvements are amortized over the life of
the related leases and the amounts are included in depreciation.

Capitalized Software Development Costs -- In accordance with Statement of
Financial Accounting Standards No. 86, Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed, the Company capitalizes the
costs associated with externally developed software products. Initial costs are
charged to operations as research prior to the development of a detailed program
design or a working model.
F-9

AIRNET COMMUNICATIONS CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Costs incurred subsequent to the product's release, and research and development
performed as contractual requirements are charged to operations. The costs of
this capitalized software development are amortized over the estimated useful
lives of the product.

Revenue Recognition -- Revenue from product sales is recognized after
delivery, after determination that the fee is fixed and determinable and
collectibility is probable, and after resolution of any uncertainties regarding
satisfaction of all significant terms and conditions of the customer contract.
If subsequent to delivery, the customer should reject the product or the
customer's financial condition deteriorate so that they are unable to pay the
Company, provisions for bad debts or adjustments to revenue recognized will have
to be made in the current or subsequent period.

Revenue is recognized for Original Equipment Manufacturer (OEM) and
reseller product sales when title to the product passes to the OEM customer.
Typically, for these product sales, title passes to the customer at the point of
shipment.

Warranty and Customer Support -- The Company typically warrants its
products against defects in materials and workmanship for a period of one year
from the date of revenue recognition. A provision for estimated future warranty
and customer support is recorded when revenue is recognized.

Research and Development Expenses -- Expenditures relating to the
development of new products and processes, including significant improvements to
existing products, are expensed as incurred. These expenses include continued
product development and engineering support costs for test development and
technical services.

Income Taxes -- The Company accounts for income taxes under the asset and
liability method. Under this method, deferred income taxes are recognized for
the tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and to operating loss carryforwards. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred taxes of a change in tax rates is recognized in
income in the period that the change in the rate is enacted.

Recent Pronouncements -- Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities (Statement
133), is effective for all fiscal years beginning after June 15, 2000. Statement
133, as amended and interpreted, establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities. All derivatives, whether designated
in hedging relationships or not, are required to be recorded on the balance
sheet at fair value. If the derivative is designated as a fair-value hedge, the
changes in the fair value of the derivative and the hedged item will be
recognized in earnings. If the derivative is designated as a cash-flow hedge,
changes in the fair value of the derivative are recorded in other comprehensive
income and will be recognized in the statements of operations when the hedged
item affects earnings. Statement 133 defines requirements for designation and
documentation of hedging relationships, as well as ongoing effectiveness
assessments in order to use hedge accounting. For a derivative that does not
qualify as a hedge, changes in fair value will be recognized in earnings.

Management completed its evaluation of the various issues related to
Statement 133, including performing an inventory of derivative and embedded
derivative instruments and did not identify any material derivatives as of
January 1, 2001. As a result, when the Company adopted Statement 133, as
amended, on January 1, 2001, the effect was not material to the Company.

In June 2001, the Financial Accounting Standards Board (FASB) issued two
new pronouncements: Statement of Financial Accounting Standards (Statement) No.
141, Business Combinations (Statement 141) and Statement No. 142, Goodwill and
Other Intangible Assets, (Statement 142). Statement 141 prohibits the

F-10

AIRNET COMMUNICATIONS CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

use of the pooling-of-interest method for business combinations initiated after
June 30, 2001 and also applies to all business combinations accounted for by the
purchase method that are completed after June 30, 2001. There are also
transition provisions that apply to business combinations completed before July
1, 2001, that were accounted for by the purchase method. Statement 142 is
effective for fiscal years beginning after December 15, 2001 to all goodwill and
other intangible assets recognized in an entity's statement of financial
position at that date, regardless of when those assets were initially
recognized. Statements 141 and 142 are not expected to have any impact on the
Company.

In August 2001, the FASB issued Statement No. 144, Accounting for the
Impairment of or Disposal of Long-Lived Assets (Statement 144). Statement 144
establishes a single accounting model for all long-lived assets, including
business segments, to be disposed of. Under Statement 144, discontinued
operations are no longer measured at net realizable value but at fair value.
Future operating losses are no longer included as part of discontinued
operations. Statement 144, which is effective for fiscal years beginning after
December 15, 2001, is not expected to have any impact on the Company, when
initially adopted in 2002.

Loss Per Share -- Basic loss per share is computed by dividing the net loss
attributable to common stockholders by the weighted average number of common
shares outstanding. Net loss attributable to common stockholders is computed by
adding dividends accrued but unpaid on cumulative preferred stocks to the net
loss reported. Diluted net loss per share equals basic net loss per share for
all periods reported since potential common shares are anti-dilutive. A
reconciliation of the components used in computing basic and diluted net loss
per share follows:

For the above-mentioned periods, the Company had securities outstanding
that may have diluted earnings per share but were excluded from the computation
of diluted net loss per share in the periods

F-11

AIRNET COMMUNICATIONS CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

presented since their effect would have been anti-dilutive. The potential number
of common shares into which these outstanding securities were convertible is as
follows:

2. INVENTORIES

During the fourth quarter ended December 31, 2000 approximately $7.3
million was recorded to cost of sales as an inventory charge for slow moving and
obsolete inventories.

3. ACCOUNTS AND NOTES RECEIVABLE

In mid-2000, management decided to provide vendor financing in select
situations, including one customer whose open account of $9,015,051 was
converted to a note receivable in June 2000, due on December 31, 2000. The
customer defaulted on the note and the Company provided for an allowance for the
estimated loss exposure under the note at December 31, 2000. The Company entered
into a mediated settlement agreement with the customer on March 29, 2001. The
settlement agreement provided for the recovery of inventory, application of
customer deposits and a cash payment of $3 million to be paid on or before July
29, 2001, which in the aggregate was sufficient to settle the customer's
account, assuming the amounts owed were collected in full, without further loss
to the Company. This amount was collected in full on July 25, 2001.

At December 31, 2001, one customer on open accounts receivable represents
43% of the net carrying amount of accounts receivable; a significant
concentration of credit risk. This customer, whose balance is in past due
status, has agreed to a payment schedule in order to satisfy the outstanding
balance with interest. As of March 11, 2002 this customer has met the agreed to
payment schedule however the customer's ability pay its balance in full, is
uncertain. The Company considered the status of this customer's financial
position in evaluating the allowance for doubtful accounts for its portfolio of
open accounts as of December 31, 2001 discussed in the following paragraph.

Provision for doubtful accounts and notes receivable amounted to
$5,677,249, $7,272,952, and $8,612 for the years ended December 31, 2001, 2000,
and 1999, respectively. Notes and accounts receivable charge offs totalled
$8,663,069 in 2001. The allowance for doubtful accounts and notes receivable of
$4,804,290 at

F-12

AIRNET COMMUNICATIONS CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

December 31, 2001 is considered adequate by management, based on current
knowledge of customer status' and market conditions, to absorb estimated losses
in the accounts receivable portfolio.

4. OTHER LONG TERM ASSETS

Other long-term assets consist of the following at December 31, 2001 and
2000 respectively:

Licensing and software development costs consist of amounts paid under two
separate agreements with external, unrelated parties. Amounts payable under
these agreements through 2003 amount to an additional $420,600.

5. CONVERTIBLE NOTE AND WARRANT

On September 12, 1997, the Company entered into a Convertible Note and
Warrant purchase agreement with Harris Corporation (Harris), pursuant to which
Harris purchased a secured convertible promissory note and a warrant for
$4,000,000. The Harris note was secured by all assets of the Company and bore
interest at an annual rate of 8%. The Harris note was convertible into
112,296,970 shares of the Company's Series E voting cumulative preferred stock,
and the Harris warrant was exercisable for the purchase of an additional
11,229,697 shares of Series E voting cumulative preferred stock at a warrant
exercise price of $0.0356 per share. The warrant expires on September 12, 2002.
The fair value of the Harris warrant was calculated at $112,297 at the date of
grant using the minimum valuation model. This fair value was accounted for as a
discount on the note, and was being amortized over the life of the note.

Harris exercised its right of conversion of the note with a carrying value
of $3,965,687 in September 1998 and received 112,296,970 shares of the Company's
Series E voting convertible preferred stock and the note was canceled. Harris
has since transferred ownership of the warrant to its wholly owned subsidiary,
VFC Capital, Inc. The warrant remains outstanding at December 31, 2001, and due
to the automatic conversion feature of the Series E voting cumulative preferred
stock, is now convertible into 169,173 shares of common stock at an exercise
price of $2.36 per share.

6. BRIDGE FINANCING

Through a private placement in June and July 1999, the Company issued
$6,338,187 of securities comprised of convertible promissory notes (Bridge
Notes) with attached warrants (the Bridge Warrants). The investors in these
securities were also preferred stockholders. The Bridge Notes, which were to
mature on December 11, 2000, bore interest at a rate of prime plus 2% and were
payable upon maturity. The Bridge Notes were collateralized by a security
interest in all assets of the Company, subordinated to a first lien for any debt
incurred to finance receivables and inventory. The Bridge Notes were
automatically convertible in the event that the Company closed on a private
financing of at least $10 million or closed on an initial public offering of the
Company's common stock. As of September 16, 1999, the carrying value and accrued
interest on the Bridge Notes totaling $6,485,985 was converted into Series G
senior voting convertible preferred stock.

The Bridge Warrants vested immediately, have a ten-year term, and contain a
cashless exercise option. Warrants to purchase 490,663 shares of common stock at
$3.49 per share were issued; 412,490 warrants were outstanding at December 31,
2001. The Bridge Warrants expire on June 11, 2009. The fair value of the Bridge

F-13

AIRNET COMMUNICATIONS CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Warrants was calculated at $1,032,180 and was accounted for as a discount on the
Bridge Notes. The fair value was determined using the Black-Scholes model based
upon the following assumptions:

Volatility.................................................. 40.7%
Expected life............................................... 10 years
Fair value of stock......................................... $3.67
Dividend rate............................................... 0%
Risk-free interest rate..................................... 6.11%

7. PREFERRED STOCKS

The Company had the following preferred stocks outstanding as of December
31, 1998 and until completion of the Company's initial public offering (see
below):

Series A voting convertible cumulative preferred stock, $.01
par value, 12,000,000 shares authorized, 11,940,301 shares
issued and outstanding.................................... $ 119,403
Series B voting convertible cumulative preferred stock, $.01
par value, 3,300,000 shares authorized, 3,230,341 shares
issued and outstanding.................................... 32,303
Series C voting convertible cumulative preferred stock, $.01
par value, 5,000,000 shares authorized, issued, and
outstanding............................................... 50,000
Series D voting convertible cumulative preferred stock, $.01
par value, 13,727,364 shares authorized, 8,174,049 shares
issued and outstanding.................................... 81,740
Series E voting convertible cumulative preferred stock, $.01
par value, 568,855,000 shares authorized, 543,624,378
shares issued and outstanding............................. 5,436,244
Series F voting convertible cumulative preferred stock, $.01
par value, 361,891,142 shares authorized, 283,471,155
shares issued and outstanding............................. 2,834,712
----------
$8,554,402
==========

In September 1999, the Company issued 230,769,231 shares at $0.13 per share
of its Series G senior voting convertible preferred stock, par value $0.01 per
share. Of this total, 49,892,191 shares were acquired by the holders of the
Bridge Notes (see Note 6), including accrued interest, and the cash proceeds
from the offering, exclusive of the Bridge Notes conversion, were approximately
$21,781,000.

Dividends -- The preferred stockholders were entitled to receive, when
declared, cumulative cash dividends at the following rates per share per year:

Series A.................................................... $0.059
Series B.................................................... $0.293
Series C.................................................... $0.360
Series D.................................................... $0.066
Series E.................................................... $0.003
Series F.................................................... $0.004
Series G.................................................... $0.010

All unpaid cash dividends were cancelled when the Company closed on its
initial public offering in December 1999.

F-14

AIRNET COMMUNICATIONS CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Conversion -- Preferred stocks were converted into the following number of
common shares as a result of the Company's initial public offering in December
1999:

The total carrying value of the preferred stocks at the date of conversion
was $10,862,094.

8. REDEEMABLE CONVERTIBLE PREFERRED STOCK (SERIES B PREFERRED)

On May 16, 2001, the Company issued 955,414 shares of Series B convertible
preferred stock to three existing shareholders at $31.40 per share for a total
face value of $30 million. The Series B convertible preferred stock was recorded
in the initial amount of $15,307,506 (face value of $30 million less issuance
costs of $418,160, the fair value of detachable warrants and of the beneficial
non-detachable conversion feature discussed below.) The stock is redeemable at
any time after May 31, 2006 by the Company out of funds legally available for
such purposes and initially each preferred share is convertible, at any time,
into ten shares of common stock. Dividends accrue to the preferred stockholders,
whether or not declared, at 8% cumulatively per annum. Holders of preferred
stock are entitled to votes equal to the number of shares of common stock into
which each preferred stockholding converts and collectively to elect two members
of the Board of Directors. Upon liquidation of the company, or if a majority of
the preferred stockholders agrees to treat a change in control or a sale of all
or substantially all of our assets (with certain exceptions) as a liquidation,
the preferred stockholders are entitled to 200% of their initial purchase price
plus accrued but unpaid dividends before any payments to any other stockholders.

In association with this preferred stock offering, the Company issued
detachable warrants to purchase 2,866,242 shares of common stock for $3.14 per
share. The warrants expire on May 14, 2011 and are recorded in the accompanying
balance sheet, at their estimated fair market value of $7,136,942, resulting in
a like amount of discount on the preferred stock. The discount is being
amortized using the effective interest method over the preferred stock
redemption period.

An additional discount for $7,136,942, related to the intrinsic value, was
also recorded as additional paid capital, after valuation of the warrants
issued, for the beneficial non-detachable conversion feature embedded in the
preferred stock. The discount is recorded as an offset to the preferred stock
and is being amortized over the preferred stock redemption period.

9. STOCK-BASED COMPENSATION PLANS

Officers and employees of the Company are awarded options periodically for
the purchase of common stock of the Company under the Company's 1994 Stock
Option Plan, as amended. The options, which expire five to ten years from the
date of grant, are exercisable equally over a vesting period up to four years.

Effective April 1998, under the Company's 1996 Independent Director Stock
Option Plan, as amended, each independent director of the Company was eligible
to receive a grant of options.

F-15

AIRNET COMMUNICATIONS CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Effective September 1, 1999, the Company adopted the 1999 Equity Incentive
Plan (1999 Plan), which amended and restated the 1994 Stock Option and the 1996
Independent Director Stock Option Plan. The 1999 Plan provides for the issuance
of a maximum of 3,206,841 shares of common stock pursuant to the grant of
incentive stock options, nonqualified stock options, restricted stock, stock
appreciation rights, performance awards and other stock-based awards to
employees, directors, and independent contractors. In the event of a change in
control, as defined, two years of pending vesting, as to all stock options
issued and outstanding, will be accelerated for all option holders.

The following table summarizes option activity for the years ended December
31, 2001, 2000, and 1999:

For options outstanding and exercisable at December 31, 2001, the exercise
price ranges and weighted average exercise prices and remaining lives are as
follows:

The outstanding options expire at various dates through December 2011. At
December 31, 2001, a total of 389,382 shares were exercisable, with a weighted
average exercise price of $7.90 per share. The weighted average remaining
contractual life of options at December 31, 2001 with exercise prices ranging
from $0.07 to $57.88 is 8.4 years. The weighted average fair value of the
options issued for the years ended December 31, 2001, 2000 and 1999 is $3.10,
$20.09, and $5.06, respectively.

F-16

AIRNET COMMUNICATIONS CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The weighted average exercise prices and fair values of options whose
exercise price equal, or are less than, the market price on the grant date are
as follows for the years ended December 31:

At December 31, 2001, a total of 1,493,365 shares of the Company's common
stock were available for future grants of stock options.

Total compensation expense for options issued at an exercise price below
fair value at the date of grant was $158,858, $378,251, and $213,965 for the
years ended December 31, 2001, 2000 and 1999, respectively. Stock-based
compensation expense is recognized on a straight-line method over the vesting
period of the options.

Pro forma information regarding net loss is required by Statement 123 and
has been determined as if the Company had accounted for its employee stock
options under the fair value method of that Statement. The fair value for these
options was estimated at the date of grant using the following assumptions:

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting periods. The effect of
applying Statement 123's fair value method to the Company's stock options
granted in 2001, 2000 and 1999 results in the following pro forma amounts:

10. NOTES RECEIVABLE FROM OFFICER AND FORMER OFFICER

On November 9, 2000, the Company loaned a former officer of the Company
$112,660, payable in full on November 9, 2005 at 6.01% interest, payable
semiannually. The loan was made to reimburse the officer for an amount paid by
him to exercise an option to purchase 113,274 shares of the Company's common
stock in February 2000 and is accordingly classified in stockholders' equity.
The note is collateralized by the underlying value of the stock and the Company
has full recourse against the officer in the event of a default. The unpaid
principal amount of the note, together with all accrued and unpaid interest and
any other sums owing under the note, are payable on November 9, 2005, the fifth
anniversary of the date of the note. Interest was payable on November 9, 2001
and semi-annually thereafter. As of December 31, 2001 this note was in default
and therefore the payment of principal and interest is currently due in full.
The Company has been notified that the collateral stock was sold in quarter 1 of
2002 and that the proceeds will be transmitted to the Company. The Company
intends to vigorously pursue collection of the balance due on the note.

F-17

AIRNET COMMUNICATIONS CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

On March 14, 2001, the Company loaned a former officer of the Company
$995,133 at an interest rate of 5.07% per annum secured by his pledge of stock
under an Account Control Agreement dated as of March 14, 2001 among the officer,
Salomon Smith Barney, Inc. and the Company. The principal represents the amount
that the Company loaned to the officer to satisfy the alternative minimum tax
liability incurred in connection with the exercise of options in February 2000.
The unpaid principal amount of the note, together with all accrued and unpaid
interest and any other sums owing under the note, is payable on March 14, 2006,
the fifth anniversary of the date of the note. As of the date of this report,
the entire principal amount of the note is outstanding. An allowance of $995,133
was recorded during 2001 for the estimated loss on this loan. The Company is not
accruing any interest associated with this note.

On March 16, 2001, the Company loaned another officer of the Company
$221,997 at an interest rate of 5.07% per annum. The note is secured by the
pledge of the officer's stock under an Account Control Agreement dated as of
March 16, 2001 among the officer, Salomon Smith Barney Inc. and the Company. The
principal represents the amount the Company loaned to the officer to satisfy the
alternative minimum tax liability incurred in connection with the exercise of
options to purchase 25,261 shares of Common Stock in March 2000. The unpaid
principal amount of the note, together with all accrued and unpaid interest and
any other sums owing under the note, is payable on March 16, 2006, the fifth
anniversary of the date of the note. As of the date of this report, the entire
principal amount and accrued interest of the note is outstanding. The note was
valued at a market rate of interest (9%) and accordingly a discount of $43,040
was recorded against the note. The Company is not recognizing any interest
income associated with this note.

11. EMPLOYEE RETIREMENT PLAN

The Company sponsors a retirement plan for all employees through a salary
deduction 401(k) savings plan. Employees are permitted to contribute to the plan
up to 15% of eligible wages, not to exceed the maximum amount allowable by law.
The Company did not match employee contributions in 1999 or 1998. Commencing on
January 1, 2000, the Company began a matching contribution of $0.50 for each
$1.00 contributed by the employee, up to 3% of the employee's annual base
salary. The Company's contribution vests ratably over a four-year period. Total
contributions made by the Company in 2001 and 2000 were $454,074, and $459,867,
respectively.

12. INCOME TAXES

At December 31, 2001, the Company has approximately $139,063,000, of net
operating loss carryforwards remaining to offset future taxable income. These
net operating losses will expire at various dates through 2021. In addition, the
Company has available approximately $2,718,000 of research and development tax
credit carryforwards, expiring at various dates through 2021, which may be used
to offset future regular tax liabilities. The benefit of all of these
carryforwards has been fully offset by a valuation allowance at December 31,
2001 and 2000 because it is considered more likely than not that the benefits of
the carryforwards will not be realized.

F-18

AIRNET COMMUNICATIONS CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

A reconciliation of the statutory income tax rate to the Company's
effective tax rate is as follows:

Significant components of the net deferred tax balances are as follows:

No amounts were paid for income taxes during any of the periods presented.

F-19

AIRNET COMMUNICATIONS CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

13. COMMITMENTS AND CONTINGENCIES

Operating Leases -- The Company leases its primary manufacturing and office
facilities under long-term noncancelable operating leases. The Company also has
operating leases for certain other furniture, equipment and computers. Future
minimum lease payments for long-term noncancelable operating leases for year
ended December 31 are as follows:

2002........................................................ $464,156
2003........................................................ 54,695
2004........................................................ 54,695
2005........................................................ 33,402
--------
$606,948
========

Rental expense charged to operations was $1,425,831, $1,182,020, and
$1,013,719 for the years ended December 31, 2001, 2000 and 1999, respectively.

Capital Lease Obligations -- The Company also leases certain computer and
test equipment under capital lease agreements, which are reported as computer
equipment in the accompanying financial statements. Summary information is as
follows:

A schedule of future minimum lease payments under capital leases for the
Company and the related present value of the net minimum lease payments as of
December 31, 2001 follows:

2002........................................................ $ 385,321
2003........................................................ 38,667
2004........................................................ 11,517
2005........................................................ 4,823
---------
Total minimum lease payments................................ 440,328
Less amount representing interest........................... (25,195)
---------
Present value of lease payments............................. 415,133
Less capital lease obligations -- current portion........... (366,633)
---------
Capital lease obligations, less current portion............. $ 48,500
=========

Agreements -- Simultaneously with its equity investment in January 1995,
Motorola, Inc. (Motorola) entered into an agreement with the Company whereby
Motorola was granted the right to obtain non-exclusive, royalty-free licenses
under any two of AirNet's patents of Motorola's choice. In return, the Company
and Motorola have agreed not to enjoin the other and to negotiate license
agreements in good faith with respect to possible patent infringement. In the
event of a merger, consolidation or sale of AirNet, the Company has the option
to require Motorola to either exercise its rights to obtain such licenses or to
cancel such right in exchange for a payment by AirNet of $1 million per patent.

Litigation -- On October 23, 2000, the Company filed a complaint against
Lucent Technologies, Inc. et al. in the Circuit Court for the 18th Judicial
Circuit in Brevard County, Florida, alleging, among other claims,

F-20

AIRNET COMMUNICATIONS CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

tortious interference with a business relationship and misappropriation of trade
secrets in connection with the purported cancellation of certain phase II
purchase orders by Carolina PCS. The Company is seeking more than $10 million in
damages and injunctive relief and have offered to mediate the dispute.

On August 14, 2001, the Company's vendor MC Test Service, Inc. d/b/a MC
Assembly and Test filed a lawsuit against the Company in the Circuit Court for
the 18th Judicial Circuit in Brevard County, Florida alleging, among other
things, breach of contract and seeking damages in the amount of $1,300,000. The
Company filed an answer raising affirmative defenses and a counter claim seeking
damages from MC Assembly and Test in excess of $5,000,000. The Company believes
MC Assembly and Test shipped defective products, which caused damage from
settlement of accounts receivable and resulted in lost business opportunities.
The Company intends to vigorously defend the claim and to aggressively pursue
the counter claim.

On August 29, 2001, Comsys Communications & Signal Processing Ltd. d/b/a
Comsys filed a lawsuit against the Company in the United States District Court,
Western District of New York, alleging breach of contract and seeking damages in
the amount of $5,000,000. The Company disputes the amount of damages claimed. On
January 2, 2002, the Company executed a settlement agreement with Comsys that
calls for the revival and reinstatement of the EDGEware License Agreement with
Comsys together with amended dates for milestone deliveries and related
payments, with no damage or penalty payments by the Company.

The Company, the members of the underwriting syndicate involved in our
initial public offering and two former officers of the Company have been named
as defendants in a class action lawsuit filed on November 16, 2001 in the United
States District Court for the Southern District of New York. The action, number
21 MC 92 (SAS), alleges that the defendants violated federal securities laws and
seeks unspecified monetary damages and certification of a plaintiff class
consisting of all persons and entities who purchased, converted, exchanged or
otherwise acquired shares of the Company common stock between December 6, 1999
and December 6, 2000, inclusive. Specifically, the complaint charges the
defendants with violations of Sections 11, 12 and 15 of the Securities Act of
1933 and Section 10(b) of the Securities Exchange Act of 1934. In substance, the
allegations are that the underwriters of the Company's initial public offering
charged commissions in excess of those disclosed in the initial public offering
materials and that these actions were not properly disclosed. The Company does
not know whether the claims of misconduct by the underwriters have merit but at
this time believe the claims against the Company are without merit and the
Company intends to defend this matter when appropriate. Under the terms of the
Underwriting Agreement, the Company has claims against the underwriters of the
initial public offering for indemnification and reimbursement of all of the
Company costs and any damages incurred in connection with this lawsuit and the
Company intends to pursue those claims vigorously.

In addition to the items listed above the Company is also involved in
various claims and litigation matters arising in the ordinary course of
business. With respect to these matters, the Company believes that it has
adequate legal defenses and/or has provided adequate accruals for related costs
such that the ultimate outcome will not have a material adverse effect on the
Company's future financial position or results of operations.

Purchase Commitments -- On December 15, 2000 the Company entered into an
agreement to purchase from a vendor (TECORE Wireless Systems) ten integrated
switch products through December 31, 2002. Alternatively, the Company may
buy-out the commitment by purchasing $3.0 million of TECORE common stock.
Additionally, TECORE has an agreement dated December 13, 2001 with the Company
to purchase products from AirNet under a reseller agreement dated October 31,
2001. As of December 31, 2001 the Company has purchased six of the original ten
products from TECORE. As of December 31, 2001 TECORE had placed orders with
AirNet for $2.3 million resulting in revenue in 2001 for the Company of $2.0
million. Each agreement was negotiated at arm's length and no terms in either
agreement are dependent upon terms in the other agreement. Subsequent to
December 31, 2001 through March 12, 2002, additional
F-21

AIRNET COMMUNICATIONS CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

orders for $9.4 million have been placed by TECORE with AirNet to provide base
stations and other equipment for a network in Central Asia.

14. MAJOR CUSTOMERS

Revenue generated from major customers representing more than 10% of net
revenues during the years ended December 31, 2001, 2000, and 1999 is summarized
below:

15. VENDOR SETTLEMENT PROGRAM AND LONG TERM ACCOUNTS PAYABLE

During the third and fourth quarters of 2001, the Company entered into
agreements with certain vendors to settle outstanding payables totaling
$11,280,221 at varying discounts from the recorded liability. The vendors
agreed, in exchange for the settlement, to release the Company from future
liability related to the settled balances. The total gain recorded as a result
of these settlements was $1,921,605, net of expenses of $342,835 ($0.08 per
share) which is recorded as an extraordinary gain in the accompanying 2001
statements of operations.

In addition, the Company negotiated extended payment terms relating to
accounts payable totaling approximately $2,323,886 with certain other vendors.
These restructured terms included a partial payment of approximately $648,236
with remaining payments to be paid, as additional product is purchased from
these vendors. The timing of these additional payments cannot be estimated since
it is contingent upon the Company's demand for each vendor's product and
accordingly the unpaid balance of $1,675,650 is included in accounts payable at
December 31, 2001. Under agreements with these vendors, the Company secured any
unpaid balances with general inventory payable upon the sale of the Company.

During the fourth quarter 2001 the company entered into long-term
agreements with certain vendors to settle outstanding payables over a period in
excess of one year. The long-term agreements require monthly or quarterly
payments as well as certain milestone and final settlement payments. Amounts due
under these agreements in excess of one year are recorded as long-term accounts
payable in the accompanying financial statements. In addition to the liability
recorded in the accompanying financial statements there are open

F-22

AIRNET COMMUNICATIONS CORPORATION

NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

purchase commitments with two of these vendors totaling approximately $1.8
million. The schedule of payments is as follows:

2002........................................................ $ 846,462
2003........................................................ 826,120
2004........................................................ 1,126,114
2005........................................................ 69,327
----------
Total....................................................... $2,868,023

Included in the long-term agreements with three of these vendors is a
Security Agreement granting these vendors a security interest in the Company's
tangible property. These rights do not include the Company's intellectual
property and the rights can be subordinated in the event that the Company
successfully raises additional funding in excess of $6.0 million.

16. RELATED PARTY TRANSACTIONS

Pursuant to a consulting agreement with a relative of an officer,
consulting services are provided to the Company with respect to evolving
telecommunications standards and business development opportunities in the
military, public safety, law enforcement and government sectors. The agreement
provides for a payment not to exceed $5,000 per month and is terminable at will
by either party with thirty days' notice. For the fiscal years ending December
31, 2001, 2000, and 1999 the payments made under this agreement were $71,074,
$63,116, and $8,574, respectively.

F-23