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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, 2002

OR

o            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)

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

NONE

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 o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of 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. o

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

The aggregate market value of shares held by non-affiliates as of June 28, 2002, the last business day of the registrant’s most recently completed second fiscal quarter, was $11,111,243 (based on a closing price on June 28, 2002 on Nasdaq of $0.79 per share). As of March 10, 2003, 23,851,177 shares of the Registrant’s Common Stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:
NONE

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TRADEMARK AND TRADE NAMES

AirNet®, AdaptaCell®, AirSite®, Backhaul Free™ and SuperCapacity™ are trademarks 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.

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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, 2002, our base stations were being used in twenty-two 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, resellers, 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 have generated $98.2 million in net revenues from our inception through December 31, 2002. We have incurred substantial losses since commencing operations, and as of December 31, 2002, we had an accumulated deficit of $225.4 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 2003. 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. See Liquidity, Capital Resources and Going Concern in Item 7.

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 operating costs than other existing base stations.

Our system features two innovative base station products: Our AdaptaCell® base station is a software-defined base station, meaning it uses software to control the way it encodes or decodes wireless signals. Our AdaptaCell 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. This broadband architecture also makes this base station an ideal platform to deliver integrated software algorithms that will permit the addition of an adaptive array antenna feature. Adaptive array technology focuses radio signals on individual handset antennas instead of spreading the signals over the entire cell covered by one base station as well as blocks to strongest interference which significantly increases performance, capacity and high speed data rates.

Our AirSite® Backhaul Free™ base station carries voice and data signals back to the wireline network without using a physical wired communications link. Our AirSite Backhaul Free base station uses an operator’s existing radio frequencies as the media 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 or microwave, 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. We have redirected our activities to focus in four interrelated areas: our adaptive array technology for our AdaptaCell SuperCapacity™ base station; our traditional GSM infrastructure market; the growing market for secure, adaptable wireless infrastructure for governmental and public safety applications; and the rapidly emerging GSM 850 market for migration of IS-136 networks to GSM and high-speed data.

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

AirNet continues to make progress in the development of its SuperCapacity AdaptaCell base station utilizing adaptive array technology. We expect to deploy in the second half of 2003. 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 at a reduced cost — by focusing radio signals on individual handset antennas instead of spreading them over the entire cell and canceling or blocking the strongest interference. This 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. In December 2002 and January 2003, several customers, potential customers and wireless experts participated in drive testing a multi-cell GSM network utilizing the AirNet SuperCapacity base station. Specifically, the test

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demonstrated multiple, adjacent adaptive array cell sites with multiple co-channel interferers, and demonstrated a frequency reuse scheme of N=1 incorporating high-speed hand-overs. N=1 frequency reuse is an important feature for network operators in that it allows simultaneous multiple users on the same timeslot, on the same frequency, in adjacent cells, previously not possible in GSM networks. This feature enables previously unattainable capacity improvements and dramatically reduces the need to add cell sites in order to meet increasing subscriber counts and higher speed data requirements, such as EDGE . We plan to market the N=1 frequency reuse feature by targeting GSM carriers who are faced with limited spectrum in many markets, need to increase capacity, and/or are introducing EDGE into their networks. There are risks associated with new product introductions and some of these risks are outlined in the risk factors set forth in Item 7 below and elsewhere in this document.

The IS-136 technology is the basis of the TDMA cellular and Personal Communications Services (PCS) air interfaces. 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. Service operators that provide IS-136 air interface services are compelled to transition their networks to 2.5 or 3G services such as GPRS , 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 a cost effective method to migrate their IS-136 networks leveraging the value proposition of the AdaptaCell software defined base station and AirSite base stations to provide an alternate GSM 850 network that shares the spectrum of existing IS-136 networks.

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.

We continue to develop and exploit leading edge technology and as of December 31, 2002, we had 50 domestic patents granted, and 18 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.

On October 23, 2002 we received certification under the ISO 9001:2000 standard. ISO 9001:2000 is the globally recognized standard for QMS aimed at consistently producing and delivering the highest quality products and services necessary to achieve complete customer satisfaction.

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 both because it is the leading accepted standard in the world and 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 connect 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 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 base station and the AirSite Backhaul Free base station. We also offer a Base Station Controller, a Transcoder Rate Adaption Unit, an Operations and Maintenance Center (radio), Serving GPRS Support Node (SGSN), and Gateway GPRS Support Node (GGSN).

AdaptaCell Base Station: 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 may have to install new equipment and potentially a completely new base station for each new wireless standard they adopt.

AdaptaCell SuperCapacity Base Station: We previously announced plans to introduce the AdaptaCell SuperCapacity base station which allows up to 12/12/12 (288 total channels) in only a 5MHz channel spectrum. 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 (General Packet Radio Service) standard, providing high-speed wireless data in packet format and the EDGE Enhanced Data rates for GSM Evolution, (also known as Enhanced GPRS or EGPRS) standard, providing yet higher speed. 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.

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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 or microwave. The AirSite Backhaul Free base station is a full featured GSM base station, meaning it has a unique cell ID for billing and “911” emergency identification purposes, offers the same geographic coverage as other existing base stations, and has configuration, 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 or microwave 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 (BSC) 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 BSC monitors the operational status of each of its attached base stations and orchestrates handoffs between base stations.

To support packet data services (i.e. GPRS and EGPRS) the BSC supports an optional packet control unit (PCU). The PCU manages distribution of packet data to and from GPRS-enabled mobile units via the base stations attached to the base station controller and GPRS network components, namely the SGSN (Serving GPRS Support Node) and GGSN (Gateway GPRS Support Node).

Transcoder Rate Adaption 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 16 Kbps. This means that the digital T-1/E-1 telephone line or microwave 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 software to support adaptive multirate (AMR) speech coding. This feature increases voice capacity of GSM networks while maintaining the current high levels of voice quality.

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.

In addition to the previously described products, AirNet also provides for sale other GSM network components manufactured by others in order to provide complete voice and data systems to our customers. These include the MSC, GGSN and SGSN.

Mobile Switching Center: The MSC interfaces to one or more base station controllers via the A-interface, previously mentioned. This MSC provides mobility management and switching to connect a caller on a mobile unit to a caller on another mobile unit or a caller on the wireline public switching telephone network (PSTN). The MSC supports other functions such authentication of mobile subscribers to prevent fraud. Additionally, the MSC supports features familiar to users of telephone systems such as call forwarding, call waiting, call conferencing, etc. The MSC may also interface to voice mail systems, short message service centers (SMSC), billing systems as well as other mobile switching centers.

Serving GPRS Support Node: The SGSN provides a mobility management function that tracks a GPRS mobile from one base station to another in order to route data packets to and from the mobile subscriber. The SGSN interfaces to the PCU in the base station controller and to the GGSN. Additionally, the SGSN supports other functions such as authentication of GPRS mobile subscribers as well as provides information on mobile subscriber usage for billing purposes.

Gateway GPRS Support Node: The GGSN is the gateway between the GPRS network and an external data network such as the Internet, supporting routing of data packets between the GPRS network and the external packet data network. The GGSN and SGSN may be combined into one physical unit, the GPRS Support Node (GSN).

CUSTOMERS

Each of three customers, TECORE Wireless Systems, Telsom Mobile, and MBO Cross accounted for approximately 5% or more of our revenues for the fiscal year ended December 31, 2002. Together these customers accounted for approximately 75% of our revenues for the period ended December 31, 2002. See Note 13 of Notes to Financial Statements for financial information regarding our customers.

SALES AND MARKETING

We sell and market our products in the U.S. primarily through our direct sales force. Our international sales and marketing efforts are conducted through a network of original equipment manufacturers, or OEMs, agents, resellers and our direct sales force. We currently have a staff of five in sales and sales support.

Our sales strategy depends on a delayed introduction of 3G technologies and the continued evolution of GSM/GPRS/EDGE. Sales in the North American PCS market may be impeded due to roaming considerations.

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.

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RESEARCH AND PRODUCT DEVELOPMENT

We spent $12,543,815 in 2002, $25,563,216 in 2001 and $29,634,807 in 2000 on research and product development. As of December 31, 2002, 57 of our 125 employees were engaged in research and product development, including hardware and software engineering. We do not expect to hire additional employees to engage in research and product development during 2003 unless such research and development is funded by strategic partners, customers or new investments. As of February 2003 we had 110 employees with 57 engaged in research and development.

Our current product development plans focus on the adaptive array technology for our AdaptaCell SuperCapacity base station, EDGE, product cost reductions and features for major operators by taking advantage of the evolution of digital signal processors and other digital components to reduce the cost of our base stations.

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 primarily 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 most of our primary components and subassemblies for our products. As a result, our in-house customer fulfillment operations consist primarily of quality control, final assembly, and product integration and testing. Circuit boards, electronic and mechanical parts, and other component assemblies are purchased from OEMs and other selected vendors. An in-house staff sets standards and monitors the quality control of our contract manufacturers.

Our product backlog was approximately $4.0 million at December 31, 2002 as compared to $5.7 million at December 31, 2001. We typically include a contract in backlog when it is signed by the customer and by us and a deposit is received from the customer.

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, operating cost 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 also 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, 2002, we had 50 domestic patents granted, and 18 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.

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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.

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.

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, 2002, we had 125 employees. Of these individuals, 57 were in research and product development. We also had 7 independent contractors as of the same date. As of February 2003 we had 110 employees and six contractors. Of these 110 employees, 57 were employed in research and product development.

Most of our employees did not receive any merit increases in 2002 and none are expected in 2003. In January 2003 we postponed the payment of bonuses to employees and suspended the company matching contributions to the 401(K) plan. These items may create an impediment to the retention of our key employees.

None of our employees are represented by a labor union, and we believe that our relations with our employees are good. However, we cannot guarantee retention of key employees due to the issues noted above.

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, 2003 for final assembly and testing. The lease for the Dow Road facility 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 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 resulted in lost business opportunities and hampered collection of our accounts receivable. In June 2002, the Company and MC Assembly and Test entered into a settlement agreement. The terms of the settlement agreement call for performance by both parties, including the purchase of products and the satisfaction of accounts payable during the third quarter of 2002. The terms of the agreement were met during the third quarter of 2002 and the matter is considered closed by both parties. The effect of the settlement agreement is included as a gain in operating expense as reported in the accompanying financial statements for the period ended December 31, 2002.

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 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

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but at this time we believe the claims against us are without merit and intend to defend this matter when appropriate. Under the terms of our Underwriting Agreement, we have claims against the underwriters of the initial public offering for indemnification and reimbursement of all of the costs and any damages incurred in connection with this lawsuit and we intend to pursue those claims vigorously. On July 15, 2002 the Issuers’ Committee filed a Motion to Dismiss on behalf of all issuers and individual defendants. In February 2003, the Motion to Dismiss was granted in part (with respect to AirNet) and denied in part (with respect to all issuer defendants). Discovery in this litigation is commencing while settlement talks between the plaintiffs and the issuers continue. The claims against our two former officers named in the class action lawsuit have been dismissed without prejudice. The Company is not able to predict the impact, if any, the ultimate resolution of this lawsuit may have on its financial position or future results of operations.

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 such that the ultimate outcome will not have a material adverse effect on our 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.

PART II

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

See Status of our Common Stock listing on Nasdaq National Market in Item 7.

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 the Series B Convertible Preferred Stock and related warrants to purchase our common stock that we issued and sold in May 2001, nor is there a trading market for outstanding warrants we issued and sold in June and August 1999. The following table sets forth the high and low sales prices for our common stock as reported by NASDAQ for the periods indicated:

We had 396 stockholders of record as of February 21, 2003. 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 7 to the Financial Statements for a complete explanation of this security.

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.

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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 have generated only $98.2 million in net revenues from our inception through December 31, 2002. We have incurred substantial losses since commencing operations, and as of December 31, 2002, we had an accumulated deficit of $225.4 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 2003. 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. See Liquidity, Capital Resources, and Going Concern below.

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, 2002, our base stations were being used in twenty-two 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 three customers accounting for 75% of our net revenues during the fiscal year ended December 31, 2002. For the fiscal years ended December 31, 2000, 2001, and 2002, 11.8%, 19.2%, and 29.1%, respectively, 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.

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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 four interrelated areas: the growing market for secure, adaptable wireless infrastructure for governmental and public safety applications; our adaptive array technology for our AdaptaCell SuperCapacity base station; the rapidly emerging GSM 850 market for migration of IS-136 networks to GSM and high-speed data; 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 four 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; regulatory developments; and our revenue recognition policies. The effect of our potentially long sales cycle on our results is compounded by our current dependence 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.

On May 31, 2002 we were notified by the SEC that it had performed what we believe was a routine review of our Annual Report on Form 10-K for the year ended December 31, 2001 and requested clarification or explanation on some items. On June 28, 2002, we provided the requested clarification and explanation without amending or restating previous filings. There have been no further questions raised by the SEC. Management does not anticipate any further questions on this review.

RELATED PARTY TRANSACTIONS

See Item 13 regarding a description of related party transactions during 2002.

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YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001

Net revenues: Net revenues increased $8.5 million or 58.6% from $14.5 million for the year ended December 31, 2001 to $23.0 million for the year ended December 31, 2002. This increase in revenues was a result of two major orders received for installations ultimately in the overseas market.

Gross Profit: Gross profit increased $16.4 million from a loss of $10.9 million for the year ended December 31, 2001 to $5.5 million for the year ended December 31, 2002. The gross profit margin was (75.2%) for 2001 and 23.9% for 2002. The increase in the gross profit margin was primarily attributable to a substantial decrease in inventory related charges, including write-downs for certain obsolete and excess inventory of $8.8 million during 2001 and our ability to leverage existing inventory to support the increase in revenue without significant procurement of new material. In addition, warranty expense decreased by $2.2 million in the period ended December 31, 2002 versus the year ended December 31, 2001. We expect our gross margin percentage to decline from our year ended December 31, 2002 level during the first six months of 2003 or until our cost reduction program is completed and products begin to ship. In addition, the slow-moving inventory, not previously written off, as of December 31, 2002 was $2.1 million, which may be written down in the future if usage remains low resulting in decreased gross profit. 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, 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 $13.1 million or 50.8% from $25.6 million for the year ended December 31, 2001 to $12.5 million for the year ended December 31, 2002. This decrease was due to previously announced actions taken in the second and third quarters of 2001 to reduce operating expenses which included actions to focus development in the areas with the greatest near-term potential. The $13.1 million dollar decrease included a $6.3 million reduction in labor and benefit costs, a $3.6 million reduction in consulting and subcontractor expenses, a $1.0 million reduction in expensed R&D equipment, a $0.5 million reduction in travel and recruiting expenses, and a $0.4 million reduction in leased equipment. The research and development expenses for the year ended December 31, 2002 included an accrual of approximately $0.7 million for bonuses accrued under a Board approved bonuses program that were scheduled to be paid in January 2003. We are deferring the payment of these bonuses until such time as payment is approved by the two entities considering a funding agreement with the Company. See Liquidity, Capital Resource and Going Concerns below.

Sales and marketing: Sales and marketing expenses decreased $6.5 million or 54.6% from $11.9 million for the year ended December 31, 2001 to $5.4 million for the year ended December 31, 2002. This decrease was due to previously announced actions taken in the second and third quarters of 2001 to reduce operating expenses. The $6.5 million reduction included a $2.4 million reduction in labor and benefit costs, a $1.0 million reduction in consulting and subcontractor expenses, a $1.2 million reduction in travel expenses and $0.4 million reduction in trade show expenses. The sales and marketing expenses for the year ended December 31, 2002 included an accrual of approximately $0.3 million for bonuses accrued under a Board approved bonuses program that were scheduled to be paid in January 2003. We are deferring the payment of these bonuses until such time as payment is approved by the two entities considering a funding agreement with the Company. See Liquidity, Capital Resource and Going Concerns below.

General and administrative: General and administrative expenses decreased $8.6 million or 74.1% from $11.6 million for the year ended December 31, 2001 to $3.0 million for the year ended December 31, 2002. The $8.6 million reduction in expenses was primarily attributable to the recovery of receivables previously accounted for in the provision for doubtful accounts of $2.4 million. In addition, there was a reduction in the provision for doubtful accounts of $5.0 million, and a $1.0 million reduction in outside legal services. Savings initiatives were also accomplished through a reduction in the aggregate workforce of the Company, consolidation of facilities, and an adjustment in certain business functions, streamlining the organization. The general and administrative expenses for the year ended December 31, 2002 included an accrual of approximately $0.2 million for bonuses accrued under a Board approved bonuses program that were scheduled to be paid in January 2003. We are deferring the payment of these bonuses until such time as payment is approved by the two entities considering a funding agreement with the Company. See Liquidity, Capital Resource and Going Concerns below..

Gain on vendor settlements: The Company recorded a gain on vendor settlements of $703,618 during 2002 as compared to $1,921,605 during 2001. The current year gain was a result of the finalization of a Company program to enter into agreements with certain vendors to settle outstanding payables in exchange for releasing the Company from future obligations.

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.

Gross Profit: 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 $8.8 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.

Research and development: Research and development expenses decreased $4.0 million or 13.6% from $29.6 million for the year ended December 31, 2000 to $25.6 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

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2001 for anticipated international orders and distribution activities and support of large operator trials. One of these trials resulted in revenue booked during 2001.

Gain on vendor settlements: The Company recorded a gain on vendor settlements of $1,921,605 during 2001 as compared to $0 during 2000. The gain was a result of a Company program to enter into agreements with certain vendors to settle outstanding payables in exchange for releasing the Company from future obligations.

General and administrative: General and administrative expenses decreased $0.9 million or 7.1% from $12.7 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.

LIQUIDITY, CAPITAL RESOURCES, 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 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, 2002, we had an accumulated deficit of $225.4 million. Cash used in operations for the years ended December 31, 2002 and 2001 was $1.1 million and $48.2 million, respectively. We expect to have an operating loss in 2003. At December 31, 2002, our principal source of liquidity was $3.2 million of cash and cash equivalents. Such conditions raise substantial doubt that we will be able to continue as a going concern without receiving additional funding. As of March 28, 2003 our cash balance was $3.7 million, after the draw of $4.8 million against our Bridge Loan for interim funding. The amounts drawn against the bridge loan are due and payable on May 24, 2003. In addition, on the same date we had a revenue backlog of $5.3 million. Our current 2003 operating plan projects that cash available from planned revenue combined with the $3.7 million on hand at March 28, 2003 will not be adequate to defer the requirement for additional funding. We are currently negotiating additional financing of $16 million with two Investors, which if successful, (a portion will be used to pay off the bridge loan) would provide the capital we require to continue operations. There can be no assurances that the proposed financing can be finalized on terms acceptable to us, if at all, or that the funding negotiated will be adequate to sustain operations through 2003.

Our future results of operations involve a number of significant risks and uncertainties. The worldwide market for telecommunications products such as those sold by us has seen dramatic reductions in demand 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 by this reduction in global demand and by our weak balance sheet. Other factors that could affect our future operating results and cause actual results to vary from expectations include, but are not limited to, ability to raise capital, dependence on key personnel, dependence on a limited number of customers (with one customer accounting for 49% of the revenue for 2002), ability to design new products, the erosion of product prices, ability to overcome deployment and installation challenges in developing countries which may include political and civil risks and risks relating to environmental conditions, 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 ultimate ability to continue as a going concern for a reasonable period of time will depend on our increasing our revenues and/or reducing our expenses and securing enough additional funding to enable us to reach profitability. Our historical sales results and our current backlog do not give us sufficient visibility or predictability to indicate when the required higher sales levels might be achieved, if at all. Additional funding will be required prior to reaching profitability. To obtain additional funding, we have entered into discussions with SCP II and TECORE concerning a proposed financing of $16,000,000 discussed below. No assurances can be given that either the proposed financing or additional equity or debt financing will be arranged on terms acceptable to us, if at all.

If we are unable to finalize the proposed financing, we will have to seek additional funding or dramatically reduce our expenditures and it is likely that we will be required to discontinue operations. 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. There can be no assurances that we will succeed in achieving our goals or finalize the proposed financing, 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. Accordingly, should we file for bankruptcy there is no assurance that our stockholders would receive any value.

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, 2002, our principal source of liquidity was $3.2 million of cash and cash equivalents.

On May 16, 2001, we issued and sold 955,414 shares of preferred stock to three existing stockholders, SCP Private Equity Partners II, L.P. (“SCP II”), Tandem PCS Investments (“Tandem”), LP and Mellon Ventures LP (“Mellon”), 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. Effective October 31, 2002, the preferred stockholders irrevocably and permanently waived the right of optional redemption applicable to the Series B Preferred Stock as set forth in the Certificate of Designation and the right to treat a specific proposed “Sale of the Corporation” as a “Liquidation Event,” to the extent that such treatment would entitle the Series B Holders to receive their “Liquidation Amount” per share in a form different from the consideration to be paid to holders of our common stock in connection with such Sale of the Corporation.

On January 24, 2003, we entered into a Bridge Loan Agreement with SCP II, an affiliate of our Chairman, James W. Brown, and TECORE, Inc., our largest customer based on revenues during the fiscal year ended December 31, 2002, and a supplier of switching equipment to us (“TECORE”). We issued two Bridge Loan Promissory Notes under the Bridge Loan Agreement, each in a principal amount of $3.0 million (the “Bridge Notes” or the “Bridge Loan”). The Bridge Notes carry an interest rate of two percent over the prime rate published in The Wall Street Journal and become due and payable on May 24, 2003. The Bridge Loan Agreement provides that the Bridge Notes are secured by a security interest in all of our assets including, without limitation, our intellectual property. To date, we have received advances totaling $4.8 million under the Bridge Notes. We are currently negotiating a definitive funding agreement, under which SCP II and TECORE would provide us financing of $16.0 million in the form of secured notes convertible into our common stock. The proceeds of this proposed financing would be used to refund the advances under the Bridge Loan Agreement and to fund our operations. See Note 16 to Financial Statements, Subsequent Events, for a further explanation of the Bridge Loan Agreement and the proposed financing.

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NET CASH USED IN OPERATING ACTIVITIES

Net cash used in operating activities was approximately $62.6 million in 2000, $48.2 million in 2001 and $1.1 million in 2002. For the year ended December 31, 2002 the cash provided through customer deposits and a reduction in both inventories and receivables was offset by the net loss incurred. We were able to reduce our inventory balance through fulfillment of customer orders. As of December 31, 2002, our net accounts receivable balance was $0.6 million. Of this balance 71% is attributable to two customers. During the years ended December 31, 2001 and 2000 the significant use of cash by operating activities was the result of the net losses together with the payment of accrued expenses associated with a reduction in workforce and the reduction in accounts payable resulting from the vendor settlements offset by gains 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, 2002, our total notes receivable balance was $1.2 million, all of which was attributable to one customer. The customer is making monthly payments of principal and interest to satisfy this note receivable.

NET CASH USED IN INVESTING ACTIVITIES

We used net cash for capital expenditures of approximately $8.7 million, $3.1 million, and $0.2 million for the years ended December 31, 2000, 2001, and 2002, respectively. During 2002, we significantly reduced the level of capital expenditures, as the physical assets available are adequate to meet our needs at this time. Our capital expenditures for testing and manufacturing equipment used during final assembly of our products will increase if our revenues increase.

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 $1.2 million, $1.4 million and $0.6 million for the years ended December 31, 2000, December 31, 2001 and December 31, 2002, 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 $0.5 million as of December 31, 2002 and we expect to spend approximately $374,365 for those leases in 2003.

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

Net cash used in financing activities for the year ended December 31, 2002 was $0.4 million resulted primarily from the payments on capital leases of $0.3 million. We had no debt facilities outstanding as of December 31, 2002. On January 24, 2003 we issued two Bridge Loan Promissory Notes in an aggregate of $6 million, to two investors with an initial draw of $1.6 million. Maximum cumulative draws, including the initial draw of $1.6 million may be made according to the following schedule:

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As of March 28, 2003, in accordance with the above schedule, the investors have advanced a total of $4.8 million to the Company, the most recent advance of $1.6 million having been made on March 26, 2003. There can be no assurance that the final draw of $1.2 million against the Bridge Loan will be fulfilled as we request, if at all.

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).

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.

We lease certain computer and test equipment under capital lease arrangements. We used net cash for capital leases of approximately $0.9 million, $1.3 million and $0.3 million for the years ended December 31, 2000, December 31, 2001 and December 31, 2002, respectively. Future minimum payments for capital leases aggregated through the year 2005 were approximately $80, 000 as of December 31, 2002.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We continually evaluate the accounting policies and estimates that we use to prepare our financial statements. In general, management’s estimates are based on historical experience, on information from third party professionals and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from those estimates made by management.

Revenue Recognition – Revenue from product sales is recognized after delivery and determination that the fee is fixed and determinable, collectibilty is probable, and after the resolution of uncertainties regarding satisfaction of significant terms and conditions of the customer contract. Revenue for sales to OEMs is recognized 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.

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. The allowance is reduced when a customer which previously was deemed a collection risk makes payments to the Company eliminating the need for the allowance or when a receivable is written off.

Accounting for 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 on assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-offs may be required beyond the writeoff that was previously taken.

Long-lived Assets – We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Long-lived assets totaled $10.3 million as of December 31, 2002 including licensing and software development costs. Upon our determination that the carrying value of the asset is impaired, we would record an impairment charge or loss. Unsuccessful product marketing or continued substantial operating losses could result in an inability to recover the carrying value of the investment; and therefore, might require an impairment charge in the future.

OTHER INFORMATION

Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002, the Chief Executive Officer and Chief Financial Officer of the Company have provided certain certifications to the Securities and Exchange Commission. These certificates accompanied this report when filed with the Commission.

STATUS OF OUR COMMON STOCK LISTING ON NASDAQ NATIONAL MARKET

All companies listed on the Nasdaq National Market are required to have net tangible assets of $4 million, total stockholders’ equity of $10 million, and a minimum bid price of at least $1.00 per share (or a minimum bid price of at least $5.00 per share with no net tangible asset requirement). If a stock fails to trade at that level for thirty consecutive business days, Nasdaq will notify the company of its deficiency in writing. The company then has ninety days to cure the deficiency and return its stock to compliance for at least ten consecutive business days (but possibly longer at the discretion of Nasdaq). We have not complied with Nasdaq’s listing requirement of a minimum bid price of $1.00 per share since September 2002 and were notified of this deficiency by Nasdaq October 8, 2002 and had until January 6, 2003 to cure this deficiency. On March 19, 2003, we received a notice from Nasdaq that the compliance period was extended for an additional ninety days. As a result, we have until April 7, 2003 to satisfy the minimum bid price requirement.

In addition, under the Nasdaq listing requirements, a company’s board of directors must have an audit committee consisting of at least three members comprised solely of “independent directors” (as defined under the Nasdaq rules). Our audit committee currently consists of two members, each of whom we believe qualifies as an “independent director.” Our board of directors has appointed Gerald Y. Hattori to fill a vacant seat on the board effective on April 1, 2003. Mr. Hattori, who is a former Chief Financial Officer of the Company, is expected to serve as the third independent director on our audit committee and may qualify as a “financial expert” (as defined under the new federal corporate governance rules).

Should Nasdaq proceed with delisting, we intend to appeal.

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 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

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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 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 $225.4 million since we began doing business in 1994 through December 31, 2002, 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 $98.2 million in net revenues through December 31, 2002. We have been marketing our GSM base stations since 1996. 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 2003 and we may continue to incur losses beyond 2003. 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 secured commitments for interim financing in the amount of $6 million from TECORE and SCP II, and have drawn down a total of $4.8 million against the Bridge Loan to date but the terms of the interim financing required us to pledge all of our assets as collateral. In addition, there can be no assurances that the final advance under the Bridge Loan of $1.2 million will be made in a timely manner.

If the proposed $16 million financing by SCP II and TECORE does not close, we may be forced to seek protection under the federal bankruptcy laws. If the investors determine not to proceed with the proposed financing or our stockholders do not approve it, the investors could demand payment when the Bridge Notes become due on May 24, 2003. If we are unable to raise capital from another source or are otherwise unable to pay the principal amount and accrued interest on the Bridge Notes when due, the Investors could foreclose on the Bridge Notes and force a sale of our assets, including our intellectual property. Under such circumstances, we are likely to cease operations or file for protection from claims of our creditors under the federal bankruptcy laws.

The proposed financing would significantly dilute the percentage ownership of our existing stockholders. If shares of our common stock are issued to the investors upon conversion of the secured convertible notes to be issued pursuant to the proposed financing and any interest due on the notes or exercise of the warrants, existing stockholders would have their ownership percentage substantially diluted. The number of shares of common stock issuable under the terms of the proposed financing will also affect our earnings per share on a going-forward basis. The larger the number of shares deemed outstanding, the lower the earnings per share will be. The actual effect of the proposed financing on our earnings per share will depend on the level of our earnings in future periods, the actual conversion prices of the notes and the impact of the accounting treatment of the proposed financing.

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-five commercially deployed systems. We had net revenues of $34.3 million, $14.5 million and $23.0 million in 2000, 2001 and 2002, 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.

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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.

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:

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Announcements concerning us or our competitors;

Receipt of substantial orders for base stations;

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. 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 not in compliance with the bid price requirement, although we have until April 7, 2003 to cure this deficiency. 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, 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. We currently do not meet the minimum listing requirements for the Nasdaq National Market (our bid price is less than $1.00 per share). In addition, we may be delisted because our audit committee does not consist of three independent directors.

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. In addition roaming considerations may impede our sales in the North American market.

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;

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 than we are. 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

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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.

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 2002, sales to three customers accounted for 74.9% of our total revenue. In 2001 sales to five customers accounted for 68.6% and in 2000 sales to three customers accounted for 61.0% of total revenue.

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 71% of our outstanding accounts receivable as of December 31, 2002, with one customer representing 63%. Two customers accounted for 73% of our combined outstanding accounts and notes receivable as of December 31, 2001. Three customers represented 62% of our combined outstanding accounts and notes receivable as of December 31, 2000. In the past 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.

If 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 29.1% in fiscal 2002, 19.2% in fiscal 2001 and 11.8% in fiscal 2000. 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;

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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, and nondisclosure agreements and other measures, intellectual 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 a relatively low number of inventions for which patents have been granted or patent applications are 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 or microwave 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 or microwave, to the wireline network.

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Any significant decrease in the cost of digital T-1/E-1 phone lines or microwave 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 or microwave 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.

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, and a noncompetition agreement that we have with Terry Williams, our CTO, 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. See Part I, Employees for discussion of potential impediments to retention of key personnel.

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

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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.

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, 2003. It may be difficult and/or it will be expensive 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 February 3, 2003, 5% or greater stockholders and their affiliates owned 9.6 million shares of our common stock or approximately 40.4% of our outstanding shares of common stock. In addition, three of these stockholders hold the rights to conversion of another 13.0 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. Moreover, if TECORE and SCP II invest $16,000,000 in the Company, under the terms of the proposed financing as currently contemplated, the combined interests of the two investors will constitute a controlling interest in the Company, with TECORE holding a majority of the outstanding shares on a fully diluted basis (assuming conversion of TECORE's Note). 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 denominated, in United States dollars. Accordingly, these funds were not exposed to significant foreign currency risk at December 31, 2002.

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ITEM 8.         FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

FINANCIAL STATEMENTS

Our balance sheet as of December 31, 2002 and 2001 and the related statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2002 and the report of Deloitte & Touche LLP, Independent Auditors (which report expresses an unqualified opinion and includes explanatory paragraphs related to substantial doubt as to the Company's ability to continue as a going concern and to the Company's adoption of Statement of Financial Accounting Standards No. 145), are included as an annex to this annual report on Form 10-K beginning on page F-1.

SELECTED QUARTERLY RESULTS OF OPERATIONS

The following table sets forth unaudited quarterly financial data for the four quarters in 2001 and 2002 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.

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Calculations adjusted from those previously reported for the quarters ended September 30, 2001, December 31, 2001 and June 30, 2002 and September 30, 2002 for effects of reclassification adjustments described in notes to results table above.

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

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.

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James W. Brown has served as a director since November 1997 and as Chairman of the Board since October 1999. He serves as the designee of SCP Private Equity Partners II, LP, one of the Company’s stockholders. Mr. Brown has been a Partner, since 1996, of SCP Private Equity Management, LP and its successors, which manage private equity investment funds. 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. Prior to his public service, he was a partner in a major Philadelphia law firm. 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 was selected as the SBA 2002 Small Business Person of the Year for the Commonwealth of Kentucky. Mr. Maynard attended Michigan Technological University in Houghton, Michigan.

George M. Calhoun has served as a director of the Company since March 2002. He was Chairman and CEO of Illinois Superconductor Corporation (Nasdaq: ISCO) from 1999 until 2002. He has more than 23 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 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.

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 MS in Engineering from the Georgia Institute of Technology and a BS from the United States Military Academy. He holds thirteen 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 more than 24 years Mr. Muirragui several capacities with Siemens Information and Communications Networks, most recently as Director of Quality. Prior to joining Siemens in 1976, Mr. Muirragui held various positions, as a Member of the Technical Staff, at Bell Laboratories. Mr. Muirragui holds a BSEE from Purdue University and a 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 eleven U.S. patents in the wireless field. Mr. Williams holds an MSEE from the Georgia Institute of Technology and a B.S. from Mississippi State University.

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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, 2002 were timely made in accordance with the requirements of the Exchange Act, except that the Form 3 for Mr. Calhoun reporting his appointment by our board of directors that was inadvertently filed late.

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, and (ii) the four highest compensated executive officers who were serving as executive officers at December 31, 2002, (collectively, the “named executive officers”) for services rendered in all capacities with respect to the fiscal years ended December 31, 2000, 2001 and 2002: