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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

Commission file number 000-30993

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

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

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

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

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

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

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

        Based on the closing sale price of the registrant's Class A Common Stock on the Nasdaq National Market System on July 2, 2004, the last business day of the registrant's most recently completed second fiscal quarter, the aggregate market value of voting and non-voting Class A Common Stock held by non-affiliates of the registrant was $136,983,232

        The number of shares outstanding of the registrant's Class A common stock as of March 14, 2005, was approximately 33,782,224.

DOCUMENTS INCORPORATED BY REFERENCE

        (1)   Portions of the Registrant's notice of annual meeting of stockholders and proxy statement to be filed pursuant to Regulation 14A within 120 days after Registrant's fiscal year end of December 31, 2004 are incorporated by reference into Part II and III of this Report.

TABLE OF CONTENTS

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PART I

        In addition to historical information, this Annual Report on Form 10-K contains forward-looking statements, including statements regarding product plans and investing activities that involve risks and uncertainties that could cause actual results to differ materially. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" You should carefully review the risks described under "Risk Factors" herein and in other documents we file from time to time with the Securities and Exchange Commission ("SEC"), including the Quarterly Reports on Form 10-Q to be filed in 2005. When used in this report, the words "expects," "could," "would", "may," "anticipates," "intends," "plans," "believes," "seeks," "targets," "estimates," "looks for," "looks to," variations of such words and similar expressions, as well as statements regarding our focus for the future, are generally intended to identify forward-looking statements. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. We undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this document.

ITEM 1.    Business

Overview

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

        We are a leader in wireless networking equipment for wireless fidelity, or "Wi-Fi," or wireless local area network ("WLAN") and broadband wireless networks or wireless wide area network ("WWAN") markets. We provide wireless solutions for the mobile enterprise, security and surveillance, last mile access, voice and data backhaul and municipal networks. We serve these sectors of the wireless market by selling our systems to service providers, businesses and other enterprises, primarily indirectly through distributors, value-added resellers, products integrators and original equipment manufacturers, and to a lesser extent, directly to end customers through our sales force.

Market Overview

Wi-Fi Market

        Our WLAN product portfolio is positioned to compete primarily in the following three Wi-Fi markets: (i) enterprise mobility, (ii) last-mile access and (iii) municipal wireless networking. Our WLAN products in the enterprise mobility market provide wireless networks inside corporate campuses, production facilities, medical centers, universities and civic centers. Our WLAN products in the last-mile access market connect end-users with a service provider's network enabling home subscribers to operate their desktops, laptops or handheld devices wirelessly within a residential home, multi-residential dwellings, business parks, school districts and rural communities. And lastly, our WLAN products in the municipal wireless networking market enable internet access in high-traffic public facilities or public hot spots such as airport terminals, hotels, convention centers, and cafes and further enable internet access to rural communities and urban networks such as providing wireless networks to governmental agencies across a city or county. These networks consist of access points or bridges that serve as the link between the wire-line network and wireless users, and network interface cards for access devices. Wi-Fi networks are currently based on three main standards: 802.11a which operates in the 5 gigahertz band and offers up to 54 Megabits per second speed, 802.11b which operates in the unlicensed 2.4 gigahertz band and offers up to 11 Megabits per

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second speed, and 802.11g which operates in the 2.4 gigahertz band and delivers up to 54 Megabits per second speed.

        Our WLAN access points and network interface cards support the enterprise mobility, last-mile access and municipal wireless networking markets and all three 802.11 networking standards. Both the enterprise and municipal wireless network markets are experiencing significant growth and intensifying competition, as mobile professionals increasingly require wireless access to corporate information. Enterprise customers for Proxim's Wi-Fi products span the education, retail, finance, health care, manufacturing, transportation industries as well as government.

Broadband Wireless Market

        The broadband wireless market is split into two segments: license-exempt and licensed. Products in this market consist of broadband radio frequency ("RF") equipment that delivers high speed, high capacity voice and data communications over a wireless medium, and include point-to-point radios for voice and data backhaul or to connect two buildings, and point-to-multipoint radios which are used to connect multiple buildings in an enterprise campus or community as well as for public safety and last mile access applications. We currently offer primarily license-exempt broadband wireless products including both point-to-point and point-to-multipoint radios in the 5.8 and 2.4 gigahertz bands. These products are sold to both enterprises and service provider customers.

        Within the broadband wireless license-exempt market, our wireless wide area network or "WWAN" product portfolio is positioned to compete in the following markets:

•

Enterprise Mobility.    Our WWAN systems and products enable enterprises with multiple facilities, including those located in a campus environment, to connect their facilities to expand or establish private computer and communications networks, which support both voice and data.



•

Last-Mile Access.    Our WWAN systems enable wireless networks to be extended to apartment complexes, business parks, school districts and rural communities.



•

Municipal Wireless Networks.    Our WWAN systems enable communities, government entities and private enterprises to rapidly and cost-effectively establish wide-area networks across municipalities, towns or cities, connecting their dispersed facilities to support voice, data and video networks.



•

Voice and Data Backhaul.    Our WWAN point-to-point and point-to-multipoint systems enable cellular and personal communication service providers to connect their base stations to other base stations and to existing wire-line networks in using primarily license-exempt frequencies.



•

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

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

The Proxim Solution

        We believe that our broadband wireless systems address the growing need for bandwidth where digital phone lines or fiber optic cable are either too expensive to deploy in a timely fashion or are unavailable. In

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addition, our systems extend the reach of wired service provider and enterprise networks by providing extended range coverage using our standards-based wireless wide area network or WWAN and wireless local area network or WLAN infrastructure systems.

        We believe that the key benefits of our solutions include:

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

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

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

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

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

        Our broadband wireless access systems have various disadvantages and limitations. In contrast to cellular wireless access solutions, our WWAN systems require near line-of-sight installation, which often requires the network service provider or enterprise network owner to obtain roof rights from third parties. Most of our point-to-point products operate in license-exempt frequencies. Therefore, our systems may experience problems due to radio signal interference, which may occur if multiple wireless systems are operating on the same radio frequencies and in the same license-exempt geographic areas as our systems. As an increasing number of unlicensed products are deployed over time, whether Proxim systems or systems from our competitors, the possibility of interference between systems that operate in the same frequency increases, and in some cases there may not be sufficient frequency available in a given

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geographic location to allow further expansion of a customer's network. Furthermore, standardization has made the WLAN market very competitive.

Strategy

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

        Capitalize on our technology expertise to rapidly introduce new products.    Over the past ten years, we have developed or acquired several core technologies that form the basis of our current product lines and that we intend to use in our future product development. Our dedicated team of engineers has multi-disciplinary technical capabilities, including radio frequency technology, digital signal processing and system software development. We believe integrating these capabilities is highly complex, and we intend to continue to take advantage of our technology expertise to introduce product enhancements and new products in a rapid and cost effective manner.

        Utilize existing customer and partner relationships to expand into new market segments. Some of our main end-user customers and partners include AT&T Wireless Group, Avaya, Cingular Wireless, Dell Computer, Fujitsu, Hewlett-Packard, Motorola, Telefonica, Telmex, Verizon Wireless, China Mobile, China Unicom, and T-Mobile, USA. We intend to build upon our relationships with current customers and partners as they continue to expand their networks and enter new market segments, such as enterprise mobility, public access, campus connectivity, security and surveillance and last mile access.

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

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

Products

        We classify our products into two product lines: WWAN and WLAN product lines. The WWAN product line includes point-to-point Lynx, Tsunami products and point-to-multipoint Tsunami products. The WLAN product line includes ORiNOCO 802.11 access point and client card products. We design our products and systems generally to use common features, components and software.

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

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WWAN Products

        Our point-to-point systems consist of two sets of units each at separate locations. Each unit is first connected to an end-user's network by a cable and then connected by an antenna cable to an antenna, which is usually mounted on a rooftop or tower if the antenna is not integrated with the unit. The two antennae are then aimed at one another to create a wireless connection between the two locations. By using multiple systems, end-users can connect multiple locations to form a more extensive network. Our point-to-multipoint system consists of a base station connected to a wire-line network and an omnidirectional antenna, which can wirelessly communicate with multiple subscriber units connecting remote local area networks to the wire-line network.

        Lynx products.    Our point-to-point Lynx products are primarily used by wireless operators to connect their base stations to other base stations and to existing wire-line networks. These connections comprise the backhaul segments of their networks keeping voice and data wireless and off of leased lines for as long a distance as possible. In addition, these products are also used to establish campus and private networks and to provide fiber extension and last mile access. Our Lynx products are offered in 2.4 GHz and 5.8 GHz bands, a license-exempt spectrum, with a variety of data transmission speeds, ranging from 1.544Mbps to 415 Mbps. Our Lynx products can transmit and receive their maximum data capacity in both directions simultaneously, a feature commonly known as full duplex. Lynx products have a compact, fully integrated design and a built-in network management system. They can be linked together within a network and managed with simple network management protocol, or SNMP, software. SNMP is an industry standard set of rules that governs network management and monitors network devices and their functions. Our Lynx products also include a separate control and diagnostic channel, which remotely monitors the system's status and performance without reducing its carrying capacity.

        Tsunami products.    Our point-to-point Tsunami products primarily enable service providers, businesses and other enterprises to expand or establish private networks by bridging Internet traffic among multiple facilities. In addition, these products are also used to provide last mile access. Tsunami products are currently offered in license-exempt frequencies ranging from 2.4 GHz, 5.3 GHz to 5.8 GHz, with a variety of data transmission speeds ranging from 12 Mbps to 480 Mbps. Like our Lynx products, our Tsunami products offer features including full duplex transmission, fully integrated design and a separate control and diagnostic channel. In addition, our higher capacity Tsunami systems include one or more additional T1 or E1 connections without reducing the carrying capacity of the system. The additional T1 or E1 connection is a standard telecommunications interface that is not based on Internet Protocol and is typically used for voice and/or video.

        Point-to-Multipoint Products.    Our point-to-multipoint systems enable service providers, businesses and other enterprises to cost-effectively connect end-users to a central hub. Businesses and other enterprises may also use these systems to cost-effectively connect multiple facilities within their private networks. Our point-to-multipoint systems are deployed in a hub and spoke configuration consisting of a single central hub and equipment located at remote location. The central hub wirelessly connects to the remote customer premises equipment, prioritizing transmissions and allocating slots of time to each end-user based on a system called time domain multiple access (TDMA). We believe our TDMA technology provides a more efficient use of capacity compared to most alternative technologies to accommodate the peaks and lows of traffic between each end-user and the central hub. Central hubs operate in a variety of frequencies, in various geographic configurations and are capable of supporting hundreds of pieces of equipment at remote locations. The hub unit can also connect to the central office of a carrier or other service provider using our point-to-point technology. The equipment at the remote locations transmit and receive data to and from the central hub at various transmission speeds and frequencies depending on user settings and the capabilities of the individual Tsunami system deployed.

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WLAN Products

        ORiNOCO Access Point.    Our family of ORiNOCO access points offer solutions for enterprises and municipal area networks enabling corporate user access and creation of indoor and outdoor networks in small, medium and large venues. Each of our ORiNOCO access points is a full featured wireless bridge that extends the range of wired Ethernet networks and enables migration from 802.11b, 2.4 GHz, WLANs to 802.11g, 2.4 GHz, WLANs or to 802.11a, 5 GHz, WLANs. With single and dual radio architecture, the ORiNOCO access points provide configuration flexibility and increased network capacity. Our ORiNOCO access points also provide high-level security including WPA and WPA2, which is native to the Windows XP operating system. Our Wireless Distribution System feature enables wireless inter-connectivity of multiple ORiNOCO access points, providing for a variety of wireless infrastructure configurations without the use of additional 10/100T cabling. Web enabled and SNMP network management allow for simple configuration and remote management of each ORiNOCO network. Through a strategic alliance with Wavelink, we also offer a Graphic User Interface for remote management of larger, more complex networks. Through a strategic alliance with Ekahau we offer RF planning tools to assist installers to design wireless networks. We support quality of service (QoS) for voice applications via several different approaches. These include standard WMM, SCCAN and SpectraLink. We believe that the high-performance Wi-Fi compliant ORiNOCO family of access points are ideal WLAN solutions for the enterprise.

        ORiNOCO Client Cards.    Our ORiNOCO client cards deliver mobile convenience, easy installation and a configuration utility that allows wireless users to connect quickly and simply. ORiNOCO client cards for notebooks and desktops work together with all ORiNOCO infrastructure products including access points, residential gateways, and access servers as well as with all third party wireless products supporting the relevant 802.11 IEEE standards. ORiNOCO client cards deliver multiple security levels with various levels of encryption including up to 152-bit WEP, WPA and WPA2 security, delivering enterprise-class security. Packaged client adapters include the following form factors: USB, ISA and PCI adapter for desktop computers, ORiNOCO 802.11a,b,g ComboCard and 802.11 b,g ORiNOCO PC Card for notebook computers and Ethernet and Serial external adapters.

Technology

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

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

        Radio frequency technology.    Microwave technology is the technology used to wirelessly transmit data, voice and video. Microwave technology uses radio frequencies ranging from 1 GHz up to 20 GHz. We have the ability to internally develop microwave circuit board designs as well as qualify, direct and utilize external partners. We believe having both internal and external design capabilities provides us with higher performance, lower production costs, shorter development cycles and the ability to customize our products so that they can more easily be integrated with our existing products and with the networks of our various customers and end-users.

        Digital signal processing technology.    Our products use either proprietary or third-party, standards-based digital signal processing or "DSP" technologies and designs that we either develop specifically for use in wireless systems or adapt to those same wireless systems. Specifically, all of our ORiNOCO WLAN products utilize third-party chipsets that embody the requirements set forth by the 802.11a,b,g standards to

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ensure that we can achieve Wi-Fi standard certification. Currently, all of our Tsunami and Lynx, WWAN products are implemented using our internally developed, proprietary FPGA or ASIC implementation. We believe this combination of technologies has enabled us to introduce a number of high-speed wireless products that we may not have been able to produce otherwise. We believe we can develop flexible, innovative products more quickly than those competitors who do not have similar capabilities. We are currently using our technological expertise in digital signal processing to develop next generation, high-speed wireless systems designed to transcend the indoor and outdoor user domains.

        System software.    Our products are networking products and follow closely the principles set forth in the Open Systems Interconnection or OSI 7 Layer Model which is a guideline for the logical partition of functionality within and between distributed computing machines. Careful consideration is given to when to implement software to run on a host processor and when to implement it in firmware running in the DSP/ASIC/FPGA described above. There are industry practices, trade secrets, and specific industrial knowledge that influence our thinking and guide us to create the software architectures that meet the specific system requirements. We strive to leverage common software elements such the VxWorks operating system and other third party components. We have developed certain unique software capabilities that we believe deliver specific market advantage such as our Wireless Outdoor Routing Protocol (WORP). Nearly all of our systems use SNMP-based software that enables remote monitoring and control and facilitate the integration and compatibility of our products with larger communications networks.

Research and Development

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

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advancing our point-to-multipoint systems;



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adapting our products to additional frequencies and interfaces;



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developing higher speed products;



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increasing the performance of our digital signal processing technology; and



•

designing our products for lower cost, outsourced manufacturing, assembly and testing.

        We devote a substantial portion of our resources to developing new products, enhancing existing products, expanding and improving our core wireless technologies and strengthening our technological expertise. Over the past ten years, we have made and expect to continue to make significant investments in research and development. We invested approximately $19.1 million, $24.2 million and $29.2 million in research and development activities in 2004, 2003 and 2002, respectively.

Sales and Marketing

        We sell our products worldwide to service providers, businesses and enterprise customers, primarily indirectly through distributors, value-added resellers, products integrators and to lesser extent, directly to end-users through our sales force. We also sell through Original Equipment Manufacturers or "OEM" customers. We sell our OEM customers both design-in products for integration into their wireless computing platforms and branded products as private label models. We also seek to stimulate market demand by increasing brand awareness and educating potential customers about the advantages of using our products.

        Although our sales are generally made through distributors or value-added resellers and original equipment manufacturers, our sales force often develops direct relationships with end-users either independently, in which case the sales representative then brings in the distributor or value-added reseller

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

        Any significant decline in direct sales to end-users or in sales to our distributors or value-added resellers, or the loss of any of our major distributors, value-added resellers or OEM customers, could materially adversely affect our revenue.

        Our backlog at December 31, 2004, was approximately $8.3 million, compared with backlog of approximately $6.3 million at December 31, 2003. Backlog includes orders confirmed with a purchase order. Because of the generally short cycle between order and shipment and occasional customer changes in delivery schedules or cancellations of orders, we do not believe that our backlog, as of any particular date is necessarily indicative of the potential actual net sales for any future period. Accordingly, a significant component of our revenue expectations will be based almost entirely on internal estimates of future demand and not on firm customer orders and as a result may have higher risk of not occurring when forecasted. Planned operating expense levels are relatively fixed in the short term and are based in large part on these estimates.

        We have a globally diversified base of end-users consisting of service providers, businesses and other enterprises. The following table summarizes each customer, which accounted for more than 10% of the Company's total revenue in each of the last three years:

*

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

        During the years ended December 31, 2004, 2003 and 2002, international sales accounted for approximately 43%, 41% and 38%, respectively, of our total sales. We expect that our revenue from shipments to international customers to vary but remain significant as a percentage of total revenue.

        Currently, substantially all of our sales are denominated in U.S. dollars. Accordingly, we are not directly exposed to material currency exchange risks other than the risk that exchange rate fluctuations may make our products more expensive for customers outside the United States and, as a result, could decrease international sales. In addition, we face risks inherent in conducting global business. These risks, which are more fully described herein, include extended collection time for receivables, reduced ability to enforce obligations, potential supply constraints resulting in product delivery delays and reduced protection for our intellectual property.

Customer Service

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

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Manufacturing

        Our manufacturing strategy is to supply high quality products in a timely fashion to our customers, while making efforts to maximize our gross margins. We perform those manufacturing tasks internally that we believe cannot be effectively outsourced, but we outsource activities which can be performed more effectively by specialized manufacturing partners. Our ISO 9001-2000 certified manufacturing operation, based in our Sunnyvale, California facility, consists primarily of pilot production, product assembly and product testing for our most complex products, primarily certain of our WWAN point-to-point products. For our higher-volume products, which represent the vast majority of our products and product revenue, we outsource manufacturing and procurement of component parts to contract manufacturers with the expertise and ability to achieve the cost reductions and quick response times to orders that we require, while maintaining our quality standards. This allows us to focus our internal resources on developing new products. For our current Lynx and Tsunami products as well as for the new generation of those products, in the fourth quarter of 2004, we have transitioned to using contract manufacturing partners in the San Francisco Bay Area in conjunction with performing limited production at our Sunnyvale facility. We manufacture our ORiNOCO and Tsunami Multipoint products through contract manufacturers in Asia.

        We depend on single or limited source suppliers for several of the key components used in our products. Any disruptions in the supply of these components or assemblies could delay or decrease our revenues. In addition, even for components with multiple sources, we have experienced, and may continue to experience, shortages due to capacity constraints caused by high industry demand. We do not have any long-term arrangements with our suppliers. If, for any reason, a supplier fails to meet our quantity or quality requirements, or stops selling components to us or to our contract manufacturers at commercially reasonable prices, we could experience significant production delays and cost increases, as well as higher warranty expenses and product reputation problems. Because the key components and assemblies of our products are complex, difficult to manufacture and require long lead times, we may have difficulty finding alternative suppliers to produce our components and assemblies on a timely basis. We have experienced shortages of some key components in the past, which delayed related revenue, and we may experience similar shortages in the future. In addition, because the majority of our products have a short sales cycle of between 30 and 90 days, we may have difficulty in making accurate and reliable forecasts of product needs. As a result, we have in the past and could in the future experience shortages in supply, which have and in the future could delay or decrease revenue because they drive customer cancellations and can induce customers to choose our competitors for their future needs.

        We have limited internal manufacturing capability. There can be no assurance that we will be able to develop or contract for additional manufacturing capacity on acceptable terms on a timely basis if needed. In addition, in order to compete successfully, we will need to continue to achieve continual product cost reductions. Although we intend to achieve cost reductions through engineering improvements, production economies, and manufacturing at lower cost locations including outside the United States, there can be no assurance that we will be able to do so. In addition, our ability to achieve such cost reductions is dependent also on volumes. In order to remain competitive, we must continue to introduce new products and processes into our manufacturing environment, and there can be no assurance that any such new products will not create obsolete inventories related to the older products being replaced. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in developing industries, particularly companies in relatively new and rapidly evolving markets. These risks include:

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an unpredictable customer demand environment;



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limited backlog;



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uncertain acceptance of new products and services;



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competition; and

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•

challenges in managing growth.

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

Competition

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

        In the markets for wireless local area networks or WLAN, we could be at a disadvantage to competitors, particularly Symbol Technologies, Inc. ("Symbol"), Cisco Systems (including Cisco's Linksys product lines and product lines from Airespace, which is presently being acquired by Cisco Systems), 3Com, NetGear, and D-Link, which have broader distribution channels, greater brand recognition, more extensive patent portfolios, more diversified product lines and greater financial resources. In the broadband wireless access market, we have several competitors including without limitation, Alvarion, Ceragon Networks, Stratex Networks, and Harris Corporation all of which have more diversified product lines and greater financial resources.

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

Intellectual Property

        We rely on a combination of patents, trademarks, non-disclosure agreements, invention assignment agreements and other security measures in order to establish and protect our proprietary rights. We have been issued twenty-two U.S. patents that are important to our current business, and we have numerous patent applications pending in the U.S. that relate to our core technologies and product designs. We can offer no assurance that patents will issue from any of these pending applications or, if patents do issue, that the claims allowed will be sufficiently broad to protect our technology. In addition, we can offer no

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assurance that any patents issued to us will not be challenged, invalidated or circumvented, or that the rights granted would adequately protect us. Since U.S. patent applications are maintained in secrecy until patents are issued, and since publication of inventions in the technical or patent literature tends to lag behind such inventions by several months, we cannot be certain that we first created the inventions covered by our issued patents or pending patent applications or that we were the first to file patent applications for such inventions or that we are not infringing on the patents of others. In addition, we have filed, or reserved our rights to file, a number of patent applications internationally. We can offer no assurance that any international patent application will issue or that the laws of foreign jurisdictions will protect our proprietary rights to the same extent as the laws of the United States.

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

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

        The results of any litigation matter are inherently uncertain. In the event of any adverse decision in litigation, we could be required to pay damages and other expenses, to cease the manufacture, use and sale of infringing products, to expend significant resources to develop non-infringing technology, or to obtain licenses to the infringing technology. We cannot make any assurance that these matters will not materially and adversely affect our business, financial condition, operating results or cash flows.

Government Regulation

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

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in this regulatory approval process may force us to reschedule, postpone or cancel the installation of our products by our customers, which may result in significant reductions in our sales.

        In the United States, we are subject to various Federal Communications Commission, or FCC, rules and regulations. Current FCC regulations permit license-exempt operation in certain FCC-certified bands in the radio spectrum. Our wireless products are certified for licensed operation in the 2.5 GHz and 4.9 GHz frequencies and license-exempt operation in the 2.4- 2.4835 GHz, 5.15-5.35 GHz and 5.725-5.825 GHz frequency bands, and we expect they will soon be certified for operation in the recently-allocated 5.470-5.725 GHz frequency band. Operation in these frequency bands is governed by rules set forth in Part 15 of the FCC regulations. The Part 15 rules are designed to minimize the probability of interference to other users of the spectrum and, thus, accord Part 15 systems license-exempt status in the frequency band. In the event that there is harmful interference caused by a Part 15 user, the FCC can require the Part 15 user to curtail transmissions that create interference. In this regard, if users of our products experience excessive interference from primary users, market acceptance of our products could be adversely affected, which could materially and adversely affect our business and operating results. The FCC, however, has established certain standards that create an irrefutable presumption of noninterference for Part 15 users and we believe that our products comply with such requirements. There can be no assurance that the occurrence of regulatory changes, including changes in the allocation of available license-exempt frequency spectrum, changes in the use of allocated frequency spectrum, or modification to the standards establishing an irrefutable presumption of non-interference for unlicensed Part 15 users, would not significantly affect our operations by rendering current products obsolete, restricting the applications and markets served by our products or increasing the opportunity for additional competition.

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

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

•

decrease the growth of the broadband wireless industry;



•

hinder our ability to conduct business internationally;



•

reduce our revenues;



•

affect the costs and pricing of our products;



•

increase our operating expenses; and



•

expose us to significant liabilities.

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

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Recent Financing Activities

Shelf Registration and Stock Subscription Agreement

        On October 26, 2004, we filed a shelf registration statement on Form S-3 (the "Registration Statement") with the Securities and Exchange Commission ("SEC") for the issuance and sale of up to $50 million of our Class A common stock ("Common Stock") and warrants to purchase Common Stock. The Registration Statement was declared effective by the SEC as of November 8, 2004. No sales of securities took place under the Registration Statement in the year ended December 31, 2004, but we sold and issued under the Registration Statement 5,010,000 shares of Common Stock and warrants to purchase 2,505,000 shares of Common Stock to certain investors on February 7, 2005 for aggregate gross proceeds of $9.018 million. As part of the sale of shares, we agreed to issue for each share of our Common Stock purchased, warrants to purchase 0.5 shares of our Common Stock at an exercise price of $2.35 per share. The warrants will become exercisable on August 7, 2005 and for a period of five years may be exercised for cash or on a cashless basis, depending on whether or not an effective registration statement is available for the issuance of the shares underlying the warrants. The aggregate number of shares of Common Stock that can be issued upon exercise of the warrants is 2,505,000. In the event of a major transaction, such as a merger or sale of the Company, the holders of the warrants are entitled to certain cash payment rights depending on the timing and valuation of such a transaction. We anticipate that the valuation of the warrants issued in connection with the Subscription Agreement will be recorded as a liability on our balance sheet in first quarter of 2005 and will be marked to market through the statement of operations at the end of each reporting period. As fully described in "Liquidity and Capital Resources," our S-3 Registration Statement may not be available following the filing of this Annual Report on Form 10-K due to our unaffiliated market capitalization currently being under $75.0 million and thus we would be precluded from issuing registered securities under the shelf registration statement.

Capital Restructuring and Bridge Loan

        On July 30, 2004, we received an aggregate investment of $10 million in cash from several private equity investors, namely, Warburg Pincus Private Equity VIII, L.P ("Warburg Pincus"), BCP Capital, L.P., BCP Capital QPF, L.P. and BCP Capital Affiliates Fund LLC (together "BCP Capital" and with Warburg Pincus, the "Investors"). In exchange for the investment, we issued to Investors 15% Secured Promissory Notes ("Bridge Notes") with an aggregate principal amount equal to their investment of $10 million and a maturity date of June 30, 2005. All principal and accrued interest on the Bridge Notes will convert into our Common Stock and/or warrants to purchase our Common Stock, at the same price and upon the same terms and conditions offered to other investors if prior to June 30, 2005 we close a financing transaction with gross proceeds of $20 million or more through a sale of our Common Stock and/or warrants to purchase our Common Stock. In the event of a change in control or material asset sale prior to our closing such Common Stock transaction, the Bridge Notes will become due and payable upon demand by the holders for an amount equal to one hundred fifty percent (150%) of all unpaid principal and accrued but unpaid interest under the Bridge Notes as of the date of the change in control or material asset sale. This greater amount is only payable by the Company in the event of change in control or material asset sale; if such an event does not occur prior to June 30, 2005, we will be required to pay to the Investors on June 30, 2005 the lesser amount that is equal to the aggregate principal amount and accrued but unpaid interest on the Bridge Notes.

        In connection with the issuance of the Bridge Notes, the Investors agreed to exchange $30 million aggregate principal amount of our Amended and Restated Secured Subordinated Promissory Notes, plus accrued but unpaid interest on each, and $10 million aggregate principal amount of our Senior Secured Promissory Notes, plus accrued but unpaid interest on each, for 490,599 shares of our Series B Preferred Stock. At the time of the transaction, the Amended and Restated Secured Subordinated Promissory Notes and Senior Secured Promissory Notes exchanged by the Investors had aggregate accrued interest of $9 million and aggregate principal and accrued interest of $49 million.

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        In connection with the issuance of the Bridge Notes, we and the Investors agreed that, subject to the approval of our stockholders, the Investors would surrender (i) all of their Series A Preferred Stock, (ii) all of their Series B Preferred Stock and (iii) their warrants to purchase an aggregate of 4,213,346 shares of our Common Stock in exchange for 16,400,000 shares of our Common Stock and 400,000 shares of our newly-issued Series C Preferred Stock. We refer to this transaction as the Exchange. At the special annual meeting of stockholders held October 21, 2004, our stockholders approved the Exchange and the Exchange closed the following day.

        The Series C Preferred Stock issued to the Investors in the Exchange is a mandatorily redeemable, nonvoting security that is not convertible into our Common Stock or any other equity security. The Series C Preferred Stock is not required to be redeemed until its maturity date of October 22, 2012, or the date of an earlier change in control, material asset sale, liquidation or similar event. At issuance the Series C Preferred Stock issued to the Investors had an initial liquidation preference of $100 per share, or $40 million in aggregate. The liquidation preference on the Series C Preferred Stock accretes at 8.75 percent per annum, compounds quarterly, and will have at maturity a fully-accreted value of approximately $80 million. The fully-accreted value of approximately $80 million will also be due upon any earlier change in control, material asset sale, liquidation or similar event.

        We also may redeem the Series C Preferred Stock at any time within the first three years after the date of issuance at its then accreted liquidation preference if the market price of our Common Stock on the Nasdaq National Market remains above $22.50 for a period of 45 consecutive trading days, such prices being subject to certain adjustments. After the third anniversary of the date of issuance, we may redeem the Series C Preferred Stock at any time at its then accreted liquidation preference, if the market price of our Common Stock on the Nasdaq National Market remains above $20.00 for a period of 45 consecutive trading days, such prices being subject to certain adjustments for stock splits, recapitalizations and similar events.

        As more fully described under Note 1 to the Consolidated Financial Statements, Liquidity and Significant Events, upon stockholders' approval in October 2004, the Investors surrendered all of their Series A Preferred Stock, all of their Series B Preferred stock and all of their warrants to purchase our Common Stock for 16.4 million shares of Common Stock and 400,000 shares of Series C Preferred Stock. We evaluated the Exchange under Emerging Issues Task force Topic D-42, "The Effect on the Calculation of Earnings per Share of the Redemption or Induced Conversion of Preferred Stock," with the assistance of a third-party valuation consulting firm and recorded a $44.0 million induced conversion charge in the quarter ended December 31, 2004 related to the excess of the fair value of the Common Stock issued in the transaction to the holders of the preferred stock over the fair value of the securities issuable pursuant to the original conversion terms. This induced conversion charge increased the net loss to arrive at net loss attributable to common stockholders in the calculation of net loss per share attributable to common stockholders.

Credit Facilities

        In December 2002, we entered into a secured credit facility with Silicon Valley Bank (the "Lender"), and then subsequently amended the credit facility in March 2003. On June 13, 2003, in order to secure additional working capital, we entered into a letter agreement (the "Letter Agreement") and an accounts receivable financing agreement, which effectively amended and restated the existing credit facility in its entirety. We subsequently amended the accounts receivable financing agreement (amended, the "Amended A/R Financing Agreement") on July 25, 2003, October 31, 2003, July 31, 2004 and most recently on January 31, 2005.

        Under the Amended A/R Financing Agreement, we may borrow up to $20.0 million in total consisting of (i) up to $10.0 million by financing a portion of our eligible accounts receivable, primarily limited to customers in the United States, and (ii) up to an additional $10 million, under which we are required to

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maintain a compensating cash balance equal to such borrowings. Under this arrangement, the Lender may agree to accept for collection through a lockbox arrangement accounts receivable from us, and in return we will receive advances from the Lender at a rate equal to 80% of accounts receivable from account debtors who are not distributors, and 50% of accounts receivable from account debtors who are distributors, subject to borrowing restrictions on most international accounts and at the discretion of the Lender. After collection of a receivable, the Lender will refund to us the difference between the amount collected and the amount initially advanced to us, less a finance charge applied against the average monthly balance of all transferred but outstanding receivables at a rate per annum equal to the Lender's prime rate plus 1.50 percentage points, or 5.75%, whichever is greater. In addition to a facility fee of $100,000, we must pay each month to the Lender a handling fee equal to 0.25% of the average monthly balance of transferred but outstanding receivables. We must repay each advance upon the earliest to occur of (i) the collection of the corresponding financed receivable, (ii) the date on which the corresponding financed receivable becomes an ineligible receivable pursuant to the terms of the Amended A/R Financing Agreement, or (iii) July 30, 2005.

        Under the Amended A/R Financing Agreement, we may receive temporary advances ("Temporary Overadvances") from the Lender in excess of the availability otherwise applicable under the A/R Financing Agreement, in an amount equal to $4.0 million for advances relating to letters of credit, and the Temporary Overadvances portion of the credit facility may be used to satisfy the financial covenant to maintain at least a $4.0 million bank balance as described below. We may receive Temporary Overadvances under this arrangement through March 31, 2005. This Temporary Overadvances arrangement may be renewed upon agreement by both us and the Lender. Borrowings outstanding under Temporary Overadvances are subject to a finance charge of 1.5% per week.

        Obligations under the amended A/ R Financing Agreement are collateralized by a security interest on all of our assets, including intellectual property, and are senior in lien priority and right of payment to our obligations to the funds affiliated with Warburg Pincus and BCP Capital pursuant to the Bridge Notes issued July 30, 2004. The amended A/ R Financing Agreement requires the consent of the Lender in order to incur debt, grant liens and sell assets. The events of default under the secured credit facility include the failure to pay amounts when due, failure to observe or perform covenants, bankruptcy and insolvency events, defaults under certain of our other obligations and the occurrence of a material adverse change in our business.

        Under the Amended A/ R Financing Agreement, the financial covenants require us to maintain cash and cash equivalents with the Lender and its affiliates in an amount not less than $4.0 million, which may be satisfied by either (i) maintaining cash balances on deposit with Silicon Valley Bank at or in excess of $4.0 million; (ii) borrowing against its eligible accounts receivable under the Amended A/R Financing Agreement; or (iii) utilizing the available borrowing capacity from the Temporary Overadvances portion of this credit facility. If we fail to meet this requirement, we may still remain in compliance with the financial covenants by maintaining a ratio of the total of cash, cash equivalents and accounts receivable approved by the Lender to our current liabilities of at least 5.0 to 1. In addition, we are required to maintain restricted cash balances to the extent that our outstanding letters of credit exceed $4.0 million. We currently maintain substantially all of our cash, cash equivalents and investments at Silicon Valley Bank and its affiliates. In the event of default under the Amended A/ R Financing Agreement, the Lender has the right to offset such cash, cash equivalents and investments against our obligations owing to the Lender. As of December 31, 2004, we complied with all of the financial covenants under this agreement.

        As of December 31, 2004, $3 million borrowings were outstanding under the Amended A/R Financing Agreement. These borrowings were repaid in January 2005.

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Seasonality

        Historically our product revenues have been higher during the last two quarters of the fiscal year. This, however, did not occur during 2004. In addition, our product revenues have historically been significantly higher in the last month of each quarter. This shift may primarily be attributed to the budgetary constraints of the customers in our industry and weather conditions that make an outdoor installation more difficult during the winter.

Employees

        As of December 31, 2004, we had 353 employees, including 49 in manufacturing, 112 in research and development, 154 in sales, marketing and customer service and 38 in finance and administration. We are not a party to any collective bargaining agreement in the United States. We believe that relations with our employees are good.

Executive Officers

        The following information as of March 5, 2005, is provided with respect to each of our executive officers.

        Franco Plastina has served as our Executive Chairman since January 2005 and as Chairman of the Board since December 2003. From May 2003 until January 2005 he served as Chief Executive Officer of the Com pany, and from May 2003 until July 2004 he held the additional office of President of the Company. From March 2003 to April 2003, Mr. Plastina served as Executive in Residence for Warburg Pincus. Previously, Mr. Plastina was with Nortel Networks for 15 years and most recently was President, Metro & Enterprise Networks at Nortel Networks. Mr. Plastina joined Nortel Networks in 1987 and held a number of key executive positions, including President of Wireless and Core Networks, President of Carrier Networks, Vice President and COO of Internet and Service Provider Networks, Vice President of Business Development for Carrier Packet Solutions, and Vice President of Global Mergers and Acquisitions. Prior to joining Nortel Networks, Mr. Plastina was with the Toronto office of PricewaterhouseCoopers.

        Kevin J. Duffy has served as our Chief Executive Officer since January 2005. From August 2004 until December 2004 he held the office of President and Chief Operating Officer of the Company. From April 2003 to July 2004 he was our Senior Vice President of Product Development. He joined Proxim in April 2002 and until March 2003, he was our Vice President and General Manager of WWAN Products. From February 2001 until March 2002, Mr. Duffy was vice president of Home Networking at SIEMENS Information & Communications Mobile. Prior to Siemens, Mr. Duffy held positions with Northern Telecom and Tracor Aerospace and was a non-commissioned officer serving as Avionics Nav/ Com technician in the United States Air Force.

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        Michael D. Angel has served as our Executive Vice President and Chief Financial Officer since April 2004. From March 2003 to April 2004, he was an independent consultant providing financial consulting services for various technology companies. In May 2003, he acted as Vice President and Chief Financial Officer for Omnivision Technologies, Inc. From September 1999 to December 2002, he served as Executive Vice President and Chief Financial Officer for Spectrian Corporation, a wireless infrastructure company. Prior to joining Spectrian Corporation, he held a number of senior finance positions with technology companies, including National Semiconductor and Hitachi Data Systems.

        David E. Olson has served as our Senior Vice President, Global Sales and Operations since October 2004. From April 2003 until September 2004 he was our Senior Vice President of Operations. In late 2002, Mr. Olson served as interim COO for Danger, Inc. From January 2002 to September 2002, Mr. Olson served as President and CEO for iGO, Inc., leading that company's restructuring and eventual acquisition. From November 1999 to December 2001, Mr. Olson served as Vice President of Sales/ Operations/ Services for Sky Stream Networks. From November 1991 to November 1999, Mr. Olson was General Manager and Senior Vice President of Avid Technology. Prior to that, Mr. Olson held management positions at Sun Microsystems.

        Richard J. Tallman has served as our Senior Vice President, Administration and General Counsel since July 2004. He joined Proxim as Vice President and General Counsel in October 2003. From August 1998 to January 2003, Mr. Tallman served as Vice President and Assistant General Counsel, M&A at Nortel Networks where he had global responsibility for the legal aspects of Nortel's mergers, acquisitions, divestitures and corporate development activity. Prior to joining Nortel Networks, Mr. Tallman held senior legal positions at Bay Networks, The ASK Group and Ingres Corporation.

        Gordana Pance has served as our Senior Vice President of Engineering and Product Management since January 2005. From October, 2000 until December 2004, Ms. Pance was Vice President of Engineering for our WAN platforms. Prior to October, 2000, Ms Pance held various engineering management positions at Western Multiplex. Ms. Pance joined Western Multiplex in August 1993.

Available Information

        Proxim makes available free of charge on the Proxim website the Company's annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after Proxim files such material with, or furnishes it to, the Securities and Exchange Commission. The address of the Proxim website is www.proxim.com. You may also read and copy any reports, statements, and other information filed by us at the SEC public reference rooms at 450 Fifth Street, N.W., Washington, D.C. 20549 or at the SEC's other public reference rooms. Our filings with the SEC are also available to the public from commercial document-retrieval services and the website maintained by the SEC at http://www.sec.gov.

Item 2.    Properties

        Our corporate headquarters, primary research and development and manufacturing operations, are located in approximately 139,000 square feet in Sunnyvale, California under leases that expire on August 31, 2009. We also lease a design center in India, occupying approximately 10,000 square feet of office space and sales offices in the U.S, China, Hong Kong, South Korea, Japan, Taiwan, Malaysia, Taiwan, Netherlands, France, Brazil and Mexico. Management considers the above facilities suitable and adequate to meet our current requirements.

        In addition, we closed certain facilities that we were leasing and consequently recorded restructuring charges for future lease commitments, net of estimated future sublease receipts and exit costs related to the closure of these facilities. Please refer to "Results of Operations" and "Liquidity and Capital Resources," under Part II, Item 7, Managements, Discussion and Analysis of Financial Condition and

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Results of Operations, for further description of the restructuring charges and our operating lease commitments, respectively. In those facilities that we have closed, we maintain approximately 80,000 square feet of office space in Sunnyvale, California under a lease and sublease that expires August 31, 2009, approximately 41,000 square feet of office space in Duluth, Georgia under a lease that expires September 30, 2009, approximately 39,000 square feet of office space in Mountain View, California under a lease and sublease that expires March 31, 2006, approximately 16,000 square feet in Austin, Texas under a lease and sublease that expires on March 31, 2005, approximately 6,300 square feet of warehouse space in Santa Clara, California under a lease that expires on October 31, 2005, approximately 11,000 square foot facility in Long Beach, California under a lease that expires in July 2005, approximately 7,000 square feet of office space in Herndon, Virginia under a lease and sublease that expires on December 31, 2006, and approximately 9,000 square feet of office space in Petaluma, California under a lease and sublease that expires on July 31, 2005.

Item 3.    Legal Proceedings

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

Active Technology Corporation

        On February 10, 2004, we received a copy of a complaint filed on February 2, 2004 in Tokyo District Court by Active Technology Corporation, a Japanese-based distributor of our products. The complaint alleges, among other things, that we sold to Active certain defective products, which Active in turn subsequently sold to our customers. Active seeks damages of 559.2 million Japanese yen, which includes the purchase price of the allegedly defective products and replacement costs allegedly incurred by Active. Active seeks to offset the claim of 559.2 million Japanese yen against outstanding accounts payable by Active of 175.3 million Japanese yen to us, resulting in a net claim against Proxim Corporation of 383.9 million Japanese yen. Translated into U.S. dollars on March 2, 2005, Active's net claim is approximately $3.6 million. On October 5, 2004, a hearing was held in the matter and we filed a counterclaim for $2.3 million plus interest for outstanding amounts owed us. Additional hearings were held on January 11, 2005 and February 22, 2005. At the present time, it is not possible to comment upon the likelihood of a favorable or unfavorable outcome of the litigation. We will continue to defend ourselves vigorously against this lawsuit.

Top Global Technology Limited

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

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allege a fraud claim against Agere. Top Global subsequently amended its complaint to allege a claim of fraud against Agere. In September 2004, Top Global voluntarily dismissed Agere from the case, leaving us as the only defendant. Also in September 2004, we moved for summary judgment on all counts on the grounds that we were not a party to the contract upon which Top Global based its claims. On January 18, 2005, the Court granted our motion for summary judgment. The distributor's time to file a notice of appeal has not expired. In the event the distributor appeals, we will continue to defend ourselves vigorously against the lawsuit.

Symbol Technologies, Inc.

        As previously reported, on December 4, 2001, Symbol filed suit in the U.S. District Court for the District of Delaware alleging that Proxim, Inc. infringed four Symbol patents related to systems for packet data transmission. Symbol sought an award for unspecified damages and a permanent injunction against Proxim, Inc. based on alleged patent infringement counterclaims.

        On September 15, 2003, we announced that a jury had rendered a verdict in the first phase of the patent infringement suit with Symbol. On Symbol's claims of patent infringement, the jury found that certain of our products infringe two Symbol's patents and assessed a 6% royalty on the relevant products.

        On July 29, 2004, we announced that the court has denied our equitable defenses and determined that the jury's award of a 6% royalty on our sales of these products from 1995 through September 2003, plus prejudgment interest, results in an award of damages to Symbol of $25.9 million. The District Court entered its judgment on this matter on August 4, 2004.

        On September 13, 2004 we entered into the Settlement Agreement and a Patent Cross License Agreement with Symbol and assigned certain intellectual property to Symbol resolving all outstanding litigation.

        Under the terms of the Settlement Agreement, we agreed to pay Symbol $22.75 million dollars in each of the ensuing ten quarters, commencing with the quarter ended October 1, 2004. The Settlement Agreement provides for lump sum payments of $2.5 million per quarter in each of the first eight quarters, a payment of $1.5 million in the ninth quarter, and a payment of $1.25 million in the tenth quarter. If at any point during the term of the Settlement Agreement, we fail to make any of these payments within 30 days after Symbol has notified us of the failure to pay, Symbol shall have the right to demand immediate payment in the amount of $25,917,669, minus payments made under the agreement and plus applicable interest.

        Under the terms of the Patent Cross License Agreement, Symbol and we have agreed to cross license certain patents, and we have agreed to pay to Symbol a two percent royalty on sales of certain of our wireless LAN products. If we fail to make any of the lump sum payments due under the Settlement Agreement over the period of ten quarters and fail to cure any such missed payment within 30 days thereafter, the Patent Cross License Agreement provides that the royalty rate payable to Symbol on sales of certain of our wireless LAN products covered by the agreement shall increase to five percent until the required payments as set forth in the Settlement Agreement have been made. Also pursuant to the terms of the Patent Cross License Agreement, we and Symbol have entered into a covenant not to sue one another for patent infringement with respect to one another's products through September 13, 2009.

General

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

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        From time to time, in addition to those identified above, we are subject to legal proceedings, claims, investigations and proceedings in the ordinary course of business, including claims of alleged infringement of third-party patents and other intellectual property rights, commercial, employment and other matters. In accordance with generally accepted accounting principles, we make a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel, and other information and events pertaining to a particular case. Litigation is inherently unpredictable. However, we believe that we have valid defenses with respect to the legal matters pending against us. It is possible, nevertheless, that our consolidated financial position, cash flows or results of operations could be affected by the resolution of one or more of these contingencies.

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

        At a special annual meeting of the stockholders of Proxim Corporation held on October 21, 2004, we submitted four proposals to the Company's stockholders for approval. A description of each of the proposals is set forth below.

The Exchange Transaction

        On July 27, 2004, we entered into a Securities Purchase Agreement (the "Purchase Agreement") with Warburg Pincus and BCP Capital (as previously defined, the "Investors") pursuant to which we received cash proceeds of $10 million in aggregate principal amount and the Investors agreed to restructure their equity instruments and debt holdings with us. Please refer to Part I, Item 1, "Business — Recent Financing Activities" for a detailed description of our recent transactions with the Investors and the terms of the Purchase Agreement.

        In order to effect the Exchange transaction contemplated by the Purchase Agreement, whereby the Investors agreed to exchange their Series A Preferred Stock, Series B Preferred Stock and warrants to purchase our Common Stock for an aggregate of 16.4 million shares of our Common Stock and 400,000 shares of our newly-issued Series C Preferred Stock, we agreed to propose the Exchange for approval by our stockholders at the special annual meeting.

        At the special annual meeting, the Exchange was approved by our stockholders. 12,434,042 shares voted in favor of the Exchange, 182,614 shares voted against the Exchange and 15,593 shares abstained from voting.

The Reverse Stock Split

        On August 30, 2004, we received a letter form the Nasdaq Stock Market, Inc. ("Nasdaq") notifying us that for the prior 30 consecutive trading days, the bid price of our common stock had closed below the $1.00 per share minimum required for continued inclusion on the Nasdaq national Market pursuant to Nasdaq's Marketplace Rules. In accordance with the Marketplace Rules, we were provided 180 calendar days, or until February 28, 2005, to regain compliance with this requirement. As a partial response to the delisting proceedings, our Board of Directors proposed a one-for-ten reverse stock split of our outstanding Common Stock. We submitted the reverse stock split to our stockholders for approval at the special annual meeting held on October 21, 2004.

        At the special annual meeting, the reverse stock split was approved by our stockholders. 19,391,335 shares voted in favor of the reverse stock split. 505,174 shares voted against the proposal and 14,751 shares abstained from voting on the reverse stock split.

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Election of Directors

        At the special annual meeting, all nominees to the Board of Directors were re-elected to serve. Accordingly, Board of Directors continued in office in its entirety after the special annual meeting. Effective December 27, 2004, Joseph R. Wright resigned from the Board of Directors.

Ratification of Independent Registered Public Accounting Firm

        At the special annual meeting of stockholders held October 21, 2004, we also submitted to the stockholders for ratification the Audit Committee's choice of PricewaterhouseCoopers, LLP as our independent registered public accounting firm. The ratification of PricewaterhouseCoopers LLP as our independent registered public accounting firm was approved by our stockholders.

        19,863,348 shares voted in favor of ratification of PricewaterhouseCoopers LLP as our independent registered public accounting firm. 35,765 shares voted against ratification of PricewaterhouseCoopers LLP as the Company's independent registered public accounting firm and 12,147 shares abstained from voting on ratification of PricewaterhouseCoopers LLP as our independent registered public accounting firm.

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PART II

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

(a) Market Information

        The following table shows the high and low sales prices of our common stock for the fiscal years ended December 31, 2003 and 2004 as reported on the Nasdaq National Market:

        The closing price of the Company's common stock on the Nasdaq National Market on March 14, 2005 was $1.25.

(b) Holders

        Proxim Corporation Common Stock is quoted on the Nasdaq National Market under the symbol PROX. The Company had 286 stockholders of record as of March 14, 2005.

(c) Dividends

        We have not paid dividends on our Common Stock in the two most recent fiscal years. For so long as our Series C Preferred Stock remains outstanding, we may not declare any dividends on our Common Stock without the affirmative vote of the holders of at least a majority of the Series C Preferred Stock then outstanding.

        Notwithstanding the foregoing, we presently intend to retain our future earnings, if any, to fund the development and growth of our business and, therefore, do not anticipate paying any cash dividends in the foreseeable future.

(d) Equity Plan Information

        The information required by this item is included under the caption, "Equity Plan Information" in our Proxy Statement to be filed in connection with our 2005 Annual Meeting of Stockholders and is incorporated herein by reference.

Item 6.    Selected Financial Data

        You should read the selected consolidated financial data set forth below in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Proxim Corporation's consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. The consolidated statement of operations data for the years ended December 31, 2004, 2003 and 2002 and the consolidated balance sheet data as of December 31, 2004 and 2003 are derived from, and are qualified by reference to, the audited consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. The statement of operations data for the years ended December 31, 2001 and 2000 and the balance sheet data as of December 31, 2002, 2001 and

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2000 are derived from audited financial statements not appearing elsewhere in this Annual Report on Form 10-K. Historical results are not necessarily indicative of results that may be expected for any future period.

        In accordance with the Securities and Exchange Commission's Staff Accounting Bulletin Topic 4C, "Equity Accounts and Change in Capital Structure," we restated all the share and per share data in these consolidated financial statements to reflect the capital structure subsequent to the one-for-ten reverse stock split, which became effective October 25, 2004.

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

        The following discussion (presented in millions, except share and per share amounts) should be read in conjunction with our consolidated financial statements and notes thereto contained elsewhere in this Annual Report on Form 10-K.

        In addition to historical information, this Annual Report on Form 10-K contains forward-looking statements, including statements regarding product plans and investing activities, that involve risks and uncertainties that could cause actual results to differ materially. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in Item 8. You should carefully review the risks described under "Risk Factors" herein and in other documents we file from time to time with the Securities and Exchange Commission ("SEC"), including the Quarterly Reports on Form 10-Q to be filed in 2005. When used in this report, the words "expects," "could," "would", "may," "anticipates," "intends," "plans," "believes," "seeks," "targets," "estimates," "looks for," "looks to," and similar expressions, are generally intended to identify forward-looking statements. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. We undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this document.

Overview

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

        We generate revenue primarily from the sale of our Lynx and Tsunami systems from our WWAN product line, and the sale of 802.11 standards-based products from our WLAN product line. We also generate a small percentage of our revenue from the sale of services and parts and rentals of our systems. Shipments to certain distributors are made under terms allowing certain rights of return, protection against subsequent price declines on our products held by our distributors and credits under co-op marketing programs.

Product Developments

        Proxim, Inc. and Western Multiplex merged in 2002 with the vision of forming a company that has the ability to provide wireless connectivity in any configuration regardless of whether the radios were providing access indoors or outdoors, and regardless of whether or not they were performing a bridging or routing function.

        We introduced several new products in 2004. In the first quarter of 2004, we introduced our new generation of Wi-Fi access points for enterprise customers, starting with our ORiNOCO AP-4000. The AP-4000 is an enterprise-class, tri-mode access point that delivers unprecedented capacity, rigorous security and scalability, and increased reliability and manageability.

        In the third quarter of 2004, we introduced our ORiNOCO AP-700 including support for IEEE 802.11i with AES encryption, the industry's first WPA2 support and more advanced rogue AP and client detection. The new security and performance features of the AP-700 are part of our Release 2.5, a major software enhancement that is now available across the entire family of ORiNOCO access points. Finally, the ORiNOCO AP-700 and AP-4000 now support IEEE 802.11e for prioritized access to wireless media, enabling voice, data and video applications with advanced Quality of Service and fast roaming capabilities.

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        In 2004, we also expanded the capabilities of our point-to-multipoint MP.11 products, which represented the highest growth portion of our product portfolio in 2004. This solution leverages the favorable cost structure of the ORiNOCO AP architecture, and applies our WAN expertise and advanced voice and data networking features. We have also evolved our complete line of point-to-point solutions. Proxim's Lynx family, now based on the G4 architecture, delivers leading performance, advanced management and deployment capabilities for cellular backhaul applications. Our point-to-point solutions provide these same benefits, and now range in performance speeds from 11 Mbps up to 1 Gbps, and range from 1 mile to 60 miles.

        In 2004, we announced a strategic partnership with Intel under a WiMAX co-development and marketing agreement, which includes collaboration on fixed base stations supporting the 802.16a, revision d specification, as well as customer premise equipment for fixed wireless networks. We intend to develop a WiMAX base station marketed as the Proxim Tsunami MP.16. This new base station can be deployed as a cost-effective alternative for enterprise customers and service providers looking to provide high-speed access to their customers.

Capital and Debt Restructuring

        We entered into an agreement with Warburg Pincus and BCP Capital on July 27, 2004. In the three-part transaction we refer to as the Exchange and as discussed in greater detail in Part I, Item 1, "Business", we first received from Warburg Pincus and BCP Capital an aggregate investment of $10 million in exchange for our issuance to the Investors of convertible promissory notes in that amount. The Bridge Notes are due on June 30, 2005 and bear interest at 15% per annum. In the event of a change in control or material asset sale prior to our closing such Common Stock transaction, the Bridge Notes will become due and payable upon demand by the holders for an amount equal to one hundred fifty percent (150%) of all unpaid principal and accrued but unpaid interest under the Bridge Notes as of the date of the change in control or material asset sale. This greater amount is only payable by the Company in the event of change in control or material asset sale; if such an event does not occur prior to June 30, 2005, we will be required to pay to the Investors on June 30, 2005 the lesser amount that is equal to the aggregate principal amount and accrued but unpaid interest on the Bridge Notes. Second, Warburg Pincus and BCP Capital exchanged an aggregate of $49 million of our secured convertible promissory notes, including accrued but unpaid interest thereon, for shares of our Series B Preferred Stock relieving us of our obligation to repay the notes in their entirety on their maturity date of September 30, 2004. Third, after the approval of our stockholders at our special annual meeting of stockholders held on October 21, 2004 as described in Part 1, Item 4 "Submission of Matters to a Vote of Security Holders," Warburg Pincus and BCP Capital surrendered all of their Series A Preferred Stock, all of their Series B Preferred Stock and all of their warrants to purchase our Common Stock in exchange for 16.4 million shares of our Common Stock and 400,000 shares of our newly issued Series C mandatorily redeemable Preferred Stock, which has a face value of $40 million and a liquidation preference that accretes at 8.75% per annum. It is due to be repaid in cash on October 22, 2012 at its fully accreted value of $80 million. In the event of change of control or material asset sale, it is required to be repaid immediately at its fully accreted value of $80 million.

        On October 26, 2004, in order to provide the Company with flexibility in raising capital, we filed a shelf registration statement on Form S-3 (the "Registration Statement") with the Securities and Exchange Commission ("SEC) for the issuance and sale of up to $50 million of our Common Stock and warrant to purchase Common Stock. The Registration Statement was declared effective by the SEC on November 8, 2004. No sales of securities took place under the Registration Statement in the year ended December 31, 2004, but, as described in more detail above, the Company sold and issued under the Registration Statement 5,010,000 shares of Common Stock and warrants to purchase 2,505,000 shares of Common Stock to certain investors on February 7, 2005 for aggregate gross proceeds of $9.018 million. As discussed below, we currently do not expect to be eligible to raise additional capital under the Registration Statement.

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Reverse Stock Split

        In accordance with the Securities and Exchange Commission's Staff Accounting Bulletin Topic 4C, "Equity Accounts and Change in Capital Structure," we restated all the share and per share data in these consolidated financial statements to reflect the capital structure subsequent to the one-for-ten reverse stock split, which became effective October 25, 2004.

Financial Performance

•

Our net product revenue for 2004 was $113.7 million, a 20% decrease over our net product revenue of $142.5 million for 2003. This year to year decrease was primarily due to (i) lower sales of our license-exempt point-to-point voice products generally used for carrier backhaul which we believe was due to carrier consolidation in 2004; (ii) decline in our 802.11 client access cards business as their available market has declined significantly since the functionality is now being integrated into PCs by the OEMs and (iii) lower sales of our access point products particularly during the fourth quarter of 2004. In addition, total revenue was lower in 2004 than 2003 due to the one-time patent license revenue of $6.0 million recognized in the first quarter of 2003, resulting from the patent litigation settlement with Intersil, as described in Note 23 to the consolidated financial statements.

In our fourth quarter of 2004, we experienced a sudden and unexpected decline in our product revenues. Our 2004 fourth quarter revenue was $24.1 million, $7.4 million or 23% less than third quarter revenue of $31.5 million. This decrease was primarily attributable to our WLAN access point and to a lesser extent WLAN client card products. Our WWAN product revenue decreased moderately in a quarter in which we have historically had strong demand. The primary reasons for the decrease in our 2004 fourth quarter WLAN revenue were (i) pricing pressure in our access point products, particularly the ORiNOCO AP-4000 products, which negatively affected volume and price, and (ii) slower than anticipated OEM partner transitions from the ORiNOCO AP-2000 to AP-4000. The relative weakness in the fourth quarter sales of our WWAN products were primarily due to carrier consolidation and unexpected availability issues with Tsunami MP.11 Model 5054R products.

•

In our two key geographies, North America and International, revenue comprised 57% and 43%, respectively, of total revenue in 2004 and 59% and 41%, respectively, of total net revenue in 2003. Year over year, North American and International revenues decreased by 26% and 19%, respectively.



•

Net loss attributable to common stockholders in 2004 was $99.7 million as compared to $133.7 million in 2003. The net loss in 2004 was primarily attributable to accretion of Series A and Series B mandatorily redeemable convertible Preferred Stock, induced conversion charge of $44.0 million associated with our capital and debt restructuring and loss from operations of $56.6 million, which include impairment of intangibles of $12.2 million and restructuring charges of $2.1 million, offset by reversal of royalties charges of $4.8 million recorded in 2003. The net loss incurred in 2003 included restructuring charges for excess and obsolete inventory of $22.5 million, estimated potential royalties and interest charges of $26.9 million related to the litigation with Symbol, restructuring charges of $7.3 million and $22.2 million loss on early extinguishment of debt in relation to our $30 million convertible notes.



•

Gross profit increased by $28.0 million to $41.6 million in 2004 from $13.6 million in 2003. Gross profit for the year ended December 31, 2004 was increased by reversal of previously recorded royalty charges of $4.8 million, which had a 4% impact on our margin and restructuring benefit of $820,000, which had 1% impact on our margin. Gross profit for the year ended December 31, 2003 was reduced by royalty charges of $23.9 million, which had 16% negative impact on our margin and restructuring provision for excess and obsolete inventory of $22.5 million, which had 15% negative impact on our margin.

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•

Combined research and development and selling, general and administrative expenses were reduced by $8.8 million to $64.9 million in 2004 from $73.7 million in 2003, primarily as a result of our continued cost reduction efforts.

        We have incurred substantial losses and negative cash flows from operations during the years ended December 31, 2004, 2003 and 2002, and have an accumulated deficit of $497.5 million as of December 31, 2004. Our revenues declined to $113.7 million in 2004 from $148.5 million in 2003. In addition, our revenues declined by 23% to $24.1 million in the fourth quarter of 2004 from $31.5 million in the third quarter of 2004. In addition, as of December 31, 2004 according to our Settlement Agreement with Symbol, we were required to pay $20.25 million to Symbol over the next eight quarters. As of December 31, 2004, under our credit facility with Silicon Valley Bank, we had a short-term bank loan outstanding of $3.0 million, which we repaid in January 2005. The amended A/R Financing Agreement, our secured credit facility with Silicon Valley Bank, expires in July 2005. In addition, the Temporary Overadvances portion of our A/R Financing Agreement with the Silicon Valley Bank has been subject to monthly renewals. There is no assurance that these credit facilities will continue to be available to us in the future. We currently believe that our continued negative cash flows from operations coupled with the quarterly obligations to Symbol would require that we obtain immediate additional financing if our bank financing facilities were to become unavailable. Additionally, if prior to June 30, 2005 we fail to close a financing transaction with gross proceeds of $20.0 million or more through a sale of our Common Stock and/or warrants to purchase our Common Stock and are required to repay the Bridge Notes of $10.0 million and accrued interest, we will be required to obtain immediate alternative sources of financing to repay the Bridge Notes. Our S-3 Registration Statement may not be available following the filing of this Annual Report on Form 10-K due to our unaffiliated market capitalization currently being under $75.0 million and thus we would be precluded from issuing registered securities under the shelf registration statement. As a result of the foregoing factors, individually or in the aggregate, we have an immediate need for additional financing.

        If we were not able to obtain financing, we would most likely have insufficient cash to pay these obligations, be unable to meet our ongoing operating obligations as they come due in the ordinary course of business, and will be required to seek protection under applicable bankruptcy laws. These matters raise substantial doubt about our ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from this uncertainty.

Critical Accounting Policies, Judgments and Estimates

        The preparation of financial statements and related disclosures in conformity with accounting policies generally accepted in the United States requires us to make judgments, assumptions, and estimates that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. On a regular basis we evaluate our assumptions, judgments and estimates and make changes accordingly. We believe that the assumptions, judgments and estimates involved with the following specific items have the greatest potential impact on our consolidated financial statements, so we consider these to be our critical accounting policies. We discuss below the critical accounting estimates associated with these policies. Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results. For further information on our critical accounting policies, see the discussion in the section titled "Recent Accounting Pronouncements" below and in Note 3 to the Consolidated Financial Statements.

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        We believe that our most critical accounting policies and estimates include the following:

Revenue Recognition

        Product revenue is generally recognized upon shipment when persuasive evidence of an arrangement exists, the price is fixed or determinable, and collectibility is reasonably assured. We grant certain distributors limited rights of return and price protection on unsold products. A provision for estimated future sales returns and warranty costs is recorded at the time revenue is recognized. Under circumstances where future returns cannot be reasonably estimated or where we are obligated to directly bring about resale of the products, revenue is deferred until shipment to value-added resellers and end customers by the distributors. Generally, we have no obligation to provide any modification or customization upgrades, enhancements or other post-sale customer support.

        Revenue from services, such as pre-installation diagnostic testing and product repair services, is recognized over the period for which the services are performed, which is typically less than one month. Revenue from enhanced service contracts is recognized over the contract period, which ranges from one to three years.

        Significant management judgments and estimates must be made in connection with determination of the revenue to be recognized in any accounting period. If we made different judgments or utilized different estimates for any period, material differences in the amount and timing of revenue recognized could result.

Allowance for Doubtful Accounts, Returns and Discounts

        We record estimated reductions to revenue for sales returns, customer programs and incentive offerings including special pricing agreements, price protection and promotions. Additionally, we maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments.

        We reassess each period these allowances by considering factors such as historical experience, credit quality, age of the accounts receivable balances and current economic conditions. Historically, our actual losses and credits have been consistent with these provisions. However, if market conditions were to decline, we may take actions to increase customer incentive offerings, possibly resulting in an incremental reduction of revenue at the time the incentive is offered. Additionally, 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. These factors and unexpected events or significant future changes in trends could result in a material impact to our future statements of operations and cash flows. If we made different judgments or utilized different estimates for any period, material differences in the amount and timing of revenue or bad debt expense recognized could result. Our allowance for doubtful accounts, returns and discounts were 7.7% and 6.6% of total net revenue at December 31, 2004 and 2003, respectively. See Note 7 to our Consolidated Financial Statements for summary of activities during the years reported. Based on our results for the year ended December 31, 2004, a one-percentage point deviation in our allowance for doubtful accounts, returns and discounts would have resulted in an increase or decrease in revenue and/or bad debt expense of approximately $1.1 million.

Warranty Provision

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

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operations. Our reserve for product warranty costs were 1.1% and 0.9% of total net revenue at December 31, 2004 and 2003, respectively. See Note 7 to our Consolidated Financial Statements for summary of activities during the years reported. Based on our results for the year ended December 31, 2004, a one-percentage point deviation in our reserve for product warranty costs, would have resulted in an increase or decrease in cost of sales of approximately $1.1 million.

Valuation of Inventories

        We write down our inventory for estimated excess and obsolete or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs, including reserve for adverse unconditional purchase order commitments to our vendors, may be required. These factors and unanticipated changes in the economic and industry environment could make our estimates differ from actual, thus materially impacting our financial position and results of operations.

Income Taxes

        We use the asset and liability method of accounting for income taxes. Under this method, income tax expense is recognized for the amount of taxes payable or refundable for the current year and for deferred tax liabilities and assets for the future tax consequences of events that have been recognized in an entity's financial statements or tax returns. Management must make assumptions, judgments and estimates to determine our current provision for income taxes and also our deferred tax assets and liabilities and any valuation allowance to be recorded against a deferred tax asset. We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event we were to determine that we would be able to realize our deferred tax assets in the future in excess of our recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, should we determine that we would not be able to realize all or part of our net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made. Our judgments, assumptions and estimates relative to the current provision for income tax take into account current tax laws, our interpretation of current tax laws and possible outcomes of current and future audits conducted by foreign and domestic tax authorities. Changes in tax law or our interpretation of tax laws and the resolution of current and future tax audits could significantly impact the amounts provided for income taxes in our consolidated financial statements. Our assumptions, judgments and estimates relative to the value of a deferred tax asset take into account predictions of the amount and category of future taxable income. Actual operating results and the underlying amount and category of income in future years could render our current assumptions, judgments and estimates of recoverable net deferred taxes inaccurate. Any of the assumptions, judgments and estimates mentioned above could cause our actual income tax obligations to differ from our estimates, thus materially impacting our financial position and results of operations.

Restructuring Costs

        In response to changes in industry and market conditions, we may be required to strategically realign our resources and consider restructuring, disposing of, or otherwise, exiting businesses and/or product lines. Any decision to limit investment in or to dispose of or otherwise exit businesses may result in the recording of special charges, such as inventory and technology related write-offs and workforce reduction costs, charges relating to consolidation of excess facilities, or claims from third parties who were resellers or users of discontinued products. Our restructuring charges included accruals for the estimated costs on facilities. The estimated facility costs were based on our contractual obligations net of estimated sublease

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income, which are affected by changes in real estate market conditions. We reassess this liability each reporting period based on current market conditions. Should facilities operating lease rental rates continue to decrease or should it take longer than expected to find a suitable tenant to sublease these facilities, the actual loss could exceed our estimate by as much as $2.5 million.

Impairment of Goodwill and Intangible Assets

        We assess the useful life or ultimate recoverability of the carrying basis of our long-lived assets, including purchased intangible assets, whenever events or changes in circumstances indicate that their carrying value may not be recoverable through the estimated undiscounted future cash flows resulting from the use of the assets. If we determine that the carrying value of long-lived and other intangible assets may not be recoverable, we measure impairment by using the projected discounted cash-flow method. Additionally, in accordance with SFAS No. 142, we are required to perform impairment tests for goodwill and intangible assets deemed to have indefinite lives on an annual basis and between annual tests if circumstances indicate that they might not be recoverable. During the fourth quarter of 2004, we recorded impairment of purchased intangible assets with definite and indefinite lives of $12.2 million. An impairment of goodwill of $129.1 million was recorded in December 2002. No additional goodwill impairment charges have been recorded since that date. If in the future our estimates or the related assumptions change, we could be required to record additional impairment charges of $10.2 million and $9.7 million for purchased intangible assets and goodwill, respectively.

Derivative Financial Instruments

        We account for derivative financial instruments under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes methods of accounting for derivative financial instruments and hedging activities related to those instruments as well as other hedging activities. Our derivatives comprise warrants issued to investors in connection with the issuance of financing and equity instruments. During the years ended December 31, 2004 and 2003, we recorded in other income, gains on derivatives of approximately $21.8 million and $0.4 million, respectively.

Patent Litigation and other Litigation Costs

        We have been involved in litigation in the normal course of business. The results of any litigation matter are inherently uncertain. In the event of any adverse decision in litigation with third parties that was pending as of December 31, 2004 and those that could arise in the future with respect to patents, other intellectual property rights relevant to our products and defective products, we could be required to pay damages and other expenses, to cease the manufacture, use and sale of infringing products, to expand significant resources to develop non-infringing technology, or to obtain licenses to the infringing technology. These charges may occur in any particular quarter resulting in variability in our operating results.

Recent Accounting Pronouncements

        In December 2004, the FASB issued Statement No. 123 (revised 2004), Share-Based Payment ("SFAS No. 123R"), which replaces SFAS No. 123, Accounting for Stock-Based Compensation, (SFAS No. 123) and supercedes APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS No.123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values beginning with the first interim or annual period after June 15, 2005, with early adoption encouraged. The pro forma disclosures previously permitted under SFAS No. 123 no longer will be an alternative to financial statement recognition. We are required to adopt SFAS No.123R in the third quarter of fiscal 2005, beginning July 2, 2005 and we are currently considering adopting SFAS No. 123R effective January 1, 2005. Under SFAS No. 123R, the Company must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for

33

compensation cost and the transition method to be used at date of adoption. The transition methods include prospective and retroactive adoption options. Under the retroactive option, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The prospective method requires that compensation expense be recorded for all unvested stock options and restricted stock at the beginning of the first quarter of adoption of SFAS 123R, while the retroactive methods would record compensation expense for all unvested stock options and restricted stock beginning with the first period restated. We are evaluating the requirements of SFAS No. 123R and expect that the adoption of SFAS 123R will have a material impact on our consolidated results of operations and earnings per share, particularly in light of our announcement on December 21, 2004 regarding our intent to effect a re-pricing of our outstanding options following stockholder approval.

        We are currently evaluating the method of adoption and what effect the adoption of SFAS No. 123R including the re-pricing of employee stock options under SFAS No. 123R will have on our results of operations and financial condition.

        See Note 3. to the Consolidated Financial Statements in Item 8 for a description of other recent accounting pronouncements, including the expected dates of adoption and estimated effects on results of operations and financial condition.

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Results of Operations

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

Comparison of Years Ended December 31, 2003 and 2004

        Total net revenue.    Revenue consists of product revenue, service revenue and license revenue. Product revenues are reduced by estimated sales returns and allowances for customer programs, incentive offerings and price protection. Provisions for estimated sales returns and allowances, which are based on historical trends, contractual terms and other available information, are recorded at the time revenue is recognized.

        We classify our products into two product lines: Wireless Wide Area Network, or WWAN, product line; and Wireless Local Area Network, or WLAN, product line. The WWAN product line includes point-to-point Lynx and Tsunami products and point-to-multipoint Tsunami products. The WLAN product

35

line includes our ORiNOCO WiFi access point and client card products based on 802.11 standard. Revenue information by product line is as follows (in thousands):

        Two distributors, Tech Data Corporation and Winncom Technologies Inc., accounted for 15.5% and 14.2% of total net revenue during the year ended December 31, 2004, respectively, while one distributor, Tech Data Corporation, accounted for 13.9% of total net revenue during the year ended December 31, 2003.

        Total revenue decreased 23.4% to $113.7 million in 2004 from $148.5 million in 2003. The revenue decrease was primarily attributable to the following factors: (i) lower sales of our license-exempt point-to-point voice products generally used for carrier backhaul which we believe was due to carrier consolidation in 2004; (ii) lower sales our 802.11 client access cards as their available market has declined significantly since the functionality is now being integrated into PCs by the OEMs; (iii) lower sales of our access point products, especially during the fourth quarter of 2004; and (iv) a one-time patent license revenue of $6.0 million recognized in the first quarter of 2003, resulting from the patent litigation settlement with Intersil, as described in Note 23 to the consolidated financial statements.

        Cost of revenue.    Cost of revenue consists primarily of outsourced manufacturing costs, component costs, labor and overhead costs, costs of acquiring finished parts from original equipment manufacturers and original design manufacturers, customer service warranty costs and write-downs of inventory for excess and obsolescence. We currently outsource the vast majority of our manufacturing and supply chain management to a limited number of independent contract manufacturers, who obtain components for our products from suppliers. Accordingly, a significant portion of our cost of revenue consists of payments to these contract manufacturers and component suppliers. The remainder of our cost of revenue is related to our in-house manufacturing operations, which consist primarily of quality control, final assembly, testing and product integration generally for certain lower volume point to point products. We expect to realize lower per unit product costs as we continue to outsource most of our in-house manufacturing as well as have certain of our products produced at lower cost off-shore locations. However, we cannot assure you when or if cost reductions will occur. The failure to achieve these cost reductions could materially adversely affect our gross margins and operating results.

        Cost of revenue decreased 14% to $76.1 million in 2004 from $88.5 million in 2003 primarily due to lower product sales. As a percentage of revenue, cost of revenue increased to 66.9% in 2004 from 59.6% in 2003. The increase in cost of revenue as a percentage of revenue was primarily due to the following two factors: First, increased write downs of estimated excess and obsolete or unmarketable inventories of $3.9 million decreased product gross margin by approximately 3.5%. Second, relatively unchanged overhead and other period costs allocated to lower sales decreased product margin by approximately 6.17%. The deterioration of product margin was partially offset by improved margin performance arising from the sales increase in our next generation, higher margin products.

        Royalty Charges (Benefit).    During the year ended December 31, 2004, we recorded royalty benefit of $3.2 million as compared to a royalty expense of $23.9 million during the year ended December 31, 2003. As of July 2004, we had recorded an accrual in connection with our patent litigation with Symbol for estimated past royalties of $22.9 million and interest of $3.0 million covering the period from 1995 through September 2003 plus a total of $2.8 million for estimated potential royalties and interest covering the

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period from October 2003 to September 2004. On September 13, 2004, we entered into a Settlement Agreement and a Patent Cross License Agreement with Symbol and executed two Patent Assignments in favor of Symbol resolving all outstanding litigation in connection with our patent litigation with Symbol. Our patent litigation with Symbol is discussed in greater detail under Item 3, Legal Proceedings.

        Under the terms of the Settlement Agreement, we agreed to pay Symbol $22.75 million over the ensuing ten quarters, commencing with our quarter ended October 1, 2004. Additionally, under the Patent License Agreement, we agreed to cross license certain patents and pay to Symbol a two percent royalty on sales of certain of our WLAN products. Accordingly, we made a reversal for royalty charges of $4.8 million and interest expense of $3.2 million in our third quarter ended October 1, 2004.

        Restructuring Provision for Excess and Obsolete Inventory.    During the year ended December 31, 2004, we recorded a restructuring benefit from excess and obsolete inventory of $820,000 due to reversal of purchase order commitments that had been settled with the contract manufacturers for less than our initial estimate for adverse purchase order commitments recorded in 2002. During the year ended December 31, 2003 we recorded $22.5 million provision for excess and obsolete inventory as part of our restructuring activities. To mitigate the component supply constraints that have existed in the past, we had built inventory levels for certain components with long lead times and entered into longer-term commitments for certain components. The excess and obsolete inventory charge was calculated based on the inventory levels in excess of the estimated 12-month demand for each specific product family. The following is a summary of the movements in the reserve for excess and obsolete inventory during 2003 and 2004 (in thousands):

        Research and development.    Research and development expenses consist primarily of salaries and related personnel expenses, prototype development expenses, consultant fees and allocated overhead related to the design, development, testing and enhancement of our products and underlying technologies. We expense all research and development expenses as incurred.

        Research and development expenses decreased 21.1% from $24.2 million in 2003 to $19.1 million in 2004. As a percentage of revenue, research and development expense increased to 16.8% in 2004 from 16.3% in 2003. The decrease in research and development expense in total dollars was primarily due to the reduction in workforce implemented in the second quarter of 2003, resulting in decreased personnel and related expenses in the fiscal year 2004 compared to those expenses in the same period of 2003.

        Selling, general and administrative.    Selling, general and administrative expenses consist primarily of salaries, commissions, product marketing, sales support functions, advertising, trade show and other promotional expenses and allocated overhead. Selling, general and administrative expenses decreased by 7.3% to $45.8 million in fiscal 2004 from $49.4 million in fiscal year 2003, primarily due to lower commissions on reduced revenues in 2004 and the workforce reduction implemented in the second quarter of 2003.

        Legal expense for certain litigation.    During the year ended December 31, 2004, we incurred litigation expense of $1.1 million versus $6.8 million in fiscal 2003 primarily in connection with our litigation with Symbol. Please refer to Item 3, Legal Proceedings for a description of this litigation.

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        Amortization of intangible assets.    Amortization of intangible assets decreased to $17.9 million in 2004 from $21.6 million in 2003. The decrease was due to certain intangible assets acquired from the acquisition of the 802.11 WLAN systems business of Agere on August 5, 2002 becoming fully amortized during the third quarter of 2004.

        Impairment of intangible assets.    In December 2004, we concluded there were sufficient indicators to require us to perform an analysis to assess whether any portion of our intangible asset balance was impaired. The analysis, which was performed with the assistance of an independent valuation consulting firm, was done using a fair-value approach based on discounted future cash flows. Based on our analysis, we recognized an impairment charge of $12.2 million to reduce our intangible assets acquired in connection with our acquisitions of Proxim, Inc. and the 802.11 WLAN systems business of Agere Systems, Inc. During 2003, no indicators for asset impairment were present and therefore no impairment charges were recorded.

        Bad debt expense.    During the year ended December 31, 2004 we recorded no bad debt expense. During year ended December 31, 2003, we recorded $2.3 million of bad debt expense in connection with a customer's accounts receivable deemed to be uncollectible. These uncollectible accounts relate to products we had previously sold to the customer and that were subsequently discontinued.

        Restructuring charges for severance and excess facilities.    During the year ended December 31, 2004, we recorded restructuring charges of $2.1 million, consisting of $2.0 million of cash provisions and $0.1 million of non-cash provisions for abandoned property and equipment. The $2.0 million of cash provisions consisted of $1.7 million of operating lease commitments, less estimated future sublease receipts and exist costs related to a portion of the Sunnyvale facility, which was closed in the first quarter of 2004, and $323,000 of severance payments for five employees. The estimated future sublease receipts are based on current comparable rates for leases in the respective markets. If facility rental rates continue to decrease in these markets, or it takes longer than expected, or if the Company is unable to sublease these facilities, the actual costs to close these facilities could exceed the original estimates, and additional restructuring charges totaling as much as $2.5 million could result.

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

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        The following table summarizes the restructuring activities during the years ended December 31, 2003 and 2004 (in thousands):

        The restructuring accruals were presented on the balance sheet as follows (in thousands):

        Interest expense, net.    Interest expense, net decreased $2.9 million from $7.3 million in 2003 to $4.4 million in 2004. The decrease in the interest expense is mainly attributable to reversal of interest expense recorded in connection with the Symbol patent litigation settlement partially offset by higher interest expense on convertible notes. The following table summarizes interest expense, net (in thousands).

        Other income, net.    Other income, net increased $12.9 million to $13.1 million in 2004 from $172,000 in 2003. This increase was primarily attributable to the revaluation of common stock warrants partially

39

offset by higher amortization of debt discount and issuance costs. The following table summarizes other income, net (in thousands).

        Loss on early extinguishment of debt.    Upon stockholders' approval in December 2003, the convertible promissory notes of $30 million were modified to include (1) warrants to purchase 24 million shares of Common Stock; and (2) a right to convert to Series B Preferred Stock at the option of the investors. We determined under Emerging Issues Task Force 96-19, "Debtor's Accounting for a Modification or Exchange of Debt Instruments," that the modification was made with substantially different terms, resulting in the extinguishment of debt. Accordingly, the December note instrument was recorded at fair value and that amount was used to determine the debt extinguishment loss to be recognized and the effective rate of the new instrument. The warrants were also recorded at fair value (See Note 12 to the consolidated financial statements for details). A loss on debt extinguishment of $22.2 million was recorded in the fourth quarter of 2003.

        Income tax provision.    We recorded income tax provision of $799,000 for the year ended December 31, 2004 pursuant to our evaluation of our estimated tax liabilities with respect to our foreign entities, which are generally operating under "cost plus" tax arrangements with foreign jurisdictions. No income tax provision was recorded in 2003.

        Accretion of Series A Preferred Stock redemption obligations.    The accretion of Series A stock represents the quarterly adjustments to the carrying value of the Series A preferred stock, on an effective-interest basis, so that the carrying value will equal the redemption amount at the earliest redemption date. The accretion was recorded to increase the net loss attributable to common stockholders. The accretion decreased from $6.3 million to $5.5 million from the year ended December 31, 2003 to 2004, primarily because the amount represents a full year of accretion in 2003 versus approximately ten months' accretion in 2004. The Series A Preferred Stock was exchanged to Common Stock and newly-issued Series C Preferred Stock on October 22, 2004.

        Accretion of Series B Preferred Stock redemption obligations.    As fully described in Note 1 to the consolidated financial statements, Warburg Pincus and BCP Capital exchanged the $49.0 million in aggregate amount of secured convertible promissory notes, including accrued but unpaid interest of $9.0 million, into 490,599 shares of Series B Preferred Stock, in accordance with the existing terms and conditions of the secured convertible promissory notes on July 30, 2004. The accretion of Series B Preferred Stock represents the quarterly adjustments to the carrying value of the Series B Preferred Stock, on an effective-interest basis, so that the carrying value will equal the redemption amount at the earliest redemption date. The accretion was recorded to increase the net loss attributable to Common Stockholders. The accretion amounted to $1.5 million during 2004 representing approximately three months' accretion from August to October 2004. The Series B Preferred Stock was exchanged to Common Stock and newly-issued Series C Preferred Stock on October 22, 2004.

        Induced conversion charge.    As fully described under Note 1 to the Consolidated Financial Statements, Liquidity and Significant Events, upon stockholders' approval in October 2004, the Investors surrendered all of their Series A Preferred Stock, all of their Series B Preferred stock and all of their warrants to purchase the our Common Stock for 16.4 million shares of Common Stock and 400,000 shares of Series C Preferred Stock. We evaluated the Exchange under Emerging Issues Task force Topic D-42,

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"The Effect on the Calculation of Earnings per Share of the Redemption or Induced Conversion of Preferred Stock," with the assistance of a third-party valuation consulting firm and recorded a $44.0 million induced conversion charge in the quarter ended December 31, 2004 related to the excess of the fair value of the Common Stock issued in the transaction to the holders of the preferred stock over the fair value of the securities issuable pursuant to the original conversion terms. This induced conversion charge increased the net loss to arrive at net loss attributable to common stockholders in the calculation of net loss per share attributable to common stockholders.

Comparison of Years Ended December 31, 2002 and 2003

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

        Prior to the March 26, 2002 merger with Proxim, Inc., we did not have a WLAN product line. Historical WLAN revenue prior to March 26, 2002 of the former Proxim, Inc. and prior to August 5, 2002 for the ORiNOCO products acquired from Agere are not reported in the table below. Revenue information by product line is as follows (in thousands):

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

        Total revenue increased 2.6% from $144.7 million in 2002 to $148.5 million in 2003. Total revenue included product revenue and a one-time patent license fee of $6.0 million recorded in the first quarter of 2003, resulting from the patent litigation settlement with Intersil, as more fully described in Note 23 to the consolidated financial statements. In addition to the license revenue of $6.0 million in 2003, total revenue increased primarily due to the increase in WLAN product revenue attributable in part to the acquisition of the ORiNOCO product line of Agere Systems on August 5, 2002, resulting in the contribution of that product line revenue for the full year in 2003 compared to five months in 2002, and in part to the overall growth in Wi-Fi spending in 2003. The increase in WLAN product revenue was partially offset by a decrease in WWAN product revenue primarily attributable to the continued weakness in the telecom industry spending in 2003.

        Cost of revenue.    Cost of revenue increased 5.7% from $83.7 million in 2002 to $88.5 million in 2003. As a percentage of revenue, cost of revenue increased from 57.8% in 2002 to 59.6% in 2003. The increase in cost of revenue as a percentage of revenue was primarily attributable to the increase in WLAN product

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sales in 2003, as WLAN products generally carry lower gross margins as a percentage of revenue than WWAN products.

        Royalty Charges.    As noted above, on September 15, 2003, we announced that a jury had rendered a verdict in the first phase of the patent infringement suit with Symbol. We recorded an accrual for estimated potential royalty charges of $22.9 million and $2.9 million for interest during the third quarter of 2003 and an accrual for estimated potential royalty charges of $1.0 million and $87,000 for interest during the fourth quarter of 2003. See Note 23 to the consolidated financial statements for further description of the Symbol litigation.

        Restructuring Provision for Excess and Obsolete Inventory.    During the year ended December 31, 2003, we recorded a $22.5 million provision for excess and obsolete inventory as part of our restructuring activities. To mitigate component supply constraints that existed in the past, we had built inventory levels for certain components with long lead times and entered into longer-term commitments for certain components. The excess inventory charges were due to the following factors:

•

A sudden and significant decrease in demand for certain Lynx and Tsunami license-exempt point-to-point, 802.11a and Harmony products;



•

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



•

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



•

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



•

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

        Due to these factors, inventory levels exceeded our requirements based on then current 12-month sales forecasts. The additional excess and obsolete inventory charge was calculated based on the inventory levels in excess of the estimated 12-month demand for each specific product family. The following is a summary of the movements in the reserve for excess and obsolete inventory during the year ended December 31, 2003 (in thousands):

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

        Selling, general and administrative.    Selling, general and administrative expenses remained relatively unchanged from 2002 to 2003. Selling, general and administrative expenses increased from the first half of

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

        Legal expense for certain litigation.    During the year ended December 31, 2003, we incurred litigation expense of $6.8 million primarily in connection with our litigation with Symbol Technologies which was settled in 2004. Please refer to Item 3, Legal Proceedings for a description of this litigation.

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

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

        Impairment of goodwill and intangible assets.    In December 2002, due to the significant decline in forecasted revenue and the cash flows therefrom, we made a complete assessment of the carrying value of all goodwill and other intangibles assets in accordance with SFAS No. 142. First, we determined the fair value of our equity to be less than the carrying value of goodwill. As such, an impairment charge was applicable in accordance with SFAS No. 142 as of December 31, 2002. Then we quantified the goodwill impairment as the amount by which the carrying amount of the asset exceeded the estimated fair value of the asset. The carrying value of goodwill totaling $138.8 million as of December 31, 2002 exceeded the estimated fair value of $9.7 million and, accordingly, we took a charge for the impairment of goodwill of $129.1 million. In December 2003, we performed our annual impairment test of goodwill and determined that no further impairment charge was required.

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

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

        Restructuring charges (benefit) for severance and excess facilities.    During the year ended December 31, 2003, we recorded restructuring charges of $7.3 million, consisting of $24.8 million of cash provisions and $3.3 million of non-cash provisions for abandoned property and equipment, partially offset by a $20.8 million net reversal of restructuring accruals. The $24.8 million of cash provisions consisted of

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

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

        The following table summarizes the restructuring activities during the year ended December 31, 2002:

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

        Purchased in-process research and development.    Purchased in-process research and development or IPR&D consists primarily of acquired technology that has not reached technological feasibility and had no alternative future use as of the date of acquisition. See Note 6 to the consolidated financial statements for additional information regarding the IPR&D projects.

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

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

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

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

        Deemed Series A preferred stock dividend.    In August 2002, in connection with the acquisition of the 802.11 WLAN systems business of Agere Systems, Inc., Warburg Pincus and BCP Capital agreed to collectively invest $75 million in us. These investors received 1,640,000 shares of Series A Mandatorily Redeemable Convertible Preferred Stock ("Series A Preferred Stock") in the amount of approximately $41 million, with a conversion price of approximately $3.06 per share. Please refer to Note 19 to the consolidated financial statements for a further description of the Series A Preferred Stock. At the time of the conversion in August 2002, a deemed preferred stock dividend representing the beneficial conversion feature of the Series A Preferred Stock of $2.7 million was also recorded to increase the loss attributable to holders of our common stock.

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

Liquidity and Capital Resources

        We have incurred substantial losses and negative cash flows from operations during the years ended December 31, 2004, 2003 and 2002, and have an accumulated deficit of $497.5 million as of December 31, 2004. Our revenues declined to $113.7 million in 2004 from $148.5 million in 2003. In addition, our revenues declined by 23% to $24.1 million in the fourth quarter of 2004 from $31.5 million in the third quarter of 2004. In addition, as of December 31, 2004 according to our Settlement Agreement with Symbol, we were required to pay $20.25 million to Symbol over the next eight quarters. As of December 31, 2004, under our credit facility with Silicon Valley Bank, we had a short-term bank loan outstanding of $3.0 million, which we repaid in January 2005. The amended A/R Financing Agreement, our secured credit facility with Silicon Valley Bank, expires in July 2005. In addition, the Temporary Overadvances portion of our A/R Financing Agreement with the Silicon Valley Bank has been subject to monthly renewals. There is no assurance that these credit facilities will continue to be available to us in the future. We currently believe that our continued negative cash flows from operations coupled with the quarterly obligations to Symbol would require that we obtain immediate additional financing if our bank financing facilities were to become unavailable. Additionally, if prior to June 30, 2005 we fail to close a financing transaction with gross proceeds of $20.0 million or more through a sale of our Common Stock

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and/or warrants to purchase our Common Stock and are required to repay the Bridge Notes of $10.0 million and accrued interest, we will be required to obtain immediate alternative sources of financing to repay the Bridge Notes. Our S-3 Registration Statement may not be available following the filing of this Annual Report on Form 10-K due to our unaffiliated market capitalization currently being under $75.0 million and thus we would be precluded from issuing registered securities under the shelf registration statement. As a result of the foregoing factors, individually or in the aggregate, we have an immediate need for additional financing.

        If we were not able to obtain financing, we would most likely have insufficient cash to pay these obligations, be unable to meet our ongoing operating obligations as they come due in the ordinary course of business, and will be required to seek protection under applicable bankruptcy laws. These matters raise substantial doubt about our ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from this uncertainty.

        Cash and cash equivalents decreased $3.8 million from $19.8 million at December 31, 2003 to $16.0 million at December 31, 2004. Cash and cash equivalents increased $3.3 million from $16.5 million at December 31, 2002 to $19.8 million at December 31, 2003.

        Net cash used in operating activities was $17.8 million for the year ended December 31, 2004, primarily due to the net loss after the effect of non-cash charges, a decrease in accrued royalties and increase in accounts receivable, net partially offset by decrease in inventory and restricted cash and other assets and increase in accounts payable and other accrued liabilities. Net cash used in operating activities was $31.0 million for the year ended December 31, 2003, primarily attributable to the net loss after the effect of non-cash charges, an increase in inventory and a decrease in accounts payable, partially offset by a decrease in accounts receivable, a decrease in restricted cash and other assets, an increase in other accrued liabilities, and an increase in accrued royalties and interest.

        Net cash provided by investing activities was $1.8 million for the year ended December 31, 2004 attributable to proceeds from sale of short-term investment of $1.7 million and decrease in restricted cash of $1.2 million partially offset by $1.1 million capital spending. Net cash used in investing activities was $7.5 million for the year ended December 31, 2003, attributable to $2.9 million in capital spending and $10.0 million to purchase a building in Sunnyvale, offset by $500,000 of proceeds from the repayment of a loan to a former officer of the Company, $583,0000 in proceeds from the sale of short-term investments, $3.0 million in proceeds from the sale of the acquired building in Sunnyvale and decrease in restricted cash of $1.2 million.

        Net cash provided by financing activities was $12.3 million for the year ended December 31, 2004 attributable to $3.0 million short-term borrowings, proceeds from $10.0 million Bridge Note and $530,000 from the issuance of Common Stock offset by principal payments on our capital lease commitments of $1.2 million. Net cash provided by financing activities was $41.8 million for the year ended December 31, 2003 attributable to $1.6 million of borrowings on capital lease obligations, $187,000 in proceeds from repayment of notes receivable from stockholders, $40 million in proceeds from the issuance of convertible promissory notes, and $808,0000 from the issuance of common stock as a result of the exercise of employee stock options and employee stock purchase plan purchases offset by principal payments on our capital lease commitments of $832,000.

Contractual Commitments

        We occupy our facilities under several non-cancelable operating lease agreements expiring at various dates through September 2009 which require payment of rent, property taxes, insurance, maintenance and utilities. For the years ended December 31, 2004, 2003 and 2002, we recorded restructuring charges of $19.8 million related to the committed future lease payments for closed facilities, net of estimated future sublease receipts of and reversal of previously recorded provision, which are included in the operating leases caption below. We are also obligated under our Settlement Agreement with Symbol to make

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quarterly royalty payments through 2006. Additionally, we are required to redeem our fully-accreted Series C Preferred Stock at its maturity date of October 22, 2012. The fully-accreted value will also be due upon any earlier change in control, material asset sale, liquidation or similar event. Our future payments under contractual obligations as of December 31, 2004, were as follows (in thousands):

        The short-term bank loan was paid in January 2005, and royalty payment of $2.5 million was made in January 2005. As of December 31, 2004, we had unconditional purchase order and project commitments of $1.3 million, which were included as other accrued liabilities.

Credit Facilities

        In December 2002, we entered into a secured credit facility with Silicon Valley Bank (the "Lender"), and then subsequently amended the credit facility in March 2003. On June 13, 2003, in order to secure additional working capital, we entered into a letter agreement (the "Letter Agreement") and an accounts receivable financing agreement, which effectively amended and restated the existing credit facility in its entirety. We subsequently amended the accounts receivable financing agreement (amended, the "Amended A/R Financing Agreement") on July 25, 2003, October 31, 2003, July 31, 2004 and most recently on January 31, 2005.

        Under the Amended A/R Financing Agreement, we may borrow up to $20.0 million in total consisting of (i) up to $10.0 million by financing a portion of our eligible accounts receivable, primarily limited to customers in the United States; and (ii) up to an additional $10 million, under which we are required to maintain a compensating cash balance equal to such borrowings. Under this arrangement, the Lender may agree to accept for collection through a lockbox arrangement accounts receivable from us, and in return we will receive advances from the Lender at a rate equal to 80% of accounts receivable from account debtors who are not distributors, and 50% of accounts receivable from account debtors who are distributors, subject to borrowing restrictions on most international accounts and at the discretion of the Lender. After collection of a receivable, the Lender will refund to us the difference between the amount collected and the amount initially advanced to us, less a finance charge applied against the average monthly balance of all transferred but outstanding receivables at a rate per annum equal to the Lender's prime rate plus 1.50 percentage points, or 5.75%, whichever is greater. In addition to a facility fee of $100,000, we must pay each month to the Lender a handling fee equal to 0.25% of the average monthly balance of transferred but outstanding receivables. We must repay each advance upon the earliest to occur of (i) the collection of the corresponding financed receivable, (ii) the date on which the corresponding financed receivable becomes an ineligible receivable pursuant to the terms of the Amended A/R Financing Agreement, or (iii) July 30, 2005.

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        Under the A/R Financing Agreement, we may receive temporary advances ("Temporary Overadvances") from the Lender in excess of the availability otherwise applicable under the A/R Financing Agreement, in an amount equal to $4.0 million for advances relating to letters of credit, and the Temporary Overadvances portion of the credit facility may be used to satisfy the financial covenant to maintain at least a $4.0 million bank balance as described below. We may receive Temporary Overadvances under this arrangement through March 31, 2005. This Temporary Overadvances arrangement may be renewed upon agreement by both us and the Lender. Borrowings outstanding under Temporary Overadvances are subject to a finance charge of 1.5% per week.

        Obligations under the amended A/ R Financing Agreement are collateralized by a security interest on all of our assets, including intellectual property, and are senior in lien priority and right of payment to our obligations to the funds affiliated with Warburg Pincus and BCP Capital, pursuant to the Bridge Notes issued in July 2004. The amended A/ R Financing Agreement requires the consent of the Lender in order to incur debt, grant liens and sell assets. The events of default under the secured credit facility include the failure to pay amounts when due, failure to observe or perform covenants, bankruptcy and insolvency events, defaults under certain of our other obligations and the occurrence of a material adverse change in our business.

        Under the Amended A/ R Financing Agreement, the financial covenants require us to maintain cash and cash equivalents with the Lender and its affiliates in an amount not less than $4.0 million, which may be satisfied by either (i) maintaining cash balances on deposit with Silicon Valley Bank at or in excess of $4.0 million; (ii) borrowing against its eligible accounts receivable under the Amended A/R Financing Agreement; or (iii) utilizing the available borrowing capacity from the Temporary Overadvances portion of this credit facility. If we fail to meet this requirement, we may still remain in compliance with the financial covenants by maintaining a ratio of the total of cash, cash equivalents and accounts receivable approved by the Lender to our current liabilities of at least 5.0 to 1. In addition, we are required to maintain restricted cash balances to the extent that our outstanding letters of credit exceed $4.0 million. We currently maintain substantially all of our cash, cash equivalents and investments at Silicon Valley Bank and its affiliates. In the event of default under the Amended A/ R Financing Agreement, the Lender has the right to offset such cash, cash equivalents and investments against our obligations owing to the Lender. As of December 31, 2004, we complied with all of the financial covenants under this agreement.

        As of December 31, 2004, $3 million borrowings were outstanding under the Amended A/R Financing Agreement and were repaid in January 2005.

Restructuring of Leases

        We had been seeking to renegotiate a material lease on a building in Sunnyvale, California that was in excess of the requirements of the business for the foreseeable future. This building was vacated in July 2002, and the net expected lease costs were included in the restructuring charge recorded in the second quarter of 2002, totaling approximately $29.0 million through the expiration of the lease in 2010, net of expected sublease proceeds. The rent rates of this lease were substantially greater than the current local market lease rates, and this unused space represented a negative cash flow of approximately $800,000 per quarter. We were not able to sublease the building since it was vacated in July 2002. In November 2002, we ceased making direct lease payments, and the building owner utilized our cash security deposit to cover the monthly payments and other lease charges. On July 21, 2003, we entered into a letter agreement (as subsequently amended and restated by that certain Purchase Agreement dated September 11, 2003) to buy the leased property and terminate the lease on or before September 12, 2003. On September 12, 2003, we paid approximately $10.0 million to consummate the transaction. Transaction costs included cash consideration of $6.0 million to the building owner, $3.2 million to pay off the mortgage obligation secured by the leased property, $577,000 for prepayment premium, and a total of approximately $200,000 for closing costs and operating costs incurred by the building owner between the date of the letter agreement and the closing. As a result of consummating the transaction, we reversed $26.8 million of previously

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recorded lease obligation restructuring reserves that were no longer required. We also reversed an additional $1.0 million of previously recorded restructuring reserves related to another building lease in Sunnyvale as a result of a reduction of the lease commitments agreed to with the lessor.

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

Other Restructuring Activities

        We have taken steps to reduce our expenses from operations by decreasing research and development and general and administrative expenses in order to begin generating cash flow from operations. These steps were initiated in October 2002, and we recorded approximately $1.9 million of restructuring charges related primarily to severance payments in the fourth quarter of 2002, $8.1 million in the second and third quarters of 2003 and $323,000 during fiscal year 2004.

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

Debt Financing

        On July 30, 2004, we received an aggregate investment of $10 million in cash from several private equity investors, namely, Warburg Pincus and BCP Capital. In exchange for the investment, we issued to Investors Bridge Notes with an aggregate principal amount equal to their investment of $10 million and a maturity date of June 30, 2005. All principal and accrued interest on the Bridge Notes will convert into our Common Stock and/or warrants to purchase our Common Stock, at the same price and upon the same terms and conditions offered to other investors if prior to June 30, 2005 we close a financing transaction with gross proceeds of $20 million or more through a sale of our Common Stock and/or warrants to purchase our Common Stock. In the event of a change in control or material asset sale prior to our closing such Common Stock transaction, the Bridge Notes will become due and payable upon demand by the holders for an amount equal to one hundred fifty percent (150%) of all unpaid principal and accrued but unpaid interest under the Bridge Notes as of the date of the change in control or material asset sale. This greater amount is only payable by the Company in the event of change in control or material asset sale; if such an event does not occur prior to June 30, 2005, we will be required to pay to the Investors on June 30, 2005 the lesser amount that is equal to the aggregate principal amount and accrued but unpaid interest on the Bridge Notes.

        In connection with the issuance of the Bridge Notes, the Investors agreed to exchange $30 million aggregate principal amount of our Amended and Restated Secured Subordinated Promissory Notes, plus accrued but unpaid interest on each, and $10 million aggregate principal amount of our Senior Secured Promissory Notes, plus accrued but unpaid interest on each, for 490,599 shares of our Series B Preferred Stock. At the time of the transaction, the Amended and Restated Secured Subordinated Promissory Notes

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and Senior Secured Promissory Notes exchanged by the Investors had accrued interest of $9 million and aggregate principal and accrued interest of $49 million. The exchange of our promissory notes in the transaction relieved us of the requirement to repay the promissory notes on their maturity date of September 30, 2004.

        In connection with the issuance of the Bridge Notes, we and the Investors agreed that, subject to the approval of our stockholders, the Investors would surrender (i) all of their Series A Preferred Stock, (ii) all of their Series B Preferred Stock and (iii) their warrants to purchase an aggregate of 4,231,055 shares of our Common Stock in exchange for 16,400,000 shares of our Common Stock and 400,000 shares of our newly-issued Series C Preferred Stock. We refer to this transaction as the Exchange. At the special annual meeting of stockholders held October 21, 2004, our stockholders approved the Exchange and the Exchange closed the following day.

        The Series C Preferred Stock issued to the Investors in the Exchange is a mandatorily redeemable, nonvoting security that is not convertible into our Common Stock or any other equity security. The Series C Preferred Stock is not required to be redeemed until its maturity date of October 22, 2012, or the date of an earlier change in control, material asset sale, liquidation or similar event. At issuance the Series C Preferred Stock issued to the Investors had an initial liquidation preference of $100 per share, or $40 million in aggregate. The liquidation preference on the Series C Preferred Stock accretes at 8.75 percent per annum, compounds quarterly, and will have at maturity a fully-accreted value of approximately $80 million. The fully-accreted value of $80 million will also be due upon any earlier change in control, material asset sale, liquidation or similar event.

        We also may redeem the Series C Preferred Stock at any time within the first three years after the date of issuance at its then accreted liquidation preference if the market price of our Common Stock on the Nasdaq National Market remains above $22.50 for a period of 45 consecutive trading days, such prices being subject to certain adjustments. After the third anniversary of the date of issuance, we may redeem the Series C Preferred Stock at any time at its then accreted liquidation preference, if the market price of our Common Stock on the Nasdaq National Market remains above $20.00 for a period of 45 consecutive trading days, such prices being subject to certain adjustments for stock splits, recapitalizations and similar events.

        In the event we fail to close a financing transaction with gross proceeds of $20.0 million or more and were required to repay the Bridge Loan on its maturity date of June 30, 2005, we would be required to obtain immediate alternative sources of financing. If we were not able to obtain an alternative source of financing, we will not have cash to repay the Notes, be unable to meet our ongoing operating obligations as they come due in the ordinary course of business, and may have to seek protection under applicable bankruptcy laws.

Litigation with Symbol

        As more fully described under Item 3: Legal Proceedings, on September 13, 2004 we entered into a Settlement Agreement and a Patent Cross License Agreement with Symbol and assigned certain intellectual property to Symbol resolving all outstanding litigation.

        Under the terms of the Settlement Agreement, we agreed to pay Symbol $22.75 million dollars over our ensuing ten quarters, commencing with the quarter ending October 1, 2004. The Settlement Agreement provides for lump sum payments of $2.5 million per quarter in each of the first eight quarters, a payment of $1.5 million in the ninth quarter, and a payment of $1.25 million in the tenth quarter. If at any point during the term of the Settlement Agreement, we fail to make any of these payments within 30 days after Symbol has notified us of our failure to pay, Symbol shall have the right to demand immediate payment in the amount of $25,917,669, minus payments made under the agreement and plus applicable interest.

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        Under the terms of the Patent Cross License Agreement, Symbol and us have agreed to cross license certain patents, and we have agreed to pay to Symbol a two percent royalty on sales of certain of our wireless LAN products. If we fail to make any of the lump sum payments due under the Settlement Agreement over the next ten quarters and fails to cure any such missed payment within 30 days thereafter, the Patent Cross License Agreement provides that the royalty rate payable to Symbol on sales of certain of our wireless LAN products covered by the agreement shall increase to five percent until the required payments as set forth in the Settlement Agreement have been made. Also pursuant to the terms of the Patent Cross License Agreement, we and Symbol have entered into a covenant not to sue one another for patent infringement with respect to one another's products through September 13, 2009.

        Since the date of the initial jury award of the patent infringement suit in September 2003, we had recorded an accrual for estimated past royalties of $22.9 million and interest of $3.0 million covering the period from 1995 through September 2003 plus total potential royalties and interest of $2.8 million covering the period from October 2003 to July 2, 2004. As a result of the Settlement Agreement, we recorded a non-cash reversal of royalty charges of $4.8 million and interest expense of $3.2 million, totaling $8.0 million during the quarter ended October 1, 2004. This reversal is the difference between the net present value of the $22.75 million settlement and the accrued liability related to the litigation of $28.7 million, which was recorded on our balance sheet prior to the litigation settlement. The initial net present value of the settlement payment was $20.69 million. At December 31, 2004 the net present value was $18.4 million which is included in the balance sheet captions "Accrued royalties and interest" and "Accrued royalties, long-term". The difference between the balance at December 31, 2004 and the sum of the periodic payments will be accreted, using the effective interest rate method, over the payment period as periodic charges to interest expense. As of December 31, 2004 we have made one payment of $2.5 million to Symbol. The second payment of $2.5 million was due on December 31, 2004 and paid on January 4, 2005.

Additional Sources of Financing

        We have incurred substantial losses and negative cash flows from operations during the years ended December 31, 2004, 2003 and 2002, and have an accumulated deficit of $497.5 million as of December 31, 2004. Our revenues declined to $113.7 million in 2004 from $148.5 million in 2003. In addition, our revenues declined by 23% to $24.1 million in the fourth quarter of 2004 from $31.5 million in the third quarter of 2004. In addition, as of December 31, 2004 according to our Settlement Agreement with Symbol, we were required to pay $20.25 million to Symbol over the next eight quarters. As of December 31, 2004, under our credit facility with Silicon Valley Bank, we had a short-term bank loan outstanding of $3.0 million, which we repaid in January 2005. The amended A/R Financing Agreement, our secured credit facility with Silicon Valley Bank, expires in July 2005. In addition, the Temporary Overadvances portion of our A/R Financing Agreement with the Silicon Valley Bank has been subject to monthly renewals. There is no assurance that these credit facilities will continue to be available to us in the future. We currently believe that our continued negative cash flows from operations coupled with the quarterly obligations to Symbol would require that we obtain immediate additional financing if our bank financing facilities were to become unavailable. Additionally, if prior to June 30, 2005 we fail to close a financing transaction with gross proceeds of $20.0 million or more through a sale of our Common Stock and/or warrants to purchase our Common Stock and are required to repay the Bridge Notes of $10.0 million and accrued interest, we will be required to obtain immediate alternative sources of financing to repay the Bridge Notes. Our S-3 Registration Statement may not be available following the filing of this Annual Report on Form 10-K due to our unaffiliated market capitalization currently being under $75.0 million and thus we would be precluded from issuing registered securities under the shelf registration statement. As a result of the foregoing factors, individually or in the aggregate, we have an immediate need for additional financing.

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        If we were not able to obtain financing, we would most likely have insufficient cash to pay these obligations, be unable to meet our ongoing operating obligations as they come due in the ordinary course of business, and will be required to seek protection under applicable bankruptcy laws. These matters raise substantial doubt about our ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from this uncertainty.

        On October 26, 2004, in order to provide us with the flexibility in raising capital, we filed the Registration Statement with the SEC for the issuance and sale of up to $50 million of our Common Stock and warrants to purchase our Common Stock. The Registration Statement was declared effective by the SEC on November 8, 2004. As more fully described in "Liquidity and Capital Resources," our S-3 Registration Statement may not be available following the filing of this Annual Report on Form 10-K due to our unaffiliated market capitalization currently being under $75.0 million and thus we would be precluded from issuing registered securities under the shelf registration statement.

        On February 7, 2005, we entered into Subscription Agreement with several purchasers (the "Purchasers"), pursuant to the terms of which the Purchasers purchased 5,010,000 shares of Common Stock at a purchase price of $1.80 per share, for aggregate gross proceeds of $9.018 million. As part of the sale of shares, we agreed to issue for each share of Common Stock purchased, warrants to purchase 0.5 shares of Common Stock at an exercise price of $2.35 per share. The warrants will become exercisable six months from the issuance of the warrants and may be exercised for cash or on a cashless basis, depending on whether or not an effective registration statement is available for the issuance of the shares underlying the warrants, for a period of five years. The aggregate number Common Stock that can be issued upon exercise of the warrants is 2,505,000. In the event of a major transaction, such as a merger or sale of the Company, the holders of the warrants are entitled to certain cash payment rights depending on the timing and valuation of such a transaction. The shares and warrants were issued and sold under the Registration Statement. We anticipate that the valuation of the warrants issued in connection with the Subscription Agreement will be recorded as a liability on our balance sheet in first quarter of 2005 and will be marked to market through statement of operations at the end of each reporting period.

        On January 27, 2005, we announced that we have engaged Bear, Stearns Co. to explore strategic alternatives for us, including capital raising and merger opportunities. There can be no assurance that additional capital beyond the amounts currently forecasted by us will not be required nor that any such required additional capital will be available on reasonable terms, if at all, at such time or times as required by us. We will need to raise additional funds to meet our obligations, strengthen our financial position, meet our working capital requirements, or take advantage of market opportunities or negotiate strategic opportunities. Our ability to raise funds or negotiate strategic opportunities may be adversely affected by a number of factors relating to us, such as the terms of the Bridge Notes and our other agreements with the Investors, as well as factors beyond our control, including market uncertainty and conditions in the capital markets. There can be no assurance that any financing if strategic opportunities will be available on terms acceptable to us, if at all, and any need to raise additional capital through the issuance of equity or convertible debt securities may result in additional, and perhaps significant dilution.

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RISK FACTORS

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

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

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

We will need to obtain a significant amount of additional capital in the near future and may not be able to secure adequate funds on a timely basis or on terms acceptable to us.

        We have incurred substantial losses and negative cash flows from operations during the years ended December 31, 2004, 2003 and 2002, and have an accumulated deficit of $497.5 million as of December 31, 2004. Our revenues declined to $113.7 million in 2004 from $148.5 million in 2003. In addition, our revenues declined by 23% to $24.1 million in the fourth quarter of 2004 from $31.5 million in the third quarter of 2004. In addition, as of December 31, 2004 according to our Settlement Agreement with Symbol, we were required to pay $20.25 million to Symbol over the next eight quarters. As of December 31, 2004, under our credit facility with Silicon Valley Bank, we had a short-term bank loan outstanding of $3.0 million, which we repaid in January 2005. The amended A/R Financing Agreement, our secured credit facility with Silicon Valley Bank, expires in July 2005. In addition, the Temporary Overadvances portion of our A/R Financing Agreement with the Silicon Valley Bank has been subject to monthly renewals. There is no assurance that these credit facilities will continue to be available to us in the future. We currently believe that our continued negative cash flows from operations coupled with the quarterly obligations to Symbol would require that we obtain immediate additional financing if our bank financing facilities were to become unavailable. Additionally, if prior to June 30, 2005 we fail to close a financing transaction with gross proceeds of $20.0 million or more through a sale of our Common Stock and/or warrants to purchase our Common Stock and are required to repay the Bridge Notes of $10.0 million and accrued interest, we will be required to obtain immediate alternative sources of financing to repay the Bridge Notes. Our S-3 Registration Statement may not be available following the filing of this Annual Report on Form 10-K due to our unaffiliated market capitalization currently being under $75.0 million and thus we would be precluded from issuing registered securities under the shelf registration statement. As a result of the foregoing factors, individually or in the aggregate, we have an immediate need for additional financing.

        If we were not able to obtain financing, we would most likely have insufficient cash to pay these obligations, be unable to meet our ongoing operating obligations as they come due in the ordinary course of business, and will be required to seek protection under applicable bankruptcy laws. These matters raise substantial doubt about our ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from this uncertainty.

        Under the terms of our settlement agreement with Symbol, we agreed, among other things, to pay Symbol $22.75 million over ten quarters. We have made two payments of $2.5 million to Symbol one during our third quarter of 2004 and the other during the first quarter of 2005. We have payment obligations of $2.5 million in each of the next six quarters, including the first quarter of 2005, a payment obligation of $1.5 million in the seventh quarter and a payment obligation of $1.25 million in the eight quarter. Our current cash on hand is insufficient to make all of the required payments to Symbol. If at any point during the term of the settlement agreement, we fail to timely make any of these payments within 30 days after

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Symbol has notified us of our failure to pay, Symbol will have the right to demand immediate payment of the sum of $25,917,669 minus payments previously made under the agreement and plus applicable interest. In this event, we would likely have insufficient funds to fund our operational activities, to make this lump sum payment to Symbol and to meet our obligations under our $10 million convertible Bridge Notes.

        We issued $10 million in convertible Bridge Notes to the Investors on July 30, 2004 and these notes mature June 30, 2005. In the event of a change in control or material asset sale prior to our closing such Common Stock transaction, we will be required to pay to the Investors with respect to the Bridge Notes an amount equal to one hundred fifty percent (150%) of all unpaid principal and accrued but unpaid interest as of the date of the change in control or material asset sale. This greater amount is only payable by the Company in the event of change in control or material asset sale; if such an event does not occur prior to June 30, 2005, we will be required to pay to the Investors on June 30, 2005 the lesser amount that is equal to the aggregate principal amount and accrued but unpaid interest on the Bridge Notes. If we are not able to close a financing transaction by June 30, 2005 with gross proceeds of $20.0 million or more through a sale of our common stock and/or warrants to purchase common stock, we will be required to repay the entire principal and interest under the convertible Bridge Notes in cash. If we are required to repay the convertible Bridge Notes in cash, either on their maturity date or earlier upon an event of default, we would likely have insufficient funds to fund our operational activities and to meet our continuing obligations to Symbol.

        We rely on our secured credit facility with Silicon Valley Bank as a source of liquidity. The credit facility allows us to borrow up to $20 million subject to certain requirements as more fully described in Note 22 to the consolidated financial statements. $10 million of the facility requires that we maintain a compensating balance equal to any borrowings, which could restrict our ability to utilize this portion of the credit facility. In addition, there are financial covenants that require us to maintain a bank balance with Silicon Valley Bank in amounts not less than $4.0 million. The secured credit facility expires in July 2005. Additionally, the temporary overadvance portion of the facility expires on March 31, 2005. The credit facilities may be renewed upon mutual agreement by both us and Silicon Valley Bank. If these facilities become unavailable to us either because of our default under the facility or due to non-renewal of the facility, and we are unable to secure a replacement facility, our liquidity will be significantly impaired.

        Our ability to raise funds may be adversely affected by factors beyond our control, including market uncertainty and conditions in the capital markets. We cannot assure you that any financing will be available on terms acceptable to us or on a timely basis, if at all, and any need to raise additional capital through the issuance of equity or convertible debt securities may result in additional, and perhaps significant, dilution. Furthermore, even if we are able to raise funds in a financing transaction or otherwise, the amount of the funds raised may be insufficient to resolve doubt about our ability to continue as a going concern.

We are not profitable and may not be profitable in the future.

        For the years ended December 31, 2002, 2003 and 2004 we had a net loss attributable to holders of our Common Stock of $244.5 million, $133.7 and $99.7 million, respectively. Our 2004 revenue of $113.7 million was substantially lower than our 2003 revenue of $148.5 million. In addition, our revenue in the fourth quarter of 2004 declined by 23% to $24.1 million compared to the third quarter of 2004. We will continue to have net losses in the future. In order for us to achieve profitability, our revenue will need to significantly increase from its current level. We cannot assure you that our revenue will increase or continue at current levels or that we will achieve profitability or generate cash from operations in future periods.

Our gross profit may decline in the future.

        Our gross profit is affected by both the average selling prices of our systems and our cost of revenue. Historically, decreases in our average selling prices have generally been offset by reductions in our per unit

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product cost. We participate in a highly volatile industry that is characterized by vigorous competition for market share and rapid technological development. Furthermore, our customers and potential customers are increasingly concentrating on limitations and reductions on their capital expenditures as well as return on investment in connection with their purchasing decisions. These factors have resulted in aggressive pricing practices and growing competition both from start-up companies and from well-capitalized wireless networking equipment providers. Manufacturers of wireless networking equipment are experiencing price pressure, which has resulted in downward pricing pressure on our products particularly WLAN access point products. Our ability to achieve profitability in the future is dependent upon our ability to improve manufacturing efficiencies, effectively and efficiently outsource manufacturing, reduce costs of materials used in our products, and to continue to introduce new products and product enhancements. We cannot assure you, however, that we will achieve any reductions in per unit product cost in the future or that any reductions will offset the effects of downward pricing pressures on our products. Any inability by us to effectively respond to these downward pricing pressures may cause our gross profit to decline in the future.

In the event the Company is sold, the sales price payable to Common Stockholders may be less than the prevailing market price due to the aggregate liquidation preferences of the Series C Preferred Stock and Bridge Notes.

        On January 27, 2005, we announced that we have engaged Bear, Stearns Co. to explore strategic alternatives for us, including capital raising and merger opportunities. The fully-accreted value of $80 million of Series C Preferred Stock will be due upon any change in control, material asset sale, liquidation or similar event. Additionally, the Bridge Notes will become due and payable upon demand by the holders for an amount equal to one hundred fifty percent (150%) of all unpaid principal and accrued but unpaid interest under the Bridge Notes as of the date of the change in control or material asset sale. This greater amount is only payable by the Company in the event of change in control or material asset sale; if such an event does not occur prior to June 30, 2005, we will be require to pay to the Investors on June 30, 2005 the lesser amount that is equal to the aggregate principal amount and accrued but unpaid interest on the Bridge Notes. In the event of a merger or sale of the Company, we cannot assure you that the sales proceeds will exceed these liquidation preferences or there will be sufficient proceeds, if any, available to the Common Stockholders.

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

        The trading prices of our Common Stock has been subject to wide fluctuations and substantial declines recently, and such trend is likely to continue with respect to the trading price of our Common Stock. The trading price of our Common Stock may fluctuate in response to a number of events and factors, including:

•

quarterly decline in revenues and operating results;



•

potential for bankruptcy;



•

dilution as a result of an immediate need to raise new financing;



•

announcements of innovations and new products;



•

strategic developments or business combinations by us or our competitors;



•

changes in our expected operating expense levels;



•

changes in financial estimates including our ability to meet its future revenue and operating profit or loss projections;



•

recommendations of financial and industry analysts;

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•

impact on our financial statements and results of our adoption of FAS 123R;



•

performance of our competitors;



•

the operating and securities price performance of comparable companies; and



•

news reports relating to trends in the wireless communications industry.

        We have frequently not met our revenue and/or earnings (loss) per share projections in the past, most recently in the quarters ended April 2, 2004, July 2, 2004 and December 31, 2004. In addition, since our operating losses have been greater than expected, our need for additional capital has increased.

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

Our Common Stockholders will experience immediate dilution if we are able to convert our outstanding Bridge Notes.

        On July 30, 2004, we received $10.0 million from the Investors in exchange for a new convertible bridge note. If we close a financing transaction involving the sale of Common Stock or warrants to purchase Common Stock that results in gross proceeds to us of at least $20.0 million, the principal and accrued interest on the convertible bridge note will convert into Common Stock and/or warrants to purchase Common Stock, at the same price and upon the same terms and conditions offered in the financing transaction. The ownership of the holders of our Common Stock outstanding at the time of the conversion will experience immediate dilution as a result of such issuance to the Investors and the Common Stock outstanding might decline in value as a result.

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

        As a result of the Exchange consummated October 22, 2004 and the sale of Common Stock and warrants on February 7, 2004 under the Shelf Registration Statement, a small number of institutional investors hold a significant percentage of our Common Stock. As of March 2, 2005, Warburg Pincus and BCP Capital own an aggregate of approximately 49% of our Common Stock.

        As a result of their ownership as described above, the holders are able to exert significant influence over actions requiring the approval of our stockholders, including many types of change of control transactions and any amendments to our certificate of incorporation. The interests of the holders described above may be different than those of other stockholders of our company.

Holders of our Series C Preferred Stock have certain rights that are senior to those of the holders of our Common Stock.

        Holders of our Series C Preferred Stock are entitled to receive certain benefits not available to holders of our Common Stock. In particular:

•

each share of Series C Preferred Stock has an initial liquidation preference of $100.00 and the liquidation preference bears interest at an annual rate of 8.75%, compounded quarterly, for eight years from the date of issuance. The liquidation preference is subject to adjustments in the event we undertake a business combination or certain other transactions, or we are liquidated or dissolved;

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•

on October 22, 2012, we will be required to redeem all outstanding shares of Series C Preferred Stock, if any, for cash equal to their liquidation preference plus accrued and unpaid dividends. The redemption right of our Series C Preferred Stock may be senior to any claim of our common stock on the Company's assets and is senior to all of our current debt obligations except for the credit facility we maintain with Silicon Valley Bank;



•

in the event of a change in control of our company, we are required to redeem in cash or readily marketable securities all of the Series C Preferred Stock at a price per share in cash equal to the liquidation preference of the Series C Preferred Stock as if it had fully accreted through the eighth anniversary of the issuance of the Series C Preferred Stock plus following the eighth anniversary of the issuance of the Series C Preferred Stock, an amount equal to the unrecognized accretion, if any, up to but not including the redemption date;



•

in the event that we participate in any sale of our assets (i) that does not constitute a business combination and (ii) as a result of which sale our revenues for the prior twelve-month period would have declined by 40% or more on a pro forma basis giving effect to such asset sale (a "Material Asset Sale"), each holder of shares of Series C Preferred Stock has the right to require us to repurchase such holder's shares of Series C Preferred Stock, in whole or in part, at such holder's option, at a price per share in cash equal to the liquidation preference as if the Series C Preferred Stock had fully accreted through the eighth anniversary of the issuance of the Series C Preferred Stock plus following the eighth anniversary of the issuance of the Series C Preferred Stock, an amount equal to the unrecognized accretion, if any, up to but not including the date of the Material Asset Sale; and



•

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