PROXIM CORP - 10-Q Quarterly Report

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PROXIM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS

	April 1, 2005			December 31, 2004
	(In thousands, except share and per share data)
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	12,117			$	16,003
Accounts receivable, net	5,522				6,050
Inventory	10,470				13,020
Other current assets	2,507				2,238
Total current assets	30,616				37,311
Property and equipment, net	5,407				5,981
Goodwill	9,726				9,726
Intangible assets, net	9,227				10,184
Restricted cash	—				20
Other assets	385				385
Total assets	$	55,361			$	63,607
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	6,469			$	8,440
Short-term bank loan, secured	—				3,000
Capital lease obligations, current	619				893
Accrued royalties and interest, current	11,559				11,808
Other accrued liabilities	20,490				20,017
Convertible bridge notes	10,000				10,000
Total current liabilities	49,137				54,158
Capital lease obligations, long-term	14				49
Accrued royalties, long-term	4,401				6,579
Long-term debt	101				101
Restructuring accruals, long-term	6,444				6,977
Common stock warrants	151				—
Series C mandatorily redeemable preferred stock (authorized 400,000 shares; 400,000 shares issued and outstanding at April 1, 2005 and December 31, 2004)	41,559				40,671
Total liabilities	101,807				108,535
Commitments and contingencies (Notes 15 and 17)
Mandatorily redeemable convertible preferred stock: authorized 24,600,000 shares; no shares issued and outstanding at April 1, 2005 and December 31, 2004	—				—
Stockholders’ deficit:
Common stock, Class A, par value $.01; authorized 390,000,000 shares: 38,000,777 and 32,972,511 shares issued and outstanding at April 1, 2005 and December 31, 2004, respectively	380				330
Common stock, Class B, par value $.01; authorized 1,000,000 shares: no shares issued and outstanding at April 1, 2005 and December 31, 2004	—				—
Treasury stock, at cost; 4,218,553 shares at April 1, 2005 and December 31, 2004	(21,585		)		(21,585		)
Additional paid-in capital	482,086				474,342
Deferred stock compensation	(1,559		)		—
Notes receivable from stockholders	(529		)		(529		)
Accumulated deficit	(505,239		)		(497,486		)
Total stockholders’ deficit	(46,446		)		(44,928		)
Total liabilities, mandatorily redeemable convertible preferred stock and stockholders’ deficit	$	55,361			$	63,607

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

PROXIM CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Three Months Ended
	April 1, 2005			April 2, 2004
	(In thousands)
	(Unaudited)
Cash flows from operating activities:
Net loss	$	(7,753	)	$	(15,822	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	1,474			5,949
Amortization of debt discount on convertible notes and issuance costs	—			2,892
Amortization of warrants issued to customer	174			174
Amortization of deferred stock compensation	229
Provision for excess and obsolete inventory and lower of cost or market	1,526			300
Restructuring charges	410			2,167
Loss on disposal of property and equipment	—			350
Deferred income taxes	—			(745		)
Revaluation of common stock warrants	(2,176		)	(5,100		)
Changes in assets and liabilities:
Accounts receivable, net	528			4,016
Inventory	1,024			281
Other assets, current and non-current	(660		)	638
Accounts payable and other accrued liabilities	(1,247		)	(119		)
Accrued royalties and interest	(2,500		)	913
Net cash used in operating activities	(8,971		)	(4,106		)
Cash flows from investing activities:
Purchase of property and equipment	(176		)	(292		)
Decrease in restricted cash	20			636
Net cash provided by (used in) investing activities	(156		)	344
Cash flows from financing activities:
Principal payments on short-term bank borrowing	(3,000		)	—
Principal payments on capital lease obligations	(309		)	(299		)
Issuance of common stock and warrants, net	8,550			437
Net cash provided by financing activities	5,241			138
Net decrease in cash and cash equivalents	(3,886		)	(3,624		)
Cash and cash equivalents at beginning of period	16,003			19,756
Cash and cash equivalents at end of period	$	12,117		$	16,132
Supplemental disclosures:
Cash paid during the period for:
Interest on short-term bank loan	$	5		$	—
Interest on capital lease obligations	$	8		$	21
Non-cash transactions:
Issuance of restricted common stock units	$	1,788		$	—
Accretion of Series A Preferred Stock redemption obligations	$	—		$	2,357

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

PROXIM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1 — The Company

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

Significant Events

On January 27, 2005, the Company announced that it has engaged Bear, Stearns & Co. to explore strategic alternatives for the Company, including capital raising and merger opportunities. The Company remains actively engaged with Bear, Stearns & Co. and is currently in discussion with a potential third party purchaser. There can be no assurance that a transaction will occur and, if a transaction occurred, there can be no assurance that any consideration available to the holders of the Company’s Class A common stock (“Common Stock”) would approach the current market trading value of the Company’s Common Stock given, among other factors, the preferences held by senior equity and debt holders.

On February 7, 2005, the Company 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 proceeds of $9.0 million. After deducting the financial advisor fees, the net proceeds to the Company totaled $8.5 million intended for general corporate purposes, including working capital needs. As part of the sale of shares, the Company 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 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. The shares and warrants were issued and sold under the Company’s previously filed Registration Statement on Form S-3, which was declared effective by the Securities and Exchange Commission on November 8, 2004.

Because the Company’s unaffiliated market capitalization has fallen below $75.0 million, the Company is precluded from issuing additional registered securities under the Registration Statement on Form S-3.

Liquidity

The Company has incurred substantial losses and negative cash flows from operations during the three months ended April 1, 2005 and years ended December 31, 2004, 2003 and 2002, and has an

PROXIM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

accumulated deficit of $505.2 million as of April 1, 2005. The Company’s net revenues declined to $25.4 million in the first quarter of 2005 from $26.7 million in the first quarter of 2004 and $113.7 million in 2004 from $148.5 million in 2003. In addition, as of April 1, 2005, pursuant to the terms of the Settlement Agreement with Symbol Technologies Inc. (“Symbol”), the Company is required to pay $17.8 million to Symbol over the next seven quarters. If at any point during the term of the Settlement Agreement, the Company fails to make any of these payments within 30 days after Symbol has notified the Company of its failure to pay, Symbol has the right to demand immediate payment in the amount of $25.9 million minus payments made under the agreement and plus applicable interest. To date, the Company has made two payments of $2.5 million each. Upon the Company’s failure to timely pay to Symbol the payment due March 31, 2005, Symbol noticed the Company of a breach under the Settlement Agreement and demanded that the Company make the payment within the thirty-day cure period provided by the Settlement Agreement. Symbol subsequently agreed to temporarily waive its rights and to extend the cure period for the payment until May 15, 2005. Unless the Company pays prior to expiration of the extended cure period, Symbol has the right to demand payment in full. The Company’s current cash on hand is insufficient to make such a payment.

The Company’s amended A/R Financing Agreement, its secured credit facility with Silicon Valley Bank, expires in July 2005, and there is no assurance that it will be renewed after expiration. Furthermore, there is no assurance that this facility will even be available or that the Company will be able to borrow up to its maximum availability prior to its expiration, because Silicon Valley Bank may limit borrowings at its discretion or the borrowing base of eligible accounts receivable may be substantially less than the maximum availability under the credit facility, respectively. In addition, the Temporary Overadvances portion of the A/R Financing Agreement with the Silicon Valley Bank expired on April 30, 2005 and was not renewed. Pursuant to the Amendment to Loan Documents executed May 9, 2005, all outstanding and future letters of credit must be fully secured by cash in an amount equal to the greater of (i) 105% of the total face amount of all outstanding letters of credit, or (ii) $100,000 plus 100% of the total face amount of all outstanding letters of credit. As of May 9, 2005, the restricted cash balance associated with outstanding letters of credit which were secured by cash was $2.0 million.

The Company currently believes that its continued negative cash flows from operations coupled with the quarterly obligations to Symbol would require that the Company obtain immediate additional financing if its bank financing facility were to become unavailable. Additionally, if prior to June 30, 2005 the Company fails to close a financing transaction with gross proceeds of $20.0 million or more through a sale of its Common Stock and/or warrants to purchase its Common Stock and is required to repay the $10.0 million of the secured promissory notes (“the “Bridge Notes”), along with accrued but unpaid interest thereon, it will be required to obtain immediate alternative sources of financing to repay the Bridge Notes. Because the Company’s unaffiliated market capitalization has fallen below $75.0 million the Company is precluded from issuing additional registered securities under the Registration Statement on Form S-3. Therefore, it will be difficult for the Company to raise capital through registered offerings of its securities.

As a result of the foregoing factors, individually or in the aggregate, the Company has an immediate need for additional financing. If the Company were not able to obtain financing in the second quarter of 2005, it will have insufficient cash to pay the above mentioned obligations, will be unable to meet its 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 the

PROXIM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from this uncertainty.

Risks and Uncertainties

The Company depends on single or limited source suppliers for several key components used in the Company’s products. The Company depends on single sources for proprietary application specific integrated circuits, or ASICs, and assembled circuit boards for these products. Any disruptions in the supply of these components or assemblies could delay or decrease the Company’s revenues. In addition, even for components with multiple sources, there have been, and may continue to be, shortages due to capacity constraints caused by high demand. The Company does not have any long-term arrangements with any suppliers.

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

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The condensed consolidated balance sheet as of April 1, 2005, the condensed consolidated statements of operations for the three months ended April 1, 2005 and April 2, 2004 and the condensed consolidated statements of cash flows for the three months ended April 1, 2005 and April 2, 2004 are unaudited but each statement includes all adjustments (consisting of normal recurring adjustments) which the Company considers necessary for a fair statement of the financial position, operating results and cash flows for the periods presented.

The condensed consolidated balance sheet at December 31, 2004 has been derived from Proxim Corporation’s audited consolidated financial statements as of that date. Certain information and footnote information normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Results for any interim period are not necessarily indicative of results for any future interim period or for the entire year. The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the

PROXIM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates and such differences may be material to the financial statements.

Principles of Consolidation

The condensed consolidated financial statements include the financial statements of Proxim Corporation and all of its subsidiaries. The financial condition and results of operations for the three months ended April 1, 2005 and April 2, 2004 include the results of acquired subsidiaries from their effective dates. All significant intercompany transactions and balances are eliminated in consolidation.

Reverse Stock Split

In accordance with the Securities and Exchange Commission’s Staff Accounting Bulletin Topic 4C, Equity Accounts and Change in Capital Structure, and the Financial Accounting Standards Board’s Statement of Financial Accounting Standards 128, Earnings Per Share, the Company restated all the share and per share data in these condensed consolidated financial statements to reflect the capital structure subsequent to the one-for-ten reverse stock split, which became effective on October 25, 2004.

Note 2 — Recent Accounting Pronouncements

In November 2004, the Financial Accounting Standards Board (“FASB”), issued Statement No. 151, Inventory Costs — An Amendment of ARB No. 43, Chapter 4 (“SFAS No. 151”). SFAS No. 151 amends the guidance in ARB No. 43, Chapter 4 Inventory Pricing, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Among other provisions, the new rule requires that items such as idle facility expense, excessive spoilage, double freight, and rehandling costs be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal” as stated in ARB No. 43. Additionally, SFAS No. 151 requires that the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 is effective for fiscal years beginning after June 15, 2005 and is required to be adopted by the Company in the first quarter of fiscal 2006, beginning on January 1, 2006. The Company is currently evaluating the effect that the adoption of SFAS No. 151 will have on its consolidated results of operations and financial condition.

PROXIM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

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 No. 123R, while the retroactive methods would record compensation expense for all unvested stock options and restricted stock beginning with the first period restated.

The Company is evaluating the requirements of SFAS No. 123R, and expects that the adoption of SFAS No. 123R will have a material impact on the Company’s consolidated results of operations and earnings per share, particularly in light of the Company’s announcement on December 21, 2004 regarding its intent to effect a re-pricing of outstanding options following stockholder approval at its annual meeting of stockholders to be held on May 16, 2005. The Company is currently evaluating the method of adoption and the effect of adoption of SFAS No. 123R on the Company including the re-pricing of the employee stock options under SFAS No. 123R will have on its results of operations and financial condition.

In December 2004, the FASB issued Statement No. 153 Exchanges of Nonmonetary Assets — An Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions (“SFAS No. 153”). SFAS No. 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No 29 Accounting for Nonmonetary Transactions, and replaces it with an exception for exchanges that do not have commercial substance. SFAS No. 153 specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153, is effective for the fiscal periods beginning after June 15, 2005 and is required to be adopted by the Company in the first quarter of fiscal 2006, beginning January 1, 2006. The Company is currently evaluating the effect that the adoption of SFAS No. 153 will have on its consolidated results of operations, financial condition or cash flows.

Note 3 — Intangible Assets

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

	April 1, 2005		December 31, 2004
Acquired intangible assets, net:
Proxim, Inc.	$	1,255		$	1,412
802.11 WLAN systems business	7,972			8,772
Total intangible assets, net	$	9,227		$	10,184

PROXIM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Acquired intangible assets by categories as of April 1, 2005 and December 31, 2004 consist of the following (in thousands):

	Gross			Accumulated Amortization
	Carrying			April 1,			December 31,
	Amounts			2005			2004
Amortized intangible assets:
Core Technology		$	4,565		$	444		$	—
Customer Relationships		878			375			—
Patents		3,439			2,328			2,190
Total		$	8,882		$	3,147		$	2,190
Unamortized intangible assets:
Tradename		$	3,492

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

Core technology		5 years
Developed technology		3 years
Customer relationships		3 years
Patents		5 years

The Company expects amortization expense of existing intangible assets to be $2.4 million in the remaining fiscal 2005, $2.3 million in fiscal 2006 and $1.0 million in fiscal 2007, at which time existing intangible assets, other than tradename, will be fully amortized assuming no future impairments of those intangible assets or additions as a result of business combinations.

PROXIM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Note 4 — Balance Sheet Components

The following is a summary of certain of the Company’s condensed consolidated balance sheets (in thousands):

	April 1, 2005			December 31, 2004
Accounts receivable, net:
Gross accounts receivable	$	17,832			$	20,801
Less: Deferred revenue	(5,212		)		(5,987		)
Allowances for bad debts, sales returns and price protection	(7,098		)		(8,764		)
	$	5,522			$	6,050
Inventory:
Raw materials	$	1,974			$	2,569
Work-in-process	769				1,512
Finished goods	5,082				5,738
Consignment inventories	2,645				3,201
	$	10,470			$	13,020
Property and equipment, net:
Computer and test equipment	$	11,641			$	11,836
Furniture and fixtures	200				201
Leased assets	2,987				2,987
Leasehold improvements	438				438
	15,266				15,462
Less: accumulated depreciation and amortization	(9,859		)		(9,481		)
	$	5,407			$	5,981
Intangible assets, net:
Core technology	$	4,565			$	4,565
Customer relationships	878				878
Tradename	3,492				3,492
Patents	3,439				3,439
	12,374				12,374
Less: Accumulated amortization	(3,147		)		(2,190		)
	$	9,227			$	10,184
Other accrued liabilities:
Restructuring accruals, current portion	$	3,335			$	3,659
Accrued interest on convertible bridge notes	1,041				645
Accrued unconditional purchase order and project commitments	730				746
Accrued compensation	3,920				3,473
Accrued warranty costs	1,150				1,199
Deferred revenue	4,314				3,784
Professional fees	1,063				1,245
Other accrued liabilities	4,937				5,266
	$	20,490			$	20,017

PROXIM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

The following is a summary of the movements in allowance for bad debt, sales returns and price protection and product warranty costs during the three months ended April 1, 2005 and April 2, 2004 (in thousands):

	Allowance for Bad Debt, Sales Returns and Discounts						Product Warranty Costs
	2005			2004			2005			2004
Balance at beginning of period	$	8,764		$	9,785		$	1,199		$	1,395
Additional provision	2,833			5,218			289			42
Settlements made during the period	(4,499		)	(4,033		)	(338		)	(71		)
Balance at end of period	$	7,098		$	10,970		$	1,150		$	1,366

The following is a summary of the changes in the reserve for excess and obsolete inventory and lower of cost or market during the three months ended April 1, 2005 (in thousands):

Balance as of December 31, 2004	$	6,905
Provision for excess and obsolete inventory and lower of cost or market	1,526
Inventory scrapped	(664		)
Balance as of April 1, 2005	$	7,767

During the three months ended April 1, 2005, the Company recorded a $1.5 million provision for excess and obsolete inventory and lower of cost or market as part of its ongoing review of its inventory reserve requirements. The additional excess and obsolete and lower of cost or market inventory charges were calculated based on the inventory levels in excess of the estimated 12-month sales forecasts and anticipated reduced selling prices for certain products. The Company does not anticipate that the excess and obsolete inventory subject to this reserve will be saleable at a later date based on its current 12-month sales forecast. The Company uses a 12-month sales forecast, because the wireless communications industry is characterized by rapid technological changes such that if the Company has not sold a product after a 12-month period, it is unlikely that the product will be sold.

Property and equipment includes $3.0 million of computer equipment under capital leases at April 1, 2005. Accumulated amortization of assets under capital leases totaled $991,000.

Note 5 — Revenue Information and Concentration of Credit Risks

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

PROXIM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

The Company’s products are classified into two product lines: WWAN and WLAN product lines. The WWAN product line includes point-to-point Lynx and Tsunami products and point-to-multipoint Tsunami products. The WLAN product line includes ORiNOCO 802.11 access point and client card products. Revenue information by product line is as follows (in thousands):

	Three Months Ended
Product Line	April 1, 2005		April 2, 2004
WWAN	$	16,363	$	13,074
WLAN	9,012		13,623
Total revenue	$	25,375	$	26,697

The Company sells its products worldwide primarily through independent distributors and value-added resellers and, to a lesser extent, through its direct sales force. It currently operates in two geographic regions: North America and International. Revenue outside of North America is primarily export sales denominated in United States dollars. Disaggregated financial information regarding the Company’s revenue by geographic region is as follows (in thousands):

	Three Months Ended
Geographic Region	April 1, 2005		April 2, 2004
North America product revenue	$	11,301	$	13,453
International product revenue	14,074		13,244
Total revenue	$	25,375	$	26,697

Three customers accounted for 13.3%, 12.6% and 10.9% of total revenue for the three months ended April 1, 2005, and two customers accounted for 14.3% and 12.5% of total revenue for the three months ended April 2, 2004.

Note 6 — Restructuring Charges for Severance and Excess Facilities

During the three months ended April 1, 2005, the Company recorded restructuring charges of $410,000, consisting of $177,000 of cash provisions for severance payments to seventeen terminated employees and $236,000 of non-cash provisions for abandoned property and equipment. 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 were unable to sublease these facilities, the actual costs to close these facilities could exceed the original estimates, and additional restructuring charges totaling $2.2 million could result.

PROXIM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

The following table summarizes the restructuring activities for the year ended December 31, 2004 and the three months ended April 1, 2005 (in thousands):

	Severance				Facilities			Other			Total
Balance as of December 31, 2003		$	3,620		$	11,584		$	600		$	15,804
Provision charged to operations		323			1,653			119			2,095
Non-cash charges utilized		—			—			(119		)	(119		)
Cash payments		(3,827		)	(3,317		)	—			(7,144		)
Balance as of December 31, 2004		116			9,920			600			10,636
Provision charged to operations		177			—			233			410
Non-cash charges utilized		—			—			(233		)	(233		)
Cash payments		(278		)	(756		)	—			(1,034		)
Balance as of April 1, 2005		$	15		$	9,164		$	600		$	9,779

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

	April 1, 2005		December 31, 2004
Current	$	3,335		$	3,659
Long-term	6,444			6,977
Total restructuring accruals	$	9,779		$	10,636

Note 7 — Interest Expense, Net and Other Income, Net

The following table summarizes the components of interest expense, net (in thousands):

	Three Months Ended
	April 1, 2005				April 2, 2004
Interest expense on royalty charges		$	(124	)	$	(85	)
Interest expense on convertible notes		—			(2,548		)
Interest expense on convertible bridge notes		(396		)	—
Interest expense on Series C mandatorily redeemable preferred stock		(888		)	—
Other interest expense, net		(38		)	(83		)
		$	(1,446	)	$	(2,716	)

The following table summarizes the components of other income (expense), net (in thousands):

	Three Months Ended
	April 1, 2005			April 2, 2004
Amortization of debt discount and issuance costs		$	—	$	(2,892	)
Revaluation of common stock warrants		2,176		5,100
		$	2,176	$	2,208

PROXIM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Note 8 — Loss Per Share Attributable to Common Stockholders

Basic net loss per common share is computed by dividing the net loss for the period by the weighted average number of common shares outstanding during the period excluding shares subject to repurchase. The terms of the Company’s redeemable convertible preferred stock include the right to participate in dividends declared to common stockholders. The Company’s redeemable convertible preferred stock does not have a contractual obligation to share in the losses in any given period. As a result, this participating security will not be allocated any losses in the periods of net losses, but will be allocated in the periods of net income using the two-class method. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating securities according to dividends declared or accumulated and participation rights in undistributed earnings. Under the two-class method, net income is reduced by the amount of dividends declared in the current period for each class of stock and by the contractual amounts of dividends that must be paid for the current period. The remaining earnings are then allocated to common stock and participating securities to the extent that each security may share in earnings as if all of the earnings for the period had been distributed. The total earnings allocated to each security are determined by adding together the amounts allocated for dividends and the amounts allocated for participation feature. The total earnings allocated to each security are then divided by the number of outstanding shares of the security to which the earnings are allocated to determine the earnings per share.

Diluted net loss per share is computed by dividing the net loss for the period by the weighted average number of common and potential common shares outstanding during the period if the effect is dilutive. Potential common shares are composed of common stock subject to repurchase rights and incremental shares of common stock issuable upon the exercise of stock options and warrants and upon the conversion of preferred stock. The dilutive effect of outstanding stock options and warrants is computed using the treasury stock method.

The following table sets forth the computation of basic and diluted net loss per share as well as securities not included in the diluted net loss per shares calculation because to do so would be antidilutive:

	Three Months Ended
	April 1, 2005			April 2, 2004
Net loss attributable to common stockholders	$	(7,753	)	$	(17,480	)
Weighted average common shares outstanding	31,684			12,318
Net loss per share — basic and diluted	$	(0.24	)	$	(1.42	)
Potentially dilutive shares not included in the calculation because they are antidilutive	6,500			11,604

PROXIM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Note 9 — Comprehensive Loss

The total comprehensive loss for the three months ended April 1, 2005 and April 2, 2004 is as follows (in thousands):

	Three Months Ended
	April 1, 2005			April 2, 2004
Net loss attributable to common stockholders	$	(7,753	)	$	(17,480	)
Unrealized gain on investments	—			1,119
Total comprehensive loss	$	(7,753	)	$	(16,361	)

Note 10 — Convertible Bridge Notes

On July 30, 2004, the Company 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, the Company issued to the Investors 15% Secured Promissory Notes (“Bridge Notes”) with an aggregate principal amount equal to their investment of $10 million and each with maturity date of June 30, 2005. All principal and accrued interest on the Bridge Notes will convert into Common Stock and/or warrants to purchase Common Stock, at the same price and upon the same terms and conditions offered to other investors if prior to June 30, 2005 the Company closes a financing transaction with gross proceeds of $20 million or more through a sale of Common Stock and/or warrants to purchase Common Stock. In the event of a change in control or material asset sale prior to 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, the Company 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.

Note 11 — Series C Mandatorily Redeemable Preferred Stock (“Series C Preferred Stock”)

In connection with the issuance of the Bridge Notes, the Company and the Investors agreed that, subject to the approval of the Company’s 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 Common Stock in exchange for 16,400,000 shares of Common Stock and 400,000 shares of mandatorily redeemable Series C Preferred Stock (“Series C Preferred Stock”), collectively referred to as “the Exchange”. At the special annual meeting of stockholders held October 21, 2004, the Company’s stockholders approved the Exchange and the Exchange closed the following day.

In accordance with SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity”, Series C Preferred Stock is accounted as a liability because the financial instrument embodies a financial obligation of the issuer. In addition, SFAS No. 150 requires that dividends or other amounts attributable to those certain financial instruments be reflected as interest expense in the Company’s statement of operations.

PROXIM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

The issuance of Series C Preferred Stock and the interest accrual was recorded through April 1, 2005 as follows (in thousands):

	Series C Preferred Stock		Interest Expense
Issuance of Series C Preferred Stock	$	40,000	$	—
Accretion of Preferred Stock redemption obligations	671		(671		)
Balance at December 31, 2004	40,671		(671		)
Accretion of Preferred Stock redemption obligations	888		(888		)
Balance at April 1, 2005	$	41,559	$	(1,559	)

The holders of Series C Preferred Stock are not entitled to voting rights or to receive dividends but have various rights and preferences as follows:

Liquidation Preference. The initial liquidation preference for the shares of Series C Preferred Stock is $100.00 per share. The liquidation preference accretes at 8.75% per annum, compounded quarterly, through October 22, 2012. The liquidation preference is subject to adjustment in the event the Company undertakes a business combination or other extraordinary transaction, or it is liquidated or dissolved. In the event of a change of control transaction or material asset sale after the Series C Preferred Stock original issue date, the liquidation preference automatically increases to include eight full year of accretion at 8.75% per annum.

Mandatory Redemption. On October 22, 2012, the Company is required to redeem all outstanding shares of Series C Preferred Stock at its fully accreted value of approximately $80 million. Upon an earlier change of control transaction or material asset sale after the Series C Preferred Stock original issue date, the Series C Preferred Stock will become redeemable at a liquidation preference of approximately $80 million as if it had fully accreted through the eighth anniversary of the Series C Preferred Stock original issue date.

Optional Redemption. At any time prior to October 22, 2012, the Company has the right at its option to redeem all outstanding shares of Series C Preferred Stock 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 Series C Preferred Stock original issue date. Additionally, the Company has the right at its option to redeem all outstanding shares of Series C Preferred Stock (i) at any time prior to, and including, the third anniversary of the Series C Preferred Stock original issue date at a price per share in cash equal to its then accreted liquidation preference, if the market price of the Company’s Common Stock has been higher than $22.50 for a period of forty-five (45) consecutive trading days prior to the date that notice of redemption is given to the Investors or (ii) at any time following the third anniversary of the Series C Preferred Stock original issuance date at a price per share equal to its then accreted liquidation preference if the market price of the Company’s Common Stock has been higher than $20.00 for a period of forty-five consecutive trading days prior to the date that notice of redemption is given to the Investors.

PROXIM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Note 12 — Stockholders’ Deficit

Deferred Stock Compensation

In connection with the grant of 700,000 restricted stock units (“RSU”) to the Company’s executive chairman and executive officers pursuant to the Company’s 1995 Long-Term Incentive Plan and 1999 Stock Incentive Plan, respectively, during the first fiscal quarter of 2005, the Company recorded deferred stock compensation of approximately $1.8 million. This amount represents the intrinsic value of the RSU based on the Company’s closing stock price on the date of the grant. The RSU vest over a period of two to three years depending on the term of the individual grant. The deferred stock compensation is being amortized as an expense on an accelerated basis over the vesting period of the individual grant consistent with the method described in FASB Interpretation 28, “Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plan.” Accordingly, approximately 63% of the unearned deferred compensation is amortized in the first year, approximately 29% in the second year and 8% in the third year following the date of grant.

During the three months ended April 1, 2005, the amortization of deferred stock compensation was relating to the associated expense categories as follows (in thousands):

Cost of revenue	$	14
Research and development	11
Selling, general and administrative	204
	$229

Warrants to Purchase Common Stock

In connection with the Subscription Agreement entered into between the Company and certain Purchasers on February 7, 2005, the Company issued to the Purchasers 2,505,000 warrants to purchase the Company’s Common Stock at the 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. These warrants were valued by the Company with the assistance of an independent valuation consulting firm at $2.3 million. Since the Company has certain repayment requirements upon a change of control, the valuation of these warrants was recorded as a long-term liability on the Company’s balance sheet. The fair value of the warrants are subject to revaluation adjustments at the end of each reporting period. As a result of a revaluation, the Company recorded a gain of $2.2 million as other income during the first fiscal quarter of 2005.

In connection with a three-year licensing and distribution agreement entered into with Motorola, Inc. on September 8, 2003, the Company issued to Motorola a fully vested warrant to purchase 108,000 shares of the Company’s Common Stock at an exercise price of $23.40 per share. This warrant will expire on September 8, 2008. At issuance the Company estimated the fair value of the warrant using the Black-Scholes option valuation model at $2.1 million. The fair value of the warrant is being amortized on a straight-line basis over the three-year term of the commercial arrangement with Motorola with quarterly charges against revenue of $174,000 effective beginning in the first quarter of 2004.

PROXIM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

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

The Company accounts for its stock options and equity awards using the intrinsic value method prescribed by Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees” and has adopted the disclosure provision of SFAS No. 123 “Accounting for Stock-Based Compensation” and SFAS No. 148 “Accounting for Stock-based Compensation, Transition and Disclosure.” In accordance with SFAS No. 148 the Company is required to disclose the effects on reported net loss and basic and diluted net loss per share as if the fair value based method had been applied to all awards.

The weighted average estimated grant date fair value, as defined by SFAS No. 123, for stock options granted under its stock option plans during the three months ended April 1, 2005 and April 2, 2004 was $1.11 and $16.70 per share, respectively. The weighted average estimated grant date fair value of stock purchase rights granted pursuant to its employee stock purchase plan during the three months ended April 1, 2005 and April 26, 2004 was $3.28 and $7.60 per share, respectively. The estimated grant date fair value disclosed by the Company is calculated using the Black-Scholes option pricing model. The Black-Scholes model, as well as other currently accepted option valuation models, was developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from its stock option and purchase awards. These models also require highly subjective assumptions, including future stock price volatility and expected time until exercise, which greatly affect the calculated grant date fair value.

Had the Company recorded compensation based on the estimated grant date fair value, as defined by SFAS No. 123, for awards granted under its stock option plans and stock purchase plan, the net loss attributable to common stockholders and net loss per share attributable to common stockholders would have been (in thousands, except per share data):

	Three Months Ended
	April 1, 2005			April 2, 2004
Net loss attributable to common stockholders as reported	$	(7,753	)	$	(17,480	)
Add: stock-based employee compensation expense included in reported net loss	229			—
Less: stock-based employee compensation expense determined under fair value method	(634		)	(1,794		)
Pro forma net loss attributable to common stockholders	$	(8,158	)	$	(19,274	)
As reported:
Basic and diluted net loss attributable to common stockholders per share	$	(0.24	)	$	(1.42	)
Pro forma:
Basic and diluted net loss attributable to common stockholders per share	$	(0.26	)	$	(1.56	)

These pro forma amounts disclosed above may not be representative of the effects for future period or years.

PROXIM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Note 15 — Commitments and Contingencies

The Company occupies its facilities under several non-cancelable operating lease agreements expiring at various dates through September 2009, and requiring payment of property taxes, insurance, maintenance and utilities. Future minimum lease payments under non-cancelable operating were as follows (in thousands):

	Minimum Lease Payments
Nine months ending December 31, 2005	$	5,788
Year ending December 31:
2006	6,738
2007	6,371
2008	6,435
2009	4,434
Total minimum lease payments	$	29,766

For the years ended December 31, 2004, 2003 and 2002, the Company recorded restructuring charges relating to the committed future lease payments for closed facilities, net of estimated future sublease receipts of $19.8 million. As of April 1, 2005 restructuring accruals of $9.2 million were related to these closed facilities.

Under the terms of the Settlement Agreement with Symbol Technologies described more fully below in Note 17, “Legal Proceedings”, the Company agreed to pay Symbol $22.75 million dollars over the period of 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, the Company fails to make any of these payments within 30 days after Symbol has notified the Company of its failure to pay, Symbol shall have the right to demand immediate payment in the amount of $25.9 million minus payments made under the agreement and plus applicable interest.

Upon the Company’s failure to timely pay to Symbol the payment due on March 31, 2005, Symbol noticed the Company of a breach under the Settlement Agreement and demanded that the Company make the payment within the thirty-day cure period provided by the Settlement Agreement. Symbol subsequently agreed to temporarily waive its rights and to extend the cure period for the payment until May 15, 2005. The waiver does not otherwise alter the Company’s obligations under the Settlement Agreement.

Under the terms of the Patent Cross License Agreement, Symbol and the Company have agreed to cross license certain patents, and the Company has agreed to pay to Symbol a two percent royalty on sales of certain of the Company’s wireless LAN products. If the Company fails 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 the Company’s 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.

PROXIM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Note 16 — Credit Facilities

In December 2002, the Company entered into a secured credit facility with Silicon Valley Bank (the “Lender”), and then subsequently amended the credit facility in March 2003. On June 13, 2003, in order to secure additional working capital, the Company entered into a letter agreement (the “Letter Agreement”) and an accounts receivable financing agreement, which effectively amended and restated the existing credit facility in its entirety. The Company 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 May 9, 2005.

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

Through April 30, 2005, the Company was able to 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. The Temporary Overadvances portion of the credit facility could also be used to satisfy the financial covenant to maintain at least a $4.0 million bank balance as described below. On May 9, 2005, the Company and the Lender executed an Amendment to Loan Documents, pursuant to which the parties agreed that all outstanding and future letters of credit must be fully secured by cash in an amount equal to the greater of (i) 105% of the total face amount of all outstanding letters of credit, or (ii) $100,000 plus 100% of the total face amount of all outstanding letters of credit. At the same time, the financial covenant requirement to maintain at least a $4.0 million bank balance was deleted. As of May 9, 2005, the restricted cash balance associated with outstanding letters of credit which were secured by cash was $2.0 million.

Obligations under the amended A/R Financing Agreement are collateralized by a security interest on all of the assets of the Company, including intellectual property, and are senior in lien priority and right of payment to the Company’s obligations to the funds affiliated with Warburg Pincus and 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,

PROXIM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

bankruptcy and insolvency events, defaults under certain of the Company’s other obligations and the occurrence of a material adverse change in the Company’s business.

Until the most recent amendment executed on May 9, 2005, the financial covenants under the Amended A/R Financing Agreement required the Company to maintain cash and cash equivalents with the Lender and its affiliates in an amount not less than $4.0 million, which could 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 the Company failed to meet this requirement, the Company could still remain in compliance with the financial covenants by maintaining a ratio of the total of cash, cash equivalents and accounts receivable approved by the Lender to the Company’s current liabilities of at least 5.0 to 1. In addition, the Company was required to maintain restricted cash balances to the extent that the Company’s outstanding letters of credit exceeded $4.0 million. The Company currently maintains substantially all of its cash, cash equivalents and investments at Silicon Valley Bank and its affiliates. In the event of default under the Amended A/R Financing Agreement, the Lender had the right to offset such cash, cash equivalents and investments against the Company’s obligations owing to the Lender. As of April 1, 2005, the Company complied with all of the financial covenants under this agreement.

The financial covenants were deleted from the amended A/R Financing Agreement on May 9, 2005 and the Company’s agreements with the Lender were amended such that as of May 9, 2005 all outstanding and future letters of credit must be fully secured by cash in an amount equal to the greater of (i) 105% of the total face amount of all outstanding letters of credit, or (ii) $100,000 plus 100% of the total face amount of all outstanding letters of credit. As of May 9, 2005, the restricted cash balance associated with outstanding letters of credit which were secured by cash was $2.0 million.

In the first quarter of 2003, the Company entered into an equipment and software lease agreement. Under the agreement, the Company may either lease or finance certain equipment, software and related services through a direct leasing or sales and leaseback arrangement with the lessor for up to $3.0 million. The lease term covers a period of 30 months, and the annual implicit interest rate on the lease is approximately 4%. During the second quarter of 2003, the Company installed and placed into service certain equipment, software and related services through both a direct leasing and sales leaseback arrangement and through a direct leasing arrangement during the third and fourth quarters of 2003 and during the second quarter of 2004. As the present value of total future minimum lease payments was greater than 90% of the fair value of the leased assets, the Company accounted for both the direct leasing and sales and leaseback transactions as capital lease transactions. Net book value of the leased assets

PROXIM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

capitalized in connection with this agreement as of April 1, 2005 was $2.0 million. Future minimum lease payments under non-cancelable capital leases at April 1, 2005 were as follows (in thousands):

Nine months ending December 31, 2005	$	596
Year ending December 31:
2006	46
Total minimum lease payments	642
Less: amounts representing interest	9
Present value of future minimum lease payments	633
Less: current portion	619
Capital lease obligations, long-term portion	$	14

Note 17 — Legal Proceedings

Patent and other litigation has resulted in, and could in the future continue to result in, substantial costs and diversion of management resources of the Company.

Active Technology Corporation

On February 10, 2004, the Company received a copy of a complaint filed on February 2, 2004 in Tokyo District Court by Active Technology Corporation, a Japanese-based distributor of the Company’s products. The complaint alleges, among other things, that the Company sold to Active certain defective products, which Active in turn subsequently sold to the Company’s customers. Active seeks damages of ¥559.2 million, 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 against outstanding accounts payable by Active of ¥175.3 million to the Company, resulting in a net claim against Proxim Corporation of ¥383.9 million. Translated into U.S. dollars on May 4, 2005, Active’s net claim is approximately $3.7 million. On October 5, 2004, a hearing was held in the matter and the Company filed a counterclaim for $2.3 million plus interest for outstanding amounts owed the Company. Additional hearings were held on January 11, 2005, February 22, 2005, March 10, 2005 and April 19, 2005. At the present time, it is not possible to comment upon the likelihood of a favorable or unfavorable outcome of the litigation. The Company will continue to defend itself vigorously against this lawsuit.

Top Global Technology Limited

On or about March 10, 2003, the Company was served with a complaint filed on January 15, 2003, by Top Global Technology Limited (“Top Global”), a distributor for Agere Systems Singapore. The Company’s demurrer to Top Global’s complaint was sustained in May 2003. Top Global then filed and served an amended complaint on May 30, 2003. Top Global’s lawsuit was filed against Agere Systems, Inc., Agere Systems Singapore, and Agere Systems Asia Pacific (collectively, “Agere”) and the Company in the Superior Court for the State of California, County of Santa Clara. Top Global claimed that it was entitled to return for a credit $1.2 million of products that it purchased from Agere Systems Singapore in June 2002 as a result of the Company’s decision to discontinue a product line that the Company purchased from Agere in August 2002. In September 2004, Top Global voluntarily dismissed Agere from the case, leaving the Company as the only defendant. Also in September 2004, the Company moved for summary judgment on all counts on the grounds that the Company is not an assignee of or party to the contract upon which

PROXIM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Top Global based its claims. On January 18, 2005, the Court granted the Company’s motion for summary judgment. The distributor’s time to file a notice of appeal has expired.

Symbol Technologies, Inc.

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, the Company announced that a jury had rendered a verdict in the first phase of the patent infringement suit 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 revenue of relevant products.

On July 29, 2004, the Company announced that the court has denied its equitable defenses and determined that the jury’s award of a 6% royalty on the Company’s 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 court entered its judgment on this matter on August 4, 2004.

On September 13, 2004 the Company 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, the Company agreed to pay Symbol $22.75 million dollars over Proxim’s next 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, the Company fails to make any of these payments within 30 days after Symbol has notified the Company of its 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.

PROXIM CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Unaudited)

Company 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, the Company 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, the Company 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 in the Company’s balance sheet prior to the litigation settlement. The initial net present value of the settlement payment was $20.69 million. At April 1, 2005 the net present value was $16.0 million, which is included in the balance sheet captions “Accrued royalties and interest” and “Accrued royalties, long-term”. The difference between the balance at April 1, 2005 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.

General

The Company is a party to disputes, including legal actions, with several of its suppliers and vendors. These disputes relate primarily to excess materials and order cancellation claims that resulted from the declines in demand for the Company’s products during 2001 and 2002 and the commensurate reductions in manufacturing volumes. The Company intends to defend itself vigorously against these claims.

The results of any litigation matters are inherently uncertain. In the event of any adverse decision in the described legal actions or disputes, or any other related litigation with third parties that could arise in the future, the Company could be required to pay damages and other expenses, and, in the case of litigation related to patents or other intellectual property rights, to cease the manufacture, use and sale of infringing products, to expend significant resources to develop non-infringing technology, or to obtain licenses to the infringing technology. The Company cannot make any assurance that these matters will not materially and adversely affect the Company’s business, financial condition, operating results or cash flows.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

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

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, public hot spots, and metropolitan area 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.

Significant Events

On January 27, 2005, we announced that we have engaged Bear, Stearns Co. to explore strategic alternatives for the Company, including capital raising and merger opportunities. We remain actively engaged with Bear, Stearns & Co. and are currently in discussion with a potential third party purchaser. There can be no assurance that a transaction will occur and, if a transaction occurred, there can be no assurance that any consideration available to the holders of our Class A common stock (“Common Stock”) would approach the current market trading value of our Company’s Common Stock given, among other factors, the preferences held by senior equity and debt holders.

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 proceeds of $9.0 million. After deducting the financial advisor fees, the net proceeds to us totaled $8.5 million intended for general corporate purposes, including working capital needs. 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 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. The shares and warrants were issued and sold under our previously filed Registration Statement on Form S-3, which was declared effective by the Securities and Exchange Commission on November 8, 2004.

Because our unaffiliated market capitalization has fallen below $75.0 million, we are precluded from issuing additional registered securities under the Registration Statement on Form S-3.

Liquidity

We have incurred substantial losses and negative cash flows from operations during the three months ended April 1, 2005 and years ended December 31, 2004, 2003 and 2002, and have an accumulated deficit of $505.2 million as of April 1, 2005. Our net revenues declined to $25.4 million in the first quarter of 2005 from $26.7 million in the first quarter of 2004 and $113.7 million in 2004 from $148.5 million in 2003. In addition, as of April 1, 2005, pursuant to the terms of the Settlement Agreement with Symbol Technologies Inc. (“Symbol”), we are required to pay $17.8 million to Symbol over the next seven quarters. 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 has the right to demand immediate payment in the amount of $25.9 million minus payments made under the agreement and plus applicable interest. To date, we have made two payments of $2.5 million each. Upon our failure to timely pay to Symbol the payment due on March 31, 2005, Symbol noticed us of a breach under the Settlement Agreement and demanded that we make the payment within the thirty-day cure period provided by the Settlement Agreement. Symbol subsequently agreed to temporarily waive its rights and to extend the cure period for the payment until May 15, 2005. Unless we pay prior to expiration of the extended cure period, Symbol has the right to demand payment in full. Our current cash on hand is insufficient to make such a payment.

Our amended A/R Financing Agreement, our secured credit facility with Silicon Valley Bank, expires in July 2005 and there is no assurance that it will be renewed after expiration. In addition, the Temporary Overadvances portion of the A/R Financing Agreement with the Silicon Valley Bank expired on April 30, 2005 and was not renewed. Pursuant to the Amendment to Loan Documents executed on May 9, 2005, all outstanding and future letters of credit must be fully secured by cash in an amount equal to the greater of (i) 105% of the total face amount of all outstanding letters of credit, or (ii) $100,000 plus 100% of the total face amount of all outstanding letters of credit. As of May 9, 2005, the restricted cash balance associated with outstanding letters of credit which were secured by cash was $2.0 million.

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 facility 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 is required to repay the $10.0 million of the secured promissory notes (“the “Bridge Notes”), along with accrued but unpaid interest thereon, we will be required to obtain immediate alternative sources of financing to repay the Bridge Notes. Because our unaffiliated market capitalization has fallen below $75.0 million, we are precluded from issuing additional registered securities under the Registration Statement on Form S-3. Therefore, it will be difficult for us to raise capital through registered offerings of our securities.

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.

Financial Performance

· Our net revenue for the first quarter of 2005 was $25.4 million, a 5.0% decrease compared to our net revenue of $26.7 million for the first quarter of 2004. The revenue decrease was primarily attributable to the market-driven declines in average selling prices of our ORiNOCO WLAN products.

· In our two geographical regions, North America and International, net revenue comprised 44.5% and 55.5%, respectively, of net revenue in the first quarter of 2005 compared to 50.4% and 49.6%, respectively, of net revenue in the first quarter of 2004.

· Net loss attributable to common stockholders in the first quarter of 2005 was $7.8 million compared to $17.5 million in the first quarter of 2004. The decrease was primarily attributable to a decrease in amortization of intangible assets of $4.4 million, decrease in legal expense for certain litigation of $691,000, a decrease in combined research and development and selling, general and administrative expenses of $1.3 million, a decrease in restructuring charges of $1.8 million, a decrease in interest expense of $1.3 million and a decrease in accretion of Series A Preferred Stock obligations of $1.7 million offset by slightly lower gross profit and an increase of $229,000 in amortization of deferred stock compensation.

· Gross profit decreased by $0.3 million to $8.2 million in the first quarter of 2005 from $8.5 million in the first quarter of 2004. Gross profit for the first quarter of 2005 included provision for excess and obsolescence of $1.5 million, which had a 6.0% negative impact on our gross margin while the provision for excess and obsolescence of $300,000 recorded during the first three months of 2004 had a negative impact of 1.1% on the first quarter 2004 gross margin.

· Combined research and development, selling, general and administrative expenses, decreased to $15.0 million from $16.3 million in the first quarter of 2004, mainly attributable to reduction in discretionary spending.

Critical Accounting Policies, Judgments and Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. 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. Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results.

Our significant accounting policies are described in Note 2 to the consolidated financial statements as of and for the year ended December 31, 2004 included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 16, 2005 and notes to condensed consolidated financial statements as of and for the three month period ended April 1, 2005, included herein. We believe our most critical accounting policies, which have not changed since December 31, 2004, include the following:

· revenue recognition

· allowance for doubtful accounts, returns and discounts

· warranty provision

· valuation of inventories

· income taxes

· restructuring costs

· impairment of goodwill and intangible assets

· derivative financial instruments

· patent litigation and other litigation costs.

Results of Operations

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

	Three Months Ended
	April 1, 2005			April 2, 2004
Revenue		100.0	%		100.0	%
Cost of revenue		67.7			65.1
Royalty charges		—			3.1
Gross margin		32.3			31.8
Operating expenses:
Research and development		18.6			17.1
Selling, general and administrative		40.6			43.9
Legal expense for certain litigation		0.2			2.8
Amortization of intangible assets		3.8			20.1
Amortization of stock compensation		0.9			—
Restructuring charges		1.6			8.1
Total operating expenses		65.7			92.0
Loss from operations		(33.4	)		(60.2	)
Interest expense, net		(5.7	)		(10.2	)
Other income, net		8.6			8.3
Loss before income taxes		(30.6	)		(62.1	)
Income tax benefit		—			(2.8	)
Net loss		(30.6	)		(59.3	)
Accretion of Series A Preferred Stock obligations		—			(6.2	)
Net loss attributable to common stockholders		(30.6	)%		(65.5	)%

Comparison of the Three Months Ended April 1, 2005 and April 2, 2004

Revenue

We classify our products into two product lines: Wireless Wide Area Network, or WWAN, product line, and Wireless Local Area Network, or WLAN, product line. The WWAN product line includes point-to-point Lynx and Tsunami products and point-to-multipoint Tsunami products. The WLAN product line includes ORiNOCO 802.11 access point and client card products. Revenue information by product line is as follows (in thousands):

	Three Months Ended
Product Line	April 1, 2005		April 2, 2004
WWAN	$	16,363	$	13,074
WLAN	9,012		13,623
Total revenue	$	25,375	$	26,697

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

	Three Months Ended
Geographic Region	April 1, 2005		April 2, 2004
North America product revenue	$	11,301	$	13,453
International product revenue	14,074		13,244
Total revenue	$	25,375	$	26,697

Revenue decreased 4.9% to $25.4 million in the first quarter of 2005 from $26.7 million in the first quarter of 2004. The revenue decrease is primarily attributable to market-driven declines in average selling prices of our ORiNOCO WLAN products.

Cost of Revenue

Cost of revenue decreased 1.1% to $17.2 million in the first quarter of 2005 from $17.4 million in the first quarter of 2004. As a percentage of revenue, cost of revenue increased to 67.7% in the first quarter of 2005 from 65.1% in the first quarter of 2004. Increased write downs of estimated excess and obsolete or unmarketable inventories increased cost of revenue by 4.9% which was offset by improved product margin of our WWAN product line.

The following is a summary of the changes in the reserve for excess and obsolete inventory during the three months ended April 1, 2005 and April 2, 2004 (in thousands):

	Three Months Ended
	April 1, 2005				April 2, 2004
Balance as of beginning of period		$	6,905			$	5,072
Provision for excess and obsolete inventory and lower of cost or market		1,526				300
Inventory scrapped		(664		)		(1,526		)
Balance as of end of period		$	7,767			$	3,846

Royalty Charges

On September 15, 2003, we announced that a jury had rendered a verdict in the first phase of our patent infringement suit with Symbol. On Symbol’s claims of patent infringement, the jury found that certain of our products infringe two of Symbol’s patents and assessed a 6% royalty on the revenue of relevant products. After the court had denied our equitable defenses on July 29, 2004 and awarded a 6% royalty on our sales of these products from 1995 through September 2003, plus prejudgment interest, we entered into a Settlement Agreement and a Patent Cross License Agreement with Symbol on September 13, 2004 resolving all our outstanding litigation with Symbol.

Under the terms of the Settlement Agreement, we agreed to pay Symbol $22.75 million over a period of ten quarters, commencing with our third quarter of 2004. Prior to the settlement, 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 a total of $2.8 million for estimated potential royalties and interest covering the period from October 2003 to July 2, 2004. During the third quarter of 2004, based on the Settlement Agreement, we reversed royalty charges of $4.8 million and interest expense of $3.2 million. While the final outcome of the Symbol litigation had not been determined during first quarter of 2004, we recorded royalty charges of $828,000 based on sales of our products which were the subject of the suit at an assumed royalty rate of 6%. As a result of the settlement of the Symbol litigation, royalty charges, which were included in cost revenue, were recorded at 2% of the relevant revenue during first quarter of 2005.

Research and Development Expense

Research and development expense increased 2.2% to $4.7 million, or 18.6% of revenue in the first quarter of 2005 from $4.6 million, or 17.1% of revenue in the first quarter of 2004. The increase in research and development expense was primarily attributable to an increase in personnel primarily at our research facility in India.

Selling, General and Administrative Expense

Selling, general and administrative expense decreased 12.0% to $10.3 million or 40.6% of total net revenue in the first quarter of 2005 from $11.7 million or 44.0% of revenue in the first quarter of 2004. The decrease in selling, general and administrative expenses from the first quarter of 2004 to the first quarter of 2005 was primarily attributable to reduction in discretionary spending and the workforce reductions implemented in 2004 which resulted in reduced personnel expenses.

Legal Expense for Certain Litigation

Legal expense for certain litigation decreased $691,000 to $54,000 in the first quarter of 2005 from $745,000 in the first quarter of 2004. The decrease was primarily attributable to the decrease in legal services incurred during the respective periods in connection with our litigation with Symbol. Please refer to Part II, Item 1, Legal Proceedings for a description of our litigation.

Amortization of Intangible Assets

Amortization of intangible assets was $1.0 million in the first quarter of 2005 compared to $5.4 million in the first quarter of 2004. The decrease is primarily attributable to the impairment of intangible assets of $12.2 million recorded during the fourth quarter of 2004.

Amortization of Deferred Stock Compensation

In connection with the grant of 700,000 restricted stock units (“RSU”) to our executive chairman and executive officers during the first fiscal quarter of 2005, we recorded deferred stock compensation within

stockholders’ equity of $1.8 million. This amount represents the intrinsic value of the RSU based on the Company’s closing stock price on the date of the grant. The deferred stock compensation is expensed to earnings on an accelerated basis over the vesting period of the individual grant consistent with the method described in FASB Interpretation 28, “Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plan.” Accordingly, approximately 63% of the unearned deferred compensation is amortized in the first year, approximately 29% in the second year and 8% in the third year following the date of grant. The amortization of deferred stock compensation amounted to $229,000 during the first quarter of 2005.

Restructuring Charges for Severance and Excess Facilities

During the three months ended April 1, 2005, we recorded restructuring charges of $410,000, consisting of $177,000 of cash provisions for severance payments to seventeen terminated employees and $233,000 of non-cash provisions for abandoned property and equipment.

The following table summarizes our restructuring activities for the year ended December 31, 2004 and the three months ended April 1, 2005 (in thousands):

	Severance				Facilities			Other			Total
Balance as of December 31, 2003		$	3,620		$	11,584		$	600		$	15,804
Provision charged to operations		323			1,653			119			2,095
Non-cash charges utilized		—			—			(119		)	(119		)
Cash payments		(3,827		)	(3,317		)	—			(7,144		)
Balance as of December 31, 2004		116			9,920			600			10,636
Provision charged to operations		177			—			233			410
Non-cash charges utilized		—			—			(233		)	(233		)
Cash payments		(278		)	(756		)	—			(1,034		)
Balance as of April 1, 2005		$	15		$	9,164		$	600		$	9,779

Interest Expense

Our interest expense decreased $1.3 million or 48.0% to $1.4 million in the first quarter of 2005 from $2.7 million in the first quarter of 2004. This decrease was primarily attributable to the Securities Purchase Agreement we entered into with our investors 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”) on July 27, 2004. Pursuant to the agreement, the investors agreed to restructure their equity instruments and debt holdings with us and we received cash proceeds of $10 million in aggregate principal amount. In exchange for the investment, we issued to the investors the 15% Bridge Notes with an aggregate principal amount equal to their investment of $10 million and a maturity date of June 30, 2005. We also agreed, pursuant to the terms of the Securities Purchase Agreement, to grant to these investors upon the approval of our stockholders, shares of our Series C Preferred Stock. The liquidation preference for shares of Series C Preferred Stock accretes at 8.75% per annum, and the quarterly accretion was recorded as interest expense.

The following table summarizes interest expense (in thousands):

	Three Months Ended
	April 1, 2005			April 2, 2004
Interest expense on royalty charges	$	(124	)	$	(85	)
Interest expense on convertible notes	—			(2,548		)
Interest expense on convertible bridge notes	(396		)	—
Interest expense on Series C mandatorily redeemable preferred stock	(888		)
Other	(38		)	(83		)
	$	(1,446	)	$	(2,716	)

Other Income, Net

Other income, net was $2.2 million during the three months ended April 1, 2005 and April 2, 2004. The following table summarizes other income, net (in thousands):

	Three Months Ended
	April 1, 2005			April 2, 2004
Amortization of debt discount and issuance costs		$	—	$	(2,892	)
Revaluation of common stock warrants		2,176		5,100
		$	2,176	$	2,208

Income Tax Provision

The income tax provision recorded during the three months ended April 2, 2004 represents the reversal of the valuation allowance of deferred tax assets to offset the deferred tax liability arising from the revaluation of short-term investments. No income tax provision was recorded during the three months ended April 1, 2005.

Accretion of Series A Preferred Stock Redemption Obligations

The accretion of Series A Preferred Stock during three months ended April 2, 2004 represents the quarterly adjustments to the carrying value of the Series A Preferred Stock, on an effective-interest basis, so that the carrying value would equal the redemption amount at the earliest redemption date. The accretion was recorded to increase the net loss attributable to common stockholders until they were surrendered October 21, 2004 in connection with the restructure of equity instruments pursuant to the Securities Purchase Agreement of July 27, 2004 between us and our investors Warburg Pincus and BCP Capital. As a result of the surrender and exchange of the Series A Preferred Stock, no charge was incurred for the quarter ended April 1, 2005.

Liquidity and Capital Resources

Sources and Use of Cash

Cash and cash equivalents decreased by $3.9 million to $12.1 million at April 1, 2005 from $16.0 million at December 31, 2004.

Net cash used in operating activities for the three months ended April 1, 2005 was $9.0 million and was attributable to the net loss after the effect of non-cash charges, decrease in accrued royalty, accounts payable and other accrued liabilities partially offset by a decrease in accounts receivable, net, and inventory, net. Net cash used in operating activities for the three months ended April 2, 2004 was $4.1 million and was attributable to the net loss after the effect of non-cash charges, a decrease in accounts

payable and other accrued liabilities partially offset by an decrease in accounts receivable, net, inventory, other assets and an increase in accrued royalties and interest.

Net cash used in investing activities for the three months ended April 1, 2005 was $156,000 and represented $176,000 capital spending offset by decrease in restricted cash. Net cash provided by investing activities for the three months ended April 2, 2004 was $344,000 and was attributable to $636,000 decrease in restricted cash partially offset by capital spending of $292,000.

Net cash provided by financing activities for the three months ended April 1, 2005 was $5.2 million and was attributable to issuance of common stock, net of $8.6 million, offset by principal payments on capital lease obligations of $309,000 and short-term bank borrowing of $3.0 million. Net cash provided by financing activities for the three months ended April 2, 2004 was $138,000 due to issuance of common stock, net of $437,000, offset by principal payments on capital lease obligations of $299,000.

Contractual Commitments

We occupy our facilities under several non-cancelable operating lease agreements expiring at various dates through September 2009 which require payment of property taxes, insurance, maintenance and utilities. Future payments under contractual obligations as of April 1, 2005 were as follows (in thousands):

	Payments Due By Period
	Total
	Amounts			Year Ending December 31,
	Committed			2005		2006		2007		2008		2009		Thereafter
Royalty payments		$	17,750	$	10,000	$	7,750	$	—	$	—	$	—		$	—
Convertible bridge loan and interest		11,439		11,439		—		—		—		—			—
Operating leases		29,766		5,788		6,738		6,371		6,435		4,434			—
Capital leases		642		596		46		—		—		—			—
Purchase order and project commitments		1,330		1,330		—		—		—		—			—
Redemption of Series C Preferred Stock		79,995		—		—		—		—		—			79,995
		$	140,922	$	29,153	$	14,534	$	6,371	$	6,435	$	4,434		$	79,995

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, which are included in the operating leases caption above. As of April 1, 2005, restructuring accruals of $9.2 million were related to the closed facilities.

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 May 9, 2005.

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 annual period beginning 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 first quarter of fiscal 2006, beginning January 1, 2006. Under SFAS No. 123R, we must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for 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 No. 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 No. 123R will have a material impact on the our consolidated results of operations and earnings per share, particularly in light of the Company’s announcement on December 21, 2004 regarding its intent to effect a re-pricing of outstanding options following stockholder approval at its annual meeting of stockholders to be held on May 16, 2005. If the proposal is approved by our stockholders, the re-pricing program may commence at any time after the annual meeting and at the discretion of our Compensation Committee.

We currently evaluating the method of adoption and the effect of 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.

RISK FACTORS

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 Class A common stock could decline and you could lose all or part of your investment. Our actual results could differ materially from those anticipated in forward-looking statements as a result of certain factors, including the risks faced by us described below and elsewhere.

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.

payments made under the agreement and plus applicable interest. To date, we have made two payments of $2.5 million each. Upon our failure to timely pay to Symbol the payment due March 31, 2005, Symbol noticed us of a breach under the Settlement Agreement and demanded that we make the payment within the thirty-day cure period provided by the Settlement Agreement. Symbol subsequently agreed to temporarily waive its rights and to extend the cure period for the payment until May 15, 2005.

Our amended A/R Financing Agreement, our secured credit facility with Silicon Valley Bank, expires in July 2005 and there is no assurance that it will be renewed after expiration. Furthermore, there is no assurance that this facility will even be available or that we will be able to borrow up to our maximum availability prior to its expiration, because Silicon Valley Bank may limit borrowings at its discretion or the borrowing base of eligible accounts receivable may be substantially less than the maximum availability under the credit facility, respectively. In addition, the Temporary Overadvances portion of the A/R Financing Agreement with the Silicon Valley Bank expired on April 30, 2005 and was not renewed. Pursuant to the Amendment to Loan Documents executed on May 9, 2005, all outstanding and future letters of credit must be fully secured by cash in an amount equal to the greater of (i) 105% of the total face amount of all outstanding letters of credit, or (ii) $100,000 plus 100% of the total face amount of all outstanding letters of credit. As of May 9, 2005, the restricted cash balance associated with outstanding letters of credit which were secured by cash was $2.0 million.

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 facility 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 $10.0 million of our Bridge Notes, along with accrued but unpaid interest thereon, we will be required to obtain immediate alternative sources of financing to repay the Bridge Notes. Because our unaffiliated market capitalization has fallen below $75.0 million, we are precluded from issuing additional registered securities under the Registration Statement on Form S-3. Therefore, it will be difficult for us to raise capital through registered offerings of our securities.

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 in the second quarter of 2005, we will have insufficient cash to pay the above mentioned obligations, we will be unable to meet our ongoing operating obligations as they come due in the ordinary course of business, and we 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 each 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 five quarters, including the March 31, 2005 payment, a payment obligation of $1.5 million in the sixth quarter and a payment obligation of $1.25 million in the seventh quarter. Our current cash on hand is insufficient to make all of the required payments to Symbol.

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 were 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 were 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 16 to the unaudited condensed consolidated financial statements. $10 million of the facility requires that we maintain a compensating cash balance equal to any borrowings, which could restrict our ability to utilize this portion of the credit facility. The secured credit facility expires in July 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. On May 9, 2005, we and the Lender executed an Amendment to Loan Documents, pursuant to which we agreed that all outstanding and future letters of credit must be fully secured by cash in an amount equal to the greater of (i) 105% of the total face amount of all outstanding letters of credit, or (ii) $100,000 plus 100% of the total face amount of all outstanding letters of credit. At the same time the financial covenant requirement to maintain at least a $4.0 million bank balance was deleted. As of May 9, 2005, the restricted cash balance associated with outstanding letters of credit which were secured by cash was $2.0 million.

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 were 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 three months ended April 1, 2005 and the years ended December 31, 2002, 2003 and 2004 we had a net loss attributable to holders of our Common Stock of $7.8 million, $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. 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 product cost. We participate in a highly volatile industry that is characterized by vigorous competition for market share and rapid technological development. Furthermore, our current 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 our other outstanding obligations.

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 that there will be sufficient proceeds, if any, available to the Common Stockholders. In addition to these obligations, we have other obligations, as disclosed herein and in our other public filings, which may affect the amounts payable to holders of our Common Stock on a sale of the Company, including but not limited to our obligations to Symbol and our trade creditors.

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;

· impact on our financial statements and results of our adoption of SFAS 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 were able to convert our outstanding Bridge Notes.

On July 30, 2004, we received $10.0 million from the Investors in exchange for the Bridge Notes. 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, a small number of institutional investors hold a significant percentage of our Common Stock. As of May 4, 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;

· 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.

In connection with the Exchange by the Investors of their Series A Preferred Stock, Series B Preferred Stock and Common Stock warrants for shares of our Common Stock and our Series C Preferred Stock, Warburg Pincus agreed that it will limit its voting rights until July 22, 2008 to no more than 49% of our issued and outstanding voting stock. In addition, for so long as each of the Investors owns at least 25% of the aggregate principal amount of the Common Stock issued to it in the Exchange, the Investors each will have the right to appoint a member of our Board of Directors. For so long as Warburg Pincus owns 50% of the Common Stock issued to it in the Exchange, it shall have the right to appoint a second member of our Board of Directors. Independent of its holdings, Warburg Pincus shall have the right to have one observer attend meetings of the Board of Directors.

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

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

Factors that may harm operating results include:

· questions as to our ultimate viability from the perspective of our suppliers, contract manufacturers, distributors, customers and others;

· our credit worthiness in the opinion of our suppliers, contract manufacturers, distributors, customers and others;

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

· the effectiveness of developing new distribution channels;

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

· seasonal factors that may affect capital spending by customers;

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

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

· the availability of liquid capital resources to fund our operations;

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

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

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

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

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

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

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

· difficulties in expanding and conducting international operations; and

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

Should the outcome of our ongoing litigation be unfavorable, we may be required to pay damages and other expenses, which could materially and adversely affect our business, financial condition, operating results and cash flows.

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, 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 against outstanding accounts payable by Active of ¥175.3 million to us, resulting in a net claim against Proxim Corporation of ¥383.9 million. Translated into U.S. dollars as of May 4, 2005, Active’s net claim is approximately $3.7 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, February 22, 2005, March 10, 2005 and April 19, 2005. At the present time, it is not possible to comment upon the likelihood of a favorable or unfavorable outcome of the litigation.

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.

Any ruling or judgment against us or any of our subsidiaries in any amount in excess of $4,000,000 that is not discharged, stayed or bonded pending appeal within 30 days from the entry thereof will constitute an event of default pursuant to the terms of the Bridge Notes. Upon such an occurrence, the Investors would have the ability to require us to repay the Bridge Notes. Likewise, any such occurrence would result in an event of default under the secured credit facility with Silicon Valley Bank. Upon such occurrence, Silicon Valley Bank would have the right to require us to repay any amounts outstanding under the credit facility and to prohibit us from borrowing any additional amounts. Any event of default under the secured credit facility with Silicon Valley Bank, whether or not related to litigation, also would constitute an event of default pursuant to the terms of the Bridge Notes if amounts outstanding under the credit facility exceeded $1.0 million.

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

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

The potential for sales of substantial amounts of our Common Stock into the public market may adversely affect the market price of our Common Stock. Following the Exchange, the Investors together own 16.4 million shares, or approximately 49% of our outstanding capital stock, based on shares outstanding as of May 4, 2005. If the Investors are able to convert the Bridge Loan into shares of the Company’s Common Stock in a Qualified Transaction, their share ownership will increase.

Upon the request of a majority-in-interest of the Investors, we have agreed to use reasonable best efforts to prepare and file with the SEC within 180 days after the closing of a financing transaction or series of financing transactions in which we would issue and sell our Common Stock or warrants to purchase our Common Stock or both in exchange for aggregate gross proceeds to us of at least $20 million (a “Qualified Transaction”), or such other time as shall be mutually agreed upon by us and the Investors, a registration statement on Form S-3 covering the resale of the securities held by each Investor in compliance with the Securities Act. Upon the effectiveness of such registration statement, the Investors will have the right to resell any shares of Common Stock issued to them upon the Exchange and the conversion of the Bridge Loan notes.

In addition to these securities, as of May 4, 2005, options and similar rights and warrants to acquire approximately 3,652,733 and 2,770,131 shares, respectively, of our Common Stock were outstanding. Also, as of May 4, 2005, approximately an additional 431,233 shares of our Common Stock were reserved for issuance to our employees under existing stock option plans and will be freely tradeable upon issuance, subject to our insider trading policies.

As of May 4, 2005, all of the Company’s outstanding stock options had exercise prices above the closing price of our Common Stock on the NASDAQ. In order to more closely align the interest of the Company and its employees and in order to provide adequate equity incentives for employee recruiting and retention, our Board of Directors has approved re-pricing of outstanding options. The Company anticipates that, following the approval of stock option re-pricing by the majority of its stockholders, the aggregate number of outstanding options with an exercise price at the then current fair market value would not exceed the number of options outstanding prior to such initiative. However, the Common Stock issuable upon the exercise of modified options that have exercise prices at, rather than above, the then current fair market value may cause dilution of the then-outstanding Common Stock and may result in then holders experiencing a decline in the value of their Common Stock.

We are exposed to increased costs and risks associated with complying with increasing and new regulation of corporate governance and disclosure standards, including the risk of an unfavorable report under Section 404 of the Sarbanes-Oxley Act.

We are spending an increased amount of management time and external resources to comply with changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and NASDAQ Stock Market rules. In particular, Section 404 of the Sarbanes-Oxley Act of 2002 requires management’s annual review and evaluation of our internal control systems, and attestations of the effectiveness of these systems by our management and our independent registered public accounting firm.

We have recently completed our evaluation of the design, remediation and testing of effectiveness of our internal controls over financial reporting required to comply with the management certification and attestation by our independent registered public accounting firm under Section 404 of Sarbanes-Oxley (“Section 404”). While our assessment, testing and evaluation of the design and operating effectiveness of our internal controls over financial reporting resulted in our conclusion that as of December 31, 2004, our internal controls over financial reporting were effective, we cannot predict the outcome of our testing in future periods. If we conclude in future periods that our internal control over financial reporting is not effective, we may be required to change our internal control over financial reporting to remediate deficiencies. In such an event, investors may lose confidence in the reliability of our financial statements and we could also be subject to investigation and/or sanctions by regulatory authorities.

Sarbanes-Oxley and newly proposed or enacted rules of the SEC and Nasdaq have caused us, and we expect will cause us, to incur significant increased costs in the future as we implement and respond to new requirements. In this regard, achieving and maintaining compliance with Sarbanes-Oxley and other new rules and regulations, may require us to hire additional personnel and use additional outside legal, accounting and advisory services.

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

The communications industry and products based on the 802.11 standards in particular are characterized by a relatively high level of litigation based on allegations of infringement of proprietary rights. We have in the past, and may in the future, be subject to such litigation. For example, we recently settled a lawsuit brought against us by Symbol alleging that certain of our products infringed on four Symbol patents related to systems for packet data transmission. As part of the settlement, we agreed to pay to Symbol $22.75 million over a period of ten quarters and a 2% royalty on sales of certain of our WLAN products. We cannot assure you that other third parties have made assertions of intellectual property rights in relation to 802.11 standards-based products and that any such assertion of infringement will not result in litigation or that we would prevail in such litigation. Furthermore, any such claims, with or without merit, could result in substantial cost to our business and diversion of our personnel, require us to develop new

technology or enter into royalty or licensing arrangements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to us, or at all. In the event of a successful claim of infringement or misappropriation against us, and our failure or inability to develop non-infringing technology or to license the infringed, misappropriated or similar technology at a reasonable cost, our business, results of operations and financial condition would be materially adversely affected. In addition, we may be obligated to indemnify our customers against claimed infringement of patents, trademarks, copyrights and other proprietary rights of third parties. Any requirement to indemnify our customers could have a material adverse effect on our business, results of operations or financial condition.

Our intellectual property rights may not provide meaningful commercial protection for our products, which could enable third parties to use our technology or methods, or very similar technology or methods, and could reduce our ability to compete.

Our success depends significantly on our ability to protect our proprietary rights to the technologies used in our products. We rely on patent protection, as well as a combination of copyright, trade secret and trademark laws and nondisclosure, confidentiality and other contractual restrictions to protect our proprietary technology. However, these legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage. Our patent applications may not issue as patents in a form that will be advantageous to us. Our issued patents and those that may issue in the future may be challenged, invalidated or circumvented, which could limit our ability to stop competitors from marketing related products. Although we have taken steps to protect our intellectual property and proprietary technology, there is no assurance that third parties will not be able to design around our patents. Furthermore, although we have entered into confidentiality agreements and intellectual property assignment agreements with our employees, consultants and advisors, such agreements may not be enforceable or may not provide meaningful protection for our trade secrets or other proprietary information in the event of unauthorized use or disclosure or other breaches of the agreements.

Furthermore, the laws of foreign countries may not protect our intellectual property rights to the same extent as the laws of the United States. If our intellectual property does not provide significant protection against competition, our competitors could compete more directly with us, which could result in a decrease in our market share. All of these factors may harm our competitive position.

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

The market for broadband wireless systems and wireless local area networking and building-to-building markets are extremely competitive and we expect that competition will intensify in the future. Increased competition could adversely affect our business and operating results through pricing pressures, the loss of market share and other factors. The principal competitive factors affecting wireless local area networking and fixed wireless markets include the following: data throughput; effective RF coverage area; interference immunity; network security; network scalability; price; integration with voice technology; wireless networking protocol sophistication; ability to support industry standards; roaming capability; power consumption; product miniaturization; product reliability; ease of use; product costs; product features and applications; product time to market; product certifications; changes to government regulations with respect to each country served and related to the use of radio spectrum; brand recognition; OEM partnerships; marketing alliances; manufacturing capabilities and experience; effective distribution channels; and company reputation. We could be at a disadvantage when compared to our competitors, particularly Symbol, Cisco Systems, NetGear and D-Link, that have broader distribution channels, greater brand recognition, more extensive patent portfolios and, in particular, 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 face competition from numerous companies that have developed competing products in both the commercial wireless and home networking markets, including several Asia-based companies offering low-price IEEE 802.11a/b/g products. We are also facing future competition from companies that offer products, which replace network adapters or offer alternative communications solutions (such as the integrated wireless functionality on the Intel Centrino computer chip), or from large computer companies, PC peripheral companies, as well as other large networking equipment companies that integrate network adapters into their products. Furthermore, we could face competition from certain of our OEM customers, which have, or could acquire, wireless engineering and product development capabilities, or might elect to offer competing technologies. We can offer no assurance that we will be able to compete successfully against these competitors or those competitive pressures we face will not adversely affect our business or operating results.

Additionally, as a result of our settlement agreement with Symbol, including the impact of the assignment and cross-licensing of certain of our patents and patent applications to Symbol, Symbol could compete more effectively across our product lines. Many of our present and potential competitors have substantially greater financial, marketing, technical and other resources with which to pursue engineering, manufacturing, marketing, and distribution of their products. These competitors may succeed in establishing technology standards or strategic alliances in the WLAN obtain more rapid market acceptance for their products, or otherwise gain a competitive advantage. We can offer no assurance that we will succeed in developing products or technologies that are more effective than those developed by our competitors. Furthermore, we compete with companies that have high volume manufacturing and extensive marketing and distribution capabilities, areas in which we have only limited experience. We can offer no assurance that we will be able to compete successfully against existing and new competitors as wireless markets evolve and the level of competition increases.

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

As the market for our wireless networking products is evolving, we believe our ability to compete successfully in this market is dependent upon the continued compatibility and interoperability of our products with products and architectures offered by other vendors. To remain competitive, we need to introduce products in a timely manner that incorporate or are compatible with these new technologies as they emerge. If we were unable to enter a particular market in a timely manner with internally developed products, we may license technology from other businesses or acquire other businesses as an alternative to internal research and development. In the past we have reduced personnel expenses as a result of the workforce reduction implementions. To the extent our revenues do not increase or we do not obtain additional financing for working capital purposes, we may be required to reduce our expenses for research and development, which could limit our ability to introduce new products.

We have expended substantial resources in developing products that are designed to conform to the IEEE 802.11 standards. We cannot assure you, however, that the IEEE 802.11 compliant products will have an ongoing meaningful commercial impact. Already, even within the 802.11 standard, there have been significant technological changes. The IEEE approved the 2.4 GHz WLAN standard designated 802.11b. In 2000, the IEEE approved the 5 GHz WLAN standard designated 802.11a. In 2003, the IEEE approved a new 2.4 GHz WLAN standard designated 802.11g. IEEE is in the process of establishing additional 802.11 standards, including 802.11e related to quality of service for voice and video transmission, 802.11i related to enhanced security, and 802.11h related to dynamic frequency selection and transmission power control. Furthermore, IEEE has recently committed to developing new wireless WAN standards under two separate initiatives, 802.16d (WiMAX) and 802.16e. 802.16d is a WWAN protocol to address the existing

Fixed Wireless Access (“FWA”) market as well as extend that market to include certain mobility applications (at vehicular levels), while 802.16e is a WWAN protocol to address the FWA market as well as lower power portable devices.

While we have products based on the 802.11a, 802.11b and 802.11g standards, future standards developments may make these technologies obsolete and require significant additional investment by the company. As an example, in August 2000, the FCC adopted a rule change to Part 15. Based on the rule change, we made significant investments in developing higher-speed frequency hopping technology that allowed for wider band hopping channels and increased the data rate from 1.6 Mbps to up to 10 Mbps based on the HomeRF 2.0 standard. However, widespread adoption of products based on the IEEE 802.11 standard has led us to discontinue these products. We cannot assure you that a similar future change in industry standards and market acceptance will not require us to abandon our current product lines and invest significantly in research and development of future standards based products.

Given the emerging nature of the WLAN market, we cannot assure you that the products and technology, or our other products or technology, will not be rendered obsolete by alternative or competing technologies, including cellular. Currently, cellular companies are deploying 3rd generation technologies designed to transmit data at up to 2 mbps. In particular, Verizon has already announced an initiative based on this technology known as EV-DO. Cellular technology today has an inherent advantage of being more ubiquitous than WLAN hotspot technology. We cannot assure you that our current product offerings will be competitive with cellular or other WLAN technologies in the future.

In addition, when we announce new products or product enhancements that have the potential to replace or shorten the life cycle of our existing products, customers may defer purchasing our existing products. These actions could materially adversely affect our operating results by unexpectedly decreasing sales, increasing our inventory levels of older products and exposing us to greater risk of product obsolescence.

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

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

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

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

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

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

· unforeseen changes in regulatory environment;

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

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

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

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

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

During the quarter ended April 2005 and years ended December 31, 2004, 2003 and 2002, international sales accounted for approximately 55%, 43%, 41% and 38% of our total sales, respectively. We expect that our revenue from shipments to international customers will vary as a percentage of total revenue. There are certain risks inherent in doing business in international markets, including the following:

· uncertainty of product acceptance by customers in foreign countries;

· uncertainty of obtaining homologation in certain key international countries;

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

· difficulty in collecting accounts receivable;

· export license and documentation requirements;

· unforeseen changes in regulatory requirements;

· difficulties in staffing and managing multinational operations;

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

· foreign currency fluctuations;

· longer payment cycles for international distributors;

· tariffs, duties, taxes and other trade barriers;

· difficulties in finding foreign licensees or joint venture partners;

· difficulties in enforcing intellectual property rights; and

· potential political and economic instability.

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

While we may extend limited credit terms, fluctuations in currency exchange rates could cause our products to become relatively more expensive to customers in a particular country, leading to a reduction in sales or profitability in that country. We cannot assure you that foreign markets will continue to develop or that we will receive additional orders to supply our products to foreign customers. Our business and operating results could be materially adversely affected if foreign markets do not continue to develop or if we do not receive additional orders to supply our products for use by foreign customers. To successfully expand international sales, we will need to recruit additional international sales and support personnel and expand our relationships with international distributors and value-added resellers. This expansion will require significant management attention and financial resources. We may incur these additional costs and add these management burdens without successfully expanding sales. This failure would harm our operating results.

Our business depends on rapidly evolving telecommunications and Internet industries.

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

We may be dependent on a limited number of OEM customers.

A limited number of OEM customers may contribute to our revenue. Sales of many of our wireless networking products depend upon decisions of prospective OEM customers to develop and market wireless solutions, which incorporate our wireless technology. OEM customers’ orders are affected by a variety of factors, including the following:

· new product introductions;

· end user demand for OEM customers’ products;

· joint development efforts;

· OEM customers’ product life cycles;

· inventory levels;

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

· manufacturing strategies;

· lengthy design-in cycles;

· pricing;

· regulatory changes;

· contract awards; and

· competitive situations.

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

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

Our business has historically generated a significant amount of revenue from a limited number of distributors. The loss of business from any of these distributors or the delay of significant orders from any of them, even if only temporary, could significantly reduce our revenue, delay recognition of revenue, harm our reputation or reduce our ability to accurately predict cash flow. Three distributors accounted for approximately 13.3%, 12.6% and 10.9% of our total revenue for the three months ended April 1, 2005. Two distributors accounted for approximately 15.5% and 14.2%, respectively, of our total revenue for year ended December 31, 2004, and one distributor accounted for approximately 14% and 23% of our total revenue for the years ended December 31, 2003 and 2002, respectively. We do not have long-term contracts with any of these distributors. While we expect to have a more diversified and expansive end customer base, the future success of our business will depend significantly on the timing and size of future purchase orders, if any, from a limited number of distributors. Additionally, our reliance on distributors limits our visibility to our end user customers, which impacts our ability to accurately forecast our revenues. Most of our expenses are fixed in the short term and any shortfall in revenues and delay in collections of our receivables in relation to planned expenditures could materially harm our operating results and financial condition.

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

We depend on single or limited source suppliers for several key components used in our products. Any disruptions in the supply of these components or assemblies could delay or decrease our revenues. In addition, even for components with multiple sources, there have been, and may continue to be, shortages due to capacity constraints caused by high demand. We do not have any long-term arrangements with our suppliers and could be at a disadvantage compared to other companies, particularly larger companies that have contractual rights or preferred purchasing arrangements. In addition, during periods of capacity constraint, we are disadvantaged compared to better capitalized companies, as suppliers have in the past and may in the future choose not to do business with us, or may require letters of credit guaranteeing our obligations, as a result of our financial condition. If, for any reason, a supplier fails to meet our quantity or quality requirements, or stops selling components to us or our contract manufacturers at commercially reasonable prices, we could experience significant production delays and cost increases, as well as higher warranty expenses and product reputation problems. Because the key components and assemblies of our products are complex, difficult to manufacture and require long lead times, we may have difficulty finding

alternative suppliers to produce our components and assemblies on a timely basis. In the Wi-Fi market, the growth in demand has created unexpected shortages and sudden increases in lead times. We have experienced shortages of some of these components in the past, which delayed related revenue, and we may experience shortages in the future. In addition, because the majority of our products have a short sales cycle of between 30 and 90 days, we may have difficulty in making accurate and reliable forecasts of product needs. As a result, we could experience shortages in supply, which could delay or decrease revenue because our customers may cancel their orders or choose a competitor for their future needs.

We have limited internal manufacturing capabilities and we will need to increasingly depend on contract manufacturers for our manufacturing requirements.

We have limited internal manufacturing capability. We cannot assure you 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 achieve significant product cost reductions. Although we intend to achieve cost reductions through engineering improvements, production economies, and manufacturing at lower cost locations including outside the United States, we cannot assure you that we will be able to do so. In order to remain competitive, we must continue to introduce new products and processes into our manufacturing environment, and we cannot assure you that any such new products will not create obsolete inventories related to older products.

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

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

Our reliance on contract manufacturers could subject us to additional costs or delays in product shipments as demand for our products increases or decreases. As demand for wireless products increases, our contract manufacturers are experiencing increasing lead times for many components increasing the possibility that they will be unable to satisfy our product requirements in a timely fashion. There can be no assurance that we will effectively manage our contract manufacturers or that these manufacturers will meet our future requirements for timely delivery of products of sufficient quality and quantity. The inability of our contract manufacturers to provide us with adequate supplies or the loss of a contract manufacturer would result in costs to acquire additional manufacturing capacity and delays in shipments of our products, materially adversely affecting our business and operating results. In addition, cancellations in orders as a result of decreases in demand for products may subject us to claims for damages. In this regard, we are party to disputes, including legal actions, with several of our suppliers and vendors. These disputes relate primarily to excess materials and order cancellation claims that resulted from declines in demand for our products during 2002 and 2003 and the commensurate reductions in manufacturing volumes.

We must be able to reduce expenses and inventory risks associated with meeting the demand of our customers.

To ensure that we are able to meet customer demand for our products, we place orders with our subcontractors and suppliers based on our estimates of future sales. If actual sales differ materially from these estimates, our inventory levels and expenses may be adversely affected and our business and results of operations could suffer. For example, in 2003 and 2004, the fulfillment of our product and supply orders resulted in our receiving more products and components than we were able to sell and caused an increase in our inventories. This oversupply was caused by customer demand not meeting the sales forecasts that were made when the orders were originally placed and our strategy to discontinue certain products in order to concentrate on selling next generation products. As part of our ongoing review of our inventory reserve requirements, we increased our reserve for excess and obsolete inventory and lower of cost or market by $1.6 million in the first quarter of 2005 and $3.9 million in the year ended December 31, 2004, primarily related to legacy WWAN products. As part of our restructuring charge in the second quarter of 2003, we increased our reserve for excess and obsolete inventory by $22.5 million, also primarily related to legacy WWAN products. As a part of our restructuring charge in the first quarter of 2002, we increased our reserve for obsolete and excess inventory, including purchase commitments, totaling $12.7 million, of which $7.7 million related to excess inventory and $5.0 million related to purchase commitments, primarily related to legacy WLAN products. These provisions related to a decrease in demand for certain products as well as our strategy to discontinue certain products in order to concentrate on selling next generation products.

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

We participate in a highly volatile industry characterized by vigorous competition for market share and rapid technological development. Furthermore, business consumers of wireless products increasingly are concentrating on reducing capital expenditures and on maximizing return on investment (ROI) in connection with their purchases of networking products. These factors have resulted in aggressive pricing practices in our industry and have resulted in downward pricing pressure on our products. For example, in December 2004, a number of our competitors announced substantial price reductions in their access point products forcing down prices in the market overall. We expect similar actions in the future, expect such market conditions to persist and expect that falling prices for competing broadband solutions will force us to reduce prices over time. In addition to the effects of industry-wide pricing pressures, we expect that the average selling prices of our products will continue to decrease because one of our strategies is to increase the percentage of domestic and international sales being made through distributors and value-added resellers, and to OEM customers, which involve lower prices than our direct sales. Given this combination of factors, we may be forced under some circumstances to reduce the selling prices of our products even if it causes us to decrease gross profit or to take a loss on our products. We may also be unable to reduce sufficiently the cost of our products to enable us to compete with other broadband access technologies with lower product costs.

In order to remain competitive, we will need to design our products so that they can be manufactured with low-cost, automated manufacturing, assembly and testing techniques. We cannot assure you that we will be successful in designing our products to allow contract manufacturers to use lower-cost, automated techniques. In addition, any redesign may fail to result in sufficient cost reductions to allow us to significantly reduce the price of our products or prevent our gross profit from declining as prices decline.

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

Many of our complex products can only be fully tested when deployed in commercial networks. As a result, end users may discover defects or errors or experience breakdowns in their networks after the products have been deployed. The occurrence of any defects or errors in these products, including defects or errors in components supplied by our contract manufacturers, could result in:

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

· cancellation of orders;

· difficulty in collecting accounts receivable;

· increased service and warranty costs;

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

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

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

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

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

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

Broadband wireless access solutions, including point-to-point and point-to-multipoint systems, compete with other high-speed access solutions such as digital subscriber lines, cable modem technology, fiber optic cable and other high-speed wire line and satellite technologies. If the market for our Lynx and

Tsunami point-to-point and Tsunami point-to-multipoint solutions fails to develop or develops more slowly than we expect due to this competition, our sales opportunities will be harmed. Many of these alternative technologies can take advantage of existing installed infrastructure and are generally perceived to be reliable and secure. As a result, they have already achieved significantly greater market acceptance and penetration than point-to-point and point-to-multipoint broadband wireless access technologies. Moreover, current point-to-point and point-to-multipoint broadband wireless access technologies have inherent technical limitations that may inhibit their widespread adoption in many areas, including the need for near line-of-sight installation and, in the case of operating frequencies above 11 GHz, reduced communication distance in bad weather. We expect point-to-point and point-to-multipoint broadband wireless access technologies to face increasing competitive pressures from both current and future alternative technologies. In light of these factors, many service providers may be reluctant to invest heavily in broadband wireless access solutions.

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

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

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

Our success depends to a large extent on the continued services of Mr. Frank Plastina, our Executive Chairman, Mr. Kevin Duffy, our President and Chief Executive Officer, Mr. Michael D. Angel, our Executive Vice President and Chief Financial Officer, and other members of our senior management team. The loss of the services of any of these management members could harm our business because of the crucial role each of them is expected to play in our operations and strategic development. In order to be successful, we must also retain and motivate key employees, including those in managerial, technical, marketing and sales positions. In particular, our product generation efforts depend on hiring and retaining qualified engineers. Experienced management and technical, sales, marketing and support personnel in the wireless networking industry are in high demand and competition for their talents is intense. This is particularly the case in Silicon Valley, where our headquarters and a majority of our operations are located. Additionally due to our current financial situation, we have experienced more attrition than in the past and it has been more difficult that in the past to fulfill vacant positions.

Wireless products may pose health and safety risks.

There has been recent publicity alleging potentially negative direct and indirect health and safety effects of electromagnetic radiation from cellular telephones and other wireless equipment sources, including allegations that such emissions may cause cancer. Our wireless communications products emit electromagnetic radiation. Health and safety issues related to our products may arise that could lead to litigation or other action against us or to additional regulation of our products. We may be required to modify our technology and may not be able to do so. We may also be required to pay damages that may reduce our profitability and adversely affect our financial condition. Even if concerns about the safety of electromagnetic radiation prove to be without merit, negative publicity could affect our ability to market our products and could, in turn, harm our business and our results of operations.

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

In the United States, we are subject to various Federal Communications Commission, or FCC, rules and regulations. Current FCC regulations permit license exempt operation in certain FCC-certified bands in the radio spectrum. Our wireless products are certified for unlicensed operation in the 902-928 MHz, 2.4-2.4835 GHz, 5.15-5.35 GHz and 5.725-5.825 GHz frequency bands, and we expect soon to have certified products in the newly opened 5.470-5.725 GHz band. Operation in these frequency bands is governed by rules set forth in Part 15 of the FCC regulations. The Part 15 rules are designed to minimize the probability of interference to other users of the spectrum and, thus, accord Part 15 systems license-exempt status in the frequency band. In the event that there is interference caused by a Part 15 user, the FCC can require the Part 15 user to curtail transmissions that create interference. In this regard, if users of our products experience excessive interference from primary users, market acceptance of our products could be adversely affected, which could materially and adversely affect our business and operating results. The FCC, however, has established certain standards that create an irrefutable presumption of noninterference for Part 15 users and we believe that our products comply with such requirements. There can be no assurance that the occurrence of regulatory changes, including changes in the availability of license-exempt spectrum, changes in the allowed use spectrum, or modification to the standards establishing an irrefutable presumption for unlicensed Part 15 users, would not significantly affect our operations by rendering current products obsolete, restricting the applications and markets served by our products or increasing the opportunity for additional competition.

Our products are also subject to regulatory requirements in international markets and, therefore, we must monitor the development of frequency regulations in certain countries that represent potential markets for our products. While we cannot assure you that we will be able to comply with regulations in any particular country, we will design our products to minimize the design modifications required to meet various 2.4 GHz and 5 GHz international spread spectrum regulations. In addition, we will seek to obtain international certifications for our product line in countries where there are substantial markets for wireless networking systems. Changes in, or the failure by us to comply with, applicable domestic and international regulations could materially adversely affect our business and operating results. In addition, with respect to those countries that do not follow FCC regulations, we may need to modify our products to meet local rules and regulations.

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

· decrease the growth of the broadband wireless industry;

· hinder our ability to conduct business both domestically and internationally;

· reduce our revenues;

· increase the costs and pricing of our products;

· increase our operating expenses; and

· expose us to significant liabilities.

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

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

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

In this regard, we took a charge of $12.2 million related to the impairment of intangibles in accordance with SFAS No. 142 and 144 in the fourth quarter of 2004 and $129.1 million related to the impairment of goodwill in accordance with SFAS No. 142 in 2002. The impairment charges were measured as the amount that the carrying amounts exceeded our estimated fair value. If we were required to recognize additional impairment charges in goodwill or intangibles, the charge will negatively impact reported earnings in the period of the charge.

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

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

In December 2004, the FASB issued Statement No. 123 (revised 2004), Share-Based Payment (“SFAS 123R”), which replaces SFAS No. 123, Accounting for Stack-Based Compensation, (SFAS 123) and supercedes APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS 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 annual period after June 15, 2005. The pro forma disclosures previously permitted under SFAS 123 no longer will be an alternative to

financial statement recognition. We are required to adopt SFAS 123R in the first quarter of fiscal 2006, beginning January 1, 2006 and are considering early adoption of SFAS 123R.

Under SFAS 123R, we must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for 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 123R and expect that the adoption of SFAS 123R will have a material impact on our consolidated results of operations and earnings per share.

Additionally, on December 21, 2004, we announced that our Board of Directors has approved re-pricing of substantially all employee stock options to fair market value subject to approval by majority of our stockholders at our annual meeting of stockholders to be held on May 16, 2005. If the proposal is approved by our stockholders, the re-pricing program may commence at any time after the annual meeting and at the discretion of our Compensation Committee. Our current pro forma disclosure under SFAS 123 does not take into consideration the impact, if any, re-pricing of our stock options would have on our results of operations. We are considering to an early adoption of FAS 123R and are currently evaluating the effect re-pricing of employee stock options under SFAS No. 123R will have on our results of operations and financial condition and earning per share.

We have not yet determined the method of adoption or the effect of adopting SFAS 123R, and we have not determined whether the adoption will result in amounts that are similar to the current pro forma disclosures under SFAS 123. In addition, this new statement could impact our ability to utilize broad-based employee stock plans to reward employees and could result in a competitive disadvantage to us in the employee marketplace.

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

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

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

· authorize our board of directors to issue shares of common stock, which in some circumstances may be sufficient in number to dilute the stock ownership of any person or persons seeking to effect a change in the composition of the Company’s board of directors or contemplating a tender offer for the combination of the Company with another company;

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

· permit directors to be removed only for cause; and

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

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Interest Rate Sensitivity

We currently do not maintain investments that are subject to interest rate risk.

Exchange Rate Risk

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

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

Item 4. Controls and Procedures

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

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

PART II. OTHER INFORMATION

Item 1. 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, 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 against outstanding accounts payable by Active of ¥175.3 million to us, resulting in a net claim against Proxim Corporation of ¥383.9 million. Translated into U.S. dollars on May 4, 2005, Active’s net claim is approximately $3.7 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, February 22, 2005, March 10, 2005 and April 19, 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 claimed that it was 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. 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 an assignee or 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 expired.

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.

Upon our failure to timely pay to Symbol the payment due March 31, 2005, Symbol noticed us of a breach under the Settlement Agreement and demanded that we make the payment within the thirty-day cure period provided by the Settlement Agreement. Symbol subsequently agreed to waive its rights to extend the cure period for the payment until May 15, 2005. The waiver does not otherwise alter our obligations under the Settlement Agreement.

General

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 5. Other Information

The Company provides the following disclosure in lieu of a report relating to such event under Item 1.01 of Form 8-K:

Amendment to Loan Documents

On May 9, 2005, the Company and Silicon Valley Bank (the “Lender”) executed an Amendment to Loan Documents, pursuant to which the parties agreed that all outstanding and future letters of credit are required to be fully secured by cash in an amount equal to the greater of (i) 105% of the total face amount of all outstanding letters of credit, or (ii) $100,000 plus 100% of the total face amount of all outstanding letters of credit.

Until this amendment executed on May 9, 2005, the financial covenants under the Amended A/R Financing Agreement between the Company and Lender required the Company to maintain cash and cash equivalents with the Lender and its affiliates in an amount not less than $4.0 million, which could 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 the Company failed to meet this requirement, the Company could still remain in compliance with the financial covenants by maintaining a ratio of the total of cash, cash equivalents and accounts receivable approved by the Lender to the Company’s current liabilities of at least 5.0 to 1. In addition, the Company was required to maintain restricted cash balances to the extent that the Company’s outstanding letters of credit exceeded $4.0 million. The Company currently maintains substantially all of its cash, cash equivalents and investments at Silicon Valley Bank and its affiliates. In the event of default under the Amended A/R Financing Agreement, the Lender had the right to offset such cash, cash equivalents and investments against the Company’s obligations owing to the Lender.

These financial covenants were deleted from the amended A/R Financing Agreement on May 9, 2005 by the execution by the parties of the Amendment to Loan Documents.

Item 6. Exhibits

Exhibit Number		Description
4.1	Form of Warrant (Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the Commission February 8, 2005)
10.37	Employment Agreement, dated as of February 23, 2000 between the Registrant and Gordana Pance (Incorporated by reference to Exhibit 10.37 to the Company’s Annual Report on Form 10-K for the fiscal period ended December 31, 2001, filed with the Commission February 25, 2002.)
10.71	Employment Agreement, dated as of December 5, 2002, between Proxim Corporation and Kevin J. Duffy (Incorporated by reference to Exhibit 10.71 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2004, filed with the Commission November 11, 2004.)
10.72	Amendment to Employment Agreement, dated as of May 25, 2004, between Proxim Corporation and Kevin J. Duffy (Incorporated by reference to Exhibit 10.72 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2004, filed with the Commission November 11, 2004.)
10.78	Second Amendment to Employment Agreement, dated as of January 11, 2005, between Proxim Corporation and Kevin J. Duffy (Incorporated by Reference to Exhibit 10.78 to the Company’s Current Report on Form 8-K, filed with the Commission January 18, 2005.)

10.79		Amended Employment Agreement, dated as of January 11, 2005, between Proxim Corporation and Frank Plastina (Incorporated by Reference to Exhibit 10.78 to the Company’s Current Report on Form 8-K, filed with the Commission January 18, 2005.)
10.81		Employment Agreement between Proxim Corporation and Gordana Pance, effective January 20, 2005 (Incorporated by Reference to Exhibit 10.81 to the Company’s Current Report on Form 8-K, filed with the Commission January 27, 2005.).
10.82		Financial Advisor Agreement (Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the Commission February 8, 2005)
10.83		Form of Subscription Agreement, dated February 7, 2005 between the Company and the Purchasers (Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed with the Commission February 8, 2005)
10.84		Amendment to Loan Documents, dated as of May 9, 2005, between the Company and Silicon Valley Bank.
31.1		Section 302 Certification of Principal Executive Officer
31.2		Section 302 Certification of Principal Financial Officer
32.1		Section 906 Certification of Principal Executive Officer
32.2		Section 906 Certification of Principal Financial Officer

x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
		For the quarterly period ended April 1, 2005
or
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
		For the transition period from to

Delaware		52-2198231
(State of Incorporation)		(I.R.S. Employer Identification No.)

		PROXIM CORPORATION
	By:	/s/ MICHAEL D. ANGEL
		Michael D. Angel
		Executive Vice President and
		Chief Financial Officer
		(Principal Financial and Accounting Officer)
Date: May 11, 2005

		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements		3
	Condensed Consolidated Balance Sheets at April 1, 2005 and December 31, 2004 (unaudited)		3
	Condensed Consolidated Statements of Operations for the three months ended April 1, 2005 and April 2, 2004 (unaudited)		4
	Condensed Consolidated Statements of Cash Flows for the three months ended April 1, 2005 and April 2, 2004 (unaudited)		5
	Notes to Condensed Consolidated Financial Statements (unaudited)		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		61
Item 4.	Controls and Procedures		61
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings		62
Item 5.	Other Information		64
Item 6.	Exhibits		64
Signatures			66
Index to Exhibits			67