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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

For the quarterly period ended July 4, 2004

OR

For the transition period from              to             .

Commission file number 000-31031

AIRSPAN NETWORKS INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code:

561-893-8670

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

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

Number of shares outstanding of the registrant’s common stock as of August 12, 2004: 37,055,330

PART 1. FINANCIAL INFORMATION

Item 1. Financial Statements

AIRSPAN NETWORKS INC.

CONSOLIDATED BALANCE SHEETS

(in thousands except for share and per share data)

AIRSPAN NETWORKS INC.

CONSOLIDATED STATEMENTS OF INCOME

(in thousands except for share and per share data)

AIRSPAN NETWORKS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

AIRSPAN NETWORKS INC.

NOTES TO THE FINANCIAL STATEMENTS

(in thousands, except for share and per share data)

BUSINESS

We are a global supplier of broadband fixed wireless access (“BWA”) equipment that allows communications service providers (often referred to as “local exchange carriers,” or simply telephone companies), internet service providers (often referred to as “ISPs”) and other telecommunications users, such as utilities and enterprises, to cost effectively deliver high-speed data and voice services using radio frequencies rather than wires. We call this transmission method “Wireless Broadband”. The primary market for our systems is a subset of the fixed wireless access systems market, which is the fixed point-to-multipoint market in radio frequencies below 6.0GHz. Each of our fixed wireless access systems utilizes digital wireless techniques, which provide wide area coverage, security and resistance to fading. Our systems can be deployed rapidly and cost effectively, providing an attractive alternative or complement to traditional copper wire, cable, or fiber-optic communications access networks. Our products also include software tools that optimize geographic coverage of our systems and provide ongoing network management. To facilitate the deployment and operation of our systems, we also offer network installation, training and support services. A more complete description of our various wireless access systems is provided below. Our BWA systems (the “Airspan BWA Solutions”) have been installed by more than 200 network operators in more than 70 countries and are being tested by numerous other service providers.

Our products were developed and sold originally to provide wireless voice connections between network operators and their end customers. Product enhancements introduced in 1998 enabled us to offer both voice and data connectivity over a single wireless link. We have continued to develop the capabilities and features of the original products, and today we sell them as the AS4000 and AS4020 products, in systems capable of delivering high-capacity broadband data with carrier-quality voice connections to operators globally.

In October 2002, we strengthened our position in the BWA equipment market with the acquisition of the WipLL (Wireless Internet Protocol in the Local Loop) business from Marconi pursuant to a stock purchase agreement, and renamed the business Airspan Networks (Israel) Limited (“Airspan Israel”). The products and services produced by Airspan Israel enable operators in licensed and unlicensed wireless bands to offer high-speed, low cost, wireless broadband connections for data and voice over IP. We acquired all of the issued and outstanding capital stock and debt of Marconi WipLL in exchange for $3 million of cash.

In October 2003, we released our AS4030 and AS3030 product range of Airspan branded high-end point-to-multipoint and point-to-point products suitable for operators wishing to deliver service offerings to medium and large businesses and multi-tenant dwellings that require considerable bandwidth for their end users. These products, based on Orthogonal Frequency Division Multiplexing (“OFDM”) technology, can also be used for a wide range of backhaul applications.

In December 2003, we completed an agreement with Nortel Networks to acquire the fixed wireless access business of Nortel Networks known as “Proximity”. The acquired Proximity products and services provide carrier class circuit switched voice and data, based on a Time Division Multiple Access (“TDMA”) technology.

Our corporate headquarters are located in Boca Raton, Florida. Our primary operations, manufacturing and product development centers are located in Uxbridge, U.K., and Airport City, Israel. Our telephone number in Boca Raton is (561) 893-8670. Further contact details and the location of all Airspan’s worldwide offices may be found at www.airspan.com.

BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal recurring nature. The interim operating results are not necessarily indicative of operating results expected in subsequent periods or for the year as a whole. Certain reclassifications have been made for consistent presentation.

The balance sheet at December 31, 2003 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

For further information, refer to the consolidated financial statements and footnotes thereto included in the company’s Annual Report on Form 10-K for the year ended December 31, 2003.

All notes to the financial statements are shown in thousands, except for share data.

AIRSPAN NETWORKS INC.

NOTES TO THE FINANCIAL STATEMENTS - (Continued)

(in thousands, except for share and per share data)

CONTINGENCIES

Warranty

The Company provides a limited warranty for periods, usually ranging from twelve to twenty-four months, to all purchasers of its new equipment. Warranty expense is accrued at the date revenue is recognized on the sale of equipment and is recognized as a cost of revenue. The expense is estimated based on analysis of historic costs and is amortized over the warranty period. Management believes that the amounts provided for are sufficient for all future warranty costs on equipment sold through July 4, 2004 but if actual product failure rates, material usage or service delivery costs differ from estimates, revisions to the estimated warranty liability would be required.

Information regarding the changes in the Company’s product warranty liabilities was as follows for the six months ended July 4, 2004.

Other guarantees

The Company had delivered to its landlords and customers bank guarantees aggregating to $1,435 at December 31, 2003 and $24,468 at July 4, 2004. The foregoing figures represent the maximum potential amount of future payments the Company could be required to make under these guarantees. The guarantees secure payment or performance obligations of the Company under contracts. The Company has pledged cash to the banks as collateral for the guarantees in the same amounts as the guarantees. These pledges have been classified as restricted cash. The Company has not recognized any liability for these guarantees as in management’s opinion the likelihood of having to make payments under the guarantees is remote.

Legal claims

On and after July 23, 2001, three Class Action Complaints were filed in the United States District Court for the Southern District of New York naming as defendants Airspan, Eric D. Stonestrom (our President and Chief Executive Officer), Joseph J. Caffarelli (our former Senior Vice President and Chief Financial Officer), Matthew Desch (our Chairman) and Jonathan Paget (our Executive Vice President and Chief Operating Officer) together with certain underwriters of our July 2000 initial public offering. A Consolidated Amended Complaint, which is now the operative complaint, was filed on April 19, 2002. The complaint alleges violations of Sections 11 and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 for issuing a Registration Statement and Prospectus that contained materially false and misleading information and failed to disclose material information. In particular, Plaintiffs allege that the underwriter-defendants agreed to allocate stock in our initial public offering to certain investors in exchange for excessive and undisclosed commissions and agreements by those investors to make additional purchases of stock in the aftermarket at pre-determined prices. The action seeks damages in an unspecified amount.

This action is being coordinated with approximately three hundred other nearly identical actions filed against other companies. On July 15, 2002, the Company moved to dismiss all claims against it and the Individual Defendants. On October 9, 2002, the Court dismissed the Individual Defendants from the case without prejudice based upon Stipulations of Dismissal filed by the plaintiffs and the Individual Defendants. This dismissal disposed of the Section 15 and 20(a) control person claims without prejudice, since these claims were asserted only against the Individual Defendants. On February 19, 2003, the Court dismissed the Section 10b claim against us, but allowed the Section 11 claim to proceed. Airspan has approved the terms of a settlement agreement (the “Settlement Agreement”) and related agreements which set forth the terms and conditions of a settlement between Airspan, the Individual Defendants, the plaintiff class and the vast majority of the other approximately 300 issuer defendants and the individual defendants currently or formerly associated with those companies. Among other provisions, the Settlement Agreement provides for a release of Airspan and the Individual Defendants for the conduct alleged in the action to be wrongful. Pursuant to the terms of the Settlement Agreement, Airspan will agree to undertake certain responsibilities, including agreeing to assign away, not assert, or release certain potential claims Airspan may have against its underwriters. Accordingly, Airspan does not expect that the settlement will involve any payment by Airspan. The Settlement Agreement, which has not yet been executed, has been submitted to Court for approval. Approval by the Court cannot be assured. We cannot opine as to whether or when a settlement will occur or be finalized and are unable at this time to determine whether the outcome of the litigation will have a material impact on our results of operations or financial condition in any future period.

AIRSPAN NETWORKS INC.

NOTES TO THE FINANCIAL STATEMENTS - (Continued)

(in thousands, except for share and per share data)

Except as set forth above, we are not currently subject to any other material legal proceedings. We may from time to time become a party to various other legal proceedings arising in the ordinary course of our business.

STOCK COMPENSATION

At July 4, 2004, the Company had three stock option employee compensation plans and the 2000 Employee Stock Purchase Plan (“ESPP”). The Company accounts for these plans under the recognition and measurement principles of APB Opinion No.25 Accounting for Stock issued to Employees, and related interpretations. In all periods shown the Company has valued stock-based employee compensation using the intrinsic value method. There was no stock-based compensation cost reflected in net income in either 2003 or 2004. All options granted under these plans had an exercise price equal to the market value of the underlying common stock on the date of grant.

The following table illustrates the effect on net loss and net loss per share if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock Based Compensation, to stock based employee compensation.

ACQUISITIONS

On December 23, 2003, the Company completed an agreement with Nortel Networks to acquire the fixed wireless access business of Nortel Networks known as “Proximity”. As part of the transaction, Airspan acquired Nortel Networks’ inventory relating to Proximity. The initial allocation of the purchase price was preliminary. During the quarter ended July 4, 2004 the Company finalised its estimates of the fair values allocated to certain assets and liabilities acquired in the Proximity transaction. Given the availability of more accurate information on the acquired Proximity inventory, the Company has increased its valuation of the acquired inventory by $3.9 million. The Company also reduced acquisition accruals by $0.1 million. The adjustments to the fair values gave rise to negative goodwill of $1.7 million which has been allocated, on a pro rata basis, against purchased long term assets.

AIRSPAN NETWORKS INC.

NOTES TO THE FINANCIAL STATEMENTS - (Continued)

(in thousands, except for share and per share data)

The following table shows the preliminary purchase price allocation along with the revisions made to this during the quarter ended July 4, 2004.

Calculation of purchase price:

Allocation of purchase price

INVENTORY

Inventory consists of the following:

AIRSPAN NETWORKS INC.

NOTES TO THE FINANCIAL STATEMENTS - (Continued)

(in thousands, except for share and per share data)

ACCRUED RESTRUCTURING CHARGES

In the third quarter of 2002, a restructuring program was initiated to reduce operating expenses. A charge of $278 was recorded in the quarter. Included in this charge were costs related to the write off of tradeshow equipment and severance payments. The total number of employees terminated as part of this restructuring program was 19 and all severance payments were made by the end of the second quarter of 2003.

In the fourth quarter of 2002 the decision was made to completely outsource all our manufacturing. As a result the Company recorded a $975 restructuring charge for the closure of our Riverside, Uxbridge facility in 2003. All of this cost relates to the excess facility. A further $368 was recognized as restructuring in the income statement in the fourth quarter of 2003 as the Company reassessed the ability to sublease the Riverside facility.

In the second quarter of 2003 an additional restructuring program was initiated to further lower operating expenses. The total cost incurred as part of this restructuring program was $298 arising from costs associated with facility closures and severance.

The costs incurred during the year ended December 31, 2003 included termination costs for 30 employees. All of these employees had left the Company by December 31, 2003.

During the first quarter of 2004 the Company revised its original restructuring programs and initiated a new program to further reduce operating expenses. The Company did not record a restructuring charge during the first quarter of 2004. The total cost expected to be incurred as part of this restructuring program is $420 related to termination costs for 21 employees. This plan will be completed by the end of the third quarter of 2004. During the second quarter of 2004 the company incurred $397 related to this plan.

In conjunction with the purchase of the Proximity business the Company implemented its plan to relocate the Proximity business from Maidenhead, England and Sunrise, Florida to the Company’s facilities in Uxbridge, England and Boca Raton, Florida. The Company recorded acquisition-related restructuring charges of $520, in the fourth quarter of 2003, in connection with the relocation of the Proximity business. The estimated relocation costs were revised during the second quarter of 2004 from $520 down to $338. The adjustment formed part of the revised fair value adjustments of the Proximity acquisition. This plan is expected to be completed by the end of the third quarter of 2004.

The restructuring charges and their utilization are summarized as follows:

All charges will result in direct cash outlays.

AIRSPAN NETWORKS INC.

NOTES TO THE FINANCIAL STATEMENTS - (Continued)

(in thousands, except for share and per share data)

SEGMENTAL INFORMATION

As a developer and supplier of fixed wireless communications access systems and solutions, the Company has one reportable segment. The revenue of this single segment is comprised primarily of revenue from products and, to a lesser extent, services. The majority of the Company’s revenue is generated from products manufactured in the United Kingdom, Mexico and Israel, with additional revenue generated from sales of original equipment manufacturer’s (OEM) products.

An analysis of revenue by geographical market is given below:

COMPREHENSIVE LOSS

Total comprehensive loss was $10,074 for the quarter ended June 29, 2003 and $4,997 for the quarter ended July 4, 2004.

Components of Comprehensive Loss

AIRSPAN NETWORKS INC.

NOTES TO THE FINANCIAL STATEMENTS - (Continued)

(in thousands, except for share and per share data)

NET LOSS PER SHARE

Net loss per share is computed using the weighted average number of shares of common stock outstanding less the number of shares subject to repurchase. Shares associated with stock options are not included in the calculation of diluted net loss per share as they are antidilutive.

The following table sets forth the computation of basic and diluted net loss per share for the periods indicated.

In 2000, the Company adopted the 2000 Employee Stock Purchase Plan (“ESPP”), which is intended to qualify as an employee stock purchase plan under Section 423 of the Internal Revenue Code of 1986. As of July 4, 2004, there were 2,037,331 shares of common stock reserved for issuance under the ESPP. On August 1, 2004 the Company issued 211,754 shares at $1.76 per share to employees participating in the ESPP.

During the six months ended July 4, 2004 728,289 options granted pursuant to the 1998 stock option plan were exercised at an average exercise price of $1.07.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE COMPANY’S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2003, AS WELL AS THE FINANCIAL STATEMENTS AND NOTES THERETO. EXCEPT FOR HISTORICAL MATTERS CONTAINED HEREIN, STATEMENTS MADE IN THIS QUARTERLY REPORT ON FORM 10-Q ARE FORWARD-LOOKING AND ARE MADE PURSUANT TO THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. WITHOUT LIMITING THE GENERALITY OF THE FOREGOING, WORDS SUCH AS “MAY”, “WILL”, “TO”, “PLAN”, “EXPECT”, “BELIEVE”, “ANTICIPATE”, “INTEND”, “COULD”, “WOULD”, “ESTIMATE”, OR “CONTINUE” OR THE NEGATIVE OTHER VARIATIONS THEREOF OR COMPARABLE TERMINOLOGY ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. INVESTORS AND OTHERS ARE CAUTIONED THAT A VARIETY OF FACTORS, INCLUDING CERTAIN RISKS, MAY AFFECT OUR BUSINESS AND CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE SET FORTH IN THE FORWARD-LOOKING STATEMENTS. THESE RISK FACTORS INCLUDE, WITHOUT LIMITATION, (I) A SLOWDOWN OF EXPENDITURES BY COMMUNICATION SERVICE PROVIDERS; (II) INCREASED COMPETITION FROM ALTERNATIVE COMMUNICATION SYSTEMS; (III) THE FAILURE OF OUR EXISTING OR PROSPECTIVE CUSTOMERS TO PURCHASE PRODUCTS AS PROJECTED; (IV) OUR INABILITY TO SUCCESSFULLY IMPLEMENT COST REDUCTION OR CONTAINMENT PROGRAMS; (V) A LOSS OF ANY OF OUR KEY CUSTOMERS; (VI) OUR ABILITY TO RETAIN THE LARGEST EXISTING CUSTOMER OF NORTEL NETWORK’S FIXED WIRELESS BUSINESS; AND (VII) OUR ABILITY TO CONTINUE TO SELL THE EXISTING INVENTORY OF NORTEL NETWORK’S FIXED WIRELESS BUSINESS ON PURCHASE TERMS AND CONDITIONS COMPARABLE TO THOSE CURRENTLY UTILIZED. THE COMPANY IS ALSO SUBJECT TO THE RISKS AND UNCERTAINTIES DESCRIBED IN ITS FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION, INCLUDING ITS ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2003.

COMPARISON OF THE QUARTER ENDED JULY 4, 2004 TO THE QUARTER ENDED JUNE 29, 2003

Revenue

Revenue totaled $18.3 million for the quarter ended July 4, 2004 representing a 143% increase from the $7.5 million reported for the comparable 2003 quarter. The increase in revenues was primarily attributable to the Proximity acquisition in the fourth quarter of 2004. In addition, revenue for the second quarter of 2004 was 47% higher than for the first quarter of 2004. During the quarter, revenue was derived from 95 customers in 51 countries. Geographically, 71% of our revenues were derived from customers in Latin America and the Caribbean, 12% from Europe and 10% from Asia. North American customers and Africa and Middle Eastern customers accounted for 6% and 1% of revenues, respectively. In the second quarter 2004, sales to customers in Latin America and Caribbean increased by $12.1 million compared to the second quarter of 2003, primarily as a result of the acquisition of the Proximity business from Nortel Networks. During the quarter ended July 4, 2004, the Company made sales across all product lines to 30 customers in the Americas region, which is a record for the region.

Cost of Revenue

Cost of revenue increased 114% to $12.2 million in the quarter ended July 4, 2004 from $5.7 million in the quarter ended June 29, 2003 as a result of the increase in revenue. During the second quarter 2003 an inventory provision of $4.4 million was recorded. There was no comparable charge in the second quarter 2004. The gross profit for the second quarter of 2004 was $6.1 million (33% of revenue) compared to a gross loss of $2.6 million (negative 34% of revenue) for the second quarter 2003. The increase in gross margin in the second quarter 2004 was due primarily to the $4.4 million inventory provision in the second quarter of 2003 and variations in the percentage of sales of lower margin subscriber terminals and higher margin infrastructure equipment. The increase in gross margin was also partly attributable to comparable amounts of period costs being spread over a larger quarterly revenue base.

Research and Development Expenses

Research and development expenses increased 29% to $4.7 million in the quarter ended July 4, 2004 from $3.7 million in the quarter ended June 29, 2003. The increase arose from the purchase of the Proximity business in the fourth quarter of 2003, which was partially offset by expense reductions arising from headcount and expense reduction programs. During the second quarter of 2004, continued research and development with respect to the WiMAX product resulted in the Company being ahead of schedule with respect to prototype hardware.

Sales and Marketing Expenses

Sales and marketing expenses increased slightly to $2.8 million in the second quarter 2004 from $2.7 million in the second quarter 2003 as a result of changes in sales focus, commission and trade shows across the regions of the company.

Bad Debt Provision

In the second quarter 2004, the Company recorded a bad debt provision of $0.3 million relating to customer accounts for which management has determined that full recovery was unlikely. No provisions were made for bad debts in the corresponding quarter of 2003.

General and Administrative Expenses

General and administrative expenses increased 26% to $2.8 million in the quarter ended July 4, 2004 from $2.3 million in the quarter ended June 29, 2003. The increase is primarily due to an increase in legal and professional expenditures, including costs related to compliance with the Sarbanes Oxley Act 2002, an increase in the foreign exchange rate of certain sterling denominated charges and additional expense incurred in connection with the purchase of the Proximity business in the fourth quarter of 2004.

Amortization of Intangibles

The Company recorded an expense of $0.16 million in the second quarter 2004 compared with an expense of $0.04 million for the second quarter 2003. The increase in amortization expense relates to intangibles acquired as part of the Proximity purchase in the fourth quarter of 2003. These intangibles are expected to be fully amortized by the end of 2008. During the quarter the Company finalised its estimates of fair values allocated to certain assets and liabilities acquired in the Proximity purchase. Pursuant to this process, the amortization charge was decreased on a quarterly basis by $0.08 million.

Restructuring Provision

During the second quarter 2004 the Company reduced operating expenses in accordance with a revised restructuring program initiated in the first quarter 2004. The Company recorded a restructuring charge during the second quarter 2004 of $0.4 million. The total cost expected to be incurred as part of this restructuring program is $0.4 million related to termination costs associated with employees. This restructuring program is expected to be completed by the end of the third quarter of 2004. The Company recorded a restructuring provision of $0.3 million in the second quarter 2003.

Interest Expense and Interest and Other Income

Interest expense was $0 in the second quarter of 2004 and second quarter of 2003 as a result of the settlement of all of our long-term debt in the second quarter of 2003. Interest and other income decreased to $0.7 million for the quarter ended July 4, 2004 compared to $1.1 million in the quarter ended June 29, 2003. The decrease was due primarily to lower foreign exchange gains of $0.5 million recorded in the second quarter of 2004 as compared to the $0.8 million recorded in the comparable period of 2003. Interest income was $0.1 million lower in the second quarter 2004 than in the second quarter 2003 due to lower average cash balances and lower interest rates during the quarter ended July 4, 2004 as compared to the comparable period of 2003. The foreign exchange gains in 2004 and 2003 are primarily a result of the Company’s liquidation of certain currency hedging contracts entered into by the Company to protect itself against a strengthening of the British Pound against the US Dollar.

Income Taxes

We did not have a material income tax charge in either the second quarter of 2004 or 2003.

Net Loss

Our net loss of $4.4 million, or $0.12 per share, in the quarter ended July 4, 2004 compares to a net loss of $10.4 million, or $0.30 per share, in the quarter ended June 29, 2003, a decrease of 58%. The net loss attributable to common stockholders for the second quarter of 2004 is $0.03 per share lower than the net loss attributable to common stockholders for the first quarter of 2004. The increase in gross profit of $8.6 million was partially offset by higher operating expenses of $2.2 million and a decrease in interest and other income of $0.4 million.

Other Comprehensive Loss

Other comprehensive loss for the quarter ended July 4, 2004 arose from the decrease in fair value of our forward foreign exchange contracts on retranslation of $0.02 million and the reclassification of gains realized in net income of $0.6 million. These forward exchange contracts are used to hedge our UK expenses through to December 2004. Other comprehensive gain for the quarter ended June 29, 2003 was $0.3 million.

COMPARISON OF THE SIX MONTHS ENDED JULY 4, 2004 TO THE SIX MONTHS ENDED JUNE 29, 2003

Revenue

Revenue totaled $30.7 million for the six months ended July 4, 2004 representing a 100% increase from the $15.3 million reported for the comparable 2003 period. The increase in revenues was primarily attributable to the Proximity acquisition in the fourth quarter of 2004. During the six month period, revenue was derived from over 130 customers in over 60 countries. Geographically, 69% of our revenues were derived from customers in Latin America and the Caribbean, 15% from Europe and 9% from Asia. North American customers and Africa and Middle Eastern customers accounted for 4% and 3% of revenues, respectively. In the six months ended July 4, 2004, sales to customers in Latin America and the Caribbean increased by $19.3 million compared to the corresponding 2003 period, primarily as a result of the acquisition of the Proximity business from Nortel Networks.

Cost of Revenue

Cost of revenue increased 91% to $20.9 million in the six months ended July 4, 2004 from $11.0 million in the six months ended June 29, 2003 as a result of the increase in revenue. During the first two quarters of 2003 an inventory provision of $4.4 million was recorded. There was no inventory provision recorded in the first six months of quarter 2004. The gross profit for the first six months of 2004 was $9.8 million (32% of revenue) compared to a gross loss of $0.02 million (0% of revenue) for the first half of 2003. The increase in gross margin was due primarily to the $4.4 million inventory provision recorded in the first six months of 2003 and variations in the percentage of sales of lower margin subscriber terminals and higher margin infrastructure equipment. The increase in gross margin was also partly attributable to comparable amounts of period costs being spread over a larger quarterly revenue base.

Research and Development Expenses

Research and development expenses increased 32% to $9.8 million in the six months ended July 4, 2004 from $7.4 million in the six months ended June 29, 2003. The increase arose from the purchase of the Proximity business in the fourth quarter of 2003, which was partially offset by expense reductions arising from headcount and expense reduction programs.

Sales and Marketing Expenses

Sales and marketing expenses remained consistent for the first six months of 2003 and 2004 at $5.3 million.

Bad Debt Provision

In the first half of 2004, the Company recorded a bad debt provision of $0.3 million. This provision related to customer accounts for which management determined that full recovery was unlikely. No provisions were made for bad debts in the corresponding 2003 period.

General and Administrative Expenses

General and administrative expenses increased 5% to $4.9 million in the six months ended July 4, 2004 from $4.6 million in the six months ended June 29, 2003. The increase is primarily due to an increase in legal and professional expenditures, including costs related to compliance with the Sarbanes Oxley Act 2002, an increase in the foreign exchange rate of certain sterling denominated charges and additional expense incurred in connection with the purchase of the Proximity business in the fourth quarter of 2004, partially offset by expense and headcount reduction programs.

Amortization of Intangibles

The Company recorded an expense of $0.4 million in the first six months of 2004 compared with an expense of $0.1 million for the corresponding 2003 period. The increase in amortization expense relates to intangibles acquired as part of the Proximity purchase in the fourth quarter of 2003.

Restructuring Provision

During the first half of 2004 the Company reduced operating expenses in accordance with a revised restructuring program initiated in the first quarter 2004. The Company recorded a restructuring charge during the period of $0.4 million. The total cost expected to be incurred as part of this restructuring program is $0.4 million related to termination costs associated with employees. This restructuring program is expected to be completed by the end of the third quarter of 2004. The Company recorded a restructuring provision of $0.3 million in the first half of 2003.

Interest Expense and Interest and Other Income

Interest expense was $0 in the first half of 2004 and first half of 2003 as a result of the settlement of all of our long-term debt in the second quarter of 2003. Interest and other income decreased to $1.5 million for the first half of 2004 compared to $1.7 million for the corresponding 2003 period primarily due to lower foreign exchange gains of $0.1 million and lower interest received of $0.1 million for the six month period ended July 4, 2004 as compared to the six month period ended June 29, 2003. The foreign exchange gains in 2004 and 2003 are primarily attributable to the Company’s liquidation of certain currency hedging contracts entered into by the Company to protect itself against a strengthening of the British Pound against the US Dollar.

Income Taxes

We did not have a material income tax charge in either the first half of 2004 or 2003.

Net Loss

Our net loss of $9.8 million in the six months ended July 4, 2004 compares to a net loss of $16.0 million in the six months ended June 29, 2003, a decrease of 39%. The increase in gross profit of $9.8 million was partially offset by higher operating expenses of $3.4 million and a decrease in interest and other income of $0.2 million.

Other Comprehensive Loss

Other comprehensive loss for the six months ended July 4, 2004 arose from the increase in fair value of our forward foreign exchange contracts on retranslation of $0.2 million and the reclassification of gains realized in net income of $1.0 million. These forward exchange contracts are used to hedge our UK expenses through to December 2004. Other comprehensive loss for the six months ended June 29, 2003 was $0.7 million.

Restructuring

In the third quarter of 2002, a restructuring program was initiated to reduce operating expenses. A charge of $0.3 million was recorded in the quarter. Included in this charge were costs related to the write off of tradeshow equipment and severance payments. The total number of employees terminated as part of this restructuring program was 19 and all severance payments were made by the end of the second quarter of 2003.

In the fourth quarter of 2002 the decision was made to completely outsource all our manufacturing. As a result we recorded a $1.0 million restructuring charge for the closure of our Riverside, Uxbridge facility in 2003. All of this cost relates to the excess facility. A further $0.4 million was recognized as restructuring in the income statement in the fourth quarter of 2003 as the Company reassessed the ability to sublease the Riverside facility.

In the second quarter of 2003 an additional restructuring program was initiated to further lower operating expenses. The total cost incurred as part of this restructuring program was $0.3 million arising from costs associated with facility closures and severance.

The costs incurred during the year ended December 31, 2003 included termination costs for 30 employees. All of these employees had left the Company by December 31, 2003.

During the first quarter of 2004 the Company revised its original restructuring programs and initiated a new program to further reduce operating expenses. The Company did not record a restructuring charge during the first quarter of 2004. The total cost expected to be incurred as part of this restructuring program is $0.4 million related to termination costs for 21 employees. This plan is will be completed by the end of the third quarter of 2004. During the second quarter of 2004 the company incurred cost of $0.4 million related to this plan

In conjunction with the purchase of the Proximity business the Company implemented its plan to relocate the Proximity business from Maidenhead, England and Sunrise, Florida to the Company’s facilities in Uxbridge, England and Boca Raton, Florida. The Company recorded acquisition-related restructuring charges of $0.5 million, in the fourth quarter of 2003, in connection with the relocation of the

Proximity business. The estimated relocation costs were revised during the second quarter of 2004 from $0.5 million down to $0.4 million. The adjustment formed part of the revised fair value adjustments of the Proximity acquisition. This plan is expected to be completed by the end of the third quarter of 2004.

The restructuring charges and their utilization are summarized as follows: