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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities

Exchange Act of 1934

For the quarterly period ended March 31, 2005

Commission File Number: 000-28217

AIRNET COMMUNICATIONS CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

3950 Dow Road, Melbourne, Florida 32934

(Address of Principal Executive Offices) (Zip Code)

(321) 984-1990

(Registrant’s Telephone Number, Including Area Code)

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

The number of shares outstanding of each of the issuer’s classes of common stock as of May 3, 2005, was:

12,481,927 Common stock, par value $.001 per share

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AIRNET COMMUNICATIONS CORPORATION

INDEX

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TRADEMARK AND TRADE NAMES

The stylized AirNet mark, AirNet^®, AdaptaCell^®, AirSite^®, Backhaul Free^™, RapidCell^™, TripCap^™, SuperCapacity^™, DirectLink^™, InteliBSS^™ and iBSS^™ are trademarks of AirNet Communications Corporation.

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

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

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

AIRNET COMMUNICATIONS CORPORATION

CONDENSED BALANCE SHEETS

(In Thousands)

SEE NOTES TO CONDENSED FINANCIAL STATEMENTS

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AIRNET COMMUNICATIONS CORPORATION

CONDENSED STATEMENTS OF OPERATIONS

(In Thousands, Except Share and Per Share Amounts)

SEE NOTES TO CONDENSED FINANCIAL STATEMENTS

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AIRNET COMMUNICATIONS CORPORATION

CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2005

(unaudited)

(In thousands, except shares)

SEE NOTES TO CONDENSED FINANCIAL STATEMENTS

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AIRNET COMMUNICATIONS CORPORATION

CONDENSED STATEMENTS OF CASH FLOWS

(In Thousands)

SEE NOTES TO CONDENSED FINANCIAL STATEMENTS

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AIRNET COMMUNICATIONS CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS

(FOR THE THREE MONTHS ENDED MARCH 31, 2005)

(Unaudited)

1) BASIS OF PRESENTATION AND NEW ACCOUNTING PRONOUNCEMENTS

The accompanying Condensed Financial Statements are unaudited, but in the opinion of management, reflect all adjustments (consisting only of normal recurring adjustments) necessary to fairly state the Company’s financial position, results of operations, and cash flows as of and for the dates and periods presented. The financial statements of the Company are prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information.

These unaudited Condensed Financial Statements should be read in conjunction with the Company’s audited financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 filed with the Securities and Exchange Commission. The results of operations for the three months ended March 31, 2005 are not necessarily indicative of the results that may be expected for the entire year ending December 31, 2005 or for any future period.

Certain prior period amounts have been reclassified to conform to current period presentation.

Stock-Based Compensation- The Company adopted the disclosure only provision of Statement of Financial Accounting Standard (SFAS) No. 123, Accounting for Stock-Based Compensation (Statement 123). Under Statement 123, companies have the option to measure compensation costs for stock options using the intrinsic value method prescribed by Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees. Under APB No. 25 compensation expense is generally not recognized when both the exercise price is the same as the market price and the number of shares to be issued is set on the date the employee stock option is granted. The Company has chosen to use the intrinsic value method and compensation expense is recognized only for stock option grants with an exercise price that is below the market price on the date of grant. In December 2002 the Financial Accounting Standards Board (FASB) issued Statement No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure – an amendment of Statement No. 123 (Statement 148). This statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. This statement also amends the disclosure requirements of Statement 123 and APB Opinion No. 28, Interim Financial Reporting, to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company implemented Statement 148 effective January 1, 2003 regarding the disclosure requirements for Condensed Financial Statements for interim periods. The Company did not change to the fair value based method of accounting for stock-based employee compensation.

If the Company had elected to recognize compensation expense for the issuance of options to employees of the Company based on the fair value method of accounting prescribed by Statement 123, net loss and loss per share would have been increased to the pro forma amounts as follows:

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In December 2004 the FASB issued SFAS No. 123(R), Share-Based Payment which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation and supersedes APB Opinion No. 25 Accounting for Stock Issued to Employees. SFAS 123(R) requires the measurement of the cost of employee services received in exchange for an award of equity instruments to be based on the grant-date fair value of the award. The cost will be recognized over the period during which an employee is required to provide service in exchange for the award. The Company is currently evaluating the two methods of adoption allowed by SFAS 123(R): the modified-prospective transition method and the modified-retrospective transition method and has yet to determine what effect the adoption of this statement will have on its financial statements. This statement requires companies to recognize the fair value of stock options and other stock-based compensation to employees prospectively, beginning with awards granted, modified, repurchased or cancelled after the fiscal periods beginning after June 15, 2005. In April 2005, the Securities and Exchange Commission amended its Regulation S-X to amend the date of compliance with SFAS 123(R) to the first reporting period of the fiscal year beginning on or after June 15, 2005. We anticipate adopting SFAS 123(R) on January 1, 2006.

2) LIQUIDITY, CAPITAL RESOURCES AND GOING CONCERN CONSIDERATIONS

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As a consequence, the financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classifications of liabilities that might be necessary should we be unable to continue as a going concern. The Company has experienced net operating losses and negative cash flows since inception and, as of March 31, 2005, had an accumulated deficit of $263.8 million. Cash used in operations and to fund capital expenditures for the three month periods ended March 31, 2005 and 2004 was $2.0 and $1.7 million, respectively. The Company expects to have an operating loss throughout 2005. At March 31, 2005, the Company’s principal source of liquidity was $5.0 million of cash and cash equivalents, $6.4 million of accounts receivable, contract backlog of $1.4 million and future contracts as awarded. Such conditions raise substantial doubt that the Company will be able to continue as a going concern without receiving additional funding. As of May 2, 2005 the Company’s cash balance was $4.7 million. The Company’s current 2005 operating plan projects that cash available from planned revenue combined with the $4.7 million cash on hand at May 2, 2005 may be adequate to defer the requirement for new funding until the second half of 2005. There can be no assurances that new financing can be secured at a reasonable cost, if at all.

The Company’s future results of operations involve a number of significant risks and uncertainties. The worldwide market for telecommunications products such as those sold by the Company has seen dramatic reductions in demand as compared to the late 1990’s and 2000. It is uncertain as to when or whether market conditions will improve. The Company has been negatively impacted by this reduction in global demand and by its weak capital structure. Other factors that could affect the Company’s future operating results and cause actual results to vary from expectations include, but are not limited to, its ability to raise capital, its dependence on key personnel, its dependence on a limited number of customers (with four customers accounting for 87.1% of our total revenue for the three months ended March 31, 2005), its ability to address large customer expectations and product defects, its ability to design new products, the erosion of product prices, its ability to overcome deployment and installation challenges in developing countries which may include political and civil risks and risks relating to environmental conditions, product obsolescence, its ability to generate consistent sales, its ability to finance research and development, government regulation, technological innovations and acceptance, competition, its reliance on certain vendors and credit risks. The Company’s ultimate ability to continue as a going concern for a reasonable period of time will depend on the Company increasing its revenues and/or reducing its expenses and securing enough additional funding to enable the Company to reach profitability. The Company’s historical sales results and its current backlog do not give the Company sufficient visibility or predictability to indicate when the required higher sales levels might be achieved, if at all.

It is likely that the Company will be required to discontinue operations if it is unable to obtain additional funding or dramatically reduce its expenditures. A dramatic reduction in expenditures may significantly reduce its ability to compete. It

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is unlikely that the Company will achieve profitable operations in the near term and therefore it is likely that its operations will continue to consume cash in the foreseeable future. The Company has limited cash resources and therefore must reduce its negative cash flows or secure additional funding in the near term to continue operations. Obtaining additional funding would require the approval of the Company’s senior note holders, and would likely be subject to additional conditions, and there can be no assurances that the Company will be able to find such financing even if its senior note holders would permit it. Likewise, there can be no assurances that the Company will succeed in achieving its goals and failure to do so in the near term will have a material adverse effect on the Company’s business, prospects, financial condition and operating results and its ability to continue as a going concern. As a consequence, the Company may be forced to seek protection under the bankruptcy laws. In that event, it is unclear whether the Company could successfully reorganize its capital structure and operations, or whether it could realize sufficient value for its assets to satisfy fully the debt to the holders of its senior notes, in accordance with the Securities Purchase Agreement described in Note 11, or to any other holders. Accordingly, should the Company file for bankruptcy, there is no assurance that its stockholders would receive any value.

The Company has engaged a financial advisor to assist in identifying and evaluating strategic business options. These options include, but are not limited to, i) seeking strategic partners and/or strategic investors and ii) a business combination or acquisition.

Considering the uncertainty regarding the Company’s ability to materially increase revenue or significantly reduce expenses, its cash requirements throughout 2005 will likely exceed its available cash resources. As a result of this condition, management is continuing to evaluate other funding options.

No assurance can be given that additional financing will be available to the Company on acceptable terms, or at all.

The Company may not continue to meet NASDAQ listing standards. Under continued listing standard one (rule 4450(a)), companies listed on the NASDAQ National Market are required to have net tangible assets of $4 million, total stockholders’ equity of $10 million, and a minimum bid price of at least $1.00 per share (or a minimum bid price of at least $5.00 per share with no net tangible asset requirement). At various times in 2003, 2004 and 2005 the Company’s share price traded at and occasionally below the required minimum bid price of $1.00 per share for continued listing and/or the Company did not comply with the total stockholders’ equity requirement. The Company cannot give investors in its common stock any assurance that it will be able to maintain compliance with the $1.00 per share minimum bid price standard or the total stockholders’ equity standard for continued listing on NASDAQ and that the liquidity that NASDAQ provides will be available to investors in the future.

3) REVENUE RECOGNITION

Revenue from product sales is recognized after delivery, after determination that the fee is fixed and determinable and collectibility is probable, and after resolution of any uncertainties regarding satisfaction of all significant terms and conditions of the customer contract. While a customer has the right to reject and return a product, none of the Company’s contracts contain a contractual right of refund. If a product is rejected, the Company’s sole contractual obligation is to repair or replace the product. Customer acceptance is a two-step process: conditional acceptance and final acceptance. Contractual payments are due when each of these milestones has been reached. Although the Company has never failed to achieve acceptance, such a failure would not entitle the customer to a refund but rather the Company, in such an event, would be obliged to diligently resolve the conditions preventing acceptance.

Revenue is recognized on product sales to OEMs when title to the product passes to the OEM, which typically occurs at the point of shipment.

The Company recognizes revenue from service agreements on a straight-line basis unless its obligation is fulfilled in a different pattern, over the contractual term of the arrangement.

Revenue on certain long-term contracts is recognized on a percentage of completion basis. The cost incurred to date is taken as a percentage of the estimated cost at completion and this percentage is used to compute revenue on an inception-to-date basis.

4) ACCOUNTS RECEIVABLE

Accounts receivable have increased from $3.2 million (net of allowance for doubtful accounts of $325 thousand) at December 31, 2004 to $4.0 million (net of allowance for doubtful accounts of $325 thousand) at March 31, 2005.

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The allowance for doubtful accounts receivable of $325 thousand at March 31, 2005 is considered adequate by management, based on current knowledge of customer status and market conditions, to absorb estimated losses in the accounts receivable portfolio.

Accounts receivable due from a related party, TECORE (see Note 11 to these Condensed Financial Statements) were $2.4 million and $3.0 million at March 31, 2005 and December 31, 2004, respectively. The Company considered the status of this account in evaluating the allowance for doubtful accounts for its portfolio of open accounts as of March 31, 2005. TECORE is also one of the Company’s significant investors and its designees currently hold two of the Company’s ten board seats. Two of the ten board seats are currently vacant.

5) INVENTORIES

Inventories consist of the following (in thousands):

6) SOFTWARE DEVELOPMENT AND LICENSING

Software development and licensing costs include amounts paid under separate agreements with external, unrelated parties. The agreements relate to both license fees and software development costs.

The first license agreement is for EDGE software which has been integrated into the base station product line for applications involving high-speed data. The license term for this agreement is perpetual with payments made as certain Company development milestones are reached. The total amount paid under this agreement was approximately $1.1 million at March 31, 2005. The remaining balance of approximately $0.4 million in licensing and first year maintenance fees are payable as certain specified milestones are reached, with payments expected in 2005. During the second quarter of 2004, the Company began marketing the EDGE software and therefore commenced amortizing this product over its five-year estimated useful life. Accumulated amortization at March 31, 2005 was $181 thousand and related amortization expense for the three-month period ended March 31, 2005 was $57 thousand. In addition to the licensing fees and non-recurring engineering fees paid, royalties will be payable on a per EDGE enabled base station basis. The Company deployed its first EDGE enabled base stations during January 2005.

The second agreement for development pertains to licensing of adaptive array technology. The license term for this agreement is perpetual. The Company has capitalized approximately $1.3 million of software costs under this agreement and achieved commercial availability of the product in December 2003, at which point, recognition of amortization commenced using a straight-line method over a five-year estimated useful life. Amortization expense for each of three-month periods ended March 31, 2005 and 2004 was $65 thousand and accumulated amortization at March 31, 2005 and December 31, 2004

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was $346 thousand and $281 thousand, respectively. In addition to the $1.3 million of software costs, a licensing fee of $1.2 million is payable 30 days following the shipment of the 100th Super Capacity base station; and royalties are payable on a per unit basis with a minimum of $1.0 million due within two years of the anniversary of shipment of 100 Super Capacity base stations. As of March 31, 2005, the Company has shipped 18 Super Capacity base stations.

The third agreement pertains to a license buy-out for a supplement to the Company’s EDGE software during 2004. The total amount paid under this agreement was $103,000, which represents a one-time license fee. No royalties are due under this agreement. This supplement is currently integrated into the Company’s base station product line and therefore being amortized over a five-year estimated useful life. Accumulated amortization at March 31, 2005 and December 31, 2004 was $17 thousand and $12 thousand, respectively; and amortization expense for the three-month period ended March 31, 2005 was $5 thousand.

7) BASIC AND DILUTED NET LOSS PER SHARE

Basic and diluted net loss per share is calculated in accordance with Statement of Financial Accounting Standards No. 128, Earnings Per Share. The denominator used in the computation of basic and diluted net loss per share is the weighted average number of common shares outstanding for the respective period. All potentially dilutive securities were excluded from the calculation of diluted net loss per share, as the effect would be anti-dilutive. The computation of loss per share is as follows (in thousands except share and per share data):

8) STOCK-BASED COMPENSATION PLANS

Effective upon the closing of the August 2003 Investment under the Purchase Agreement described in Note 11, the Company amended its stock option plan. Under the amended plan the number of options available for grant was increased to 3,074,299. After the closing of the Investment, 2,008,193 options at a strike price of $0.10 per share were issued to employees. This includes options granted to the Chief Executive Officer of the Company provided under a separate agreement, concurrent with the closing of the Purchase Agreement. The granting of the non-qualified stock options to employees will have a non-cash impact to the earnings of the Company of $19.1 million amortized ratably over the two-year vesting period ending in September 2005. The amortization expense of these grants during the three-month periods ended March 31, 2005 and 2004 was approximately $2.3 million and $2.4 million, respectively. In January 2004, as a result of the change of control that occurred when the additional $1.0 million payment on the Securities Purchase agreement was made, the vesting on all options outstanding prior to August 13, 2003 accelerated.

The following table summarizes option activity for the three months ended March 31, 2005:

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For options outstanding and exercisable at March 31, 2005, the exercise price ranges and weighted average exercise prices and remaining lives are as follows:

The outstanding options expire at various dates through February 2015. At March 31, 2005, a total of 965,111 options were exercisable, with a weighted average exercise price of $8.39 per share. The weighted average remaining contractual life of options at March 31, 2005 with exercise prices ranging from $0.10 to $397.50 was 8.2 years.

During the three months ended March 31, 2005, 2,400 stock options were granted with a strike price of $1.10 per share, and 9,242 options were exercised at strike prices ranging from $0.10 to $1.10.

Total stock compensation expense for the three-month periods ended March 31, 2005 and 2004 was $2.3 million and $2.4 million, respectively.

At March 31, 2005, a total of 770,623 shares of the Company’s common stock were available for future grants of stock options.

9) SERIES G BRIDGE FINANCING

Through a private placement in June and July 1999, the Company issued $6,338,187 of securities comprised of convertible promissory notes (1999 Bridge Notes) with attached warrants (the Bridge Warrants). As of September 16, 1999, the carrying value and accrued interest on the 1999 Bridge Notes totaling $6,485,985 was converted into Series G senior voting convertible preferred stock, which was subsequently converted into Company common stock during 1999.

The Bridge Warrants vested immediately, have a ten-year term, and contain a cashless exercise option. Warrants to purchase 51,834 shares of common stock were issued in June and August 1999 at an exercise price of $36.70 per share. In August 2003, the number of shares that could be purchased upon exercise of the warrants and the exercise price per share were adjusted pursuant to the anti-dilution rights of the warrants as a result of the Company’s consummation of the Securities Purchase Agreement with convertible debt at an effective conversion price of $1.081 per share. Following this adjustment, there were outstanding warrants to purchase 370,870 shares at an exercise price of $4.30 per share. (See Note 11).

No warrants were exercised during the three-month period ended March 31, 2005. As of March 31, 2005 and December 31, 2004, warrants to purchase 8,701 shares of common stock, were outstanding at an exercise price of $4.30 per share. The Bridge Warrants issued in June 1999 expire on June 10, 2009. The Bridge Warrants issued in August 1999 expire on August 1, 2009.

10) CONTINGENCIES

The Company, two of our former officers and members of the underwriting syndicate involved in our initial public offering have been named as defendants in a class action complaint filed on November 16, 2001 in the United States District Court for the Southern District of New York. The action, number 21 MC 92 (SAS), alleges that the defendants violated federal

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securities laws and seeks unspecified damages and certification of a plaintiff class consisting of all persons and entities who purchased, converted, exchanged or otherwise acquired shares of the Company’s common stock between December 6, 1999 and December 6, 2000, inclusive. The complaint charges ostensible violations of Sections 11 and 15 of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934. In substance, the suit alleges that the underwriters of the Company’s IPO charged commissions in excess of those disclosed in the IPO materials and that these actions were not properly disclosed.

More than 300 similar class action lawsuits filed in the Southern District of New York have been consolidated for pretrial purposes under the caption of In re Initial Public Offering Securities Litigation. On July 15, 2002, a joint Motion to Dismiss was filed by the defendants. In February 2003, the Motion to Dismiss was granted in part (with respect to the Company) and denied in part (with respect to all issuer defendants). The claims against our two former officers named in the class action lawsuit have been dismissed without prejudice, pursuant to agreement.

The issuer defendants and the plaintiffs have since drafted and agreed upon a settlement, which is pending approval by the court. A committee of the Company’s Board of Directors has accepted the pending settlement. Under the terms of the settlement agreement, the defendant issuers’ insurers have agreed to guarantee the plaintiffs the amount of one billion dollars less the total of all of the plaintiffs’ recoveries from the underwriter defendants. None of the proceeds will be distributed to any proposed class member until after the conclusion of the class members’ proceedings with respect to the underwriter defendants. Furthermore, pursuant to the agreement, the issuer defendants have assigned all their potential claims against the underwriter defendants to a litigation trust, to be represented by plaintiffs’ counsel. On February 15, 2005, the Court granted preliminary approval of the proposed settlement. The Court’s approval is contingent on certain modifications of the settlement provisions concerning a bar on claims of contribution. A proposed amendment to the settlement addressing the Court’s concerns has been prepared and is currently awaiting approval from the other issuers to this action.

Under the terms of the settlement, there would be no liability to be recorded by the Company. Pursuant to a separate agreement, the insurers have also agreed to pay the issuers’ defense costs incurred on or subsequent to June 1, 2003 on a pooling basis. Furthermore, pending approval, the individual tolling agreements dismissing the named individual defendants have been extended, so that the individual defendants will be covered by the settlement as well. Final approval of the settlement remains pending before the Court and, given the Court’s scheduling orders, will likely not be determined until 2006. While awaiting final court approval of the settlement, the issuers, including the Company, have complied with discovery obligations specified in the settlement, by providing a limited number of documents.

In the event that the settlement is not approved, the Company intends to defend vigorously against the plaintiffs’ claims. Moreover, while the Company does not know whether the claims of misconduct by the underwriters have merit, the Company has claims under the Underwriting Agreement against the relevant underwriters of the IPO for indemnification and reimbursement of costs and any damages incurred in connection with the matter, and the Company intends to pursue those claims vigorously as well in the event that the settlement is not finally approved.

In addition to the item listed above the Company is also involved in various claims and litigation matters arising in the ordinary course of business.

With respect to the above matters, the Company believes that it has adequate legal defenses and/or provided adequate accruals for related costs such that the ultimate outcome will not have a material adverse effect on the Company’s future financial position or results of operations.

11) SECURITIES PURCHASE AGREEMENT TRANSACTION

On January 24, 2003, the Company entered into a Bridge Loan Agreement (the Loan Agreement), with TECORE, Inc., a Texas corporation (TECORE), and SCP Private Equity Partners II, L.P., a Delaware limited partnership (SCP II and together with TECORE, the Lenders), pursuant to which each of the Lenders agreed to make loans to the Company of up to $3.0 million (collectively, the Commitments or Bridge Loans), for an aggregate interim financing of $6.0 million. The Company was allowed to draw down the balance of the Commitment at its discretion upon compliance with certain conditions set forth in the Loan Agreement. The annual interest rate on the Bridge Loans was 2% plus prime rate as quoted in The Wall Street Journal. The Bridge Loans were due on May 24, 2003 but the due date was extended until the closing of the Securities Purchase Agreement by the Lenders discussed below.

On June 5, 2003, the Company, and the Lenders entered into a Securities Purchase Agreement (Purchase Agreement) for the issuance and sale to the lenders of senior secured convertible notes (the Notes) in the principal amount of $16.0 million (the Investment). Although this security is not registered, the Lenders have demand registration rights. The Notes are collateralized by a security interest in all of the Company’s assets, including without limitation its intellectual property, in favor of the Lenders under the terms and conditions of the Purchase Agreement. The Purchase Agreement was disclosed in an attachment to the Company’s Form 8-K filed on June 9, 2003.

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The Company’s stockholders approved the closing of the Investment under the Purchase Agreement on August 8, 2003 and the Purchase Agreement closed on August 13, 2003. On that date, the Company issued Notes of $16.0 million ($4.0 million and $12.0 million to SCP II and TECORE, respectively), which carry an interest rate of 12% per annum, an initial conversion rate of $1.081 and a maturity date of August 13, 2007. Payment of all accrued interest therefrom is deferred until the maturity date. The Notes, inclusive of interest, have voting rights equivalent to the number of shares into which the Notes and accrued interest could be converted at a deemed conversion price of $5.70.

Upon the closing of the Purchase Agreement, the Company immediately received $8.0 million in proceeds ($4.0 million each from SCP II and TECORE) and the principal balance of the Bridge Loans ($6.0 million) was due and paid from the proceeds. The interest accrued on these Bridge Loans was deferred by the Lenders and is due and payable four years from the closing date under the Purchase Agreement. The interest rate at 12% per annum will compound on the amount of interest deferred under the Bridge Loans. As of March 31, 2005 the deferred accrued interest from the Bridge Loans was $160,741 and accrued interest on this amount was $33,113. The interest on the Bridge Loans and any accrued interest on this amount are not convertible into shares of common stock.

Pursuant to the Purchase Agreement, the remaining proceeds from the Investment were due from TECORE and scheduled in eight quarterly installments of $1.0 million each, as detailed in the table below:

As of March 3, 2005, the Purchase Agreement was funded in its entirety, $16 million.

The Notes, inclusive of interest, are convertible, at any time, into shares of the Company’s common stock at an initial conversion price of $1.081, subject to adjustment for certain future dilutive issuances of securities. Such adjustment was necessitated by the exercise of 180,419 and 181,750 Bridge Warrants (described in Note 9) during 2003 and 2004, respectively. The table below details the conversion rates and the ending balances of the Notes (principal and interest) for the periods ended as indicated:

The approximate fair value of the notes, excluding giving consideration to potential conversions to common stock, as of March 31, 2005 and December 31, 2004 was $11,029,000 and 9,754,000, respectively.

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The table below details all conversions of both principal and interest that have occurred since the inception of the Purchase Agreement.

The accounting treatment of the Notes and the resulting impacts on the financial statements of the Company are as follows:

Events surrounding the closing of the Purchase Agreement and their impact on the financial statements of the Company are as follows:

Effective upon the closing of the Investment under the Purchase Agreement, the Company had amended its stock option plan. Under the amended plan the number of options available for grant was increased to 3,074,299. After the closing of the Purchase Agreement, 2,008,193 options at a strike price of $0.10 per share were issued to employees. This includes options granted to the Chief Executive Officer of the Company provided under a separate agreement, concurrent with the closing of the Purchase Agreement. The granting of the non-qualified stock options to employees will cause a non-cash charge to the earnings of the Company of $19.1 million amortized ratably over the two-year vesting period ending in September 2005.

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On June 19, 2003, as a condition to the Investment under the Purchase Agreement and contingent upon the closing of the Investment under the Purchase Agreement, the holders of the Company’s Series B Preferred Stock (which consisted of three institutional holders, namely SCP Private Equity Partners II, LP, or SCP II; Mellon Ventures, LP, or Mellon; and Tandem PCS Investments, LP, or Tandem), agreed to irrevocably elect to convert the aggregate number of 955,414 shares of Series B Preferred Stock currently outstanding into 1,910,828 shares of common stock at the closing of the Purchase Agreement in consideration for the Company’s payment (return of capital) of $500,000 to each of Mellon and Tandem and the Company’s issuance of 462,534 shares of common stock to SCP II. The Series B Holders each signed a written notice (collectively, the Notices) electing to convert their shares of Series B Preferred Stock upon closing of the Purchase Agreement. In addition, Mellon and Tandem entered into a separate agreement, pursuant to which Mellon purchased all the shares of the Company’s common stock held by Tandem (including the shares received upon conversion of its shares of Series B Preferred Stock into common stock but excluding the Series G Bridge Warrants) at the closing of the Purchase Agreement, for an aggregate purchase price of $500,000. As a result of the conversion of the Series B Preferred Stock, the $60 million liquidation preference and other rights and privileges of the Series B Preferred Stock expired. In addition, the Series B Holders agreed to irrevocably waive their rights to all accrued but unpaid dividends totaling approximately $5.4 million as of August 13, 2003 on the Series B Preferred Stock upon closing of the Purchase Agreement. Accordingly, at the closing of the Investment under the Purchase Agreement on August 13, 2003 and the conversion of the Series B Preferred Stock, all such accrued dividends were cancelled and no further dividends have been or will be recorded by the Company related to the Series B Preferred Stock. As of August 14, 2003 the Series B Preferred Stock was converted into 1,910,828 shares of common stock at a conversion price of $15.70 per share.

As a result of the payment of stock and cash to the Series B Preferred Holders in the negotiated conversion of the Series B Preferred Stock into shares of common stock, the Company recorded a non-cash inducement charge of approximately $7.9 million to net loss attributable to common stockholders during the third quarter of 2003. Additionally, cash inducements of $500,000 paid to each Tandem and Mellon as an inducement for them to convert their shares of Series B Preferred Stock into common stock was charged to additional paid-in capital during the third quarter of 2003.

As of March 31, 2005, there were a total of 12,481,927 shares of common stock outstanding with 10,536,320 shares issuable upon conversion of the principal amount of the Notes and related accrued interest. The 10,536,320 shares and other shares issuable upon conversion of such additional accrued interest are excluded from the fully diluted loss per share calculation, as their inclusion would be anti-dilutive.

TECORE and SCP II entered into a Voting Agreement, in which each agreed, among other things, to vote all shares issuable upon conversion of the Notes and shares of common stock owned by them for their respective nominees to the Board of Directors and to maintain a Board of Directors of a certain size.

TECORE is a supplier of switching equipment to the Company. At March 31, 2005, TECORE held approximately 30.6% of the outstanding shares of the Company’s common stock (or 57.6% assuming conversion of the TECORE Note, inclusive of accrued interest, and assuming no conversion of the SCP II Note) and beneficially owned approximately 36.6% of the voting power of the Company (the Company’s largest single voting block). TECORE was the Company’s second largest customer, based on revenues (23.1%), during the three-month period ended March 31, 2005 and at March 31, 2005 owed the Company approximately $2.4 million (or 38.1%) of the Company’s total net accounts receivable balance. At March 31, 2005, SCP II held approximately 14.9% of the outstanding shares of the Company’s common stock (or 29.6% assuming conversion of the SCP II Note, inclusive of accrued interest, and assuming no conversion of the TECORE Note) and beneficially owned approximately 16.2% of the voting power of the Company. Two of the directors of the Company are affiliates of TECORE; however, TECORE can appoint four board seats per the Purchase Agreement. As of March 31, 2005, TECORE’s appointees to the board were comprised of two affiliates and two independent non-affiliates.

12) 2004 PRIVATE PLACEMENT/FUNDING TRANSACTION

On April 26, 2004, the Company closed on a Private Placement with several institutional investors (the Investors) which resulted in the issuance of 606,061 shares of its common stock at a price of $9.08 per share and Warrants (the Private Placement Warrants) to purchase 315,531 shares (including warrants to purchase 12,500 shares issued to the placement agent) of common stock at an exercise price of $13.20 per share for the aggregate gross proceeds of $5.5 million. Issuance costs associated with the Private Placement approximated $457,000. This Private Placement is described in detail in the Company’s Current Report on Form 8-K filed with the SEC on April 23, 2004. Pursuant to the Registration Rights Agreement the Company entered into in connection with the Private Placement, the Company registered for resale all shares of common stock issued or issuable under the Private Placement, including the shares of common stock issuable upon exercise of the Private Placement Warrants, under a Registration Statement on Form S-3 filed with the Securities and Exchange Commission and declared effective on June 3, 2004.

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The Private Placement Warrants became exercisable on October 21, 2004, have a five-year term, contain a cashless exercise option (available only in limited instances) and carry certain anti-dilution rights. At March 31, 2005, Private Placement Warrants to purchase 315,531 shares of common stock were outstanding at an exercise price of $13.20, which expire on October 21, 2009.

13) RESTATEMENT

Subsequent to the issuance of its financial statements for the year ended December 31, 2003 and the first three quarters of the year ended December 31, 2004, the Company determined that the discount resulting from the beneficial conversion feature in the senior convertible notes issued in 2003 (see Note 11) should have been amortized over the life of the note to comply with FASB Emerging Issues Task Force (EITF) Issue No. 00-27, Application of Issue No. 98-5 to Certain Convertible Instruments. The Company had been recording the discount to interest expense when the proceeds of the funding were received in compliance with of EITF Issue 98-5, Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratio, which had been amended by EITF 00-27.

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

FORWARD-LOOKING STATEMENTS

The following discussion should be read in conjunction with our Condensed Financial Statements and related notes presented elsewhere in this Form 10-Q. This report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the United States Securities Act of 1933, as amended. The words, “expects,” “anticipates,” “believes,” “intends,” “plans” and similar expressions identify forward-looking statements. In addition, any statements, which refer to expectations, projections or other characterizations of future events or circumstances (including, without limitation, projections or estimates relating to our future cash available for operations, our anticipated customer orders or revenues during any future period, and any anticipated changes to the telecommunications market generally), are forward-looking statements. We undertake no obligation to publicly disclose any revisions to these forward-looking statements to reflect events or circumstances occurring subsequent to filing this Form 10-Q with the Securities and Exchange Commission. These forward-looking statements are subject to risks and uncertainties, including, without limitation, those discussed below in “Risk Factors” and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2004. Accordingly, our future results may differ materially from historical results or from those discussed or implied by these forward-looking statements.

OVERVIEW

This discussion should be read in conjunction with the Notes to the Condensed Financial Statements contained in this report and Management’s Discussion and Analysis of Financial Condition and Results of Operations appearing in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004. The results of operations for an interim period may not give a true indication of results for the year. In the following discussion, all comparisons are with the corresponding items in the prior year.

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We provide base stations and other wireless telecommunications infrastructure products designed to support the GSM system of mobile voice and data transmission. We have substantial intellectual experience in the wireless industry and products and market our products worldwide to operators of wireless networks. A base station is a key component of a wireless network and is used to receive and transmit voice and data signals over radio frequencies. Our products include the AdaptaCell base station, a software-defined base station, meaning it uses software to control the way it encodes and decodes voice and data wireless signals, and the AirSite Backhaul Free base station, which carries voice and data signals back to the wireline network without using a physical communications link. These products are continually evolving. For example, our product line now also includes our Adaptive Array Super Capacity base station, using adaptive array technology to focus radio signals on individual handset antennas instead of spreading signals over the entire cell covered by one base station, and our RapidCell base station, a miniaturized version of our AdaptaCell base station configured for rapid deployment for use by emergency first responders or governmental agencies.

From our inception in January 1994 through May 1997, our operations consisted principally of start-up activity associated with the design, development, and marketing of our products. We did not generate significant revenues until 1998 and have generated only $139.8 million in net revenues from our inception through March 31, 2005. We have incurred substantial losses since commencing operations, and as of March 31, 2005, we had an accumulated deficit of $263.8 million. We have not achieved profitability on a quarterly or annual basis. As we continue to build our customer and revenue base we expect to continue to incur net losses at least through 2005. We will need to generate significantly higher revenues in order to support research and development, sales and marketing and general and administrative expenses, and to achieve and maintain profitability. We are likely to require additional funding during the second half of 2005, and there is no guarantee that such funding will be available to us. See Liquidity, Capital Resources, Going Concern Considerations and NASDAQ listing below.

We began marketing our GSM base stations in the beginning of 1996 and shipped our first GSM base station in May 1997. Through March 31, 2005, our base stations had been deployed in twenty-seven networks. We currently sell and market our products in the U.S. through our direct sales force. Internationally, we sell our products through our direct sales force, as well as through agents and OEMs. Our revenues are derived from sales of a product line based on the GSM standard. We generate a substantial portion of our revenues from a limited number of customers, with four customers accounting for 87.1% of our net revenues during the three month period ended March 31, 2005. For the fiscal years ended December 31, 2002, 2003, and 2004, our revenue from direct sales to international customers was 29.1%, 1.7% and 0.1%, respectively. In addition, revenue from OEM sales for international deployments were 49.0%, 39.8% and 37.6% for the years ended December 31, 2002, 2003, and 2004, respectively.

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

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

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

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

Research and development expenses consist primarily of expenses incurred in the design, development and support of our proprietary technology. We expect research and development expenses to increase throughout 2005 as we further the development of our core technology. Research and development associated with future products will depend on customer requirements. We may, however, incur costs in connection with the development of the software needed to upgrade our base stations to support emerging wireless high-speed data transmission standards. The cost incurred for software development performed by third parties through development agreements are carried on the balance sheet as an intangible asset until the product is deployed. Subsequent to deployment the cost is amortized over the estimated useful life of the product. Refer to Note 6 of Notes to the Condensed Financial Statements for a detailed discussion.

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

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

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RESULTS OF OPERATIONS The following table sets forth for the periods indicated the results of operations expressed as a percentage of net revenues:

THREE MONTHS ENDED MARCH 31, 2005 COMPARED TO THREE MONTHS ENDED MARCH 31, 2004

Net revenue: Net revenues for the three months ended March 31, 2005 increased $1.2 million or 29.0% to $5.2 million compared to $4.0 million for the three months ended March 31, 2004. This net increase was primarily attributable to a $1.9 million (or 82.9%) increase in revenues generated by our OEM/Partners, largely by Alcatel USA Sourcing and a leading aerospace and defense contractor. The OEM/Partner revenue gains were partially offset by a $0.7 million (or 43.4%) decrease in Direct Sales. The net increase in revenue was mainly derived from an increase in sales of two new (initial sales in 2004) products: Adaptive Array SuperCapacity and RapidCell base stations. During the three months ended March 31, 2005, Adaptive Array and RapidCell accounted for 63.1% or $3.3 million of our revenue compared to 22.7% or $0.9 million during the three months ended March 31 2004. Service revenue, which includes feature development services and equipment maintenance contracts, increased $0.2 million during the three months ended March 31, 2005 to $1.6 million compared to $1.5 million for the three months ended March 31, 2004. For the three months ended March 31, 2005, $4.5 million (or 87.1%) of our revenue was generated by four customers.

We recognize the need for revenue growth to obtain profitability and achieve positive cash flow from operations. Based on our 2004 gross profit rate and taking into account a series of expense reduction efforts and product cost initiatives, we estimate that we would need revenue of approximately $12.0 million per quarter in order to achieve a positive cash flow from operations. Achievement of these revenue levels would require a substantial increase over previous years’ revenues. To address the need for revenue growth, we shifted our selling strategy in 2002 from a direct sales strategy to relying primarily on OEM/Partners to sell and distribute our products. To date, we have signed multiple non-exclusive OEM agreements with OEM/Partners including: Alcatel USA Sourcing, TECORE, Electronia and two large defense contractors. Because we have a direct sales and marketing staff of only six employees, OEM/Partners revenue is critical to our revenue strategy. Revenue generated by OEM/Partners was $4.2 million (82.1% of total revenue) and $2.3 million (57.9% of total revenue) for the three month periods ended March 31, 2005 and 2004, respectively.

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We project our fiscal year 2005 business plan (the “plan”) revenue at $24-28 million with our current distribution channels. Our first quarter results were in line with the plan. The second quarter of 2005 looks to be a challenging quarter for revenue because of our limited backlog and emphasis on a major trial opportunity which is being pursued. As of March 31, 2005, we had revenue backlog of approximately $1.4 million. Our revenue projection for our Adaptive Array and RapidCell base station products exceeds $10 million for 2005. Our historical sales results and our current backlog do not give us sufficient visibility or predictability to indicate when the higher sales levels might be achieved, if at all. Our 2005 plan contains aggressive targets and there can be no assurances that these targets can be met. For example, our 2005 plan makes certain assumptions about new Adaptive Array contract awards, and if these contracts are not awarded to us, our revenue may be significantly less than our plan projects. Even if we meet these aggressive targets, revenue will fall well under the $12 million per quarter that we estimate we would need to achieve positive cash flow from operations.

Gross profit: Gross profit for the three months ended March 31, 2005 increased $0.7 million (or 66.6%) to $1.8 million as compared to $1.1 million for the three months ended March 31, 2004. The gross profit margins were 35.5% and 27.5% for the three months ended March 31, 2005 and 2004, respectively. Equipment margins increased to 22.6% during the three months ended March 31, 2005 from 11.5% during the three months ended March 31, 2004 due mainly to sales of Adaptive Array and RapidCell base stations which yield higher profit margins than our traditional commodity and coverage products. Service margins improved from 54.5% during the three months ended March 31, 2004 to 63.2% during the three months ended March 31, 2005. The $0.7 million net increase in the total gross profit is primarily derived from $2.1 million in revenue generated from Adaptive Array base station sales during the three months ended March 31, 2005 compared with no Adaptive Array revenue being generated during the three months ended March 31, 2004. However, future market conditions and economic conditions could affect the achievement of this margin objective. Cost of revenues for the three months ended March 31, 2005 also includes $43 thousand of non-cash stock compensation expense versus $48 thousand during the three months ended March 31, 2004.

Research and development: Research and development expenses for the three months ended March 31, 2005 decreased $0.3 million or 10.2% to $2.9 million compared to $3.2 million for the three months ended March 31, 2004. This net decrease was primarily the result of reductions in non–cash stock compensation expense of $0.1 million and labor costs of $0.2 million. Decreased labor costs were the result of transferring engineers from research and development projects onto revenue generating feature development projects, in which case their labor was accounted for within cost of revenues. Our 2005 annual plan projects research and development costs to trend downward due primarily to an expected decrease in non-cash stock compensation expense from $2.8 million in 2004 to $1.9 million in 2005, offset by an anticipated increase in labor costs resulting from our continuing effort to accelerate development.

Sales and marketing: Sales and marketing expenses for the three months ended March 31, 2005 increased $97 thousand or 12.1% to $897 thousand compared to $800 thousand for the three months March 31, 2004. The net increase was due primarily to increases in trade show and salary expenses. We are expecting sales and marketing costs to continue trending upward in 2005 since anticipated increased revenue should result in increased sales commissions. The sales and marketing related portion of the non-cash stock compensation expense is expected to decrease from $0.8 million in 2004 to $0.5 million in 2005.

General and administrative: General and administrative expenses for the three months ended March 31, 2005 increased $8 thousand to $2,423 thousand as compared to $2,415 thousand for the three months ended March 31, 2004.

Total other expense: Total other expense for the three months ended March 31, 2005 decreased $55 thousand or 16.8% to $273 thousand compared to $328 thousand for the three months ended March 31, 2004. The decrease was mainly the result of a decrease in interest charged on our convertible debt (described in Note 11 of Notes to the Condensed Financial Statements) that was attributed to a decrease in the average convertible debt balance. The average convertible debt balance decreased to $9.3 million in the three months ended March 31, 2005 from $11.0 in the three months ended March 31, 2004 due to conversions of debt to common stock that occurred during the last three quarters of 2004. These note balances are currently included in the Stockholders’ Equity balance.

RESTATEMENT

As described more fully in Note 13 in Notes to the Condensed Financial Statements, we have restated certain items for the three months ended March 31, 2004, with respect to the timing of our recognition of certain non-cash interest charges resulting from the beneficial conversion feature of our August 2003 convertible note financing.

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Significant non-cash charges which affected our net loss attributed to common stockholders during the three months ended March 31, 2005 and 2004 were as follows:

CONTRACTUAL OBLIGATIONS

The following table summarizes our significant contractual obligations at March 31, 2005, and the effect such obligations are expected to have on our liquidity and cash flows in future periods.

Also includes deferred accrued interest on the Bridge Loan of $160,741 and accrued interest of $93,784 on this amount through its maturity date of August 13, 2007 (see Note 11 in Notes to the Condensed Financial Statements).

Certain remaining obligations under our agreement with ArrayComm (see Note 6 in Notes to the Condensed Financial Statements) are not included above as they are contingent upon the shipment of 100 SuperCapacity base stations, which cannot be estimated at this point. As of March 31, 2005, we have shipped 18 SuperCapacity base stations.

LIQUIDITY, CAPITAL RESOURCES, GOING CONCERN CONSIDERATIONS AND NASDAQ LISTING

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business; and, as a consequence, the financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classifications of liabilities that might be necessary should we be unable to continue as a going concern. We have experienced net operating losses and negative cash flows since inception and, as of March 31, 2005, we had an accumulated deficit of $263.8 million. Cash used in operations and to fund capital expenditures for the three month periods ended March 31, 2005 and 2004 was $2.0 million and $1.7 million, respectively. We expect to have an operating loss throughout 2005. At March 31, 2005, our principal source of liquidity was $5.0 million of cash and cash equivalents, $6.4 million of accounts receivable, our contract backlog of $1.4 million and future contracts as awarded. Such conditions raise substantial doubt that we will be able to continue as a going concern without receiving additional funding. As of May 2, 2005 our cash balance was $4.7 million. Our current 2005 operating plan projects that cash available from planned revenue combined with the $4.7 million cash on hand at May 2, 2005 may be adequate to defer the requirement for new funding until the second half of 2005. There can be no assurances that new financing can be secured at a reasonable cost, if at all.

Our future results of operations involve a number of significant risks and uncertainties. The worldwide market for telecommunications products such as ours has seen dramatic reductions in demand as compared to the late 1990’s and 2000. It is uncertain as to when or whether market conditions will improve. We have been negatively impacted by this reduction in global demand and by our weak capital structure. Other factors that could affect our future operating results and cause actual

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results to vary from expectations include, but are not limited to, our ability to raise capital, our dependence on key personnel, our dependence on a limited number of customers (with four customers accounting for 87.1% of our total revenue for the three months ended March 31, 2005), our ability to address large customer expectations and product defects, our ability to design new products, the erosion of product prices, our ability to overcome deployment and installation challenges in developing countries which may include political and civil risks and risks relating to environmental conditions, product obsolescence, our ability to generate consistent sales, our ability to finance research and development, government regulation, technological innovations and acceptance, competition, our reliance on certain vendors and credit risks. Our ultimate ability to continue as a going concern for a reasonable period of time will depend on increasing our revenues and/or reducing our expenses and securing enough additional funding to enable us to reach profitability. Our historical sales results and our current backlog do not give us sufficient visibility or predictability to indicate when the required higher sales levels might be achieved, if at all.

It is likely that we will be required to discontinue operations if we are unable to obtain additional funding or dramatically reduce our expenditures. A dramatic reduction in expenditures may significantly reduce our ability to compete. It is unlikely that we will achieve profitable operations in the near term and therefore it is likely our operations will continue to consume cash in the foreseeable future. We have limited cash resources and therefore we must reduce our negative cash flows or secure additional funding in the near term to continue operations. Obtaining additional funding would require the approval of our senior note holders, and would likely be subject to additional conditions, and there can be no assurances that we will be able to find such financing even if our senior note holders would permit it. Likewise, there can be no assurances that we will succeed in achieving our goals and failure to do so in the near term will have a material adverse effect on our business, prospects, financial condition and operating results and our ability to continue as a going concern. As a consequence, we may be forced to seek protection under the bankruptcy laws. In that event, it is unclear whether we could successfully reorganize our capital structure and operations, or whether we could realize sufficient value for our assets to satisfy fully the debt to the holders of our senior notes, in accordance with the Securities Purchase Agreement described in Note 11 in Notes to the Condensed Financial Statements, or to any other holders. Accordingly, should we file for bankruptcy, there is no assurance that our stockholders would receive any value.

We have engaged a financial advisor to assist us in identifying and evaluating strategic business options. These options include, but are not limited to, i) seeking strategic partners and/or strategic investors and ii) a business combination or acquisition.

Considering the uncertainty regarding our ability to materially increase revenue or significantly reduce expenses, our cash requirements throughout 2005 will likely exceed available cash resources. As a result of this condition, management is continuing to evaluate other funding options.

No assurance can be given that additional financing will be available to us on acceptable terms, or at all.

We may not continue to meet NASDAQ listing standards. Under continued listing standard one (rule 4450(a)), companies listed on the NASDAQ National Market are required to have net tangible assets of $4 million, total stockholders’ equity of $10 million, and a minimum bid price of at least $1.00 per share (or a minimum bid price of at least $5.00 per share with no net tangible asset requirement). At various times in 2003, 2004 and 2005 our share price traded at and occasionally below the required minimum bid price of $1.00 per share for continued listing and/or the we did not comply with the total stockholders’ equity requirement. We cannot give investors in our common stock any assurance that we will be able to maintain compliance with the $1.00 per share minimum bid price standard or the total stockholders’ equity standard for continued listing on NASDAQ and that the liquidity that NASDAQ provides will be available to investors in the future.

NET CASH USED IN OPERATING ACTIVITIES

Net cash used in operating activities was approximately $1.9 million during the three months ended March 31, 2005 compared with $1.5 million during the three months ended March 31, 2004. The $0.4 million increase in net cash used in operating activities was primarily the result of decreases in accounts receivable and accrued expenses during the three months ended March 31, 2004 that were unmatched during the three months ended March 31, 2005.

For the three months ended March 31, 2005 cash was provided through an increase in customer deposits which was attributed to increases in customers’ prepayments of annual maintenance contracts, an increase in accrued license and royalty fees related to the sales of SuperCapacity Base Stations (see Note 6 in Notes to the Condensed Financial Statements), and an increase in accrued interest on the long-term convertible debt (see Note 11 in Notes to the Condensed Financial Statements).

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The foregoing was offset by cash used during the three months ended March 31, 2005 through a decrease in accounts payable due to a decrease in revenue during the three months ended March 31, 2005 and the net loss incurred during the three months ended March 31, 2005.

Except for sales to OEMs or to customers under agreements providing for acceptance concurrent with shipment, our customers are billed as contractual milestones are met. Deposits ranging up to 50% of the contracted amount are typically received at the inception of the contract and an additional percentage of the contracted amount is generally billed upon shipment. The terms vary from contract to contract but are always agreed to in the initial contract. Most of the remaining unbilled amounts are invoiced after a customer has placed the products in service, completed specified acceptance testing procedures or has otherwise accepted the product. Collection of the entire amounts due under our contracts to date have lagged behind shipment of our products due to the time period between shipment and fulfillment of all of our applicable post-shipment contractual obligations, the time at which we bill the remaining balance of the contracted amount. This lag will require an increase in investments in working capital as our revenues increase.

NET CASH USED IN INVESTING ACTIVITIES

Net cash used in investing activities (capital expenditures) for the three months ended March 31, 2005 was $87 thousand compared to $126 thousand for the three months ended March 31, 2004. The level of capital expenditures remains low, as our physical assets available are adequate to meet our needs at this time. We anticipate an increase in our capital expenditures for testing and manufacturing equipment used during final assembly of our products as our revenues increase.

NET CASH PROVIDED BY FINANCING ACTIVITIES

Net cash provided by financing activities was $1.0 million for both of the three-month periods ended March 31, 2005 and 2004, which was the result of proceeds from installments received on the long-term convertible debt as described in Note 11 of our Notes to the Condensed Financial Statements.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

Revenue Recognition – Revenue from product sales is recognized after delivery and determination that the fee is fixed and determinable, collectibility is probable, and after the resolution of uncertainties regarding satisfaction of significant terms and conditions of the customer contract. Revenue for sales to OEMs is recognized when title to the product passes to the OEM customer. Typically, for these product sales, title passes to the customer at the point of shipment. We recognize revenue from service agreements on a straight-line basis unless our obligation is fulfilled in a different pattern, over the contractual term of the arrangement. Revenue on certain long-term projects is recognized on a percentage of completion basis. The cost incurred to date is taken as a percentage of the estimated cost at completion and this percentage is used to compute revenue on an inception-to-date basis.

Allowance for Doubtful Accounts – We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the future financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The allowance is reduced when a customer who previously was deemed a collection risk makes payments to us, eliminating the need for the allowance or when a receivable is written off.

Accounting for Inventory – We write-down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based on assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-offs may be required beyond the write-off that was previously taken.

Long-lived Assets—We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Our long-lived assets include property and equipment and licensing and software development costs. Upon our determination that the carrying value of the asset is impaired, we would record an impairment charge or loss. Unsuccessful product marketing or continued substantial operating losses could result in an inability to recover the carrying value of the investment and therefore, might require an impairment charge in the future.

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Stock-Based Compensation—We have adopted the disclosure only provisions of Financial Accounting Standards Board (FASB) Statement No. 123, Accounting for Stock-Based Compensation (Statement No. 123). Under Statement No. 123, companies have the option to measure compensation costs for stock options using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25). Under APB 25, compensation expense is not recognized when the exercise price is the same as the market price. A stock option is considered compensatory if the exercise price of the option is less than the fair market value of the stock on the measurement date, which is the date all terms of the grant are finalized (normally the grant date). The intrinsic value of an option is the excess of the fair market value of the underlying stock over the exercise price of the options, which the Company recognizes using the straight-line method over the vesting period of the options.

Warranty and Customer Support—We offer one year warranties for the products that we sell which generally provides for a basic limited warranty, including parts and labor for any product deemed to be defective. Actual warranty costs are charged to expense as incurred. Generally, we estimate the warranty costs that may be incurred in the future based largely on the ratio of historical warranty costs in relation to revenue recognized in the corresponding period. The resulting liability is reviewed on a quarterly basis and adjusted accordingly. Factors that may affect the warranty liability include the number of products sold and historical and anticipated warranty claims.

RISK FACTORS

In addition to the following risk factors, see RISK FACTORS included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2004.

We may not be able to obtain additional capital to fund our operations on reasonable terms and this could hurt our business and negatively impact our stockholders. If adequate funds in the form of equity or debt are not available on reasonable terms or terms acceptable to us, we may be unable to continue as a going concern. If we raise additional funds through the issuance of convertible debt or additional equity securities, the percentage ownership of our existing stockholders would be reduced, the securities issued may have rights, preferences and privileges senior to those of holders of our common stock, and the terms of the securities may impose restrictions on our operations. Any additional funding would likely require the approval of our secured convertible note holders, and those note holders may not approve new funding if it requires substantial dilution, waiver of anti-dilution adjustment rights, subordination of their security interest, or a lock-up of their ability to sell their shares of common stock in the market, even if the funding is in the best interest of the Company or our stockholders. Our secured convertible note holders have a senior security interest in all of our assets, and until these investors are paid in full or until they have converted the notes and accrued interest into common stock, we may not be able to obtain additional investment or working capital.

If we are unable to raise additional financing, we may be forced to seek protection under the federal bankruptcy laws. If we are unable to raise capital from another source we are likely to cease operations or file for protection from claims of our creditors under the federal bankruptcy laws.

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

Ourproducts are designed to operate at frequencies defined by the GSM standard. In our pursuit of selling our products to the U.S. Government and U.S. Government contractors for use domestically, Government customers may wish to use AirNet products at frequencies that may not be consistent with regard to frequency spectrum policies of the FCC and NTIA for use by those Government agencies. The inability of AirNet or Government customers to adequately address frequency spectrum policies with regard to use of AirNet products by Government customers within the United States, can have an adverse effect on our ability to sell our products in that market segment.

If we do not succeed in the development of new products and product features in response to changing technology and standards, customers will not buy our products. We need to develop new products and product features in response to the evolving demands for better technology or our customers will not buy our products. The market for our products is

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characterized by rapidly changing technology, evolving industry standards, emerging wireless transmission standards, and frequent new product introductions and enhancements. If we fail to develop our technology, we will lose significant potential market share to our competitors. If we are unable to realize the performance and capacity enhancements from these new product developments, then we will be unable to meet our customers’ needs and will be unable to meet our business goals.

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

Investment in our stock is speculative, and our stock price is volatile. In light of the current market conditions for wireless communications, our uncertain financial condition and recent sales of our shares by significant stockholders, including SCP II and TECORE, Inc., we believe that an investment in our stock is highly speculative. Any investment in our common stock should only be made with discretionary capital, all of which an investor can afford to lose.

The market price of our common stock has fluctuated in the past and is likely to fluctuate in the future as well. In addition to the volume of sales by our significant stockholders, which is described in more detail below, factors that may have a significant impact on the market price of our stock include:

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

We may not continue to meet NASDAQ listing standards. Under continued listing standard one (rule 4450(a)), companies listed on the NASDAQ National Market are required to have net tangible assets of $4 million, total stockholders’ equity of $10 million, and a minimum bid price of at least $1.00 per share (or a minimum bid price of at least $5.00 per share with no net tangible asset requirement). At various times in 2003, 2004 and 2005, our share price traded at and occasionally below the required minimum bid price of $1.00 per share for continued listing and/or the we did not comply with the total stockholders’ equity requirement. We cannot give investors in our common stock any assurance that we will be able to maintain compliance with the $1.00 per share minimum bid price standard or the total stockholders’ equity standard for continued listing on NASDAQ and that the liquidity that NASDAQ provides will be available to investors in the future.

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Sales in certain foreign countries pose unique and significant risks. A substantial portion of our product sales in 2004 were directly or indirectly made to operators in foreign countries, including countries experiencing armed conflict, civil unrest and instability, reports of terrorist activities, and anti-American sentiment and activities. Conditions in these countries present unique and significant risks. Actions by foreign governments or hostile forces could result in harm to our personnel or our customers’ personnel, or the loss of customers and prospective customers and could materially adversely affect our business.

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

If we fail to accurately estimate product demand, we may incur expenses for excess inventory or be unable to meet customer requirements. Our customers typically give us firm purchase orders with short lead times before requested shipment. However, our contract manufacturer requires commitments from us so that it can allocate capacity and be assured of having adequate components and supplies from third-parties. Failure to accurately estimate product demand could cause us to incur expenses related to excess inventory or prevent us from meeting customer requirements. In addition, our products are constantly evolving requiring new assemblies and components. If we fail to accurately estimate product demand, some inventory could be designed out resulting in excess inventory.

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

We have started to sell our products and services to the U.S. Government or U.S. Government contractors, and the loss of these relationships or a shift in government funding could have adverse consequences on our business. Approximately 23.0% and 23.4% of our net sales during fiscal 2004 and the three months ended March 31, 2005, respectively were to the U.S. Government or to U.S. Government contractors. Therefore, any significant disruption or deterioration of these relationships with the U.S. Government and its contractors could significantly reduce our revenues. Our U.S. Government programs must compete with programs managed by other defense contractors for a limited number of programs and for uncertain levels of funding. Our competitors continuously engage in efforts to expand their business relationships with the U.S. Government and likely will continue these efforts in the future. The U.S. Government may choose to use other defense contractors for its limited number of defense programs. In addition, the funding of defense programs also competes with non-defense spending of the U.S. Government. Budget decisions made by the U.S. Government are outside of our control and have long-term consequences for our business. A shift in government defense spending to other programs in which we are not involved, or a reduction in U.S. Government defense spending generally, could have adverse consequences on our business.

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

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

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Control by our existing stockholders could discourage the potential acquisition of our business. As of May 2, 2005, 5% or greater stockholders and their affiliates owned approximately 5.7 million shares of our common stock or approximately 45.6% of our outstanding shares of common stock. In addition, two of these stockholders, TECORE and SCP Private Equity Partners II, L.P. (“SCP II”), hold the rights to acquire another approximately 10.7 million shares of common stock upon conversion or exercise of other securities. Acting together, these stockholders would be able to control all matters requiring approval by stockholders, including the election of directors. Moreover, since the sale of the secured convertible notes to TECORE and SCP II, the combined interests of these two investors constitute a potential controlling interest in the Company, with TECORE holding a majority of the outstanding shares on a fully diluted basis (assuming full conversion of TECORE’s Note). This concentration of ownership could have the effect of delaying or preventing a change in control of our business or otherwise discouraging a potential acquirer from attempting to obtain control of us, which could prevent our stockholders from realizing a premium over the market price for their shares of common stock.

Some of our larger investors have sold and may attempt to further sell their common stock, which may depress the market price of our securities. SCP Private Equity Partners II, LP and TECORE each beneficially hold more than 5% of the Company’s common stock. SCP Private Equity Partners II, LP, which at May 2, 2005 held approximately 1.9 million shares of common stock, sold approximately 1.1 million shares in 2004 and may continue selling throughout 2005. TECORE, which at May 2, 2005 held approximately 3.8 million shares, sold approximately 0.9 million shares in 2004 and may continue selling throughout 2005. Other large investors may elect to sell at the same or proximate times. If any one of these investors sells their common shares, the number of buyers in the market may not support the shares being sold and the market price of our shares could drop. The effect of these sales could be further accelerated in the event the Company is not able to maintain its NASDAQ National Market listing.

Our internal control over financial reporting may not prevent a misstatement in our financial statements. The Sarbanes-Oxley Act of 2002 and related SEC rules that have been promulgated in connection with it require, among other things, the management of public companies to prepare a report that addresses the adequacy of a company’s internal control over financial reporting. The company’s independent auditor also needs to attest to the report.

Under the applicable rules, as a non-accelerated filer, we will not be required to prepare and include this report in our filings until our annual report for our fiscal year ending December 31, 2006. However, we note that we recently restated our financial results for the fiscal year ended December 31, 2003, for the last two quarters of fiscal 2003, and for the first three quarters of fiscal 2004. Under the standards of the Public Company Accounting Oversight Board, such a restatement of previously issued financial statements is a strong indicator of the existence of a “material weakness” in internal control over financial reporting. Under the relevant SEC rules, management will not be permitted to conclude that internal control over financial reporting is effective if it has identified one or more material weaknesses in those internal controls. The events surrounding the restatement may be an indication that we have insufficient personnel resources and technical accounting expertise within our internal accounting function to resolve non-routine or complex accounting issues. As a small company with limited resources, we may find the cost of addressing these matters by hiring additional accounting staff with such technical expertise to be prohibitive. We have been using an outside consultant to review our internal controls, IT systems, control strengths and weaknesses, documentation and review procedures. However, if we are unable to address these issues before we are required to report our conclusions relating to our internal control over financial reporting, our management and independent auditors may be unable to conclude that our internal control over financial reporting is effective. Moreover, while we note that a material weakness in internal control over financial reporting does not itself suggest a material misstatement of a company’s financial statements, if we are unable to address these matters as they relate to the application of generally accepted accounting principles to complex, non-routine transactions, there is a risk going forward that a material misstatement in our annual or interim financial statements will not be prevented or detected.

Investment in our stock is speculative. In light of the current market conditions for wireless communications, we believe that an investment in our stock is highly speculative and volatile, and subject to numerous risks which are described in this document. Any investment in our common stock should only be made with discretionary capital, all of which an investor can afford to lose.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have no derivative financial instruments or derivative commodity instruments in our cash and cash equivalents. We invest the proceeds from our financing activities in interest bearing, investment grade securities that have the option to renew on a monthly basis. Our transactions are generally conducted, and our accounts are denominated, in United States dollars. Accordingly, these funds were not exposed to significant foreign currency risk at March 31, 2005.

Due to the fixed rate nature of senior debt, our interest rate risk is minimal.

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ITEM 4. CONTROLS AND PROCEDURES

Our Chief Executive Officer and Chief Financial Officer (collectively, the “Certifying Officers”) are responsible for establishing and maintaining disclosure controls and procedures for us that are designed to ensure that information required to be disclosed by us in this report is accumulated and communicated to management, including our principal executive officers as appropriate, to allow timely decisions regarding required disclosure.

Our management, including each of the Certifying Officers, does not expect that our disclosure controls or our internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of these inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

In connection with the preparation of this Quarterly Report on Form 10-Q for the quarter ended March 31, 2005, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Certifying Officers, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934). The Company’s disclosure controls and procedures include certain components of its internal control over financial reporting. Insofar as management’s assessment of the Company’s disclosure controls and procedures involves an assessment of its internal control over financial reporting, such assessment is expressed at the level of reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes. In performing its evaluation, management reviewed in particular the Company’s practices relating to the treatment of the non-cash interest expense relating to its August 2003 convertible note financing and the related restatement reflected in the Annual Report on Form 10-K for the year ended December 31, 2004 and described in Note 13 of Notes to the Condensed Financial Statements. The evaluation considered the procedures used by the Company in facing non-routine or complex transactions, including its reliance on consultation with its outside financial experts in connection with the accounting treatment for such complex transactions where appropriate, and considered whether such procedures are effective, among other things, in providing reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States. In light of the restatement described above, the Company’s Certifying Officers concluded that the Company’s disclosure controls and procedures were not effective as of March 31, 2005.

The Company, under the supervision of its Certifying Officers, is currently evaluating potential steps that it can take to remediate any deficiencies in its disclosure controls and procedures, including steps that can be taken in the process of documenting and evaluating the applicable accounting treatment for non-routine or complex transactions as they may arise. The Company has also been using an outside consultant to assist the Company with its review of internal controls over financial reporting. As noted above, particularly in light of the Company’s limited resources, the Company’s control system is unlikely to provide absolute assurance that the objectives of the control system are met, even if certain remedial steps can be identified and taken.

The Certifying Officers also have indicated that there were no changes in our internal control over financial reporting during the first quarter of fiscal 2005 that materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

The Company, two of our former officers and members of the underwriting syndicate involved in our initial public offering have been named as defendants in a class action complaint filed on November 16, 2001 in the United States District Court for the Southern District of New York. The action, number 21 MC 92 (SAS), alleges that the defendants violated federal securities laws and seeks unspecified damages and certification of a plaintiff class consisting of all persons and entities who purchased, converted, exchanged or otherwise acquired shares of the Company’s common stock between December 6, 1999 and December 6, 2000, inclusive. The complaint charges ostensible violations of Sections 11 and 15 of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934. In substance, the suit alleges that the underwriters of the Company’s IPO charged commissions in excess of those disclosed in the IPO materials and that these actions were not properly disclosed.

More than 300 similar class action lawsuits filed in the Southern District of New York have been consolidated for pretrial purposes under the caption of In re Initial Public Offering Securities Litigation. On July 15, 2002, a joint Motion to Dismiss was filed by the defendants. In February 2003, the Motion to Dismiss was granted in part (with respect to the Company) and denied in part (with respect to all issuer defendants). The claims against our two former officers named in the class action lawsuit have been dismissed without prejudice, pursuant to agreement.

The issuer defendants and the plaintiffs have since drafted and agreed upon a settlement, which is pending approval by the court. A committee of the Company’s Board of Directors has accepted the pending settlement. Under the terms of the settlement agreement, the defendant issuers’ insurers have agreed to guarantee the plaintiffs the amount of one billion dollars less the total of all of the plaintiffs’ recoveries from the underwriter defendants. None of the proceeds will be distributed to any proposed class member until after the conclusion of the class members’ proceedings with respect to the underwriter defendants. Furthermore, pursuant to the agreement, the issuer defendants have assigned all their potential claims against the underwriter defendants to a litigation trust, to be represented by plaintiffs’ counsel. On February 15, 2005, the Court granted preliminary approval of the proposed settlement. The Court’s approval is contingent on certain modifications of the settlement provisions concerning a bar on claims of contribution. A proposed amendment to the settlement addressing the Court’s concerns has been prepared and is currently awaiting approval from the other issuers to this action.

Under the terms of the settlement, there would be no liability to be recorded by the Company. Pursuant to a separate agreement, the insurers have also agreed to pay the issuers’ defense costs incurred on or subsequent to June 1, 2003 on a pooling basis. Furthermore, pending approval, the individual tolling agreements dismissing the named individual defendants have been extended, so that the individual defendants will be covered by the settlement as well. Final approval of the settlement remains pending before the Court and, given the Court’s scheduling orders, will likely not be determined until 2006. While awaiting final court approval of the settlement, the issuers, including the Company, have complied with discovery obligations specified in the settlement, by providing a limited number of documents.

In the event that the settlement is not approved, the Company intends to defend vigorously against the plaintiffs’ claims. Moreover, while the Company does not know whether the claims of misconduct by the underwriters have merit, the Company has claims under the Underwriting Agreement against the relevant underwriters of the IPO for indemnification and reimbursement of costs and any damages incurred in connection with the matter, and the Company intends to pursue those claims vigorously as well in the event that the settlement is not finally approved.

In addition to the item listed above the Company is also involved in various claims and litigation matters arising in the ordinary course of business.

With respect to the above matters, the Company believes that it has adequate legal defenses and/or provided adequate accruals for related costs such that the ultimate outcome will not have a material adverse effect on the Company’s future financial position or results of operation.

ITEM 6. EXHIBITS

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated: May 13, 2005