AIRNET COMMUNICATIONS CORP - 10-K Annual Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM [ ] TO [ ]

COMMISSION FILE NUMBER: 000-28217

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

DELAWARE 59-3218138
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3950 DOW ROAD, 32934
MELBOURNE, FLORIDA
(Address of principal executive offices) (Zip Code)

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

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.001 PER SHARE
(TITLE OF CLASS)

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

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

As of March 20, 2002, 23,789,865 shares of the Registrant's Common Stock
were outstanding, and the aggregate market value of such shares held by
non-affiliates of the Registrant on such date was $21,750,699 (based on a
closing price on March 20, 2002 on Nasdaq of $1.55 per share).

DOCUMENTS INCORPORATED BY REFERENCE:
NONE
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TABLE OF CONTENTS

1

TRADEMARK AND TRADE NAMES

AirNet(TM), AdaptaCell(R), AirSite(R) Backhaul Free(TM) and Super
Capacity(TM) are trademarks and/or service marks 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.

2

PART I

ITEM 1. BUSINESS

OVERVIEW

We were incorporated in Delaware in 1994 as Overture Systems, Inc. and
changed our name to AirNet Communications Corporation later that year.

We began marketing our GSM base stations in the beginning of 1996 and
shipped our first GSM base station in May 1997. Through December 31, 2001, our
base stations were being used in twenty-one deployed systems. We currently sell
and market our products in the U.S. through our direct sales force.
Internationally, we sell our products through our direct sales force, as well as
through agents and original equipment manufacturers (OEMs).

From our inception in January 1994 through May 1997, our operations
consisted principally of start-up activity associated with the design,
development, and marketing of our products. We did not generate significant
revenues until 1998 and generated only $75.2 million in net revenues from our
inception through December 31, 2001. We have incurred substantial losses since
commencing operations, and as of December 31, 2001, we had an accumulated
deficit of $207 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 the next several quarters. 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 provide base stations and other wireless telecommunications
infrastructure products designed to support the GSM, or Global System for Mobile
Communications, system of mobile voice and data transmission. We market our
products worldwide to operators of wireless networks and to certain military and
public safety organizations. A base station is a key component of a wireless
network that receives and transmits voice and data signals over radio
frequencies. We designed our base stations to be easier to deploy and upgrade
and to have lower capital and operating costs than other existing base stations.

Our system features two innovative base station products: Our AdaptaCell(R)
base station is a software-defined base station, meaning it uses software to
control the way it encodes or decodes wireless signals. Our AdaptaCell(R) base
station incorporates a proprietary radio architecture that is designed to enable
operators to upgrade their wireless networks to offer high-speed data and
Internet services by changing software with few, if any, hardware modifications
rather than deploying new base stations. Our AdaptaCell base station also
incorporates a broadband architecture, meaning that it uses only one radio to
process a large number of radio channels.

Our AirSite(R) Backhaul Free(TM) base station carries voice and data
signals back to the wireline network without using a physical communications
link. Our AirSite Backhaul Free base station uses an operator's existing radio
frequencies as the medium to provide the necessary connection to the wireline
network. Unlike our competitors' base stations, our AirSite Backhaul Free base
station does not require an expensive physical communications link, usually
through a digital T-1/E-1 telephone line, to the wireline network. As a result,
an operator's fixed network operating costs may significantly decrease.

Like other wireless infrastructure suppliers, we have experienced the
adverse effects of the global downturn in telecommunications infrastructure
spending. We have historically relied upon an integrated suite of infrastructure
products for all our sales -- a product line that was optimized to meet the
needs of the initial-coverage and coverage-limited segments of the wireless
infrastructure market. These are market segments where we believe our products
enjoy a competitive advantage. Unfortunately, the slowdown in infrastructure
spending has adversely affected demand in all segments of the infrastructure
market.

In response, we undertook a major restructuring starting in June of 2001 to
better leverage our technology base and entrepreneurial culture to target new
market opportunities for our GSM products, particularly in the military and
public safety segments. Under new leadership we reorganized much of our trade
payables with a

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voluntary vendor settlement program and we changed our focus and strategic
direction. We have redirected our activities to focus in three interrelated
areas: the growing market for secure, adaptable wireless infrastructure for
governmental and public safety applications; the rapidly emerging market for
IS-136 high-speed data transitional infrastructure; and, our traditional GSM
infrastructure market.

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

The IS-136 technology is the basis of the TDMA cellular and Personal
Communications Services (PCS) air interface. The IS-136 systems allow
telecommunications companies to offer advanced personal wireless communications
features and services to subscribers while maintaining backward compatibility
for their existing analog (AMPS) system customer bases. It will also provide a
cost effective migration path from AMPS through the use of dual-mode operation.
Service operators that provide IS-136 air interface services are compelled to
transition their networks to 2.5 or 3G services such as General Packet Radio
System (GPRS) or Enhanced Data rates for GSM Evolution (EDGE) and WideBand CDMA
in order to provide high-speed data services and to remain compatible with
Cingular and ATT Wireless, which have announced plans to migrate their IS-136
networks to GSM/GPRS/EDGE. In order to continue to share in roaming revenues
offered by users of these nationwide networks, other IS-136 operators must
follow suit. We offer customers two methods to migrate their IS-136 networks.
The first is to overlay the cost effective coverage value proposition of the
Software Defined BTS and AirSite Base Stations to provide an alternate GSM
network that shares the spectrum of existing IS-136 networks. The second and
more novel migration technique is to commission us to create software that will
allow IS-136 and GSM/GPRS/EDGE to operate simultaneously on the same BTS radio.
In the first case, our equipment can be deployed alongside existing
infrastructure and eventually phase it out. In the latter case, the our solution
can simply replace existing equipment and the IS-136 standard can be phased out
by gradually allocating more spectrum to the GSM family of protocols. In either
case, the new equipment that the service provider buys from us can be migrated
to future high-speed data standards that are software defined. We will enter
this market as funding becomes available to support research and development and
marketing activities.

Our portfolio of broadband SDR technology and our entrepreneurial tradition
lend themselves to exploiting numerous new opportunities in the wireless arena.
We believe these new opportunities -- driven by recent developments both inside
and outside the company -- offer a tremendous potential for immediate growth and
success. SDR technology allows us to readily "reprogram" our wireless
infrastructure products to address new markets and new opportunities in a cost
effective manner. The development and acceptance of SDR technology in the
marketplace has created new opportunities for us outside our core industry. Due
to our significant portfolio of basic SDR intellectual property, it is now
possible for us to explore licensing our technology in a variety of applications
to third parties. Previously, the only potential licensees for our technology
were our wireless infrastructure competitors.

As of December 31, 2001, we had 43 domestic patents granted, and 28 patent
applications pending. We received the 1998 GSM World Award for Best Technical
Innovation from the GSM Association, an international body with members from
over 150 countries, in recognition of our innovative infrastructure.

PRODUCTS

Our base station subsystem products currently support the GSM system for
wireless voice and data communications services. We chose to develop products
based on this standard because the interfaces, or connections, between the
various pieces that make up the GSM base station subsystem are well defined and
publicly documented. One of these interfaces, the connection between the mobile
switching center (MSC) and the base station controller, and ultimately the base
stations that compose the base station subsystem, is referred to as the
A-interface. This A-interface allows wireless operators to attach our base
station subsystem equipment to an existing operator's mobile switching center.
It is this standard interface that makes any existing GSM operator a potential
customer for our base station subsystem equipment. We are currently

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marketing the base station subsystem in four standard configurations, the
GSM-850, GSM-900, GSM-1800 and GSM-1900, operating at 850 MHz, 900 MHz, 1800 MHz
and 1900 MHz respectively. Our products have been deployed with customers using
the following MSC providers: Nortel, Alcatel, Lucent, Nokia, Siemens, Tecore,
and Telos.

Our base station subsystem features two unique base station products: the
AdaptaCell broadband, software-defined GSM base station and the AirSite Backhaul
Free base station. We also offer a Base Station Controller, a Transcoder Rate
Adaptation Unit and an Operations and Maintenance Center (radio).

The AdaptaCell wireless base station supports up to 12 GSM radio frequency
carriers (96 total channels including 92 voice/data channels and four control
channels) for up to 4 pairs of antennas (sectors). The AdaptaCell base station
differs from our competitors' base stations in that its operation is defined by
software, not hardware. This means that as subscribers demand new services from
operators, specifically new high-speed data and Internet services, it will be
possible to upgrade the AdaptaCell base station to support those services via a
change of software and few, if any, hardware modifications. Operators using our
competitors' equipment will likely have to install new equipment, and
potentially a completely new base station, for each new wireless standard they
adopt.

We previously announced plans to introduce the AdaptaCell Super
Capacity(TM) base station. This new base station is built on our current
software-defined AdaptaCell base station platform using adaptive array
technology. Adaptive array technology dramatically increases the operators'
spectral efficiency -- resulting in tremendous increases in network
performance -- by focusing radio signals on individual handset antennas instead
of spreading them over the entire cell. The new base station is designed to
benefit operators in the transition from current wireless standards to the new
GPRS (providing high-speed wireless data in packet format) and Enhanced Data
rates for GSM Evolution (or EDGE, providing yet higher speed) standards. When
our development work is completed, the new base station will provide increased
capacity and higher data rates without the need to deploy additional base
stations, while avoiding decreases in cell coverage area.

AirSite Backhaul Free Base Station: The AirSite Backhaul Free base station
is a compact wireless base station that includes its own wireless backhaul
system. By contrast, other existing base stations must be connected to the rest
of the system using expensive physical communications links, usually digital
T-1/E-1 telephone lines. The AirSite Backhaul Free base station is a full
featured GSM base station, meaning it has a unique site ID for billing and "911"
emergency identification purposes, offers the same geographic coverage as other
existing base stations, and has fault and error detection integrated into the
Operations and Maintenance Center (radio). The AirSite Backhaul Free base
station operates by receiving a subscriber's wireless telephone signal and
transmitting it to the AdaptaCell base station. The AdaptaCell base station then
sends the signal over a T-1/E-1 line to the base station controller and on to
the mobile switching center. In reverse, digitized voice signals come from the
mobile switching center to the base station controller and then to the serving
AdaptaCell base station, which then transmits the signal to the AirSite Backhaul
Free base station. The AirSite Backhaul Free base station then transmits the
signal to the subscriber.

Base Station Controller: Our base station controller coordinates the
activities of the AdaptaCell base stations physically attached to it and all the
AirSite Backhaul Free base stations served by those AdaptaCell base stations.
Among other things, the base station controller monitors handset signal levels
and the operational status of each of its attached base stations, controls
handset transmit power, and orchestrates handoffs between base stations.

Transcoder Rate Adaptation Unit: In most telecommunications systems,
digitized voice requires 64 Kbps of bandwidth to accurately convey human speech.
Our transcoder rate adaptation unit compresses a standard 64 Kbps voice stream
to a GSM-standardized 13 Kbps. This means that the digital T-1/E-1 telephone
line used to connect the base station controller to the mobile switching center
can carry four times as many voice conversations as it normally would. This
makes it less expensive to attach a base station subsystem to its associated
mobile switching center. Additionally, AirNet is developing a software upgrade
to support adaptive multirate (AMR) speech coding. This feature increases voice
capacity of GSM networks while maintaining the current high levels of voice
quality.

5

Operations and Maintenance Center (Radio): The operations and maintenance
center-radio provides the network management facility for one or more of our
base station subsystems. Our operations and maintenance center (radio) provides
a comprehensive graphical user interface for maintenance personnel.

CUSTOMERS

Each of the following five customers accounted for 10% or more of our
revenues for the fiscal year ended December 31, 2001:

TMP Corporation (Adam's Telecommunications)
Comtel PCS Mainstreet Limited Partnership
Cross Communications
Marconi Communications SPA
TECORE Wireless Systems

Together these customers accounted for approximately 69% of our revenues
for the period ending December 31, 2001. See Note 14 of Notes to Financial
Statements for financial information regarding our customers.

SALES AND MARKETING

We sell and market our products in the U.S. through our direct sales force.
Our international sales and marketing efforts are conducted through a network of
original equipment manufacturers, or OEMs, agents, distributors and our direct
sales force. We have developed programs to attract and retain high quality,
motivated sales representatives who have the technical skills and sales
experience necessary to sell our infrastructure solutions.

We have established a marketing communications organization that is
responsible for the branding and marketing of our products and services and for
distinguishing the AirSite Backhaul Free base station and AdaptaCell base
station as branded product offerings. The marketing organization is responsible
for all new product launches to ensure both internal execution and marketplace
acceptance.

RESEARCH AND PRODUCT DEVELOPMENT

We spent $25,512,516 in 2001, $29,457,209 in 2000 and $15,752,943 in 1999
on research and product development. As of December 31, 2001, 61 of our 128
employees were engaged in research and product development, including hardware
and software engineering. We do not expect to hire more employees to engage in
research and product development during 2002 unless such research and
development is funded by strategic partners, customers or new investments.

Our current product development plans focus on the adaptive array
technology for our AdaptaCell Super Capacity base station, EDGE, product cost
reductions and features for major operators. We also plan to take advantage of
the evolution of digital signal processors and other digital components to
reduce the cost of our base stations. In addition, we expect to develop an EDGE
high-speed data upgrade package.

Ultimately, we expect to develop one or more 3G upgrade packages. We may
not be able to introduce these or any other products as scheduled. In addition,
market conditions may not necessitate developing upgrade packages to support one
or more of these emerging 3G high-speed data standards.

Our product development strategy has been to concentrate our engineering
resources on our core technology while making maximum use of third-party vendors
and products for everything else. As a result, our engineering resources are
focused on broadband, software-defined base station technology and backhaul free
base stations.

MANUFACTURING AND BACKLOG

We currently use a limited number of third-party contractors to manufacture
all of our primary components and subassemblies for our products. As a result,
our in-house manufacturing operations consist
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primarily of quality control, final assembly, and testing and product
integration. Circuit boards, electronic and mechanical parts, and other
component assemblies are purchased from OEMs and other selected vendors. An
in-house staff that sets standards and manages our manufacturing contractors
maintains quality control.

Our product backlog was approximately $5.7 million at December 31, 2001 as
compared to $15.1 million at December 31, 2000. We include a contract in backlog
when it is signed by the customer and by us.

The amount of our backlog is subject to fluctuation based on the timing of
the receipt and completion of orders. The amount generally consists of orders
shippable within one year and deferred revenue from products that have been
shipped to customers but have not yet satisfied all significant terms and
conditions of the customer contract as well as revenue from contracts with
vendor financing arrangements which extend beyond one year. Such conditions
include completion of installation and customer acceptance of product technical
performance. See Note 1 of Notes to Financial Statements for a description of
our revenue recognition policy.

Our backlog at any particular date is not necessarily indicative of future
revenues.

COMPETITION

The wireless telecommunications infrastructure market is highly
competitive. The market for our products is characterized by rapidly changing
technology, evolving industry wireless standards and frequent new product
introductions and enhancements. Failure to keep pace with these changes could
seriously harm our competitive position and prospects for growth. Our ability to
compete depends on many factors including product and standard flexibility,
price, and reliability.

Current and potential competitors consist primarily of major domestic and
international companies, most of which have longer operating histories; larger
installed customer bases; higher volumes; substantially greater name
recognition; and greater financial, technical, manufacturing, marketing, sales
and distribution resources. Competing base station vendors can be divided into
two groups: existing large equipment manufacturers who supply a complete range
of wireless base station systems to wireless service operators and smaller
companies that typically market components of wireless systems to system
suppliers or directly to operators. Our current competitors include Alcatel
S.A., LM Ericsson Telephone Company, Lucent Technologies Inc., Motorola, Inc.,
NEC Corporation, Nokia Corporation, Nortel Networks Corporation and Siemens AG.
We face actual and potential competition not only from these established
companies but from start-up and smaller companies that develop and market new
wireless telecommunications products and services.

PROPRIETARY RIGHTS

We consider our technologies proprietary and seek to protect our
intellectual property rights. As of December 31, 2001, we had 43 domestic
patents granted, and 28 domestic patent applications pending. In addition, we
are seeking patent protection for our inventions in foreign countries. One of
the allowed domestic patents was based upon proprietary rights originally
obtained from Harris Corporation, one of our stockholders, and is subject to a
non-exclusive cross license to a third party. We also obtained from Harris
Corporation a royalty-free, worldwide, non-exclusive right and license to use
six other patents in the manufacture and sale of products covered by these
patents. Our patents cover the basic architecture of the system, sub-components,
and frequency reuse planning schemes.

Simultaneously with Motorola's equity investment in January 1995, we signed
an agreement granting Motorola the right to obtain a non-exclusive, royalty-free
license under any two of our patents. With respect to possible infringement of
our respective digital base station patents, each of us agreed not to enjoin the
other and to attempt dispute resolution, including negotiation of nonexclusive
license agreements in good faith, before resorting to litigation.

While we believe that our patents will render it more difficult for
competitors to develop and market similar products, our patents may be
invalidated, circumvented, or challenged. Our patent rights may fail to provide
us with competitive advantages. Any pending or future patent applications,
whether or not being currently challenged by applicable governmental patent
examiners, may not be issued with the scope we seek.

7

We also rely upon copyright and trade secret laws. Source code for our own
proprietary software is protected as an unpublished copyrighted work and as a
trade secret. In addition, we generally enter into confidentiality or licensing
agreements with employees, consultants, vendors, customers, and licensees, and
generally limit access to the details of proprietary designs, software,
documentation, and other confidential information.

Notwithstanding our efforts to protect our rights, it may be possible for a
third party to copy or to obtain and use our intellectual property without our
authorization. We may have to pursue litigation in the future to enforce our
proprietary rights or to defend against claims of infringement and such
litigation could result in substantial costs and diversion of resources and
could seriously harm our business, operating results, and financial condition.
We are not engaged in any legal proceedings concerning matters of patent
infringement or enforcement; however, we are presently involved in a few minor
legal proceedings involving rights in our AirNet trademark. In addition, others
may develop technologies superior to our technology, duplicate our technology,
or design around our patents.

GOVERNMENT REGULATION

Our products must conform to a variety of requirements and protocols. In
order for our products to be used in certain jurisdictions, regulatory approval
may be necessary. The delays inherent in this regulatory approval process may
cause the rescheduling, postponement or cancellation of the installation of
telecommunications systems by our customers, which, in turn, may significantly
reduce sales of products to such customers. The failure to comply with current
or future regulations or changes in the interpretation of existing regulations
in a particular country could result in the suspension or cessation of sales in
that country, restrictions on our development efforts and those of our
customers, render current products obsolete, or increase the opportunity for
additional competition. Such regulations or such changes in interpretation could
require us to modify our products and incur substantial costs to comply with
such regulations and changes. Products to support new services can be marketed
only if permitted by frequency allocations and regulations. In most cases, we
only plan to qualify our products in a foreign country once we have a purchase
order from a customer located there, and this practice may deter customers or
contribute to delays in receiving or filling orders.

EMPLOYEES

As of December 31, 2001, we had 128 employees. Of these individuals, 61
were in research and product development, 18 were in manufacturing, 11 were in
sales and marketing, 28 were in customer service and technical support, and 10
were in administration. We also had one independent contractor in manufacturing.

None of our employees is represented by a labor union, and we believe that
our relations with our employees are good.

ITEM 2. PROPERTIES

Our headquarters consist of approximately 41,000 square feet of space
leased through December 31, 2004, located at 3950 Dow Road in Melbourne,
Florida. The space also houses the primary manufacturing and product engineering
operation. Additional space of approximately 20,000 square feet at the Trio
Complex in Melbourne, Florida, is leased through December 31, 2004 for final
assembly and testing. Each of these leases gives us the right to terminate any
time after June 2002 with a six-month notice. We believe that these facilities
will be adequate to meet our requirements for the foreseeable future and that
suitable additional or substitute space will be available if needed.

ITEM 3. LEGAL PROCEEDINGS

On October 23, 2000, we filed a complaint against Lucent Technologies, Inc.
et al. in the Circuit Court for the 18th Judicial Circuit in Brevard County,
Florida, alleging, among other claims, tortious interference with a business
relationship and misappropriation of trade secrets in connection with the
purported

8

cancellation of certain phase II purchase orders by Carolina PCS. We are seeking
more than $10 million in damages and injunctive relief and have offered to
mediate the dispute.

On August 14, 2001, our vendor MC Test Service, Inc. d/b/a MC Assembly and
Test filed an action against us in the Circuit Court for the 18th Judicial
Circuit in Brevard County, Florida alleging, among other things, breach of
contract and seeking damages in the amount of $1,300,000. We filed an answer
raising affirmative defenses and a counterclaim seeking damages from MC Assembly
and Test in excess of $5,000,000. We believe MC Assembly and Test shipped
defective products, which caused damage from settlement of our accounts
receivables and resulted in lost business opportunities. We intend to defend the
claim vigorously and to pursue the counterclaim aggressively.

On August 29, 2001, Comsys Communications & Signal Processing Ltd. d/b/a
Comsys filed a lawsuit against us in the United States District Court, Western
District of New York, alleging breach of contract and seeking damages in the
amount of $5,000,000. We dispute the amount of damages claimed. On January 2,
2002, we executed a settlement agreement with Comsys that calls for the revival
and reinstatement of the EDGEware License Agreement with Comsys together with
amended dates for milestone deliveries and related payments, with no damage or
penalty payments by us.

The Company, the members of the underwriting syndicate involved in our
initial public offering and two of our former officers have been named as
defendants in a class action lawsuit filed on November 16, 2001 in the United
States District Court for the Southern District of New York. The action, number
21 MC 92 (SAS), alleges that the defendants violated federal securities laws and
seeks unspecified monetary damages and certification of a plaintiff class
consisting of all persons and entities who purchased, converted, exchanged or
otherwise acquired shares of our common stock between December 6, 1999 and
December 6, 2000, inclusive. Specifically, the complaint charges the defendants
with violations of Sections 11, 12 and 15 of the Securities Act of 1933 and
Section 10(b) of the Securities Exchange Act of 1934. In substance, the
allegations are that the underwriters of our initial public offering charged
commissions in excess of those disclosed in the initial public offering
materials and that these actions were not properly disclosed. We do not know
whether the claims of misconduct by the underwriters have merit but at this time
we believe the claims against us are without merit and we intend to defend this
matter when appropriate. Under the terms of our Underwriting Agreement, we have
claims against the underwriters of our initial public offering for
indemnification and reimbursement of all of our costs and any damages incurred
in connection with this lawsuit and we intend to pursue those claims vigorously.

In addition to the items listed above we are also involved in various
claims and litigation matters arising in the ordinary course of business. With
respect to these matters, we believe that we have adequate legal defenses 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.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

During the fourth quarter of the fiscal year covered by this report, no
matter was submitted to a vote of security holders.

9

PART II

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

Our common stock has been listed on the Nasdaq National Market System under
the symbol ANCC since December 7, 1999. There is no established trading market
for our Series B preferred stock and related warrants. The following table sets
forth the high and low sales prices for our common stock as reported by Nasdaq
for the periods indicated:

YEAR ENDED DECEMBER 31, 2000
First Quarter............................................. $30.00 $62.00
Second Quarter............................................ $10.88 $35.00
Third Quarter............................................. $20.75 $39.88
Fourth Quarter............................................ $ 5.00 $23.50

We had 405 stockholders of record as of March 20, 2002. This number does
not include the number of persons whose stock is in nominee or in "street name"
accounts through brokers.

We have not paid dividends and do not anticipate paying cash dividends in
the foreseeable future. We have a retained earnings deficit, and we expect to
retain future earnings for use in our businesses. We are accruing dividends at a
rate of 8% annually on our Series B Convertible Preferred Stock, which is not
publicly traded. See Note 8 to the Financial Statements for a complete
explanation of this security.

USE OF PROCEEDS OF INITIAL PUBLIC OFFERING

The effective date of our registration statement on Form S-1 filed under
the Securities Act of 1933 (No. 333-87693) relating to the initial public
offering of our common stock was December 6, 1999.

Through the fiscal quarter ended June 30, 2001, we applied all of the $80.4
million net proceeds from our initial public offering primarily to general
corporate purposes including working capital, expansion of our engineering
organization, product development programs, sales and marketing capabilities and
general and administrative functions.

10

ITEM 6. SELECTED FINANCIAL DATA

You should read the following selected financial information in conjunction
with our financial statements and related notes and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this report.

11

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

RESULTS OF OPERATIONS

OVERVIEW

We provide base stations and other wireless telecommunications
infrastructure products designed to support the GSM system of mobile voice and
data transmission. We have substantial intellectual experience in the wireless
industry and products and market our products worldwide to operators of wireless
networks. A base station is a key component of a wireless network and is used to
receive and transmit voice and data signals over radio frequencies. Our products
include the AdaptaCell base station, a software-defined base station, meaning it
uses software to control the way it encodes and decodes voice and data wireless
signals, and the AirSite Backhaul Free base station, which carries voice and
data signals back to the wireline network without using a physical
communications link. These products are continually evolving.

From our inception in January 1994 through May 1997, our operations
consisted principally of start-up activity associated with the design,
development, and marketing of our products. We did not generate significant
revenues until 1998 and generated only $75.2 million in net revenues from our
inception through December 31, 2001. We have incurred substantial losses since
commencing operations, and as of December 31, 2001, we had an accumulated
deficit of $207 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 2002. 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 began marketing our GSM base stations in the beginning of 1996 and
shipped our first GSM base station in May 1997. Through December 31, 2001, our
base stations were being used in twenty-one deployed systems. We currently sell
and market our products in the U.S. through our direct sales force.
Internationally, we sell our products through our direct sales force, as well as
through agents and OEMs. Our revenues are derived from sales of a product line
based on the GSM standard. We generate a substantial portion of our revenues
from a limited number of customers, with five customers accounting for 69% of
our net revenues during the fiscal year ended December 31, 2001. Through
year-end 1999, all of our sales were to domestic customers. For the fiscal years
ending December 31, 2000 and 2001, 11.8% and 19.2% of our revenues were from
international deployments, respectively. We expect our percentage of
international revenues to increase as a result of our expansion of international
sales and distribution activities.

During 2001, we experienced a significant period of transition. In
mid-2001, management undertook a strategic review of the business and
established the following objectives for the future: simplify the business,
reduce the cost structure and move towards the path to long-term sustainable
profitability. In connection with these objectives, we took action during the
second and third quarters to reduce costs and discretionary expenditures,
negotiated settlements with vendors on existing accounts payable balances,
undertook efforts to better leverage our technology base and entrepreneurial
culture to target new market opportunities, and redirected our activities to
focus in three interrelated areas: the growing market for secure, adaptable
wireless infrastructure for governmental and public safety applications; the
rapidly emerging market for IS-136 high-speed data transitional infrastructure;
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 three 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;

12

regulatory developments; and our revenue recognition policies. The effect of our
potentially long sales cycle on our results is compounded by our current
dependency on a small number of customers.

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

- Demand for our products and services;

- New product introductions, both by us and our competitors;

- Changes in our pricing policies and those of our competitors;

- The mix of base stations and other products sold;

- The mix of sales channels through which our products are sold;

- Engineering cost reduction successes;

- Access to the best vendors from a cost and technology viewpoint;

- The mix of domestic and international sales; and

- The volume pricing we are able to obtain from contract manufacturers and
third party vendors.

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

Research and development expenses consist primarily of expenses incurred in
the design, development and support of our proprietary technology. We expect
research and development expenses to stabilize as we complete the development of
our core technology. Research and development associated with future products
will depend on customer requirements. We may, however, incur costs in connection
with the development of the software needed to upgrade our base stations to
support emerging wireless high-speed data transmission standards. The cost
incurred for the software development performed by third parties through
development agreements are carried on the balance sheet as an intangible asset
until the product is deployed. At that time the cost will be amortized over the
life of the product.

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

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

RELATED PARTY TRANSACTIONS

See Item 13 regarding a description of related party transactions during
2001.

YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000

Net revenues: Net revenues decreased $19.8 million or 57.7% from $34.3
million for the year ended December 31, 2000 to $14.5 million for the year ended
December 31, 2001. This decrease in revenues was a result of the deterioration
in global telecommunications market conditions and a reduction in capital
spending by service providers, leading to a reduction in orders received from
active customers and difficulties in obtaining orders from potential new
customers.

13

Gross Profits: Gross profit decreased $14.0 million or 451.6% from $3.1
million for the year ended December 31, 2000 to a loss of $10.9 million for the
year ended December 31, 2001. The gross profit margin was 9.0% for 2000 and
(75%) for 2001. The decrease in the gross profit margin was primarily
attributable to an increase in inventory related charges, including write-downs
for certain obsolete and excess inventory of $9.3 million and the decrease in
revenue volume during 2001 discussed above. In addition, warranty expense
increased by $1.6 million due to the AirSite warranty replacement program
whereby we replaced defective parts in over 400 AirSites. The expense was
incurred during the first six months of 2001 and is not expected to continue. We
expect our gross margin percentage to improve from our year ended December 31,
2001 level. Based upon our estimated view that the telecommunications market
will experience a turnaround in the future, our improved product mix, a
reduction of one-time charges, successful implementation of cost reductions
initiated in fiscal year 2001, and the refocus of our efforts in the new
directions discussed previously, we expect our gross margin percentage to
improve in the future. However, future market conditions and economic conditions
could affect the achievement of this objective.

Research and development: Research and development expenses decreased $4.0
million or 13.6% from $29.5 million for the year ended December 31, 2000 to
$25.5 million for the year ended December 31, 2001. This decrease resulted from
the actions taken during the fiscal year ended December 31, 2001 to limit
discretionary spending. These actions included focusing development in the areas
with the greatest near-term revenue potential.

Sales and marketing: Sales and marketing expenses increased $1.5 million
or 14.4% from $10.4 million for the year ended December 31, 2000 to $11.9
million for the year ended December 31, 2001. This increase was attributable to
costs associated with an expansion in the first half of 2001 for anticipated
international orders and distribution activities and support of large operator
trials. One of these trials resulted in revenue booked during 2001.

General and administrative: General and administrative expenses decreased
$0.9 million or 7.1% from $12.6 million for the year ended December 31, 2000 to
$11.6 million for the year ended December 31, 2001. This decrease was primarily
due to a decrease in the provision for bad debts, and our directed savings
initiatives limiting and focusing discretionary spending. The savings
initiatives were accomplished through a reduction in the aggregate workforce of
the Company, consolidation of facilities, and an adjustment in certain business
functions streamlining the organization. These savings initiatives are reflected
in a greatly reduced level of general and administrative expenses as a percent
of revenue generated in the fourth quarter of 2001. In light of this significant
reduction in our costs, we believe our projected revenues will be sufficient to
sustain our business through the first half of 2003.

YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999

Net revenues: Net revenues increased $16.5 million or 93.3% from $17.8
million for the year ended December 31, 1999 to $34.3 million for the year ended
December 31, 2000. This increase in revenues was a result of higher shipments
to, and installations by, new and existing customers as they expand their
commercial networks. Additionally, we completed development and began shipping
international versions of our product during 2000, which accounted for 11.8% of
the net revenues or $4.1 million.

Gross Profits: Gross profit decreased $3.4 million or 52.3% from $6.5
million for the year ended December 31, 1999 to $3.1 million for the year ended
December 31, 2000. The gross profit margin was 36.7% for 1999 and 9% for 2000.
The decrease in the gross profit margin was mainly attributable to increased
inventory related charges, including write-downs for certain product
obsolescence, of $7.3 million and low sales volume in the fourth quarter of
2000.

Research and development: Research and development expenses increased
$13.7 million or 86.7% from $15.8 million for the year ended December 31, 1999
to $29.5 million for the year ended December 31, 2000. This increase was due to
recruitment and additional new hires and contract labor as well as the purchase
of additional engineering lab equipment and supplies. These increased expenses
were the result of an effort to accelerate product development and was driven by
an increased demand by our larger customers for advanced features and a rapid
increase in the adoption of wireless Internet services by subscribers.
14

Sales and marketing: Sales and marketing expenses increased $5.7 million
or 121% from $4.7 million for the year ended December 31, 1999 to $10.4 million
for the year ended December 31, 2000. Expenses increased for the recruitment and
acquisition of additional new hires to expand our international sales and
distribution activities and sales support functions. Travel, trade show and
public relations expenses and the opening of our new customer training center
also contributed to the increase.

General and administrative: general and administrative expenses increased
$9.6 million or 320% from $3 million for the year ended December 31, 1999 to
$12.6 million for the year ended December 31, 2000. This increase was primarily
due to a $6.9 million increase to the provision for bad debts. Additionally,
expenses in recruitment, accounting and legal services contributed to the
increase.

LIQUIDITY AND CAPITAL RESOURCES

Prior to our initial public offering in December 1999, which raised net
proceeds of $80.4 million, we funded our operations primarily through the
private sales of equity securities and through capital equipment leases. At
December 31, 2001, our principal source of liquidity was $4.7 million of cash
and cash equivalents. We have no credit facilities.

On May 16, 2001, we issued and sold 955,414 shares of preferred stock to
three existing stockholders, SCP Private Equity Partners, L.P., Tandem PCS
Investments, L.P. and Mellon Ventures L.P., at $31.40 per share for a total face
value of $30 million. The preferred stock is redeemable at any time after May
31, 2006 out of funds legally available for such purposes and initially each
share of preferred stock is convertible, at any time, into ten shares of our
common stock. Dividends accrue to the preferred stockholders, whether or not
declared, at 8% cumulatively per annum. The preferred stockholders are entitled
to votes equal to the number of shares of common stock into which each share of
preferred stock converts and collectively to designate two members of the Board
of Directors. Upon liquidation of the Company, or if a majority of the preferred
stockholders agree to treat a change in control or a sale of all or
substantially all of our assets (with certain exceptions) as a liquidation, the
preferred stockholders are entitled to 200% of their initial purchase price plus
accrued but unpaid dividends before any payments to any other stockholders. In
association with this preferred stock investment, we issued immediately
exercisable warrants to purchase 2,866,242 shares of our common stock for $3.14
per share, which expire on May 14, 2011. The proceeds from the sale of the
preferred stock were used to fund our operations from May 2001 into 2002. We
have entered into discussions with one of our stockholders concerning an
additional investment.

The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business; and, as a consequence, the
financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or the amounts and
classifications of liabilities that might be necessary should we be unable to
continue as a going concern. We have experienced net operating losses and
negative cash flows since inception and, as of December 31, 2001, we had an
accumulated deficit of $207 million. Cash used in operations for the years ended
December 31, 2001 and 2000 was $48.2 million and $62.6 million, respectively. At
December 31, 2001, our principal source of liquidity was $4.7 million of cash
and cash equivalents. Such conditions raise substantial doubt that we will be
able to continue as a going concern for a reasonable period of time. Subsequent
to the end of the year, we have collected approximately $10.6 million in cash
from both existing contracts and deposits on new contracts. As of March 11, 2002
our cash balance was $9.7 million and we had a revenue backlog of $17.0 million.
Our current 2002 operating plan projects that cash available from planned
revenue combined with the $4.7 million on hand at December 31, 2001 will be
adequate to defer the requirement for additional funding until no earlier than
the first half of 2003. This plan is dependent upon the collection of revenues
from one customer who accounts for approximately 50% of the 2002 projected
revenue. The projected revenue from this customer draws products from inventory,
thereby leveraging the cash flow associated with fulfillment of the order. As of
March 11, 2002 this customer has released and provided deposits to us of $4.7
million for $9.4 million of purchase orders for product we are to deliver during
2002. However, there can be no assurance that we will be successful in
accomplishing our operating plan as projected.

15

Our future results of operations involve a number of significant risks and
uncertainties. The worldwide market for telecommunications products such as
those we sell has seen dramatic reductions in demand in 2001 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 in 2001 by such global demand
reductions. Factors that could affect our future operating results and cause
actual results to vary materially from expectations include, but are not limited
to, dependence on key personnel, dependence on a limited number of customers,
ability to design new products, product obsolescence, ability to generate
consistent sales, ability to finance research and development, government
regulation, technological innovations and acceptance, competition, reliance on
certain vendors and credit risks. Our historical sales results and current
backlog do not give us sufficient visibility or predictability to indicate that
the required higher sales levels might be achieved. We currently believe that
sales will increase from fourth quarter of 2001 levels in the first and second
quarters of 2002, and continue to increase in the third and fourth quarters of
2002. If such third and fourth quarter sales do not materialize, we will have to
reduce our expenses to maintain cash levels necessary to sustain our operations.
Our future success will depend on us increasing our revenues and reducing our
expenses to reach profitability. To conserve cash, we took measures in the
second and third quarters of 2001 to reduce operating expenses for the remainder
of the year. During the fiscal year ended December 31, 2001, we entered into
agreements with certain vendors to settle outstanding payables totaling
$11,280,221 at varying discounts from the recorded liability. The vendors
agreed, in exchange for the settlement, to release us from future liability
related to the settled balances. The total gain realized as a result of these
settlements was $1,921,605, net of expenses of $342,835, which is recorded as an
extraordinary gain ($0.08 per share), in the accompanying statements of
operations. In addition, we negotiated modified payment terms relating to
accounts payable totaling approximately $6,882,700 with certain other vendors.
These restructured terms included a partial payment of approximately $2,132,146
with remaining payments to be paid over a thirty-month period. (See Note 15 of
Notes to Financial Statements for a complete description of the Vendor
Settlement Program.)

We believe that additional funding will be required prior to reaching
profitability and several alternatives are possible, including subordinated
notes and private placement financing. We currently have a nonexclusive
investment banking relationship with Keybridge Partners. However, no assurances
can be given that additional equity or debt financing can be arranged on terms
acceptable to us, if at all.

If near term sales do not meet expectations, we may have to further reduce
our discretionary spending to maintain cash levels necessary to sustain our
operations through the fourth quarter of 2002. It is unlikely that we will
achieve profitable operations in the near term and therefore it is likely our
operations will continue to consume cash in the foreseeable future. We have
limited cash resources and therefore we must reduce our negative cash flows in
the near term to continue operations, or we will need to secure additional
funding. However, 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 our
debts or our liquidation preference obligations to the preferred stockholders.
Accordingly, should we file for bankruptcy there is no assurance that any value
would be received by our stockholders.

On December 15, 2000 we entered into an agreement to purchase from a vendor
(TECORE Wireless Systems) ten integrated switch products through December 31,
2002. Alternatively, we may buy-out the commitment by purchasing $3.0 million of
TECORE common stock. Additionally, TECORE has an agreement with us dated
December 13, 2001 to purchase products from us under a reseller agreement dated
October 31, 2001. As of December 31, 2001 we had purchased six of the original
ten products from TECORE. As of December 31, 2001, TECORE placed orders with us
for $2.5 million resulting in revenue in 2001 for us of $2.0 million. Each
agreement was negotiated at arm's length and no terms in either agreement are
dependent upon terms in the other agreement. Subsequent to December 31, 2001
additional orders for $9.4 million have been placed by TECORE with us to provide
base stations and other equipment for a network in Central Asia.

16

NET CASH USED IN OPERATING ACTIVITIES

Net cash used in operating activities was approximately $15.1 million in
1999, $62.6 million in 2000 and $48.2 million in 2001. The significant use of
cash by operating activities was the result of the net losses during all
reported periods together with the reduction in accrued expenses associated with
a reduction in workforce and the reduction in accounts payable resulting from
the vendor settlements discussed previously. Except for sales to OEMs or to
customers under agreements providing for acceptance concurrent with shipment,
our customers are billed as contractual milestones are met. Deposits ranging
between 10% and 50% of the contracted amount typically are received at the
inception of the contract and an additional percentage of the contracted amount
is generally billed upon shipment. The terms vary from contract to contract but
are always agreed to in the initial contract. Most of the remaining unbilled
amounts are invoiced after a customer has placed the products in service,
completed specified acceptance testing procedures or has otherwise accepted the
product. Collection of the entire amounts due under our contracts to date have
lagged behind shipment of our products due to the time period between shipment
and fulfillment of all of our applicable post-shipment contractual obligations,
the time at which we bill the remaining balance of the contracted amount. This
lag will require an increase in investments in working capital as our revenues
increase. As of December 31, 2001, our accounts receivable balance was $5.8
million. Of this balance 54% was attributable to two customers, and receivables
from one of these customers accounted for approximately 43% of the total amount
outstanding. This customer is making payments against the outstanding balance to
demonstrate their commitment to pay the balance. In some instances, we have
offered vendor financing to certain customers where it assists us in entering a
strategic market or where it is an initial part of a larger order. As of
December 31, 2001, our total notes receivable balance was $2.0 million, of which
one customer owed approximately 77%.

NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES

We used net cash for capital expenditures of approximately $1.5 million,
$8.7 million, and $3.1 million for the years ended December 31, 1999, 2000, and
2001, respectively. These expenditures reflect our investments in computer
equipment, software development tools and test equipment, and other capital
equipment, which was required to support our business.

We lease our primary manufacturing and office facilities under long-term
non-cancelable operating leases. We also have operating leases for certain other
furniture, equipment and computers. We used net cash for operating leases of
approximately $1.0 million, $1.2 million and $1.3 million for the years ended
December 31, 1999, December 31, 2000 and December 31, 2001, respectively. Future
minimum payments for operating leases (including payments under our new lease
for final assembly and testing facilities in Melbourne, Florida) aggregated
through the year 2005 were approximately $0.6 million as of December 31, 2001
and we expect to spend approximately $464,156 for those leases in 2002.

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES

Net cash provided by financing activities for the year ended December 31,
2001 was $27.2 million and was due to net proceeds received from the sale of
convertible preferred stock in May 2001 of $30.0 million (a portion of which was
used to reduce accounts payable in our vendor settlement program). We currently
have no debt facilities outstanding.

Net cash used by financing activities for the year ended December 31, 2000
of $0.3 million resulted primarily from the payments on capital leases of $0.9
million offset by the cash provided from the exercise of stock options raising
$0.7 million.

Net cash provided by financing activities for the year ended December 31,
1999 of $109.4 million resulted primarily from the initial public offering in
December 1999 raising $80.4 million.

We lease certain computer and test equipment under capital lease
arrangements. We used net cash for capital leases of approximately $0.6 million,
$0.9 million and $1.3 million for the years ended December 31, 1999, December
31, 2000 and December 31, 2001, respectively. Future minimum payments for
capital leases aggregated through the year 2005 were approximately $0.4 million
as of December 31, 2001.

17

CRITICAL ACCOUNTING POLICIES AND ESTIMATES.

The preparation of financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates, including those related to customer
programs, product returns, bad debts, inventories, warranty obligations,
long-term service contracts, and contingencies. We base our estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.

We believe the following critical accounting policies are most affected by
significant judgments and estimates in the preparation of its financial
statements.

Revenue Recognition -- Revenue from product sales is recognized after
delivery after determination that the fee is fixed and determinable,
collectibility is probable and after resolution of any uncertainties regarding
satisfaction of all significant terms and conditions of the customer contract.
If subsequent to delivery, the customer should reject the product or the
customer's financial condition deteriorates so that they are unable to pay the
Company, provisions for bad debts or adjustments to revenue recognized will have
to be made in the current or subsequent period.

Allowance for Doubtful Accounts -- We maintain allowances for doubtful
accounts for estimated losses resulting from the inability of our customers to
make required payments. If the financial condition of our customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.

Warranties -- We provide for the estimated cost of product warranties at
the time revenue is recognized. While we engage in extensive product quality
programs and processes, including actively monitoring and evaluating the quality
of its component suppliers, our warranty obligation is affected by product
failure rates and material usage and service delivery costs incurred in
correcting a product failure. Should actual product failure rates, material
usage or service delivery costs differ from our estimates, revisions to the
estimated warranty liability would be required.

Inventories -- We write down our inventories for estimated obsolescence or
unmarketable inventory equal to the difference between the cost of inventory and
the estimated market value based upon assumptions about future demand and market
conditions. If actual market conditions are less favorable than those projected
by management, additional inventory write-downs may be required.

STATUS OF OUR COMMON STOCK LISTING ON NASDAQ NATIONAL MARKET

Stock traded on the Nasdaq National Market System must meet certain listing
requirements, including requirements with respect to a company's net tangible
assets, the minimum bid price of its stock and the market value of its public
float. As reported in our Quarterly Report on Form 10-Q for the quarter ended
September 30, 2001, we fell out of compliance with certain of the listing
requirements during the third quarter of 2001. However, Nasdaq issued a
de-listing moratorium effective September 27, 2001 until January 2, 2002. We
received a letter from Nasdaq dated February 14, 2002, notifying us that our
stock price had not met the minimum bid price of $1.00 for the previous 30 days,
and, as a result, Nasdaq would begin de-listing proceedings if our stock price
did not trade above $1.000 for a minimum of ten consecutive trading days before
May 15, 2002 (90 days after the date of the letter). As of March 21, 2002, our
stock price had traded at/or above the minimum bid price of $1.00 for 10
consecutive trading days. Nasdaq informed us on March 25, 2002 that we regained
compliance with Nasdaq Rule 4450(a)(5) governing the maintenance criteria for
listing on the Nasdaq National Market, and the matter is now closed.

FORWARD-LOOKING STATEMENTS; RISKS AND UNCERTAINTIES

This report contains forward-looking statements, including statements under
the captions "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business" and elsewhere in this
18

report, concerning our expectations of future sales, gross profits, earnings,
research and development expenses, selling, general and administrative expenses,
product development and introductions and cash requirements. Forward-looking
statements often include words or phrases such as "will likely result,"
"expect," "will continue," "anticipate," "estimate," "intend," "plan,"
"project," "outlook" or similar expressions. These statements are only
predictions and are not guarantees of future performance. They are subject to
certain risks, uncertainties and other factors, some of which are beyond our
control, are difficult to predict and could cause actual results to differ
materially from those expressed in the forward-looking statements. Actual
results may vary materially from those expressed in forward-looking statements.
We caution you not to place undue reliance on these forward-looking statements,
which reflect our management's view only as of the date of this report. We are
not obligated to update these statements or publicly release the results of any
revisions to them to reflect events or circumstances occurring after the date of
this report or to reflect the occurrence of unanticipated events.

Certain risk factors, which could cause actual results to differ from
expectations, are set forth below. We cannot assure you that one or more of
these factors will not adversely affect our results of operations.

RISK FACTORS

You should consider each of the following factors as well as the other
information in this Annual Report in evaluating our business and our prospects.
The risks and uncertainties described below are not the only ones we face.
Additional risks and uncertainties not presently known to us or that we
currently consider immaterial may also impair our business operations. If any of
the following risks actually occur, our business and financial results could be
harmed. In that case the trading price of our common stock could decline. You
should also refer to the other information set forth in this Annual Report,
including our financial statements and the related notes.

A long-lasting downturn in the global economy that impacts the wireless
communications industry could negatively affect our revenues and operating
results. The global economy is in the midst of a slowdown that

19

has had wide-ranging effects on markets that we serve, particularly wireless
communications equipment manufacturers and network operators. This downturn has
had a negative effect on our revenues. We cannot predict the depth or duration
of this downturn, and if it grows more severe or continues for a long period of
time, our ability to increase or maintain our revenues and operating results may
be impaired. In addition, because we intend to continue to invest in research
and development during this downturn and to maintain ongoing customer service
and support capability, any decline in the rate of growth of our revenues will
have a significant adverse impact on our operating results.

Current economic conditions affecting the wireless communications industry
may lead prospective and existing customers to postpone their purchasing
decisions. The industry wide decrease in demand for wireless telecommunications
infrastructure has adversely affected us. We cannot predict when the demand will
increase or when many of our customers and potential customers will start to
make significant purchases of our products.

We have incurred significant losses since we began doing business. We
anticipate continuing losses and may never achieve or sustain profitability. We
have accumulated losses of $207 million since we began doing business in 1994
through December 31, 2001, and we may never achieve or sustain profitability. We
will need to generate significantly higher revenues to achieve and sustain
profitability. Since we began doing business in 1994, we have generated only
$75.2 million in net revenues through December 31, 2001. We have been marketing
our GSM base stations since 1996, and to date the majority of our sales have
been to a small number of start-up domestic wireless operators. We have never
reported a profit. We will continue to incur significant research and product
development, sales and marketing, materials and general administrative expenses,
and we expect our expenses to increase as compared to prior periods, as we
expand our sales force and our international operations. We anticipate a net
loss for the year 2002 and we may continue to incur losses beyond 2002. We
cannot be certain that we will realize sufficient revenues or margins to sustain
our business.

We may not be able to obtain additional capital to fund our operations on
reasonable terms and this could hurt our business and negatively impact our
stockholders. If adequate funds in the form of equity or debt are not available
on reasonable terms or terms acceptable to us, we may be unable to continue as a
going concern. If we raise additional funds through the issuance of convertible
debt or additional equity securities, the percentage ownership of our existing
stockholders may be reduced, the securities issued may have rights, preferences
and privileges senior to those of holders of our common stock, and the terms of
the securities may impose restrictions on our operations. While the vendors
holding a security interest in our assets have agreed to subordinate their liens
to a secured lender who loans at least $6 million to us, until these vendors are
paid in full, we may not be able to borrow secured financing of less than $6
million.

We have a limited operating history. You should not rely on our recent
results as an indication of our future results. Our base stations are being used
in twenty-one commercially deployed systems. We had net revenues of $17.8
million, $34.3 million and $14.5 million in 1999, 2000 and 2001, respectively.
Unless we can achieve significant increases in market acceptance of our
products, we may never advance beyond our market penetration phase. Due to our
limited operating history, it is difficult or impossible for us to predict
future results and you should not expect future revenue growth based on our
recent results. You should consider our business and prospects in light of the
risks and problems faced by technology companies in the early stages of
development.

Our operating results are subject to substantial quarterly and annual
fluctuations and to market downturns. Our revenues, earnings and other
operating results have fluctuated significantly in the past and may fluctuate
significantly in the future. General economic or other conditions causing a
downturn in the market for our products or technology, affecting the timing of
customer orders or causing cancellations or rescheduling of orders could also
adversely affect our operating results. Moreover, our customers may change
delivery schedules or cancel or reduce orders without incurring significant
penalties and generally are not subject to minimum purchase requirements.

20

Our future operating results will be affected by many factors, including
the following:

Changes in the growth rate of the wireless communications industry;

Consolidation in the wireless communications industry;

The collectibility of our trade receivables;

Our ability to retain existing or secure anticipated customers or
orders, both domestically and internationally;

The availability and cost of products and services from our
third-party suppliers;

Our ability to develop, introduce and market new technology, products
and services on a timely basis;

Foreign currency fluctuations, inflation and deflation;

Decreases in average selling prices or demand for our products;

Intellectual property disputes and litigation;

Government regulations;

Product defects;

Management of inventory in response to shifts in market demand; and

Changes in the mix of technology and products developed, produced and
sold.

The foregoing factors are difficult to forecast and these, as well as other
factors, could harm our quarterly or annual operating results. If our operating
results fail to meet the expectations of investment analysts or investors in any
period, the market price of our common stock may decline.

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

We may have difficulty meeting our customers' delivery requirements in
the event many large orders are received in a short period of time because
we have limited production capacity and generally do not carry materials in
inventory;

We may expend significant management efforts and incur substantial
sales and marketing expenses in a particular period that do not translate
into orders during that period or at all; and

We may have difficulty meeting our cash flow requirements and
obtaining credit because of delays in receiving orders and because the
terms of many of our customer contracts defer certain billings until post-
shipment contractual milestones are met.

The problems resulting from our lengthy and variable sales cycle could
impede our growth, harm our stock price, and restrict our ability to take
advantage of new opportunities.

Our stock price is volatile. The stock market in general, and the stock
prices of technology-based companies in particular, have experienced extreme
volatility that often has been unrelated to the operating performance of any
specific public company. The market price of our common stock has fluctuated in
the past and is likely to fluctuate in the future as well. Factors that may have
a significant impact on the market price of our stock include:

Announcements concerning us or our competitors;

Receipt of substantial orders for base stations;

21

Quality deficiencies in services or products;

Announcements regarding financial developments or technological
innovations;

International developments, such as technology mandates, political
developments or changes in economic policies;

New commercial products;

Changes in recommendations of securities analysts;

Government regulations;

Acts of terrorism or war;

Proprietary rights or product or patent litigation; or

Strategic transactions, such as acquisitions and divestitures.

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

Our stock price may decline significantly if we are delisted from the
Nasdaq National Market. Our common stock currently is quoted on the Nasdaq
National Market System. For continued inclusion on the Nasdaq National Market
System, we must meet certain tests, including a minimum bid price of $1.00. We
currently are in compliance with the bid price requirement, although our stock
price traded below $1.00 from July 11, 2001 until March 8, 2002. If we fail to
satisfy the listing standards in the future, Nasdaq may de-list our common stock
from its National Market System. If this occurs, trading of our common stock may
be conducted on the Nasdaq SmallCap Market, if we qualify for listing at that
time, the OTC Bulletin Board or in the over-the-counter market on the "Pink
Sheets." In any of those cases, investors could find it more difficult to buy or
sell, or to obtain accurate quotations as to the value of our common stock. The
trading price per share of our common stock likely would be reduced as a result.

Intense competition in the market for wireless telecommunications equipment
from many larger, more established companies with greater resources could
prevent us from increasing our revenue and achieving profitability. The
wireless telecommunications infrastructure market is highly competitive. We
compete with large infrastructure manufacturers, systems integrators, and base
station subsystem suppliers, as well as new market entrants. Most of our current
and potential competitors have longer operating histories and presence in key
markets, larger installed customer bases, substantially greater name
recognition, and more financial, technical, manufacturing, marketing, sales,
distribution and other resources than we do. We may not be able to compete
successfully against current and future competitors, including companies that
develop and market new wireless telecommunications products and services. These
competitive pressures may result in price reductions, reduced gross margins,
longer sales cycles and loss of customers.

Competition in the telecommunications market is based on varying
combinations, including:

Comprehensiveness of product and technology solutions;

Manufacturing capability;

Scalability and the ability of the system solution to meet customers'
immediate and future network requirements;

Product performance and quality;

Design and engineering capabilities;

Compliance with industry standards;

Time to market;

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System cost; and

Customer support.

We anticipate that additional competitors will enter our markets as a
result of growth opportunities in wireless telecommunications, the trend toward
global expansion by foreign and domestic competitors, technological and public
policy changes and relatively low barriers to entry in selected segments of the
industry.

As a result of these factors, these competitors may be more successful that
us. In addition, we anticipate additional competitors will enter the market for
products based on 3G standards. These competitors may have more established
relationships and distribution channels in markets not currently deploying
wireless communications technology. These competitors also have established or
may establish financial or strategic relationships among themselves or with our
existing or potential customers, resellers or other third parties. These
relationships may affect customers' decisions to purchase products from us.
Accordingly, new competitors or alliances among competitors could emerge and
rapidly acquire significant market share to our detriment.

Our comparative inability to provide financing for our customers is a
competitive disadvantage and could result in a loss of sales and/or customers to
competitors with greater resources. We do not typically offer financing to our
customers, which could cause us to lose business to our larger competitors. Our
future success may depend upon our continuing ability to help arrange financing
for our customers. If we cannot assist in arranging financing for our customers,
we may lose sales and customers to competitors that directly provide financing.

Credit risk problems resulting from customer financing could hurt our
results and require us to raise additional capital. Many of our customers and
potential customers are start-up and small companies with a limited operating
history. In some instances, we have provided and will continue to provide
customer financing. We face credit risks, including slow payments or
non-payments from customers, and we may need to raise additional capital to
support financed sales and to deal with related credit risk problems.

Our lawsuit against Lucent Technologies relating to a purported
cancellation of a purchase order by a large customer could be expensive, could
divert management's time and resources, and may not be successful. On October
23, 2000, we filed a complaint against Lucent Technologies, Inc. et. al. in the
Circuit Court for the 18th Judicial Circuit in Brevard County, Florida,
alleging, among other claims, tortious interference with a business relationship
and misappropriation of trade secrets in connection with the purported
cancellation of certain Phase II purchase orders by Carolina PCS. We are seeking
more than $10 million in damages and injunctive relief. Lucent has filed a
number of pre-trial motions, which we are vigorously opposing.

The cost of pursuing this litigation could be high and could divert the
attention of our management's time and resources. This type of interference with
our customers could result in the loss of orders from other customers in the
future.

A small number of customers account for substantially all of our revenues
and the loss of any of these customers could hurt our results and cause our
stock price to decline. Our customer base has been and may continue to be
concentrated with a small number of customers. The loss of any of these
customers or the delay, reduction or cancellation of orders by or shipments to
any of these customers could hurt our results and cause a decline in our stock
price. The effect of these risks on our operating results is compounded by our
lengthy sales cycle. In 2001, sales to five customers accounted for 68.6% of our
total revenue. In 2000 and 1999, sales to three customers accounted for 61.0%
and 78.6% of total revenue, respectively.

23

The chart below shows the breakout by fiscal year of the concentration of
revenue:

We have a concentrated customer base and the failure of any of our
customers to pay us or to pay us on time could cause significant cash flow
problems, hurt our results and cause our stock price to decline. Our
concentrated customer base significantly increases the credit risks associated
with slow payments or non-payments by our customers. These risks are also higher
for us since many of our customers are start-up and small companies. Two
customers accounted for 73% of our outstanding accounts receivable as of
December 31, 2001, with one customer representing 43%. Three customers accounted
for 62% of our combined outstanding accounts and notes receivable as of December
31, 2000, with one customer, Carolina PCS, representing 37%. Two customers
represented 70% of our outstanding accounts receivable as of December 31, 1999,
with one customer, Carolina PCS, representing 45%. In the past and for the year
ending December 31, 2001, we have incurred bad debt charges and we may be
required to do so in the future. The failure of any of our customers to pay us,
or to pay us on time, causes significant cash flow problems, hurts our results
and could cause our stock price to decline.

As we continue to expand into international markets, we will become subject
to additional business risks. We have begun marketing and selling our products
internationally in Africa, the Middle East, Asia and Latin America. Our business
plan contemplates that a majority of our sales over the next several years will
be in international markets. Our revenues from international customers as a
percentage of total revenues were 19.2% in fiscal 2001, 11.8% in fiscal 2000 and
0% in fiscal 1999. In many international markets, barriers to entry are created
by long-standing relationships between our potential customers and their local
providers and protective regulations, including local content and service
requirements. In addition, our pursuit of international growth opportunities may
require significant investments for an extended period before we realize
returns, if any, on our investments.

Our international operations could be adversely affected by a variety of
uncontrollable and changing risks and uncertainties, including:

Difficulties and costs associated with obtaining foreign regulatory
approval for our products;

Unexpected changes in regulatory requirements;

Difficulties and costs associated with complying with a wide variety
of complex foreign laws and treaties;

Legal uncertainties regarding, and timing delays and expenses
associated with, tariffs, export licenses and other trade barriers;

Inadequate protection of intellectual property in foreign countries;

Increased difficulty in collecting delinquent or unpaid accounts;

Lack of suitable export financing;

24

Adverse tax consequences;

Dependence upon independent sales representatives and other indirect
resellers who may not be as effective and reliable as our employees;

Difficulties and costs associated with staffing and managing
international operations, overcoming cultural, linguistic and nationalistic
barriers and adapting to foreign business practices;

Political and economic instability; and

Currency fluctuations, including a decrease in the value of foreign
currencies relative to the U.S. dollar which could make our products less
competitive against those of foreign competitors.

In addition to general risks associated with our international sales and
operations, we are subject to risks specific to the individual countries in
which we do business. A portion of our international sales efforts will be
targeted to service operators who plan to deploy wireless communications
networks in developing countries where risks ordinarily associated with
international operations are particularly acute, including developing countries
in Africa, Asia, the Middle East and Latin America.

Any of these factors could impair our ability to expand into international
markets and could prevent us from increasing our revenues and achieving
profitability.

Our business and operating results may be harmed by inflation and
deflation. Inflation has had and may continue to have adverse effects on the
economies and securities markets of certain countries and could have adverse
effects on our customers, including their ability to obtain financing and repay
debts. Brazil and Mexico, for example, have periodically experienced relatively
high rates of inflation and currency devaluation. Significant inflation or
deflation could have a material adverse effect on our business, operating
results, liquidity and financial position.

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

Our failure to comply with evolving industry standards could delay our
introduction of new products. An international consortium of standards bodies
has established the specifications for the third generation (3G) wireless
standard, and is further working to establish the specifications of a future
wireless standard and its interoperability with existing standards. Any failure
of our products to comply with 3G or future standards could delay their
introduction and require costly and time-consuming engineering changes. After
the future standard is adopted, any delays in our introduction of next
generation products could impair our ability to grow revenues in the future. As
a result, we may be unable to achieve or sustain profitability. Even if we do
develop our technology and products to work with these new standards, consumer
demand for advanced wireless services may not be sufficient to justify network
operators upgrading to them.

A reduction or interruption in component supply or a significant increase
in component prices could have a material adverse effect on our business or
profitability. Our ability to meet customer demands depends, in part, on our
ability to obtain timely and adequate delivery of parts and components from our
suppliers and internal manufacturing capacity. We have experienced component
shortages in the past, including components for our integrated circuit products,
that have adversely affected our operations. Although we work closely with our
suppliers to avoid these types of shortages, we may continue to encounter these
problems in the future. A reduction or interruption in component supply or a
significant increase in the price or one or more components could have a
material adverse effect on our business.

We may not be able to adequately protect or defend our proprietary rights,
which would hurt our ability to compete. Although we attempt to protect our
intellectual property rights through patents, trademarks, trade secrets,
copyrights, confidentiality and nondisclosure agreements and other measures,
intellectual

25

property is difficult to evaluate and these measures may not provide adequate
protection for our proprietary rights and information. Patent filings by third
parties, whether made before or after the date of our filings, could render our
intellectual property less valuable. Competitors may misappropriate our
proprietary rights and information, disputes as to ownership of intellectual
property may arise, and our proprietary rights and information may otherwise
become known or independently developed by competitors. The failure to protect
our proprietary rights could seriously harm our business, operating results and
financial condition. We have not been granted any foreign patents and presently
have only a relatively low number of patent applications pending
internationally. If we do not obtain sufficient international protection for our
intellectual property, our competitiveness in international markets could be
significantly impaired, which would limit our growth and future revenues.

Others may bring infringement claims against us that could be
time-consuming and expensive to defend. In the future, claims of infringement of
other parties' proprietary rights, invalidity claims or claims for
indemnification resulting from infringement claims may be asserted or prosecuted
against us. Even if none of these claims were valid or successful, we would be
forced to incur significant costs and divert important resources to defend
against them. Any claim of infringement, whether or not successful, could cause
us considerable expense and place a significant burden on our management.

A significant decrease in the cost of digital T-1/E-1 phone lines will
diminish one of our competitive advantages. Existing base stations require an
expensive physical communications link, usually through a digital T-1/E-1 phone
line, to the wireline network. Any significant decrease in the cost of digital
T-1/E-1 phone lines used to connect base stations to the wireline network,
especially in less populated areas, will diminish a cost advantage that we
currently use to market our products. The cost of T-1/E-1 facilities has
recently declined significantly in urban areas because of increased competition.

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

Our reliance on a limited number of suppliers could lead to delays,
additional costs, problems with our customers and potential customers, and loss
of revenue. We plan to continue utilizing only one or a small number of
suppliers for each of the components of our base station systems. We have no
long-term contracts or arrangements with any of our suppliers that guarantee
product availability or the continuation of particular payment or credit terms.
If, for any reason, a supplier fails to meet our quality and quantity
requirements or stops selling products to us at commercially reasonable prices,
we could experience significant production delays and cost increases, as well as
higher warranty expenses and product image problems. Any of these problems could
damage relationships with current or prospective customers, which could
seriously harm our operating results in a given period and impair our ability to
generate future sales.

From time to time, we must replace some of the components of our products
when the supplier of that component is discontinuing production. While we
generally do not maintain an inventory of components, sometimes we do purchase
an inventory of these discontinued components so that we can maintain production
while finding new suppliers or developing substitute components ourselves. We
face the risk that we may deplete that inventory before finding an adequate
substitute, and that could cause the loss of significant sales opportunities.
Alternatively, we could purchase too many of the components and may be left with
excess inventory on our hands. We generally do not maintain an inventory of
finished goods and many components have long lead times, with some taking 12 to
16 weeks from the time of entry of the order to delivery. We cannot guarantee
that alternative sources of supply can be arranged on short notice or that
components will be available from alternative sources on satisfactory terms.

26

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, 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.

If we fail to manage our operations efficiently, our business and prospects
could be seriously harmed. The need to develop and offer our products and
implement our business plan in a difficult market will significantly challenge
our planning and management capabilities. We may not be able to implement
management information and control systems in an efficient and timely manner. If
we are unable to manage our operations efficiently, our business and prospects
could be seriously harmed. To manage our operations and personnel, we will need
to:

Improve financial and operational controls, as well as our reporting
systems and procedures;

Install new management information systems; and

Train, motivate and manage our sales and marketing, engineering,
technical, finance and customer support employees.

We have an agreement with Motorola, Inc. to grant them rights, which could
harm our business. When Motorola purchased $10.0 million of our Series B
Preferred Stock in 1995, we granted Motorola the right to acquire a worldwide,
nonexclusive, royalty-free license under any two of our patents. Motorola is a
large telecommunications and technology company with significant resources and
could exercise this right at any time and begin using these licenses to compete
against us. With respect to any possible infringement of our respective digital
base station patents, Motorola has agreed with us not to enjoin the other and to
attempt dispute resolution, including negotiation of nonexclusive license
agreements in good faith, before resorting to litigation.

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

We may make future acquisitions that dilute our stockholders' percentage
ownership, cause us to incur debt or assume contingent liabilities and subject
us to other risks. We expect to review opportunities to buy other businesses or
technologies that would complement our current products, expand the breadth of
our markets, enhance our technical capabilities, help secure critical sources of
supply or that may otherwise offer growth opportunities. While we have no
current agreements or negotiations underway, we may buy businesses, products or
technologies in the future. In the event of any future purchases, we could:

Issue stock that would dilute our current stockholders' percentage
ownership;

Incur debt; or

Assume liabilities.

27

These purchases also involve numerous risks, including:

Problems combining the purchased operations, technologies or products;

Unanticipated costs;

Diversion of management's attention from our core business;

Adverse effects on existing business relationships with suppliers and
customers;

Risks associated with entering markets in which we have no or limited
prior experience; and

Potential loss of key employees of purchased organizations.

Our industry is subject to extensive government regulation that could cause
significant delays and expense. Wireless telecommunications are subject to
extensive regulation by the U.S. and foreign governments. If we fail to conform
our products to regulatory requirements or experience any delays in obtaining
regulatory approvals, we could lose sales. Moreover, in most cases, we only plan
to qualify our products in a foreign country once we have a purchase order from
a customer located there, and this practice may deter customers or contribute to
delays in receiving or filling orders.

Continuing regulatory compliance could be expensive and may require
time-consuming and costly modifications of our products. Any failure of domestic
and international regulatory authorities to allocate suitable frequency spectrum
could limit our growth opportunities and our future revenues.

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

Directors' and officers' insurance may be difficult or cost prohibitive to
obtain. Our current directors' and officers' insurance policy was difficult and
expensive to obtain. The policy will expire on December 6, 2002. It will be
expensive and may be difficult to secure a replacement policy. If we are unable
to renew or secure a replacement policy, we could lose our officers and
directors and it will be extremely difficult to recruit qualified replacements
for our management team and board of directors, which would have a material
adverse affect on our business.

Control by our existing stockholders could discourage the potential
acquisition of our business. As of March 20, 2002, 5% or greater stockholders
and their affiliates owned 9.6 million shares of our common stock or
approximately 40.5% of our outstanding shares of common stock. In addition,
three of these stockholders hold the rights to conversion of another 13.8
million shares of common stock. Acting together, these stockholders would be
able to control all matters requiring approval by stockholders, including the
election of directors. This concentration of ownership could have the effect of
delaying or preventing a change in control of our business or otherwise
discouraging a potential acquirer from attempting to obtain control of us, which
could prevent our stockholders from realizing a premium over the market price
for their shares of common stock.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We have no derivative financial instruments or derivative commodity
instruments in our cash and cash equivalents. We invest the proceeds from our
financing activities in interest bearing, investment grade securities that
mature within 24 months. Our transactions are generally conducted, and our
accounts are

28

denominated, in United States dollars. Accordingly, these funds were not exposed
to significant foreign currency risk at December 31, 2001.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

FINANCIAL STATEMENTS

Our balance sheet as of December 31, 2001 and 2000 and the related
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 2001 and the report of Deloitte &
Touche LLP, Independent Auditors, are included as an annex to this report
beginning on page F-1.

29

SELECTED QUARTERLY RESULTS OF OPERATIONS

The following table sets forth unaudited quarterly financial data for the
four quarters in 2000 and 2001 and such information expressed as a percentage of
our net revenues. This unaudited quarterly information has been prepared on the
same basis as the audited financial information presented elsewhere in this
report and, in management's opinion, includes all adjustments, consisting only
of normal recurring adjustments, that we consider necessary for a fair
presentation of the information for the quarters presented.