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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 000-29053

                       Telaxis Communications Corporation
             (Exact name of registrant as specified in its charter)

                 Massachusetts                              04-2751645
          (State or other jurisdiction                   (I.R.S. Employer
       of incorporation or organization)               Identification No.)

                            20 Industrial Drive East
                            South Deerfield, MA 01373
                    (Address of principal executive offices)
                                 (413) 665-8551
              (Registrant's telephone number, including area code)

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

                                                    Name of each exchange
              Title of each class                    on which registered
          Common Stock, $.01 Par Value              Nasdaq National Market

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  Company  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 Company'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.[ _ ]

As of February 28, 2002, the aggregate market value of the voting and non-voting
common equity held by non-affiliates  of the Company was $14,054,562.  Shares of
voting and non-voting common equity held by each executive officer, key employee
and  director  identified  in Item 10 below and by each person who  beneficially
owns 10% or more of the outstanding common stock have been excluded in that such
persons may be deemed to be affiliates.  This  determination of affiliate status
is not necessarily a conclusive  determination for other purposes. The aggregate
market value has been computed based on a price per share of $1.05, which is the
average of the high and low sales prices on February 28, 2002. On such date, the
Company had 16,690,531 shares of common stock outstanding.

                             DOCUMENTS INCORPORATED BY REFERENCE

Portions of the  registrant's  definitive  proxy  statement to be filed with the
Securities  and Exchange  Commission in connection  with the  registrant's  2002
Annual Meeting of  Stockholders  are  incorporated by reference into Part III of
this Form 10-K.

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                                     PART I

This Annual Report on Form 10-K contains  forward-looking  statements as defined
by federal  securities  laws.  Forward-looking  statements are predictions  that
relate to future events or our future  performance  and are subject to known and
unknown  risks,  uncertainties,  assumptions,  and other  factors that may cause
actual results,  outcomes,  levels of activity,  performance,  developments,  or
achievements  to be  materially  different  from any future  results,  outcomes,
levels  of  activity,  performance,  developments,  or  achievements  expressed,
anticipated  or implied  by these  forward-looking  statements.  Forward-looking
statements  should be read in light of the  cautionary  statements and important
factors described in this Form 10-K, including Item  7--Management's  Discussion
and Analysis of Financial Condition and Results of  Operations--Safe  Harbor for
Forward-Looking  Statements.  We undertake no obligation to update or revise any
forward-looking  statement to reflect events,  circumstances  or new information
after the date of this Form 10-K or to reflect the  occurrence of  unanticipated
events.

Item 1.  Business.

Overview

We develop and market FiberLeapTM products,  which transparently  transmit fiber
optic signals over a wireless link between two access points. Using our wireless
products,  fiber optic carriers and enterprises can obtain connectivity at fiber
optic data rates and quality of service,  but where fiber optic cable  itself is
not  available  or is not  economically  viable.  Our current  FiberLeapTM  2006
product  is  a  compact,   easily  deployed   product  that  enables   fiberless
transmission  of data,  voice and video  communication  at fiber  rates that are
variable  from an Optical  Cable -3 (or OC-3) rate of 155 Mbps (or  Megabits per
second) to an OC-12 rate of 622 Mbps.

FiberLeapTM is a fiber optic network extension product that addresses the "fiber
gap" - the "last mile" connectivity  divide between existing fiber optic network
infrastructure and potential revenue-generating subscribers, such as businesses,
institutions,  and  governmental  agencies.  These potential  subscribers may be
located  in  buildings  that are not  connected  to a  metropolitan  Synchronous
Optical Network,  or SONET, ring (commonly referred to as an "off-net" building)
or in multiple  buildings in a private  enterprise  or campus  environment.  Our
FiberLeapTM  products could also be used to connect  cellular  telephone  towers
with the existing  fiber optic network  infrastructure  (a  connection  commonly
called "cellular backhaul"). We are not addressing the consumer-level, broadband
access market.

FiberLeapTM is designed to integrate directly and transparently into fiber optic
network  infrastructure,  thereby enabling carriers or enterprises to deploy and
support  FiberLeapTM as if it were a length of fiber optic cable. We believe its
simplicity  will  enable  us to  address  multiple  markets,  applications,  and
customers with a common product,  thereby providing market  diversification with
multiple areas of opportunity.

We were formed as a  Massachusetts  corporation  in January  1982 under the name
"Millitech Corporation". In 1995, we began to focus the company on the broadband
wireless access industry and subsequently  developed and produced a large number
of Local  Multi-point  Distribution  System (LMDS)  point-to-multipoint  outdoor
units for original equipment  manufacturers (OEMs). In December 1999, we changed
our name to  Telaxis  Communications  Corporation  to  reflect  our focus on the
wireless  industry.  Our initial success in the LMDS industry led to the initial
public  offering  of  our  stock  in  February  2000.  Due  to  changing  market
conditions,  in July 2001, we made the decision to exit the LMDS industry and to
focus all of our resources on closing the  connectivity  gap in fiber  networks.
Since  that  time,  we  have  restructured  our  company  to  address  this  new
opportunity,  FiberLeapTM trial and Beta units have been developed and tested, a
new marketing program has begun, and limited production has begun.

Industry Background

The fiber optic network industry is faced with financial stresses due in part to
the connectivity  gap. Major fiber carriers are having  difficulty in generating
sufficient revenue to service the debt they incurred as they deployed their core
networks.  Their revenue difficulties are partially due to their limited ability
to close the gap between  their core  network  infrastructure  and  under-served
subscribers that require or desire fiber optic capacity. Carriers typically have
to overcome cost, time,  technological,  and other barriers when trying to close
the fiber gap.

Given the revenue difficulties faced by fiber carriers,  they are limiting their
further capital  expenditures.  In the current economic climate,  it is expected
that further fiber  network  development,  especially at the network edge,  will
focus on deployments where new capital  expenditures will be closely followed by
new  revenue.  Connecting  new  subscribers  to existing  fiber  networks at low
incremental  cost  would  fit  well in this  market  reality.  We  believe  that
FiberLeapTM  products are well suited to this market  environment  as they could
provide fiber network  connectivity  at the network edge faster and cheaper than
new fiber optic cable.



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As a result  of the  capital  expenditure  reductions  by fiber  carriers,  some
potential subscribers are looking elsewhere to satisfy their connectivity needs.
For  example,   enterprises  are  expected  to  increasingly   turn  to  network
integrators to provide connectivity between their local area networks,  or LANs,
and storage  area  networks,  or SANs,  as their  business  conditions  improve.
Cellular network operators are faced with similar  connectivity issues when they
try to provide  backhaul to connect their cellular  telephone towers to the rest
of their  networks.  We expect this issue to  intensify  as  subscribers  demand
increasingly data-intensive mobile services.

Overlaying  all of these  industry  trends is the current  desire for  increased
network redundancy and reduced  vulnerability  through duplicate and alternative
fiber optic paths, which could potentially be provided by FiberLeapTM.

     Fiber Network Connectivity Gap

Industry  sources have estimated that over 39 million miles of fiber optic cable
have been laid and over $90 billion has been invested in that process,  but less
than 5% of the installed  fiber is generating  revenue.  At the same time,  less
than 5% of the estimated  700,000 U.S.  commercial  buildings  with  occupancies
greater than 100 people are estimated to be served by fiber.  This fiber gap has
arisen largely for two reasons. First, it is expensive and time-consuming to lay
fiber to connect individual businesses to fiber network infrastructure,  and the
process of laying fiber is often delayed by the need to obtain rights of way and
permits.  Second, there is a shortage of alternative access solutions that would
enable  fiber  carriers  to connect  potential  customers  to the fiber  network
infrastructure.  As a result, much of the existing fiber network  infrastructure
is significantly underutilized.

     Private Enterprise Networks

Business,  government  and  institutional  enterprise  network  deployments  are
expected to accelerate as economic  conditions  improve.  These deployments will
provide high-speed  connections  between multiple buildings occupied by the same
or affiliated  businesses or other  enterprises in a campus or business  complex
setting.  Given that public fiber network  carriers have curtailed their capital
spending  programs,  enterprises  are turning to network  integrators to provide
LAN-to-LAN and SAN-to-SAN connectivity.  These integrators may be more receptive
to  considering  alternative  methods  of  providing  connections  (such  as our
FiberLeapTM   products)  rather  than  just  fiber  optic  cable.  In  addition,
high-data-rate  next generation fixed wireless LAN systems such as 802.11a could
create  additional  needs for  LAN-to-LAN  connectivity  that  could be met with
FiberLeapTM.  The higher  data rate  capability  within  the LAN could  generate
demand for higher speed connections between LANs.  FiberLeapTM could potentially
provide the fiber optic connectivity that may be required by these new systems.

     Cellular Backhaul

The need for high-speed  connections  between cellular  telephone towers and the
rest of the cellular telephone network is expected to rise dramatically.  Use of
cellular telephones and other mobile wireless access devices is expected to grow
on a worldwide  basis.  Also, the  complexity of cellular  signals and amount of
data that needs to be backhauled is expected to increase  significantly as 2.5G,
3G and  other  high-data-rate  cellular  systems  are  developed  and  deployed.
Backhaul data rates required for some individual  cells are expected to increase
from 1.5-to-2.0 Mbps for current  cellular systems (which can be provided with a
typical   T-1/E-1   connection)  to  1-to-2   gigabits  per  second  (Gbps)  for
high-data-content  3G cells. These speeds are far beyond the capabilities of the
T-1/E-1  connections  that  are  typically  used  today,  thereby  providing  an
attractive market for FiberLeapTM.

     Native Gigabit Ethernet Trend

For fiber carriers that are providing  public access services and for businesses
providing  and/or  using  LAN/LAN and  SAN/SAN  connectivity,  extending  native
Gigabit  Ethernet into  metropolitan  core  networks is becoming a  requirement.
Gigabit  Ethernet,  like SONET,  is a  standardized  method of  structuring  the
transmission of data over networks.  Ethernet protocol,  which is currently used
primarily within business Intranet LANs, is being extended from the desktop into
core networks  instead of converting data to SONET protocol before entering core
networks.  This trend is occurring due to technical and cost advantages inherent
to Ethernet.  The lower costs of Gigabit Ethernet equipment are expected to make
it attractive to financially  stressed carriers.  However, in order for carriers
to take full advantage of lower cost Gigabit Ethernet equipment,  they will have
to address the fiber gap between their core networks and the high  percentage of
potential  subscribers that do not currently have fiber optic  connectivity.  We
believe that  FiberLeap(TM) can enable the



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advantages  of native  Gigabit  Ethernet to be  realized  in many cases.  We are
currently  developing  a product  that will  transmit  native  Gigabit  Ethernet
traffic.

     The Desire for Redundancy and Reduced Vulnerability

There is now a greater emphasis on redundancy in networks,  including the use of
alternative  media in achieving  redundancy,  plus reduced  vulnerability of all
media.  In  addition,   there  is  greater   emphasis  on  distributed   network
infrastructures  to prevent  single  node  network  failures.  This trend  could
favorably  affect  all  of  the  market  segments  that  we  are  addressing  as
FiberLeapTM could provide a redundant path of wireless  connectivity rather than
cable-based connectivity.

Strategy

Our  objective is to be the leading  provider of wireless  equipment  addressing
fiber network connectivity  markets worldwide.  Our strategies for serving these
markets are to:

     Develop and market  wireless  equipment  that is simple and  transparent to
fiber optic  infrastructure.  FiberLeapTM has been designed to provide fiberless
or  fiber-like  connectivity  with a  wireless  link  that  can be  very  easily
integrated into existing fiber networks.  The objective is to enable carriers or
enterprises to easily adopt,  install, use and support FiberLeapTM as if it were
a length of fiber optic  cable.  This  capability  could result in lower cost of
installation,  faster speed of deployment, and quicker returns on investment for
carriers or enterprises. It also simplifies our processes of marketing, selling,
distributing,  and supporting  FiberLeapTM.  The simplicity of FiberLeapTM  will
also enable us to address multiple markets with a common, standard product.

     Focus on high-value market segments where the FiberLeapTM value proposition
is most  attractive.  Our objective is to enable our sales force to prepare for,
and to close sales for, specifically selected applications where the FiberLeapTM
value  proposition is strongest.  These  applications  are those for which fiber
optic cable itself would  normally be used given needs for high data rates,  but
is not  feasible  because of physical  barriers,  higher  cost,  longer time for
installation,  or limited  availability.  The  fiber-like  nature of FiberLeapTM
enables us to use fiber optic carrier  financial models that are very similar to
those  already  being used for fiber optic cable to estimate  potential  revenue
generation.  We  expect  this  will  emphasize  the  value  proposition  of  our
FiberLeapTM products and assist in our selling process.

     Drive product requirements from the needs of the fiber network connectivity
market as a whole. In the past, we have traditionally  developed products on the
basis of specifications  provided by OEM customers for vehicular radars and LMDS
point-to-multipoint  outdoor  units.  The  result  was  that our  products  were
customized  to the needs of  particular  customers and did not have broad market
applicability.  With  FiberLeapTM,  we intend to develop  standard  products  to
satisfy the  expectations  of fiber carrier and enterprise  customers in a broad
range of markets and applications. This strategy is expected to make our selling
process more  efficient and to reduce our exposure to  fluctuations  in specific
market segments without the expense of multiple, tailored products.

     Position FiberLeapTM to be the generic brand for its intended  application.
FiberLeapTM  is being  positioned as a piece of equipment  that an  applications
engineer or installer in the fiber optic  network and  equipment  industry  will
select as a "length  of cable" to  connect  two  points in a network  that would
normally be served by fiber optic cable  itself.  Our  objective  is to position
FiberLeapTM as the preferred solution for specific fiber optic networking needs.

     Exploit our  existing  capabilities  and  experience  to maintain  superior
product  performance,  integrity and reliability.  Our core capabilities include
the following strengths:

     o    Millimeter-wave  technology  extending  to the  upper  reaches  of the
          millimeter-wave spectrum (30 gigahertz (GHz) to 300 GHz);

     o    Technology for compact, high-performance, cost-effective antennas;

     o    Experience in the design and  development of  millimeter-wave  outdoor
          units that are highly integrated,  compact and robust for use in harsh
          outdoor environments;

     o    Experience  and  capability  in  the   development   and   high-volume
          production of millimeter-wave outdoor units for LMDS;

     o    Experience  with  high-capacity,  secure  data  links  for  government
          agencies; and

     o    Proprietary, patented and patent pending FiberLeapTM technologies.



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We intend to exploit these  capabilities to develop  products with  performance,
integrity and reliability that are superior to any competitive product.

     Create barriers to entry through proprietary and patented technology. As we
continue to invest in the development of superior products,  we will also strive
to develop,  maintain and extend a position of competitive  superiority by means
of proprietary  technology and through  patent and other  intellectual  property
protection where possible.

     Outsource manufacturing to the extent appropriate while balancing financial
performance  and business  risk.  We intend to  continually  evaluate each part,
component,  subassembly and final assembly for possible outsourced production in
an effort to maximize our financial gain and minimize  business risk. We have an
ongoing and proactive  make/buy  discipline to consider and reconsider  in-house
manufacturing versus outsourced manufacturing of all elements of our products.

Existing and Future Products

The  FiberLeapTM  product family is being  developed to  transparently  transmit
fiber optic signals over a wireless  link between two access points  without the
use of  traditional  modems.  Taking  advantage  of our core  capabilities,  the
FiberLeapTM  product  family  is being  developed  to use the large  amounts  of
unallocated  spectrum  in the  millimeter-wave  portion  of the  electromagnetic
spectrum,  generally considered to extend from 30 GHz to 300 GHz. These products
are currently  being  developed to provide data rates of OC-3 (155 Mbps),  OC-12
(622 Mbps),  and native Gigabit Ethernet (1.2 Gbps). The use of large amounts of
unallocated  millimeter-wave spectrum is the key to enabling FiberLeapTM to be a
simple  product,  while  providing high data rates very  efficiently in terms of
dollars per megabit per second.

     FiberLeapTM 2006

Our initial  FiberLeapTM  product,  FiberLeapTM  2006,  has been developed with
sufficient  performance  to fill a major portion of the fiber gap being faced by
fiber carriers and enterprises.  In third party tests, FiberLeapTM 2006 has been
demonstrated to be transparent to existing fiber networks.  We commenced limited
production of the FiberLeapTM 2006 product in the first quarter of 2002.

FiberLeapTM 2006 is a compact,  easily deployed product  operating in the 60 GHz
millimeter-wave   band  between  57  GHz  and  64  GHz.  It  enables   fiberless
transmission of data, voice and video communication at variable fiber optic data
rates from OC-3 (155 Mbps) to OC-12 (622 Mbps). It is engineered to provide link
distances  from 600 meters to 1,100 meters with 99.99%  availability,  depending
upon prevailing rainfall rates in the geographic regions where it will be used.

The  benefit  of  operating  in the 60 GHz  millimeter-wave  band  is that it is
"unlicensed" in the United States - in other words, an operator does not have to
acquire a license from the Federal Communications Commission (FCC) to operate in
that  frequency.  However,  we expect  that  customers  will  require  FCC "type
approval" of our FiberLeapTM products before commercially deploying (and perhaps
even buying) the products.  A third-party  laboratory has tested the FiberLeapTM
2006 product for  compliance  with the FCC type approval  criteria.  We formally
submitted our type approval  application  to the FCC in February  2002,  and the
formal  application  process is thus underway.  We cannot predict the outcome or
completion  date of this process.  Further,  even if our  application is granted
(assuming it is successful), we believe we will have to obtain a waiver from the
FCC of  certain  portions  of  the  type  approval  criteria  for  us to  have a
type-approved  product with the  performance  described in this Annual Report on
Form 10-K. We cannot  predict when we will be able to obtain this waiver,  if at
all.

A  FiberLeapTM  2006  product  consists of two units,  an Access Unit (AU) and a
FiberLeapTM  Interface Panel (FLIP). The AU contains the transmitter,  receiver,
antenna, and other electronics for one end of a link. The AU is a self-contained
unit connecting to the FLIP with a single cable that incorporates fiber optic as
well as power cables. The dimensions for the AU are 10.3" x 10.3" x 8.0", and it
weighs nine kilograms.  The AU is typically mounted on a 4-inch diameter pole on
a rooftop  or tower.  It can also be  mounted  on an  exterior  wall or behind a
window.

The FLIP would normally be installed in the communications  equipment room of an
"off-net"  subscriber  building  or an "on-net"  building  located at the access
point to the metropolitan fiber optic ring infrastructure.  The FLIP is a simple
breakout  panel that  connects  in-building  fiber optic cables and wires to the
FiberLeapTM  AU. It also  contains  status  lights to indicate the health of the
FiberLeapTM link.



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     Future Products

Our product strategy flows from our corporate  strategies  described  earlier in
this section.  In particular,  our goal is to develop wireless equipment that is
simple  and  transparent  to  fiber  optic  network  infrastructure  and that is
responsive to fiber network connectivity market needs. Our engineers have a wide
range of tools available, including the use of various operating frequencies, to
address FiberLeapTM product  requirements.  Operating  frequencies are chosen on
the basis of  product  requirements,  technical  considerations  and  regulatory
considerations  in the  geographic  areas  to be  served  by the  products.  The
millimeter-wave  spectrum  (30-to-300  GHz),  where  FiberLeapTM  products  will
operate,  provides  over  250  GHz  of  spectrum  that  is  largely  unallocated
throughout the world.  Our expertise in developing  products  operating in these
frequencies  provides us  flexibility  in  developing  the right product for the
right opportunity.  Further,  regulatory  agencies around the world are actively
advocating the use of these millimeter-wave frequencies. As new technologies and
products are developed, we continue to focus on creating barriers to competitive
entry, including through patent and other intellectual property protection.

Customers

We are marketing FiberLeapTM to prospective customers that need fiber optic data
rates  and  quality  of  service,  but where  fiber  optic  cable  itself is not
available or is not economically  viable.  Prospective  customers  include fiber
optic network carriers, enterprises, network integrators, and cellular carriers.
Network integrators include engineer, furnish and install (EF&I) contractors and
OEMs.  We expect to serve our  customers  by means of direct  sales and  through
channel partners such as network integrators,  OEMs and distributors.  Selection
of channel  partners  will depend upon the value added by channel  partners  and
upon the financial benefit to us and to our partners.

We began our FiberLeapTM marketing activities in mid-2001 and have augmented our
activities  as  FiberLeapTM  Beta  links  and  marketing  material  have  become
available. We have ongoing discussions with numerous prospective customers.  The
types of prospective  customers  currently  being pursued,  and their  potential
applications of FiberLeapTM, are as follows:

     o    Major  fiber  optic  network   carriers  -  -  extensions   off  their
          metropolitan SONET rings to off-net buildings.

     o    Regional fiber optic wholesale  carriers - - extend wholesale  service
          off their metropolitan SONET rings.

     o    Regional  EF&I  contractors  - -  provide  LAN-to-LAN  and  SAN-to-SAN
          connectivity within off-net enterprise environments.

     o    Major EF&I contractors - - provide enterprise fiber network redundancy
          and reduced vulnerability.

     o    Major enterprises - - provide  LAN-to-LAN and SAN-to-SAN  connectivity
          within off-net enterprise environments.

For the year ended  December 31, 2001, we had no sales of  FiberLeapTM  products
since we were still  developing the initial  product.  Initial Beta units became
available in December 2001. We commenced  limited  production of the FiberLeapTM
2006 product in the first quarter of 2002.  We commenced the limited  production
run to validate our manufacturing  processes and to enable us to deliver initial
products promptly upon receipt of orders. We currently have no customers for our
FiberLeapTM products.

Manufacturing Operations

We have developed  extensive expertise and facilities for automated assembly and
testing of  millimeter-wave  products.  All our  manufacturing  operations  have
recently been  consolidated  into a single  building,  and our  production  flow
lines,  work  instructions,  processes and fixtures have been refined to address
the production needs of FiberLeapTM.  Our automated assembly and test equipment,
shop  floor  control  system,  data  collection  and  analysis  system,  and our
enterprise  system that were previously  developed and used for our LMDS product
line are being adapted for use in our FiberLeapTM production.

All of the  FiberLeapTM  Beta  links  and  limited  production  units  have been
manufactured  in our existing  facilities.  In the future,  we plan to outsource
manufacturing  to the extent  appropriate  while  balancing  financial  gain and
business risk. We intend to continually  evaluate,  on a case-by-case  basis for
every  part,   component,   subassembly  and  final  assembly   associated  with
FiberLeapTM,  whether to make that piece at our facilities or to have that piece
manufactured  by a third  party.  Factors  involved in the  "Make/Buy"  decision
include adequacy of capacity for production,  capital expenditure  requirements,
maintenance of high quality, cost, and continuity of supply.

Our manufacturing operations include the following facilities and groups:


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     o    Module assembly.

     o    Final assembly for complete FiberLeapTM access units

     o    Production test for FiberLeap(TM) modules and access units.

     o    Test engineering for all production test equipment.

     o    Supply chain management.

     o    Quality assurance.

Electronic  components  and raw  materials  used in our products  are  generally
obtained from a large number of suppliers.  Some  components are standard items,
and others are  manufactured  to our  specifications.  In some special cases, we
obtain  components  from a single source or a limited number of sources.  At the
present  time,  we do not have  long-term  supply  agreements  with any of these
vendors.  We try to  maintain  good  relationships  with our vendors to mitigate
risks associated with single or limited sources of supply. From time to time, we
may purchase or commit to purchase extra quantities of selected  material due to
anticipated  needs or market or vendor  developments.  However,  we try to avoid
unnecessary long-term obligations and the accumulation of excessive inventory.

Marketing, Sales & Customer Care

Our  potential   customers   include  fiber  carriers,   cellular  carriers  and
enterprises  that need  connectivity  at fiber  optic data rates and  quality of
service,  but where  fiber  optic  cable  cannot be readily  used.  The use of a
wireless link like FiberLeapTM is a new approach to meeting the demand for fiber
network connectivity; and we are a new entrant in the fiber market. As a result,
we are  pursuing a highly  focused,  intense  marketing,  promotional  and sales
program.  We are also paying particular  attention to applications  engineering,
field  engineering,  and  customer  care to  educate  and  train  key  people in
prospective  customer  organizations on the virtues of FiberLeapTM and its value
proposition.

     Marketing

In recognition  that  FiberLeapTM  is addressing the fiber network  connectivity
market, we have revamped our marketing  approach and  capabilities.  The primary
objective of our marketing activity is to cause FiberLeapTM to become the "first
choice" product for our customers. Our FiberLeapTM marketing activities began to
intensify in late 2001 after the first  FiberLeapTM  Beta link was completed and
made available for our marketing activities. Several demonstration links are now
available. Our marketing material and our new Website focused on our FiberLeapTM
products were completed in February 2002.

     Focus of our Marketing Program

We are carefully focusing our marketing  activities on selected prospects in the
United States. Our marketing activities are targeting both large and small fiber
network  carriers,  enterprises and other potential  customers where our current
product,  FiberLeapTM  2006,  has the best  potential to meet customer needs and
offers a compelling value proposition. The primary applications being pursued at
present  are  extensions  of  fiber  carriers'   metropolitan  SONET  rings  and
LAN-to-LAN and SAN-to-SAN connectivity for enterprises. We are approaching fiber
carriers through direct marketing,  while the enterprise  connectivity market is
being addressed  primarily  through  network  integrators and OEMs. We expect to
apply greater  resources to the cellular  backhaul  market as 2.5G, 3G and other
high-data-rate  cellular  expansion  occurs.  We believe  that our most  fertile
markets are with the numerous carriers, network integrators and enterprises that
have  already  recognized  the  "fiber  gap"  problem  and  have  given  serious
consideration to closing the gap with Free Space Optics equipment.

     Marketing Aids

FiberLeapTM is being promoted via our new Website; collateral material including
brochures and data sheets;  product  demonstrations;  instructional material and
procedures;   product  and  package  labeling;   customer  seminars;   technical
presentations; and product road shows. Our new Website (at www.fiberleap.com and
at www.tlxs.com) offers both product information and instructional material.

Broad-based  advertising  is  not  currently  a  large  part  of  our  marketing
activities  because we prefer to focus our sales  people,  demonstration  links,
collateral  material and funding on more carefully  targeted  audiences.  We may
later pursue trade shows and other broad-based advertising venues.



                                       7
<PAGE>


     Sales

Our sales force currently includes employees and representatives  located in the
Eastern United States.  They are compensated  with  commissions  based on orders
booked, in addition to salaries and retainers.

     Customer Care

A key element of our sales  approach  is to be highly  proactive  in  addressing
customer   needs  in  advance  of  sale  and  for  the   duration   of  customer
relationships.  Customer  care  is  considered  to be an  integral  part  of the
"product"  being sold. We provide  customer  care in the  following  areas among
others:

    o Applications engineering and solutions   o  Product documentation and aids

    o Field engineering and problem resolution o  Training and seminars

    o Spares and repairs







Currently,  all of these  activities  are  conducted  from our South  Deerfield,
Massachusetts  headquarters.  We may  establish  Customer  Care Centers at other
locations depending on the deployments of FiberLeapTM.

Research and Development

The basic goal of our research and development activities is to develop wireless
equipment that is simple and  transparent to fiber optic network  infrastructure
and that is responsive to fiber network connectivity market needs. We also focus
on creating  barriers to competitive  entry,  including through patent and other
intellectual  property  protection.  We have a  multidisciplinary  research  and
development   team   consisting  of  engineers  and  scientists   whose  primary
specialties are in microwave engineering and millimeter-wave  engineering.  Over
the past ten years, we have also developed  substantial  expertise in developing
millimeter-wave  products for use in harsh outdoor conditions.  Our research and
development team operates with vertically integrated facilities and an extensive
complement of computer aided design tools and test equipment. These capabilities
enable us to design,  develop and validate integrated products,  while improving
the balance of product cost, performance, and integrity. We also maintain strong
relationships  with the  University of  Massachusetts,  other  universities  and
various technical  organizations to stay abreast of the latest  technologies and
trends.

     Core Technical Competencies

Our  technical   core   competencies   stem  from  our  long   experience   with
millimeter-wave science, technology and products. That experience has enabled us
to develop the ability to integrate  millimeter-wave  and microwave circuits and
semiconductor  devices with other electronic  components into a highly reliable,
robust outdoor unit that enables repeatable automated assembly and testing.

In  order  to  combine   millimeter-wave  and  microwave  technologies  into  an
integrated outdoor unit for FiberLeapTM,  we have developed additional expertise
in several areas, including:

     o    Patented antennas integrated into outdoor unit housings

     o    Proprietary power amplifiers

     o    Direct modulation designs

     o    Microcontroller driven adaptation and telemetry

     o    Material selection and mechanical assemblies

     o    Product integrity

Competition

The market for wireless fiber network connectivity equipment is rapidly evolving
and highly  competitive.  A number of large fiber  optic and  telecommunications
equipment suppliers, as well as a number of smaller companies, have developed or
are  developing  products that compete with ours.  Many of our  competitors  are
substantially  larger  than we are and  have  significantly  greater  financial,
sales, marketing, distribution,  technical,  manufacturing, and other resources.
These  competitors  may make  strategic  acquisitions  or establish  cooperative
relationships  among  themselves or with third parties



                                       8
<PAGE>


to  increase  their  ability to gain  market  share  rapidly.  We expect to face
increasing competitive pressures from both current and future competitors in the
markets  we  serve,  particularly  if we are  successful  with  our  FiberLeapTM
products.

The  alternative  technologies  for  addressing  the fiber network  connectivity
market include other high-frequency,  high-data-rate  millimeter-wave  products;
lasers  (also  called  Free Space  Optics  (FSO));  traditional  millimeter-wave
radios; and fiber optic cable itself. At the present time, we know of only three
companies with high-frequency,  high-data-rate  millimeter-wave products similar
to FiberLeapTM.  These three companies are Harmonix  Corporation,  SierraCom,  a
division  of Sierra  Networks,  and Loea,  a division  of Trex  Enterprises.  We
believe several other companies are using the 60 GHz frequency for products with
lower data rates than our  FiberLeapTM  products  and others are  exploring  the
technologies  necessary  for a  high-frequency,  high-data-rate  millimeter-wave
product.  These  competitors  may have or develop  products that are superior to
ours  in  performance,  cost,  technological  approach,  durability,  and  other
criteria.  There are a number  of  companies  developing  and/or  supplying  FSO
equipment, including Canon, Lightpointe, Terabeam, and fSONA. There are a number
of companies  developing and/or supplying  traditional  millimeter-wave  radios,
including DMC Stratex, Harris, Alcatel, Ericsson, Nera, P-Com, NEC, and Ceragon.

In addition to these technologies, there are other high-speed solutions (such as
digital  subscriber lines, cable modems, and T-1/E-1 dedicated lines) that could
be  viewed  as  competing  with  our  FiberLeapTM   products.   However,   these
technologies  provide  much lower data rates than our  FiberLeapTM  products and
serve  different  markets and therefore do not directly  compete.  We believe an
element  of  the  success  of  our  FiberLeapTM  products  will  be  the  proper
positioning and description of the  capabilities of our products to minimize the
chance of confusion with other, lower data rate technologies.

Many of these alternative  technologies can take advantage of existing installed
infrastructure  and have achieved  significantly  greater market  acceptance and
penetration  than  our  FiberLeapTM  products.  We  expect  to  face  increasing
competitive  pressures  from both current and future  technologies  in the fiber
network  connectivity  market,  particularly  if  we  are  successful  with  our
FiberLeapTM products.

The rapid  technological  developments  within  the fiber  network  connectivity
equipment  industry result in frequent changes to our group of competitors.  The
principal  competitive factors in our market include price; product performance,
quality,  features and inter-operability;  ability to manufacture and distribute
products;   product   availability;   relationships  with  potential  customers;
technical support and customer service; and brand recognition.

Intellectual Property

We attempt to preserve and protect our product and manufacturing process designs
and other proprietary technology. We rely on a combination of patent, copyright,
trademark,  and trade secret laws,  as well as  confidentiality  agreements,  to
establish and protect our proprietary  rights. We generally  require  employees,
consultants,  business  partners,  and  others  doing  business  with us to sign
confidentiality  and  nondisclosure  agreements on a routine basis.  Our success
depends to a  significant  degree upon the  preservation  and  protection of our
product designs and other proprietary  technology.  Although we employ a variety
of intellectual  property in the development and  manufacturing of our products,
we believe that none of our  intellectual  property is individually  critical to
our current operations.  However,  taken as a whole, we believe our intellectual
property  rights  are  significant.  See  Item  7--Management's  Discussion  and
Analysis of  Financial  Condition  and Results of  Operations  - Safe Harbor for
Forward-Looking Statements.

We have been granted two material  United  States  patents,  which relate to our
antenna and access unit design and will remain in force until September 2018 and
2019. In addition,  we have six  material  United  States patent  applications
pending.   We  have  counterpart   patents  pending  in  several   international
jurisdictions. We plan to continue to pursue intellectual property protection in
foreign countries (primarily in the form of international  patents) in instances
where the technology covered is considered important enough to justify the added
expense. We have an active patent disclosure,  application and filing process in
place,  with  incentive  bonuses paid to employee  inventors at key steps in the
process.

Employees

On February 28, 2002, we had 79  employees.  On that date, we employed 36 people
in  engineering,  23  people  in  our  manufacturing  operations,  6  people  in
marketing,   sales  and  customer   service,   and  14  people  in  finance  and
administration.  We are not a party to any collective bargaining  agreement.  We
believe that relations with our employees are good.

Item 2.  Properties.

We  lease  approximately  66,000  square  feet of  facilities  comprised  of two
buildings  in  South  Deerfield,   Massachusetts.   One  building  is  used  for
engineering  and the other for  manufacturing.  The term of the lease of the two
buildings expires in



                                       9
<PAGE>


October 2005.  Approximately 15,000 square feet of space is currently unused and
available for future  expansion.  We expect that our current  facilities will be
adequate to meet  foreseen  needs.  To the extent we determine to open  customer
care  centers,  we  believe  adequate  space  will  be  available  at  customary
commercial rates.

Item 3.  Legal Proceedings.

During the period from June 12 to September 13, 2001, four purported  securities
class action  lawsuits were filed against us in the U.S.  District Court for the
Southern  District of New York,  Katz v. Telaxis  Communications  Corporation et
al., Kucera v. Telaxis  Communications  Corporation et al.,  Paquette v. Telaxis
Communications   Corporation  et  al.,  and  Inglis  v.  Telaxis  Communications
Corporation et al. The complaints  also name one or more of the  underwriters in
our initial  public  offering  and certain of our officers  and  directors.  The
complaints allege violations of the federal securities laws regarding statements
in  our  initial  public   offering   registration   statement   concerning  the
underwriters'  alleged  activities in connection  with the  underwriting  of our
shares to the public.  The actions seek  rescission of the  plaintiff's  alleged
purchases  of our  stock  and  other  damages  and  costs  associated  with  the
litigation.  The complaints  have been assigned along with  approximately  1,000
other complaints making substantially  similar allegations against approximately
300 other  publicly-traded  companies  and their  IPO  underwriters  to a single
federal judge in the U.S.  District Court for the Southern  District of New York
for consolidated  pre-trial purposes. We and our officers and directors deny any
liability and intend to vigorously defend the allegations against us.

     On July  26,  2001,  we  filed  a  lawsuit  in the  Superior  Court  of the
Commonwealth  of  Massachusetts  against a former  customer.  This  lawsuit  was
transferred   to  the  United  States   District   Court  for  the  District  of
Massachusetts.  This suit  asserts  that  Alcatel  has  failed to honor  various
contractual  obligations and  commitments  made to us and sought damages arising
from those failures.  This action was settled in March 2002. The principal terms
of the  settlement  are an  immediate,  one-time  payment of $1.7  million  from
Alcatel to us and mutual general releases.

We are subject to potential  liability  under  contractual and other matters and
various  claims and legal  actions  which are pending or may be asserted.  These
matters  arise in the  ordinary  course and conduct of our  business.  While the
outcome of all of the pending and potential  claims and legal actions against us
cannot be forecast  with  certainty,  we believe  that such  matters  should not
result in any  liability  which  would  have a  material  adverse  effect on our
business.

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

No matters  were  submitted  to a vote of  stockholders  during the three months
ended December 31, 2001.



                                       10
<PAGE>



                                     PART II

Item 5. Market for Company's Common Equity and Related Stockholder Matters.

Market Information

On February 2, 2000, we completed an initial  public  offering  (``IPO'') of our
common stock.  Our common stock is quoted on The Nasdaq Stock Market's  National
Market, under the symbol "TLXS". Before the IPO, there was no established public
trading market for our common stock.

The following  table shows the high and low sales prices of our common stock for
each indicated fiscal period as reported by The Nasdaq Stock Market:

        Fiscal Year 2000                         High               Low
        ----------------                         ----               ---
        First Quarter (ended 3/31/00)           $120.25             $43.563
        Second Quarter (ended 6/30/00)           $79.438            $17.063
        Third Quarter (ended 9/30/00)            $36.125             $4.063
        Fourth Quarter (ended 12/31/00)           $7.50              $0.688

        Fiscal Year                              High               Low
        -----------                              ----               ---
        2001
        First Quarter (ended 3/31/01)             $2.781             $1.00
        Second Quarter (ended 6/30/01)            $1.438             $0.52
        Third Quarter (ended 9/30/01)             $0.73              $0.24
        Fourth Quarter (ended 12/31/01)           $0.94              $0.20

As of February  28,  2002,  the number of  stockholders  of record of our common
stock was approximately 256.

We have never  declared  or paid any cash  dividends  on any class of our common
equity.  We  currently  intend  to  retain  any  future  earnings  to  fund  the
development  and growth of our business and currently do not  anticipate  paying
cash dividends in the foreseeable future.

Use of Proceeds from Registered Offerings

On February 1, 2000, the Securities and Exchange  Commission  declared effective
our registration  statement on Form S-1 (File No. 333-87885) filed in connection
with the initial public offering of 4,600,000 shares of our common stock.

We received approximately $71.1 million of net proceeds from the offering. Those
net proceeds are being used for working capital and general corporate  purposes.
Pending  such  uses,   the  net  proceeds  have  been  invested  in  short-term,
interest-bearing,   investment   grade   securities   or  direct  or  guaranteed
obligations of the U.S.  government.  From the time of receipt through  December
31, 2001, we have applied  approximately  $49.6 million of the net proceeds from
the offering toward working capital, financing capital expenditures, and funding
operating losses.

Item 6.  Selected Financial Data.

Set forth below is certain of our historical  selected  financial data which has
been derived from the audited  financial  statements  of the Company for each of
the respective years. We have never declared or paid any cash dividends.

<TABLE>
<CAPTION>
                                                       Year Ended December 31,
                                      -----------------------------------------------------------
                                         2001       2000        1999       1998         1997
                                      -----------------------------------------------------------
                                                (in thousands, except per share data)
  Statement of Operations Data:
<S>                                   <C>        <C>         <C>        <C>         <C>
  Sales.............................. $    1,929 $   24,753  $    9,720 $     2,386 $     1,733
  Loss from continuing operations....    (27,062)   (37,634)     (8,293)    (11,253)     (6,712)
  Basic and diluted loss per share
    from continuing operations.......       (1.62)     (2.54)     (13.68)    (22.87)     (14.16)

</TABLE>



                                       11
<PAGE>

<TABLE>
<CAPTION>

                                      -----------------------------------------------------------
                                                             December 31,
                                      -----------------------------------------------------------
                                         2001       2000        1999       1998         1997
                                      -----------------------------------------------------------
                                                            (in thousands)
Balance Sheet Data:
<S>                                   <C>        <C>         <C>        <C>         <C>
  Total assets....................... $   29,692 $   65,538  $   25,297 $    14,955 $    20,059
  Long-term debt and capital lease
    obligations, net of current
    portion..........................      1,574      3,225       2,385       1,047       1,690
  Total liabilities..................      6,318     15,439      11,925       6,753       9,632
  Redeemable preferred stock.........         --         --      47,793      32,793      25,425
  Total stockholders' (deficit)
  equity.............................     23,374     50,099     (34,421)    (24,591)    (14,999)
</TABLE>


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

Overview

We  are  currently   developing  and  marketing  FiberLeapTM   products,   which
transparently  transmit  fiber optic  signals  over a wireless  link between two
access points. Using our wireless products, fiber optic carriers and enterprises
can obtain  connectivity  at fiber optic data rates and quality of service,  but
where fiber optic cable itself is not available or is not  economically  viable.
Our current FiberLeapTM 2006 product is a compact,  easily deployed product that
enables fiberless  transmission of data, voice and video  communication at fiber
rates  that are  variable  from an OC-3 rate of 155 Mbps to an OC-12 rate of 622
Mbps.

We commenced  operations  in 1982 and,  prior to 1999,  derived the  significant
majority  of our  sales  from our  millimeter-wave  products  business  segment.
Millimeter waves are  electromagnetic  waves having wavelengths  between one and
ten  millimeters  and  frequencies  from 30 GHz to 300 GHz. In August  1999,  we
adopted  a plan to focus  all of our  resources  on our  broadband  connectivity
business (then focused on  point-to-multipoint  outdoor units) and to dispose of
the  millimeter-wave  products  segment.  We decided to dispose of this  segment
because  it would  have  required  us to  reallocate  financial  and  management
resources  from the broadband  point-to-multipoint  outdoor unit  business.  The
segment  was sold on  February  8,  2000.  As a result,  we have  presented  the
operations of the millimeter-wave  products segment as a discontinued  operation
in our financial statements.  The following management's discussion and analysis
focuses on our broadband connectivity business.

Due to changing  market  conditions,  in July 2001, we made the decision to exit
the point-to-multipoint  outdoor unit business and to focus all of our resources
on closing the  connectivity  gap in fiber  networks.  Since that time,  we have
restructured our company to address this new opportunity,  FiberLeapTM trial and
Beta units have been  developed  and tested,  a new  marketing  program has been
initiated, and limited production has begun.

For the year ended December 31, 2001,  approximately  99% of our sales were to a
customer located in Canada and our remaining sales were to customers  located in
the United States.  For the year ended December 31, 2000,  approximately  93% of
our sales  were to a customer  located  in  Canada,  and 4% of our sales were to
customers  located in the United  States.  For the year ended December 31, 1999,
approximately  88% of our sales were to a customer  located in Canada and 12% of
our sales were to  customers  located in the United  States.  Sales to customers
located  outside  the United  States may  continue to  represent  a  significant
portion of our total sales.

Results of Operations

The following table provides continuing operations data as a percentage of sales
for the periods presented. The percentages may not add due to rounding.

<TABLE>
<CAPTION>
                                                                    Year Ended December 31,
                                                                 ----------------------------
                                                                    2001      2000     1999
                                                                 ----------------------------
<S>                                                                 <C>       <C>     <C>
  Sales.........................................................    100.0%    100.0%  100.0%
  Cost of sales.................................................    333.9     119.6    93.0
  Charges relating to excess inventory on hand and on order.....     --        71.7    --
  Inventory restructuring cost..................................    257.2      --      --
                                                                   ------    ------  ------

  Gross margin (loss)...........................................   (491.1)    (91.3)    7.0
  Operating expenses
    Research and development, net...............................    320.1      34.8    50.1
    Selling, general and administrative.........................    352.6      36.5    37.2
    Other restructuring costs...................................    346.7      --      --
                                                                   ------    ------  ------
       Total operating expenses.................................  1,019.3      71.3    87.3
  Operating loss................................................ (1,510.4)   (162.6)  (80.3)
  Other income (expense)........................................    107.5      10.6    (5.0)
                                                                   ------    ------  ------

  Loss from continuing operations before income taxes........... (1,402.9)   (152.0)  (85.3)
  Income tax benefit............................................     --        --      --
                                                                   ------    ------  ------

  Loss from continuing operations............................... (1,402.9)%  (152.0)% (85.3)%
                                                                 ========    ======   =====
</TABLE>

                                       12
<PAGE>


Years Ended December 31, 2001, 2000 and 1999

     Sales

Sales  decreased 92% to $1.9 million in 2001 from $24.8  million in 2000.  Sales
increased  155% from $9.7 million in 1999 to $24.8 million in 2000. The decrease
in sales from 2000 to 2001  resulted  from a decrease in shipments of our planar
products  from  $23.4  million  in 2000 to $1.9  million  in 2001 due to reduced
demand  for  our  products  resulting  from  a  general  industry  decline,  our
discontinuation  of  shipments  to our former major  customer  Alcatel,  and our
decision to exit our point-to-multipoint outdoor unit product line. The increase
in sales from 1999 to 2000  primarily  reflects an increase in  shipments of our
planar  products to  approximately  $23.4  million in 2000 from $8.2  million in
1999. Sales in units of our planar products were 565 in 2001, 13,709 in 2000 and
3,755 in 1999.

     Cost of Sales

Cost of sales  consists of  component  and material  costs,  direct labor costs,
warranty  costs,  overhead  related to  manufacturing  our products and customer
support  costs.  Cost of sales  decreased  $23.2 million to $6.4 million in 2001
from  $29.6  million in 2000.  Cost of sales  increased  $20.6  million to $29.6
million in 2000 from $9.0  million in 1999.  The  decrease in cost of sales from
2000 to 2001 was  attributable  to the decreases in sales of our planar products
to Alcatel.  The  increase  in cost of sales from 1999 to 2000 was  attributable
primarily to increased  shipments of our planar  products.  Gross margins were a
negative  491% in 2001,  a negative  91% in 2000 and a positive 7% in 1999.  The
decline in gross  margin from 2000 to 2001 was  primarily  the result of charges
for inventory  restructuring  cost of approximately $5.0 million in 2001 and the
impact of this charge and the absorption of manufacturing  overhead on the lower
sales  volume  in 2001.  The  decline  in  gross  margin  from  1999 to 2000 was
primarily a result of charges of $17.7  million  related to excess  inventory on
hand and on order. These charges were the result of the continuing evaluation of
the  relationship  with a major customer,  Alcatel.  Excluding the effect of the
charges related to excess  inventory on hand and on order,  gross margin for the
year ended  December 31, 2000 would have been  negative 20%. This portion of the
negative  gross  margin  was  principally  due to  increases  in  equipment  and
personnel to support the forecasted delivery requirements of our customers,  the
costs  associated  with  qualification  and initial  production  at our contract
manufacturing  location in Canada, and the effects of significant  reductions in
production  volume in the second half of 2000.  In the third quarter of 2000, we
incurred a charge of $1.9  million  to reserve  for  obsolete  inventory,  which
resulted from changes in product configuration and shifts in customer demand. In
the fourth quarter of 2000, the $17.7 million charge related to excess inventory
on hand and on order  resulted from  significant  declines in  requirements  for
Alcatel.  Procurements  and commitments for material placed earlier in 2000 were
reviewed and evaluated in the context of the Alcatel relationship,  resulting in
a write down to their  expected net  realizable  value.  In the third quarter of
2001, we made the decision to exit the point-to-multipoint ODU business and as a
result, we incurred a charge of $5.0 million for inventory restructuring cost to
writedown  the value of our remaining  point-to-multipoint  ODU inventory to its
estimated net realizable value.

     Research and Development Expenses

Research and  development  expenses  consist  primarily of personnel and related
costs associated with our product development  efforts.  These include costs for
development of products and components,  test equipment and related  facilities.
Gross research and  development  expenses  decreased 30% to $6.4 million in 2001
from $9.2 million in 2000. Our gross research and development expenses were $6.0
million in 1999. The decrease from 2000 to 2001 is  attributable to the decrease
in the size of our research and  development  staff from 72 personnel at the end
of 2000 to 36 at the end of 2001,  and to  reductions in  development  material,
capital  equipment and related  facilities  and support costs.  These  decreases
resulted  from the  reduction  in our product  development  requirements  as our
business  with  Alcatel  declined  and the global  telecommunications  equipment
market continued to weaken. The increase from 1999 to 2000 reflects  significant
investments to further  enhance our planar  product  design to  accommodate  low
cost, high volume  manufacturing and expand our designs for additional  customer
requirements. These activities required us to substantially increase the size of
our  research  and  development  staff by 50% to 72 personnel at the end of 2000
from 48 at the end of 1999.  Customer funding of development  projects decreased
57% to $266,000 in 2001 from $612,000 in 2000.  Customer  funding of development
projects  decreased 43% from $1.1 million in 1999.  Some of our  customers  have
provided funding to offset our development



                                       13
<PAGE>


costs for specific products.  Net of customer  reimbursements,  our research and
development  expenses decreased 28% to $6.2 million in 2001 from $8.6 million in
2000 and increased 77% from $4.9 million in 1999.

     Selling, General and Administrative Expenses

Selling,  general and  administrative  expenses  consist  primarily  of employee
salaries  and  associated  costs  for  selling,  marketing,   customer  support,
information systems,  finance, legal, and administration.  Selling,  general and
administrative  expenses decreased 25% to $6.8 million in 2001 from $9.0 million
in 2000.  Selling,  general and  administrative  expenses increased 150% to $9.0
million  in 2000 from  $3.6  million  in 1999.  The  decrease  from 2000 to 2001
resulted from  decreasing  our number of personnel in these areas from 37 at the
end of 2000 to 21 at the end of 2001,  and from  decreases in related  spending.
The increase from 1999 to 2000 was primarily  related to expenditures to support
the Company's  growth and operation as a public company.  The Company  increased
spending for travel,  trade  shows,  and  consulting  in an effort to expand its
customer base.  Additionally,  the Company incurred  increased  expenditures for
recruitment of technical personnel and senior management positions.

     Other Income (Expense)

Other income  (expense)  consists of interest and dividends earned on cash, cash
equivalents   and  marketable   securities   offset  by  interest   expense  and
miscellaneous  non-operating expenses.  Total other income decreased 21% to $2.1
million in 2001 from $2.6 million in 2000.  Total other income increased 641% to
$2.6 million in income in 2000 from $484,000 in expense in 1999. The decrease in
total other  income from 2000 to 2001  resulted  from a decrease in interest and
dividends earned on cash and marketable securities to approximately $1.6 million
in 2001  from  approximately  $3  million  in 2000.  Partially  offsetting  this
decrease was income of $1 million recorded in the fourth quarter of 2001 for the
increase in valuation  of a note  receivable.  The change in other  expense from
1999 to other income in 2000 was primarily due to interest and dividends  earned
on  proceeds  from the  Company's  initial  public  offering.  Interest  expense
decreased to $578,000 in 2001 from $610,000 in 2000 due to the lower outstanding
balances  for long term debt and capital  lease  obligations.  Interest  expense
decreased  from $756,000 in 1999 primarily due to the  amortization  of $284,000
for a discount on subordinated promissory notes in 1999.

     Income Tax Benefit

No tax benefit has been recorded in 2001,  2000 and 1999 due to the  uncertainty
in deducting current losses against future taxable income.

Liquidity and Capital Resources

Since  1997,  we have  financed  our  operations  primarily  through the sale of
redeemable  preferred  stock,  from proceeds of our initial  public  offering in
February  2000  and,  to a  much  lesser  extent,  from  cash  generated  by our
discontinued  operations.  We have  also  issued  subordinated  notes  and  used
equipment  lease  financing and bank lines of credit to provide  cash.  The 2000
events of default disclosed in the footnotes to the financial  statements relate
to the failure to meet a minimum  sales  revenue  growth  requirement,  required
under our line of credit  facility,  in effect  during 2000.  The line of credit
expired on November 30, 2000 and was not renewed by the  Company.  We raised net
proceeds  of $12.9  million in 1999 from the  issuance of  redeemable  preferred
stock.

On  February  7, 2000 we  completed  an  initial  public  offering  of
4,600,000  shares of our common  stock at $17.00  per share  under the terms and
conditions  contained in an  underwriting  agreement dated February 1, 2000 with
various underwriters.  We received net proceeds from our initial public offering
of $71.1  million,  after  underwriting  discounts and  commission  and offering
costs, to be used primarily for general corporate purposes.

At December  31, 2001,  we had cash and cash  equivalents  of $15.9  million and
marketable securities of $5.6 million.

At December 31, 2001, we had  approximately  $1.2 million in long-term  debt, of
which  $150,000  is due  through  June 2003 with an  interest  rate of 10%,  and
$1,059,000 is due through November 2003 with an interest rate of 12%.

At  December  31,  2001,  we had  approximately  $2.9  million in capital  lease
obligations, which are due through 2005.

Cash used in operating  activities in 2001 was $17.2  million  compared to $30.4
million in 2000 and $9.6 million in 1999. Cash used in operating  activities has
primarily  represented  funding of our net losses  and  inventory  build to meet
expected future production requirements.



                                       14
<PAGE>


Cash provided by investing  activities in 2001 was $7.3 million compared to cash
used in investing  activities of $17.8 million in 2000 and $2.5 million in 1999.
In  2001,  cash  provided  by  investing  activities  resulted  from the sale of
marketable securities. In 2000, cash used in investing activities related to the
purchase of marketable  securities and the purchase of equipment.  In 1999, this
amount related  primarily to the purchase of equipment used in our manufacturing
and research and development activities.

Cash utilized by financing  activities in 2001 was $2.1 million compared to cash
provided by financing  activities  of $69.5 million in 2000 and $16.1 million in
1999. In 2001,  the financing  activities  consisted  primarily of repayments of
long term debt and capital lease obligations.  The financing  activities in 2000
consisted  primarily  of the  proceeds  from our initial  public  offering.  The
financing  activities  for 1999  consisted  primarily of the sale of  redeemable
preferred stock and the issuance of term notes collateralized by equipment.

Our 2002 and future  cash  requirements  will  depend  upon a number of factors,
including the timing and extent of growth in our FiberLeap(TM)  product line and
the  timing  and level of  research  and  development  activities  and sales and
marketing campaigns,  and our ability to generate sales orders while controlling
manufacturing  and overhead costs . We believe that our cash,  cash  equivalents
and marketable  securities balances at December 31, 2001 will provide sufficient
capital  to fund  our  operations  for at least 12  months.  Thereafter,  we may
require  additional  capital to fund our operations.  In addition,  from time to
time  we  evaluate  opportunities  to  acquire  complementary   technologies  or
companies.  Should we identify any of these opportunities,  we may need to raise
additional capital to fund our operations and the acquisitions.  There can be no
assurance that  additional  financing will be available to us on favorable terms
or at all.

Disclosures About Market Risk

The  following  discusses  our  exposure  to market  risk  related to changes in
interest  rates,  equity  prices  and  foreign  currency  exchange  rates.  This
discussion  contains  forward-looking  statements  that are subject to risks and
uncertainties,  many of which are out of our control.  Actual results could vary
materially as a result of a number of factors,  including  those discussed below
in ``Safe Harbor for Forward-Looking Statements.''

As of December  31, 2001,  we had cash and cash  equivalents  of $15.9  million.
Substantially all of these amounts  consisted of highly liquid  investments with
remaining  maturities  at the  date of  purchase  of less  than 90  days.  As of
December 31, 2001, we had marketable  securities of $5.6 million which consisted
of municipal and government bonds and commercial  paper with maturities  through
November  2002.  These  investments  are exposed to interest  rate risk and will
decrease in value if market interest rates  increase.  We believe a hypothetical
increase in market  interest  rates by 10 percent  from the December
31,  2001 rates would not cause the fair value of these  investments  to decline
significantly,  since the Company's investments mature within one year. Although
an immediate  increase in interest rates would not have a material effect on our
financial  condition or results of  operations,  declines in interest rates over
time will reduce our interest income.

We do not own any material equity  investments.  Therefore,  we do not currently
have any  direct  equity  price  risk.  In the past  three  years,  all sales to
international   customers  were   denominated  in  United  States  dollars  and,
accordingly, we were not exposed to foreign currency exchange rate risks.

Safe Harbor for Forward-Looking Statements

     General Overview

This Annual Report on Form 10-K contains  forward-looking  statements as defined
by federal securities laws which are made pursuant to the safe harbor provisions
of  the  Private  Securities  Litigation  Reform  Act of  1995.  Forward-looking
statements include statements concerning plans,  objectives,  goals, strategies,
expectations,  intentions, projections, developments, future events, performance
or products,  underlying  assumptions and other  statements which are other than
statements of historical facts. In some cases, you can identify  forward-looking
statements by terminology such as ``may,''  ``will,''  ``should,''  ``expects,''
``intends,''   ``plans,''   ``anticipates,''    "contemplates,"    ``believes,''
``estimates,''  ``predicts,''  ``projects,''  ``potential,''  ``continue,''  and
other similar  terminology or the negative of these terms. From time to time, we
may publish or  otherwise  make  available  forward-looking  statements  of this
nature.  All such  forward-looking  statements,  whether  written  or oral,  and
whether made by us or on our behalf,  are expressly  qualified by the cautionary
statements described in this Form 10-K, including those set forth below, and any
other cautionary statements which may accompany the forward-looking  statements.
In addition,  we undertake no obligation to update or revise any forward-looking
statement to reflect events,  circumstances or new information after the date of
this  Form 10-K or to  reflect  the  occurrence  of  unanticipated  or any other
subsequent events, and we disclaim any such obligation.




                                       15
<PAGE>


We believe that the forward-looking statements included in this Form 10-K have a
reasonable basis. However,  forward-looking statements are only predictions that
relate to future events or our future  performance  and are subject to known and
unknown  risks,  uncertainties,  assumptions,  and other  factors that may cause
actual results,  outcomes,  levels of activity,  performance,  developments,  or
achievements  to be  materially  different  from any future  results,  outcomes,
levels  of  activity,  performance,  developments,  or  achievements  expressed,
anticipated  or implied by these  forward-looking  statements.  As a result,  we
cannot  guarantee  future results,  outcomes,  levels of activity,  performance,
developments,  or  achievements,   and  there  can  be  no  assurance  that  our
expectations,  intentions,  anticipations, beliefs or projections will result or
be achieved or accomplished.


     Cautionary Statements

In addition to other factors and matters discussed  elsewhere in this Form 10-K,
in our  other  periodic  reports  and  filings  made  from time to time with the
Securities and Exchange Commission, and in our other public statements from time
to  time  (including,  without  limitation,  our  press  releases),  some of the
important  factors  that,  in our view,  could  cause  actual  results to differ
materially from those expressed,  anticipated or implied in the  forward-looking
statements include, without limitation, the following:

     o    Significant Change in our Business. In July 2001, we announced that we
          are going to focus on our  FiberLeapTM  product  line and exit our old
          point-to-multipoint  outdoor unit  product  line.  As a result,  it is
          difficult to predict our future  prospects in this market based on our
          limited history.  Many of the cautionary  statements contained in this
          Form 10-K are particularly  relevant in light of this recent decision.
          Our future depends on our ability to develop, market, and gain market
          acceptance of our  FiberLeapTM  products.  We have limited  experience
          with this new product line and in the markets the FiberLeapTM products
          address. We currently have no customers for our FiberLeapTM  products.
          We are still in the  process of  developing  our  FiberLeapTM  product
          line.  We do not have all  governmental  approvals  necessary  for the
          commercial sale and deployment of our FiberLeapTM products.  There can
          be  no  assurance  that  we  will  be  successful  in  developing  the
          FiberLeapTM  product line,  obtaining  customers  for our  FiberLeapTM
          products,  obtaining all necessary governmental approvals at all or in
          a timely manner, or addressing the other issues inherent in entering a
          new line of business.  These  issues,  together with many of the other
          cautionary statements contained in this Form 10-K (including,  without
          limitation,  our having limited capital), could have an adverse affect
          on our  business,  financial  condition,  results of  operations,  and
          viability as an ongoing company.

     o    Requirement to Generate Customers. We currently have no customers for
          our  FiberLeapTM  products.  There can be no assurance that we will be
          able to obtain  customers for our FiberLeapTM  products at all or in a
          timely  manner.  There are many  factors  that  influence  a potential
          customer's decision whether or not to buy our products,  some of which
          are within our control and many of which are not. Potential  customers
          may  request  terms of sale  that are  unacceptable  to us.  The sales
          process  may be  quite  lengthy  even  if  successful.  Even if we are
          successful in obtaining  customers,  we may be dependent on only a few
          customers  due to capacity  constraints.  These  issues  could have an
          adverse  affect  on our  business,  financial  condition,  results  of
          operations, and viability as an ongoing company.

     o    Market   Uncertainty.   We  have  limited   experience  with  our  new
          FiberLeapTM  product line and in the markets our FiberLeapTM  products
          address.  We are  developing  very  high data  rate  products  and are
          focusing our marketing  and sales efforts on only those  end-users who
          need or desire  very high data rate  transmission  capabilities.  This
          market  is much  smaller  than the  broad-based  market  of  end-users
          desiring general broadband access. There may be an insufficient number
          of end-users  who need or desire (and are willing to pay for) the high
          data rate capabilities of our products,  particularly  given the short
          operating range of our products  (approximately  600 to 1,100 meters).
          Lack of a sufficiently large market could adversely affect our ability
          to sell our products at all or at the prices we currently contemplate.
          Further,  while our products are designed to operate as if they were a
          piece of fiber optic cable,  they are wireless in nature and therefore
          based  on a  different  technology  than  that  typically  used in the
          markets we are now addressing.  This difference could hinder, delay or
          prevent  sales  of  our  products.  Our  initial  FiberLeapTM  product
          operates in an unlicensed  frequency band at 60 GHz.  Customers may be
          reluctant  or  unwilling  to  utilize   products   operating  in  that
          unlicensed  band  given the  possibility  of  interference  from other
          products operating in that same band. This concern may be particularly
          applicable for our products given the very high data rate transmission
          capabilities of our products.  Also, customers may establish very high
          standards for quality, durability, and other criteria for our products
          due to the  very  high  data  rate  transmission  capabilities  of our
          products.  We  may be  unable  to  meet  those  criteria  at all or on
          economic and other terms acceptable to us.

     o    Limited  Capital.  Our  operations to date have  required  substantial
          amounts  of  capital.   As  of  the  end  of  December  2001,  we  had
          approximately $21.5 million in cash, cash equivalents,  and marketable
          securities.  While we believe that our cash on hand will be sufficient
          to meet our working capital and capital expenditure


                                       16
<PAGE>


          needs  for the  next  twelve  months,  we may  need  or want to  raise
          additional capital.  Our capital  requirements will depend on numerous
          factors,  including the  commercial  acceptance  of our products,  the
          timing  and extent of demand for our  products,  potential  changes in
          strategic  direction,  and the costs of our research  and  development
          efforts. Additional financing may not be available on favorable terms,
          if at all. If we cannot  raise the  additional  capital we may need or
          want on acceptable  terms,  we may not achieve our business  goals. If
          additional funds are raised through the issuance of equity securities,
          the percentage  ownership of our current  stockholders may be reduced,
          the value of their  holdings  of our stock  may be  diluted,  and such
          equity securities may have rights, privileges or preferences senior to
          those  of our  common  stock.  Alternatively,  we may  need  to  incur
          substantial  debt or  contingent  obligations,  which could  adversely
          affect our cash flow, results of operations,  financial condition, and
          business.  Depending on the investors in any equity or debt  offering,
          we may injure our relationships with investors,  customers,  suppliers
          and others.

     o    Government  Approvals.  We believe that  customers  will require "type
          approval" of our  FiberLeapTM  products from the United States Federal
          Communications  Commission  (FCC) before  commercially  deploying  our
          FiberLeapTM products.  Further,  customers may well require this "type
          approval"  before buying or agreeing to buy our FiberLeapTM  products.
          We submitted our formal type approval application in February 2002. In
          addition to that formal type approval application,  we believe we will
          need to obtain a waiver  from the FCC of certain  portions of the type
          approval  criteria  for us to have a  type-approved  product  with the
          performance and other characteristics  described in this Annual Report
          on Form 10-K. We cannot predict the outcome or completion date of this
          process.  Obtaining  those  approvals  and/or  waivers  may be a long,
          expensive  process,  even if we are ultimately  successful.  Delays in
          obtaining   those   approvals   and/or  waivers  could  hinder  market
          acceptance  of our  products,  delay our  obtaining  customers for our
          products  and our  selling  our  products,  and  adversely  affect our
          ability to market the products  given our limited  capital.  We expect
          that failure to obtain or extended delay in obtaining  those approvals
          and/or  waivers would have a material  adverse impact on our viability
          as an ongoing company.

     o    Pending Stockholder  Litigation.  We, as well as some of our directors
          and officers,  currently are party to four purported  securities class
          action lawsuits. These lawsuits arose out of the underwriters' alleged
          activities in connection  with the  underwriting  of our shares to the
          public in our initial  public  offering in February 2000. The lawsuits
          have been  assigned  along with  approximately  1,000  other  lawsuits
          making  substantially  similar allegations  against  approximately 300
          other publicly-traded companies and their IPO underwriters to a single
          federal judge for consolidated pre-trial purposes.  These lawsuits are
          at an early  stage,  and  accordingly  we cannot  predict the outcome.
          Defending lawsuits of this nature can be a lengthy, expensive process,
          and  there  can be no  assurance  that  we  will  prevail.  Even if we
          prevail,   the  costs   associated   with  these   lawsuits  could  be
          substantial.  In addition,  these  lawsuits  could have other  adverse
          impacts  on us  such as  management  distraction,  adverse  publicity,
          adverse reaction from the financial markets, and adverse reaction from
          our customers.  The difficulties and  uncertainties  relating to these
          lawsuits very likely may be increased and complicated  given the large
          number of pending similar cases and other parties  involved.  Although
          we currently  don't expect  these  impacts to have a material  adverse
          effect on our business,  financial condition or results of operations,
          there  can  be no  assurance  as to  the  ultimate  outcome  of  these
          lawsuits.

     o    Continued Nasdaq Listing Issues.  Our common stock is currently traded
          on the Nasdaq National  Market.  One of the requirements for continued
          listing is that the price of our stock must remain  above  $1.00.  Our
          stock  price was below  $1.00 for much of 2001 and has been both above
          and below $1.00 in 2002. If our stock price remains below $1.00 for at
          least  thirty  consecutive  trading  days,  Nasdaq will  commence  the
          delisting process. There can be no assurance that our stock price will
          remain above $1.00. If the delisting process is commenced, we may take
          certain  actions to attempt to increase the price of our stock.  While
          there are many  actions  that may be taken to attempt to increase  the
          price of our stock, two of the possibilities are a reverse stock split
          and a stock repurchase. Any such actions (even if successful) may have
          adverse  effects  on us,  such as  adverse  reaction  from  employees,
          investors and financial  markets in general,  adverse  publicity,  and
          adverse  reactions from customers.  There are other  requirements  for
          continued  listing on the  Nasdaq  National  Market,  such as having a
          minimum of $4.0 million of net tangible assets,  $5.0 minimum value of
          public float, 400 round lot stockholders, and two market makers. There
          can be no  assurance  that we will  continue  to  meet  these  listing
          requirements.  Should our stock be delisted  from the Nasdaq  National
          Market, we may have our stock listed on the Nasdaq SmallCap Market (if
          we meet the  requirements for listing on that market) or traded on the
          OTC Bulletin  Board.  These  alternatives  may result in a less liquid
          market  available for existing and potential  stockholders  to buy and
          sell  shares of our stock and could  further  depress the price of our
          stock.

     o    Inability  to  Predict  Date  of   Profitability.   We  have  incurred
          substantial  losses and may not be profitable in the future. We cannot
          predict  when  we will  become  profitable.  Our  failure  to  achieve
          profitability  within  the time frame  investors  expect may cause the
          market price of our stock to decline.



                                       17
<PAGE>

     o    Fluctuation in Quarterly Results.  Our sales and operating results are
          likely to fluctuate  significantly  and may fail to meet or exceed the
          expectations  of securities  analysts or investors,  causing our stock
          price to fall.  Factors  that  could  cause our  quarterly  results to
          fluctuate   include  the  timing  of  obtaining   customers   for  our
          FiberLeapTM products,  the timing and size of orders for our products,
          the mix of our product sales, the hiring and loss of personnel, timing
          of expenditures for research and development activities,  our expected
          lengthy  sales cycle which  makes it  difficult  to predict our future
          business  operations and make plans for the future,  our manufacturing
          capacity  constraints and our ability to fulfill orders, our inability
          to  obtain  components  and test and  manufacturing  equipment  at the
          prices  and times and in the  quantities  we need,  the  timing of our
          investments  in additional  manufacturing  capacity,  unexpected  poor
          assembly  or test  yields for our  products,  price  competition,  new
          product  introductions  by us or by our  competitors,  disruptions  in
          delivery of products  manufactured by  subcontractors or of components
          or subsystems provided by third-party suppliers, seasonal factors that
          may affect capital  spending by customers,  such as the varying fiscal
          year   ends   of   customers,   political   instability,    regulatory
          developments,  conditions  affecting the  telecommunications  industry
          generally  or general  economic  conditions,  acquisitions,  and other
          factors described in this section.

     o    Stock Price Volatility.  The market price of our common stock has been
          volatile  and is likely  to remain  volatile.  Potential  reasons  for
          volatility include our financial performance or the performance of our
          competitors,   technological   innovations  or  other  trends  in  our
          industry,  successes or failures at significant product evaluations or
          site  demonstrations,  the  introduction  of new products by us or our
          competitors, the arrival or departure of key personnel,  acquisitions,
          strategic alliances or joint ventures involving us or our competitors,
          announcements  by our  customers,  announcements  by us concerning our
          relationship with our existing or new customers,  changes in estimates
          of  our  performance  or  recommendations   by  securities   analysts,
          decisions  by  major  participants  in  the  communications  industry,
          decisions by investors to de-emphasize  investment categories,  groups
          or  strategies  that  include  our  company  or  industry,  and market
          conditions in the industry, the financial markets and the economy as a
          whole.

     o    Qualified  Personnel.  Our  success  depends in part on our ability to
          attract,   hire,  train,  retain  and  motivate  qualified  technical,
          production,  management,  marketing,  sales,  and other personnel with
          appropriate  levels of  capabilities.  We believe  that a  significant
          level of  expertise  is required  to develop  and market our  products
          effectively.   Recruiting   qualified   personnel   is  an   intensely
          competitive and time-consuming  process. We compete for such personnel
          with a number of other  companies,  many of which  have  substantially
          greater  resources  than us. There can be no assurance that we will be
          successful  in  attracting  and  retaining the personnel we require to
          conduct  and expand our  business  and  operations  successfully  on a
          timely basis.  Our ability to attract,  hire,  retain and motivate our
          personnel   may  be  adversely   impacted  by  our  current   business
          uncertainty,  the recent reductions in the size of our workforce,  and
          our lower stock price (since we grant many of our personnel options to
          buy our  stock).  The  failure to  attract,  hire,  train,  retain and
          motivate  qualified  personnel  in the  future  would  have a material
          adverse  effect on our  business,  financial  condition and results of
          operations.

     o    Dependence  on  Key  Personnel.   Our  performance  is   substantially
          dependent on the  performance of our executive  officers and other key
          employees.  We no longer have  key-man  life  insurance  on any of our
          executive officers or other key employees.  We do not currently have a
          succession  plan  in  place.  Loss of the  services  of any of our key
          executive  officers  or other  key  employees  could  have a  material
          adverse  effect on our  business,  financial  condition and results of
          operations.

     o    Reliance on Third-Party Suppliers.  Our products include single-source
          and other  critical  components,  and our  inability  to obtain  these
          components  at the prices we desire  could halt  production  and could
          hurt our sales and lower our margins. Further, our inability to obtain
          these  components in the  quantities  and at the times we desire could
          hurt our  ability to expand our  business as rapidly as we would like.
          We typically do not have any long-term  supply  agreements  with these
          vendors. Inability to develop alternative sources for these components
          or to obtain  sufficient  quantities  of  components  could  result in
          delays or reductions in product shipments. In the event of a reduction
          or interruption in the supply of a key component, a significant amount
          of time could be required to qualify alternative suppliers and receive
          an adequate flow of  replacement  components.  Reconfiguration  of our
          products to adapt to new  components  may also be  required  and could
          entail substantial time and expense. In addition,  because the process
          of manufacturing certain of these components is extremely complex, our
          reliance on the suppliers of these components  exposes us to potential
          production difficulties and quality variations, which could negatively
          affect the cost and timely  delivery of our products.  The  historical
          fluctuation  in our business  may make current or potential  suppliers
          unwilling or reluctant to supply components to us in the future at all
          or on acceptable terms.

     o    Difficulties in New Business  Lines.  We have recently  focused on our
          FiberLeapTM  product line. We may be unable to realize the anticipated
          benefits  from  focusing  on this  product  line.  We may be unable to
          successfully enter


                                       18
<PAGE>

          into the new areas of business addressed by our FiberLeapTM  products.
          We may incur unanticipated costs,  liabilities or delays in attempting
          to enter those new business areas.

     o    Difficulties in Developing New Products.  We may be unable to develop,
          manufacture  or supply new  technology  and new  products  (including,
          without limitation, our current and contemplated FiberLeapTM products)
          with the  features,  performance,  cost and other  characteristics  as
          currently contemplated or as desired by our customers or the market in
          general.  Any new  technology and new products we develop may not gain
          the market  acceptance we  anticipate.  Development of new technology
          and new products may take longer than we expect,  take more  resources
          than we expect, and distract us from other portions of our business.

     o    Product Improvements.  The market for telecommunications  products and
          services is subject to rapid technological  change,  evolving industry
          standards,  rapid  changes  in  customer  requirements,  and  frequent
          product  and service  introductions  and  enhancements.  We expect our
          competitors  to continue to improve the  performance  of their current
          products and to introduce  new products or new  technologies  that may
          supplant or provide  lower-cost or better  performing  alternatives to
          our  products.   To  be  competitive,   we  must  continue  to  invest
          significant resources in research and development, sales and marketing
          and customer support.  We may be unable to achieve the continuing cost
          reductions and technological improvements required for our products to
          remain  competitive.  Market  acceptance  of  our  products,  and  our
          success, may depend in part on our ability to reduce the per-unit cost
          of our products over time.  There can be no assurance  that we will be
          able to keep pace with competitive  pricing pressures or technological
          developments.

     o    Delays in Development,  Manufacture or Supply of Products.  We may not
          be able to develop,  manufacture  or supply our products as quickly as
          our  customers  require  or  would  like.  We  may  have  to  allocate
          production of our products among our  customers,  to the extent we are
          permitted to do so. This  manufacturing  constraint  could cause us to
          lose sales, damage our reputation,  incur financial  liabilities,  and
          jeopardize our long-term prospects.

     o    Difficulty in Estimating  Costs. We expect that a large  proportion of
          our sales will be made pursuant to contracts that require  delivery of
          products over several  quarters or years. We expect that the prices of
          products sold under these contracts, at least initially, will be based
          at least in part on our  estimate  of our costs to develop  and supply
          these products.  We may have limited ability to increase our prices in
          the future.  If we incur  higher costs than  estimated  in  performing
          under these contracts,  it could have a material adverse effect on our
          results of operation and financial condition.

     o    Intellectual  Property  Protection.  Our future success will depend in
          part on our ability to protect  our  proprietary  product  designs and
          manufacturing   process   and  other   proprietary   technology.   Our
          intellectual property rights, and our ability to enforce those rights,
          may be  inadequate  to prevent  others  from using our  technology  or
          substantially  similar technology they may independently  develop. The
          use of that  technology  by others  could  eliminate  any  competitive
          advantage  we have,  cause us to lose  sales  and  otherwise  harm our
          business.  A  significant  portion of our  proprietary  technology  is
          know-how,  and employees with know-how may depart before  transferring
          their  know-how  to  other  employees.  Moreover,  the  laws of  other
          countries  where we may  market  our  products  may  afford  even less
          protection  for our  intellectual  property.  If we  resort  to  legal
          proceedings  to  enforce  our  intellectual   property   rights,   the
          proceedings  could be burdensome  and costly and divert the efforts of
          our technical and management personnel, even if we were to prevail.

     o    Intellectual  Property  Infringement  Claims. From time to time, third
          parties may assert patent, copyright, trademark and other intellectual
          property rights to technologies and in various  jurisdictions that are
          important  to our  business.  In  addition,  third  parties may assert
          intellectual  property right infringement  claims against us. Any such
          assertions, with or without merit, could be costly and time-consuming,
          result in litigation (in which we may or may not prevail),  divert the
          efforts of our  technical  and  management  personnel,  cause  product
          shipment delays,  require us to develop new technology,  or require us
          to enter into royalty or licensing agreements, any of which could have
          an adverse effect on our reputation,  business,  results of operations
          and financial condition. Royalty or licensing agreements, if required,
          may  not be  available  on  terms  acceptable  to us,  if at  all.  In
          addition,  we expect  we will  have to  indemnify  our  customers  for
          expenses  and  liabilities  resulting  from claimed  infringements  of
          intellectual  property rights of third parties. Any requirement for us
          to indemnify a customer  could have a material  adverse  effect on our
          reputation, business, results of operations and financial condition.

     o    Warranty and Product  Liability  Claims.  Our  business and  financial
          condition could be adversely affected by warranty or product liability
          claims.  Products  as complex as ours  frequently  contain  undetected
          errors, defects or failures,  especially when first introduced or when
          new versions are released.  The occurrence of such errors,  defects or
          failures  could  result  in  product  returns  and  other  losses  and
          liabilities for us or our customers. Such occurrence could also result
          in the loss of or delay in market  acceptance of our products.  Due to
          our  recent  focus  on  our  FiberLeapTM  products,  we  have  limited
          experience with the problems that could arise with these products.




                                       19
<PAGE>


     o    Downturn and Ongoing  Uncertainty in  Telecommunications  Industry and
          Larger Economy. In the past few years, the overall economic climate in
          the United States has declined. Telecommunication markets specifically
          have experienced a severe downturn,  which has been highlighted by the
          bankruptcy  filings of  several  former  prominent  telecommunications
          companies.  Large  companies  have also  reduced  the amount of vendor
          financing they are willing to extend. Due to this restricted access to
          new capital and internal  reluctance to spend existing capital,  large
          and small service providers have limited financial  resources to start
          or complete  infrastructure  projects.  If these service providers are
          unable or unwilling to adequately  finance and grow their  operations,
          they may not  order or delay or cancel  orders  for  products  such as
          ours. In certain  situations  such service  providers may be forced to
          cease operations or operate under bankruptcy law protection, which may
          cause us losses.  Since we expect  purchase orders may be received and
          accepted  far in  advance  of  shipment,  we expect at times to permit
          orders to be modified or canceled  with limited or no  penalties.  Our
          inability to reduce actual costs  relating to the modified or canceled
          order could materially adversely affect our operating results.

     o    Continued  Demand for Broadband  Connectivity  and Access.  Our future
          success is dependent in part upon the continued and increasing  demand
          for high-speed,  broadband connectivity and access,  particularly with
          regard  to  the  Internet,   and  for  high-speed   telecommunications
          products.  There can be no assurance that this growth will continue or
          that the deregulation, privatization and economic globalization of the
          worldwide  telecommunications  market that has  resulted in  increased
          competition and escalating  demand for new  technologies  and services
          will continue in a manner favorable to us.  Regulatory and legislative
          changes could adversely affect our business.

     o    Market  Acceptance.  The fiber optic  extension  and entire  broadband
          connectivity  and access industry is relatively new, and its future is
          uncertain. If significant demand for our products does not develop, we
          will not be able to generate  significant  sales.  Many  factors  will
          influence  the success or failure of wireless  fiber optic  extension,
          connectivity and access  technology,  including its capacity to handle
          growing  demands  for faster  transmission  of  increasing  amounts of
          video, voice and data, its cost-effectiveness and performance compared
          to other  forms of  broadband  access,  whose  prices and  performance
          continue  to  improve,  its  reliability  and  security,  whether  the
          products can be manufactured in sufficient volume, its suitability for
          a  sufficient  number  of  geographic  regions,  the  availability  of
          appropriate  frequencies  for service  providers to deploy products at
          commercially reasonable rates, the availability on reasonable terms of
          sufficient site locations for service providers to install products at
          commercially  reasonable rates, and safety and environmental  concerns
          regarding broadband wireless transmissions.

     o    Competition in General. The fiber optic extension and other industries
          in which we now operate are intensely competitive,  and our failure to
          compete  effectively  could hurt our sales and reduce our  margins.  A
          number of large  telecommunications  equipment suppliers, as well as a
          number of smaller companies, have developed or are developing products
          that  compete  (or could be  viewed as  competing)  with  ours.  These
          competitors may have or develop  products that are superior to ours in
          performance,  cost,  technological  approach,  durability,  and  other
          criteria. Many of our competitors are substantially larger than we are
          and  have   significantly   greater   financial,   sales,   technical,
          manufacturing and other resources.

     o    Competing Technologies. A number of competing technologies may be able
          to  provide  high-speed,   broadband  access  or  connectivity.  These
          competing  technologies include digital subscriber lines, hybrid fiber
          coaxial cable,  fiber optic cable,  other high-speed wire, laser (also
          known as free space optics), satellite,  point-to-multipoint wireless,
          and  other  point-to-point   wireless  technologies.   Some  of  these
          technologies may have advantages over our FiberLeapTM  products,  such
          as lower cost,  greater range, and greater current market  acceptance.
          In addition,  new products or new  technologies  may be developed that
          supplant or provide  lower-cost or better  performing  alternatives to
          our products.

     o    Difficulties in  Distinguishing  Our Products from Others.  We need to
          carefully and clearly  distinguish our  FiberLeapTM  products from the
          other competing  technologies and products that may be able to provide
          broadband access or connectivity.  Points of distinction  include data
          rate  transmission  capabilities  of our  products,  ease and speed of
          installation of our products,  markets served by our products, cost of
          our products, and value proposition of our products for our customers.
          Failure to distinguish  our products for our customers,  investors and
          others could  hinder  market  acceptance  of our  products,  delay our
          obtaining customers for our products, force reductions in contemplated
          sales prices of our products, and reduce our overall sales.



                                       20
<PAGE>


     o    Dependence on Third-Party Manufacturers. Given our recent focus on our
          FiberLeapTM  products,  we  are  still  developing  our  manufacturing
          approach. We currently expect to rely on independent  manufacturers to
          provide  full  turnkey  manufacturing  of  our  complete  products  or
          important components of our products.  We have only limited experience
          qualifying   and  dealing  with  this  type  of  highly   specialized,
          third-party  manufacturer,  and our  failure  to  obtain  satisfactory
          performance  from  third-party  manufacturers  could  cause us to lose
          sales or expose us to product  quality  issues.  We  believe  that few
          third-party  manufacturers have the technical capabilities to meet our
          quality standards and production goals. Therefore, it may be difficult
          and   time-consuming   to  engage  a   third-party   manufacturer   or
          manufacturers.

     o    Government  Regulation.  Wireless  equipment  such as our  current and
          contemplated  FiberLeapTM  products  is subject to  regulation  by the
          United  States  and  foreign  laws  and  international  treaties.  Our
          products   must   conform  to  domestic   and   foreign   requirements
          established, among other reasons, to avoid interference among users of
          millimeter-wave   frequencies.   In  addition,  domestic  and  foreign
          authorities regulate the allocation of portions of the radio frequency
          spectrum.   Products   generally   can  be   marketed  in  a  specific
          jurisdiction  only if permitted by specific  frequency  allocation and
          regulations.  As we obtain  customers in new  markets,  we may have to
          adapt  our  products   rapidly  to  the   frequency   and   regulatory
          requirements that exist in those markets, and we may incur significant
          costs making the necessary modifications.  The governmental regulatory
          process may change or impose additional  requirements on our products,
          which  could  require  a  revision  to  our  products,  a  costly  and
          time-consuming  process.  Future  regulatory  developments  could also
          adversely  affect our development and introduction of new products and
          technology.

     o    International  Issues. We expect to derive a portion of our sales from
          international  sources,  and risks and  difficulties  associated  with
          international   operations  could  result  in  lower  sales  and  less
          favorable  terms  with our  customers.  These  difficulties  and risks
          include licenses, tariffs and other trade barriers imposed on products
          such  as  ours,   political   and   economic   instability,   currency
          fluctuation,  and  compliance  with a wide variety of complex laws and
          treaties relating to telecommunications equipment.

     o    Investment Risk. As of the end of December 2001, we had  approximately
          $21.5 million in cash, cash equivalents and marketable securities.  We
          have engaged  investment  managers to assist us with  investing  these
          funds.  While we believe  we have a  conservative  investment  policy,
          events  could  occur  that  result  in the  value  of our  investments
          declining.

     o    Accounts Receivable. We may, under certain circumstances, be unable to
          enforce a policy of receiving  payment within a limited number of days
          of issuing invoices. For example, customers may be unwilling or unable
          to pay for  products on a timely basis if they are  dissatisfied  with
          the product or if they (or their customers) are experiencing financial
          difficulty or if their customer  cancelled their order.  Any inability
          to timely collect our  receivables  could cause us to be short of cash
          to fund operations, could result in our having to negotiate for only a
          partial payment of certain  accounts  receivable,  or could ultimately
          require us to write-off as uncollectible  certain accounts receivable,
          which could have a material adverse effect on our business, results of
          operations and financial condition.

     o    Future  Stock  Sales.  Future  sales of common  stock by our  existing
          stockholders  could cause our stock price to fall.  We believe  that a
          number of our pre-IPO  stockholders have sold their shares, but that a
          number of pre-IPO stockholders continue to hold their shares. If those
          stockholders decided to sell their shares, a substantial amount of our
          common stock would  become  available  for sale in the public  market.
          This  could  cause  the  market  price  of our  common  stock to fall.
          Similarly the perception  among  investors that these sales will occur
          could produce the same effect.  Sales of shares received upon exercise
          of our  outstanding  warrants  will become  available  for sale in the
          public  market  pursuant  to  Rule  144.  We have  filed  registration
          statements  on Form  S-8  pursuant  to which  we  registered  over 5.0
          million shares of our common stock that may be issued  pursuant to the
          exercise of our  outstanding  stock options and stock options or other
          stock  grants  that we may grant in the future.  The  exercise of some
          outstanding warrants and options will result in dilution to holders of
          our common stock.  The sale of shares issued upon exercise of warrants
          or options could cause our stock price to fall.  The sale of shares by
          our directors and officers  could cause the market price of our common
          stock to fall.  Similarly the  perception  among  investors that these
          sales will occur could produce the same effect.

     o    Anti-Takeover  Defenses.  We have  anti-takeover  defenses  that could
          discourage,  delay or prevent an  acquisition  of our  company,  which
          could  depress our stock price or lessen any premium over market price
          that an acquirer might otherwise pay.

     o    Acquisition and Investment Risk. As part of our business strategy,  we
          expect to continue to review  potential  acquisitions  and  investment
          opportunities  that could  complement our current  product  offerings,
          augment our market  coverage,  enhance our technical  capabilities  or
          that may  otherwise  offer growth or  synergistic


                                       21
<PAGE>

          opportunities.  Our business and  financial  condition  and the market
          price of our common stock may be adversely affected by our acquisition
          of, or significant investment in, companies,  products or technologies
          that we believe are  complementary.  There can be no assurance that we
          would be successful in overcoming the risks and other issues typically
          encountered  in any  such  transactions,  including  the  difficulties
          associated with assimilating the personnel,  technology and operations
          of  acquired  companies,  the  potential  disruption  of  our  ongoing
          business,  diversion of management's  attention from our business, the
          potential injury to existing business relationships with suppliers and
          customers,  unanticipated  costs or  liabilities  associated  with the
          transactions,  and the risks that we will  otherwise  not  realize the
          expected   benefits   of   the   transactions.   Furthermore,   future
          transactions   could  result  in  the  issuance  of  dilutive   equity
          securities,  the  incurrence  of debt or  contingent  liabilities,  or
          amortization   and/or   impairment   related  to  goodwill  and  other
          intangible assets.

     Possible Implications of Cautionary Statements

     The items described  above,  either  individually  or in some  combination,
could have a  material  adverse  impact on our  reputation,  business,  need for
additional  capital,  ability  to obtain  additional  debt or equity  financing,
current and contemplated products gaining market acceptance,  development of new
products and new areas of business, cash flow, results of operations,  financial
condition,  stock price,  viability as an ongoing  company,  results,  outcomes,
levels of activity,  performance,  developments,  or  achievements.  Given these
uncertainties,  investors  are  cautioned  not to place  undue  reliance  on any
forward-looking statements.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

See Item  7--Management's  Discussion  and Analysis of Financial  Condition  and
Results of Operations, Disclosures about Market Risk.

Item 8. Financial Statements and Supplementary Data.

                          INDEX TO FINANCIAL STATEMENTS

  FINANCIAL STATEMENTS                                                    Page
  Report of Independent Accountants...................................     23
  Balance Sheets......................................................     24
  Statements of Operations ...........................................     25
  Statement of Changes in Stockholders' (Deficit) Equity..............     26
  Statements of Cash Flows............................................     27
  Notes to Financial Statements.......................................     28
  FINANCIAL STATEMENT  SCHEDULE
  Schedule II- Valuation and Qualifying Accounts.......................    47

                                       22
<PAGE>



                        REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors and Stockholders of
Telaxis Communications Corporation


In our  opinion,  the  financial  statements  listed in the  accompanying  index
present  fairly,  in all material  respects,  the financial  position of Telaxis
Communications  Corporation  (the  "Company") at December 31, 2001 and 2000, and
the results of its operations and its cash flows for each of the three years in
the period ended  December 31, 2001, in conformity  with  accounting  principles
generally accepted in the United States of America. In addition, in our opinion,
the financial  statement  schedule  listed in the  accompanying  index  presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related financial  statements.  These financial  statements
and  financial  statement  schedule  are  the  responsibility  of the  Company's
management;  our  responsibility  is to express  an  opinion on these  financial
statements and financial  statement  schedule based on our audits.  We conducted
our audits of these statements in accordance with auditing  standards  generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable  assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence  supporting the amounts and  disclosures  in the financial  statements,
assessing the  accounting  principles  used and  significant  estimates  made by
management,  and evaluating the overall  financial  statement  presentation.  We
believe that our audits provide a reasonable basis for our opinion.

                                                  /s/ PRICEWATERHOUSECOOPERS LLP




Hartford, Connecticut
February 14, 2002, except for Note 23,
as to which the date is March 21, 2002


                                       23
<PAGE>


                       TELAXIS COMMUNICATIONS CORPORATION
                                 BALANCE SHEETS
                        (in thousands, except share data)

<TABLE>
<CAPTION>

                                                                        December    December
                                                                           31,         31,
                                                                          2001        2000
                                                                       ----------- -----------

<S>                                                                    <C>         <C>
Assets
Current assets
  Cash and cash equivalents........................................... $    15,875 $    27,865
  Marketable securities...............................................       5,588      13,158
  Trade accounts receivable, less allowance for doubtful accounts
  ($250 in 2001 and 2000).............................................         438       2,836
  Other accounts receivable...........................................         154         297
  Note Receivable, less allowance of $210 in 2001.....................       1,000          --
  Inventories.........................................................         129       7,838
  Assets held for sale................................................       1,659          --
  Other current assets................................................         102         486
                                                                       ----------- -----------

   Total current assets...............................................      24,945      52,480
  Property, plant and equipment, net..................................       4,668      12,751
  Intangible assets, net of accumulated amortization..................          --         198
  Other assets........................................................          79         109
                                                                       ----------- -----------

   Total assets....................................................... $    29,692 $    65,538
                                                                       =========== ===========

Liabilities and Stockholders' Equity
Current liabilities
  Accounts payable.................................................... $       169 $     8,156
  Customer prepayments................................................          --         218
  Accrued expenses....................................................         803       1,770
  Accrued restructuring costs.........................................       1,298          --
  Current maturities of long-term debt................................         562         507
  Current maturities of capital lease obligations.....................       1,912       1,563
                                                                       ----------- -----------

   Total current liabilities..........................................       4,744      12,214
  Long-term debt......................................................         618       1,180
  Capital lease obligations...........................................         956       2,045
                                                                       ----------- -----------

   Total liabilities..................................................       6,318      15,439

Commitments and contingencies
Stockholders' Equity
  Preferred stock, $.01 par value; authorized 4,500,000 shares in
   2001 and 2000; none issued.........................................          --          --
  Common stock, $.01 par value; authorized 100,000,000 shares in 2001
   and 2000; issued and outstanding 16,630,698 shares (16,734,673
   shares in 2000)....................................................         167         167
  Additional paid-in capital..........................................     124,623     124,740
  Accumulated comprehensive income....................................           4          --
  Notes receivable....................................................          (3)       (331)
  Deferred stock compensation.........................................          --        (159)
  Treasury stock 112,500 shares in 2001...............................         (37)         --
  Accumulated deficit.................................................    (101,380)    (74,318)
                                                                       ----------- -----------

   Total stockholders' equity.........................................      23,374      50,099
                                                                       ----------- -----------

Total liabilities and stockholders' equity............................ $    29,692 $    65,538
                                                                       =========== ===========
</TABLE>
   The accompanying notes are an integral part of these financial statements.

                                       24
<PAGE>

                       TELAXIS COMMUNICATIONS CORPORATION
                            STATEMENTS OF OPERATIONS
                      (in thousands, except per share data)
<TABLE>
<CAPTION>

                                                                Year ended December 31,
                                                          -------------------------------------
                                                              2001        2000        1999
                                                           ----------- ----------  ------------

<S>                                                       <C>         <C>          <C>
Sales.................................................... $     1,929 $    24,753  $     9,720
Cost of sales............................................       6,440      29,610        9,041
Charges relating to excess inventory on hand and on order          --      17,744           --
Inventory restructuring cost.............................       4,962          --           --
                                                           ----------- ----------  ------------
Gross margin (loss)......................................      (9,473)    (22,601)         679
Operating expenses
  Research and development, net..........................       6,174       8,623        4,870
  Selling, general and administrative....................       6,802       9,029        3,618
  Other restructuring costs..............................       6,687          --           --
                                                           ----------- ----------  ------------

   Total operating expenses..............................      19,663      17,652        8,488
                                                           ----------- ----------  ------------

Operating loss...........................................     (29,136)    (40,253)      (7,809)
                                                           ----------- ----------  ------------

Other income (expense)
  Interest and other income..............................       1,677       3,243          272
  Increase in valuation of note receivable...............       1,000          --           --
  Interest and other expense.............................        (603)       (624)        (756)
                                                           ----------- ----------  ------------

   Total other income (expense)..........................       2,074       2,619         (484)
                                                           ----------- ----------  ------------

Loss from continuing operations before income taxes......     (27,062)    (37,634)      (8,293)
Income taxes ............................................          --          --           --
                                                           ----------- ----------  ------------

Loss from continuing operations..........................      27,062     (37,634)      (8,293)
                                                           ----------- ----------  ------------

Discontinued operations:
  Income from operations of MMWP segment, net of taxes...          --          --          258
  Loss on disposition of MMWP segment, including stock
   compensation expense of $2,848 for 2000...............          --      (1,479)      (1,900)
                                                           ----------- ----------  ------------

Loss from discontinued operations........................          --      (1,479)      (1,642)
                                                           ----------- ----------  ------------

Net loss................................................. $   (27,062)$   (39,113) $    (9,935)
                                                           ==========  ==========  ============

Basic and diluted loss per share from:
  Continuing operations.................................. $     (1.62)$     (2.54) $     (13.68)
                                                           ----------- ----------  ------------

  Discontinued operations................................ $        -- $     (0.10) $      (2.71)
                                                           ----------- ----------  ------------

  Net loss............................................... $     (1.62)$     (2.64) $     (16.39)
                                                           =========== ==========  ============


Shares used in computing basic and diluted loss
per share................................................       16,708      14,816          606
                                                           =========== ==========  ============


</TABLE>

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




                                       25
<PAGE>
                       TELAXIS COMMUNICATIONS CORPORATION
             STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY
                        (in thousands, except share data)



<TABLE>
<CAPTION>


                                                   Common Stock          Additional
                                             --------------------------   Paid-in       Accumulated     Notes
                                                Shares        Amount      Capital         Deficit     Receivable
                                             ----------     ---------  -------------   ------------- -----------

<S>                                           <C>        <C>         <C>          <C>            <C>
Balances, December 31, 1998 .............       987,920    $     10    $     669    $   (25,270)   $      --

Sale of common stock ....................       229,074           2          522             --         (281)
Issuance of preferred stock warrants ....            --          --          140             --           --
Issuance of common stock warrants .......            --          --          266             --           --
Exercise of common stock options ........       427,526           4          219             --           --
Exercise of warrants ....................        39,150          --           19             --           --
Amortization of deferred stock
  compensation ..........................            --          --           --             --           --
Offering costs ..........................            --          --         (780)            --           --
Other ...................................            --          --          161             --           --
Comprehensive income:
     Net loss ...........................            --          --           --         (9,935)          --
     Unrealized gain on investments .....            --          --           --             --           --
Reverse stock split .....................      (839,798)         (8)           8             --           --
                                            -----------    --------    ---------    -----------    ---------

Balances, December 31, 1999 .............       843,872           8        1,224        (35,205)        (281)
Sale of common stock ....................     4,600,000          46       78,154             --           --
Exercise of common stock options ........       507,101           5          721             --          (67)
Exercise of warrants ....................       295,295           3          130             --           --
Amortization of deferred stock
  compensation ..........................            --          --           --             --           --
Offering costs ..........................            --          --       (6,330)            --           --
Other ...................................            --          --        3,153             --           17
Conversion of preferred stock ...........    10,488,405         105       47,688             --           --
Comprehensive income:
     Net loss ...........................            --          --           --        (39,113)          --
     Unrealized gain on investments .....            --          --           --             --           --
                                            -----------    --------    ---------    -----------    ---------

Balances, December 31, 2000 .............    16,734,673         167      124,740        (74,318)        (331)
Sale of common stock ....................            --          --           --             --           --
Exercise of common stock options ........         8,525          --            8             --           --
Amortization of deferred stock
  compensation ..........................            --          --           --             --           --
Purchase of treasury stock ..............            --          --          (99)            --          282
Other ...................................            --          --          (26)            --           46
Comprehensive income:
     Net loss ...........................            --          --           --        (27,062)          --
     Unrealized gain on investments .....            --          --           --             --           --
                                            -----------    --------    ---------    -----------    ---------

Balances, December 31, 2001 .............    16,743,198    $    167    $ 124,623    $  (101,380)   $      (3)
                                            ===========    ========    =========    ===========    =========



<CAPTION>



                                                                        Accumulated
                                        Deferred         Common            Other
                                           Stock         Stock in       Comprehensive
                                       Compensation      Treasury          Income        Total
                                        -----------     ------------  ---------------- -----------
<S>                                      <C>             <C>             <C>            <C>
Balances, December 31, 1998.........     $    --         $   --          $ --           $ (24,591)

Sale of common stock................        (225)            --            --                  18
Issuance of preferred stock warrants          --             --            --                 140
Issuance of common stock warrants...          --             --            --                 266
Exercise of common stock options              --             --            --                 223
Exercise of warrants................          --             --            --                  19
Amortization of deferred stock
  compensation......................          58             --            --                  58
Offering costs......................          --             --            --                (780)
Other...............................          --             --            --                 161
Comprehensive income:
     Net loss.......................          --             --            --              (9,935)
     Unrealized gain on investments           --             --            --                  --
Reverse stock split.................          --             --            --                  --
                                         -------         ------          ----           ---------

Balances, December 31, 1999.........        (167)            --            --             (34,421)
Sale of common stock................          --             --            --              78,200
Exercise of common stock options              --             --            --                 659
Exercise of warrants................          --             --            --                 133
Amortization of deferred stock
  compensation......................          56             --            --                  56
Offering costs......................          --             --            --              (6,330)
Other...............................         (48)            --            --               3,122
Conversion of preferred stock.......          --             --            --              47,793
Comprehensive income:
     Net loss.......................          --             --            --             (39,113)
     Unrealized gain on investments           --             --            --                  --
                                         -------         ------          ----           ---------

Balances, December 31, 2000.........        (159)            --            --              50,099
Sale of common stock................          --             --
Exercise of common stock options....          --             --            --                   8
Amortization of deferred stock
  compensation......................          23             --            --                  23
Purchase of treasury stock..........          99            (37)           --                 245
Other...............................          37             --            --                  57
Comprehensive income:
     Net loss.......................          --             --            --             (27,062)
     Unrealized gain on investments           --             --             4                   4
                                         -------         ------          ----           ---------

Balances, December 31, 2001.........     $    --         $  (37)         $  4           $  23,374
                                         =======         ======          ====           =========



</TABLE>
   The accompanying notes are an integral part of these financial statements.


                                       26
<PAGE>



                       TELAXIS COMMUNICATIONS CORPORATION
                            STATEMENTS OF CASH FLOWS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                Year ended December 31,
                                                          -------------------------------------
                                                              2001        2000        1999
                                                          -------------------------------------

Cash flows from operating activities
<S>                                                       <C>         <C>          <C>
 Net loss................................................ $   (27,062)$   (39,113) $    (9,935)
 Adjustments to reconcile net loss to net cash utilized
 by operating activities:
  Depreciation and amortization..........................       3,401       3,644        2,808
  Non-cash restructuring costs ..........................       9,400          --           --
  Loss (gain) on disposition of MMWP segment.............          --      (1,369)       1,900
  Non-cash compensation expense..........................          34       3,161          290
  Loss (gain) on the disposal of property and equipment..          84          (5)          21
  Provision for excess inventory on hand and on order....          --      17,744           --
  Changes in assets and liabilities
   Accounts receivable...................................       1,816          64       (1,198)
   Other accounts receivable.............................         143        (297)          --
   Note receivable.......................................      (1,000)         --           --
   Contracts in progress.................................          --          --           40
   Inventories...........................................         637     (13,486)      (6,557)
   Other current assets..................................         384        (361)         (28)
   Accounts payable and accrued expenses.................      (6,297)       (360)       2,721
   Customer prepayments..................................         (54)        (67)         328
   Income taxes payable..................................          --          --           (2)
   Accrued restructuring costs...........................       1,298          --           --
                                                          ------------ ----------- ------------

   Net cash utilized by operating activities.............     (17,216)    (30,445)      (9,612)
                                                          ------------ ----------- ------------

Cash flows from investing activities
 Purchase of marketable securities.......................     (22,167)    (24,529)          --
 Sale of marketable securities...........................      29,741      11,371           --
 Proceeds from sale of discontinued operations...........          --       1,990           --
 Additions to property and equipment.....................        (459)     (6,342)      (2,409)
 Proceeds from sale of assets held for sale..............         102          --           --
 Reduction (addition) to intangible and other assets.....          30        (246)        (104)
                                                          ------------ ----------- ------------

   Net cash provided (utilized) by investing activities..       7,247     (17,756)      (2,513)
                                                          ------------ ----------- ------------

Cash flows from financing activities
 Proceeds from note payable..............................          --          --        2,000
 Net (repayment) borrowing under line of credit..........          --        (500)         500
 Proceeds from capital lease obligations.................         569          --           --
 Proceeds from long-term debt............................          --          --        2,401
 Proceeds from note receivable...........................          46          --           --
 Repayments of long-term debt and capital lease
 obligations.............................................      (2,644)     (2,716)      (1,217)
 Issuance of common stock upon exercise of options and
 warrants................................................           8         792          242
 Issuance of redeemable preferred stock..................          --          --       13,000
 Issuance of common stock................................          --      78,200           --
 Stock issuance costs....................................          --      (6,330)        (833)
 Repayment of notes receivable...........................          --          17           --
                                                          ------------ ----------- ------------

   Net cash (utilized) provided by financing activities..      (2,021)     69,463       16,093
                                                          ------------ ----------- ------------

Net (decrease) increase in cash and cash equivalents.....     (11,990)     21,262        3,968
Cash and cash equivalents at beginning of period.........      27,865       6,603        2,635
                                                          ------------ ----------- ------------

Cash and cash equivalents at end of period............... $    15,875 $    27,865  $     6,603
                                                          =========== ===========  ===========

Supplemental disclosure of cash flow information
 Cash paid during period for interest.................... $       573 $       555  $       361
 Non-cash investing and financing activities:
  Equipment acquired under capital leases................         807       3,474        1,164
  Conversion of redeemable preferred stock...............          --      47,793           --
  Issuance of preferred stock for subordinated
  promissory note........................................          --          --        2,000
  Notes receivable for issuance of common stock..........          --          67          281
  Commitments recorded in accounts payable for inventory
  on order...............................................          --       4,995           --
  Unrealized gain on investments.........................           4          --           --

</TABLE>
   The accompanying notes are an integral part of these financial statements.

                                       27
<PAGE>
                       TELAXIS COMMUNICATIONS CORPORATION
                          NOTES TO FINANCIAL STATEMENTS

1.   Description of Business and Summary of Significant Accounting Policies

We  currently  develop  and market  FiberLeapTM  products,  which  transparently
transmit  fiber optic  signals over a wireless  link between two access  points.
Using our wireless  products,  fiber optic carriers and  enterprises  can obtain
connectivity  at fiber optic data rates and quality of service,  but where fiber
optic cable itself is not available or is not economically  viable.  Our current
FiberLeapTM  2006  product is a compact,  easily  deployed  product that enables
fiberless  transmission of data,  voice and video  communication  at fiber rates
that are variable from an OC-3 rate of 155 Mbps to an OC-12 rate of 622 Mbps.

We commenced  operations  in 1982 and,  prior to 1999,  derived the  significant
majority of our sales from our  millimeter-wave  products business  segment.  In
August 1999,  we adopted a plan to focus all of our  resources on our  broadband
connectivity business (then focused on point-to-multipoint outdoor units) and to
dispose  of the  millimeter-wave  products  segment.  The  segment  was  sold on
February  8,  2000.  As a  result,  we  have  presented  the  operations  of the
millimeter-wave  products  segment as a discontinued  operation in our financial
statements.

On October 13, 1999,  the  stockholders  voted to change the name of the Company
from  Millitech   Corporation  to  Telaxis   Communications   Corporation.   The
stockholders  also voted to amend the automatic  conversion  provisions  for the
Class A Preferred Stock,  Class B Preferred Stock and Class D Preferred Stock by
reducing the minimum public  offering  price upon an initial public  offering of
the Company's  stock  required to trigger  automatic  conversion to common stock
from $9.75 per share to $4.50 per share. All of our outstanding  preferred stock
converted into common stock upon the closing of our initial  public  offering on
February 7, 2000.

Due to changing  market  conditions,  in July 2001, we made the decision to exit
the point-to-multipoint  outdoor unit business and to focus all of our resources
on closing the  connectivity  gap in fiber  networks.  Since that time,  we have
restructured our company to address this new opportunity,  FiberLeapTM trial and
Beta units have been  developed  and tested,  a new  marketing  program has been
initiated, and limited production has begun.

     Use of Estimates and Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles
generally  accepted in the United States of America requires  management to make
estimates  and  assumptions  that  affect  the  reported  amounts  of assets and
liabilities  and disclosure of contingent  assets and liabilities at the date of
the  financial  statements  and the  reported  amounts of revenues  and expenses
during the reporting  period.  On an ongoing  basis,  the Company  evaluates its
estimates,  including  its  allowance  for bad debts,  allowances  for excess or
obsolete inventories,  the net realizable value of its assets held for sale, its
liability   reserve  for  warranty   obligations,   its  liability   related  to
restructuring  activities,  long-term contracts and its deferred taxes valuation
allowance. Actual results could differ from those estimates.

The  Company's  critical   accounting   policies  and  methods  include  revenue
recognition, inventory valuation, and recognition of income taxes, primarily due
to their  estimation  processes.  Each of these  policies is  discussed  further
below.

     Cash and Cash Equivalents

The Company considers highly liquid  investments with a maturity of three months
or less at the time of purchase to be cash equivalents.


                                      28
<PAGE>


     Marketable Securities

The Company has  invested  the  proceeds  from its  initial  public  offering in
accordance with its corporate cash management policy.  Marketable securities are
classified as available-for-sale  and are carried at cost plus accrued interest,
which  approximates fair value. The Company's  investments  consist of municipal
and government  bonds,  and commercial  paper.  At December 31, 2001, all of the
Company's securities will mature within 12 months.

The  carrying  value  of the  Company's  investments  by  major  security  type,
consisted of the following (in thousands):

             Description                                 2001       2000
             ------------                             -----------------------
             Auction Rate Preferred...................    $   --     $1,003
             Municipal Bonds..........................        --      2,000
             U.S. Government Securities...............     5,588     10,155
                                                      -----------------------
                                                          $5,588    $13,158
                                                      =======================

     Revenue Recognition

Sales  under  short-term  contracts  and for  stock  items are  recognized  when
deliveries   are  made  and  title   passes  to  the   customer.   Sales   under
cost-reimbursement  contracts  are  recorded as costs are  incurred  and include
estimated  earned  fees in the  proportion  that costs  incurred to date bear to
total estimated costs.

As some  contracts  extend over one or more years,  revisions in cost and profit
estimates  during the course of the work are reflected in the accounting  period
in which the facts which require the revision  become known.  At the time a loss
on a contract becomes known, the entire amount of the estimated ultimate loss on
the contract is accrued.

Sales under certain fixed-price and fixed-price incentive contracts are recorded
utilizing  the  percentage of  completion  method,  in which costs and estimated
gross margin are recorded as the work is performed. Income is accrued based upon
the percentage  that costs incurred to date bear to estimated  total costs after
giving effect to the most recent estimates of costs and funding at completion.

Under the Company's  millimeter-wave  business which was disposed of in February
2000,  fees under certain  contracts were  increased or decreased  under cost or
performance  incentive  provisions  which measured  actual  performance  against
established targets or specific criteria. Incentive fee awards or penalties were
included  in sales or cost of sales  at the  time the  amounts  were  reasonably
determined.

     Concentrations of Credit Risk

Financial  instruments that potentially subject the Company to concentrations of
credit risk consist principally of cash, cash equivalents, marketable securities
and trade  accounts  receivable.  The Company places its cash  investments  with
high-quality financial institutions. The Company extends credit to its customers
based on an evaluation  of the  customer's  financial  condition and history and
generally does not require  collateral.  The Company has  historically  incurred
minimal  credit  losses.   At  December  31,  2001  and  2000,   100%  and  75%,
respectively, of accounts receivable was due from one customer.

Investments are placed in instruments  with  institutions  that have "Investment
Grade" ratings or better. The Company has established policies for investment of
its cash that  attempt to  maintain  safety and  liquidity.  The Company has not
realized any significant losses on cash equivalents or marketable securities.

     Comprehensive Income

Comprehensive  Income  (loss) is defined  as  changes in equity  other than from
transactions  resulting from investments by owners and  distributions to owners.
The company's  comprehensive loss for the year ended December 31, 2001 consisted
of its reported net loss  attributable  to common  shareholders,  and unrealized
gains on  marketable  securities  and  totaled  ($27,058).  For the years  ended
December 31, 2000 and 1999 comprehensive loss equaled net loss.





                                       29
<PAGE>



     Research and Development

The Company incurs costs in the research and development of commercially  viable
applications of its millimeter-wave and microwave technology.

The Company also incurs  research and  development  costs under  customer-funded
contracts.  Costs of  approximately  $626,000,  $1,788,000,  and  $1,156,000 are
recorded  net of the  associated  customer  funding of  approximately  $266,000,
$612,000,  and $1,068,000 for the years ended December 31, 2001, 2000, and 1999,
respectively.  Significant  terms of  customer-funded  research and  development
arrangements  from  our  point-to-multipoint   outdoor  unit  business  included
granting the customer a non-exclusive, royalty-free right and license to use and
distribute the product and its related sales and technical  literature developed
by the Company under the agreement. The Company is not obligated to repay any of
the funds received under these contracts.

     Inventory Valuation

Inventories are stated at the lower of cost (standard cost,  which  approximates
actual) or market.  The Company recorded charges of approximately  $7,072,000 in
2001 and $17,744,000 in 2000 to adjust  inventory to its expected net realizable
value.  As of December  31, 2001 and 2000,  the Company had  recorded  inventory
reserves of  $172,000  and  $1,640,000,  respectively,  to reserve for  obsolete
inventory.

     Property, Plant and Equipment

Property, plant and equipment are stated at cost. Depreciation is computed using
the straight-line  method based upon the estimated useful lives of the assets as
follows:

                        Asset                               Life
                       --------                        ---------------
             Machinery and equipment...................  3 to 7  years
             Furniture and fixtures....................  7 to 10 years
             Leasehold improvements....................  3 to 10 years
             Equipment under capital leases............  3 to 7  years

Leasehold improvements and equipment under capital leases are amortized over the
lesser  of the life of the  lease or the  useful  lives of the  improvements  or
equipment.

When assets are sold or retired,  the related cost and accumulated  depreciation
are removed from their  respective  accounts and any  resulting  gain or loss is
included in income.

     Intangible Assets

Intangible assets are recorded at cost and are amortized using the straight-line
method over their expected useful life, which is five years.

Intangible assets consisted of the following (in thousands):

                                                         2001       2000
                                                      ----------------------
             Proprietary technology.................. $        0 $     216
             Less:  accumulated amortization.........          0       (18)
                                                      ----------------------
                                                      $        0 $     198
                                                      ======================

Due to the  company's  restructuring  activities in July 2001,  the  unamortized
balance of intangible  assets was determined to have no remaining  estimated net
realizable value.


                                       30
<PAGE>


     Impairment of Long-Lived Assets

Under  Financial   Accounting   Standards  Board  ("FASB")  Statement  No.  121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," the Company reviews long-lived assets and certain  identifiable
intangibles  for impairment at each reporting date based on the expected  future
cash flows of the assets  compared to the  carrying  value of the asset.  To the
extent that such carrying value exceeds  expected future cash flows, a writedown
in intangibles is recorded.

     Recognition of Income Taxes

Deferred  tax assets and  liabilities  are  computed  annually  for  differences
between the  financial  statement and tax bases of assets and  liabilities  that
will result in taxable or deductible  amounts in the future based on enacted tax
laws and rates  applicable to periods in which the  differences  are expected to
affect taxable income.  Valuation  allowances are established  when necessary to
reduce deferred tax assets to the amount expected to be realized. As of December
31,  2001 and 2000 a full  valuation  allowance  has  been  recorded  due to the
uncertainty of realization of the Company's deferred tax assets.

     Reverse Stock Split

On December 16,  1999,  the  stockholders  voted to effect a one for two reverse
split of the Company's  outstanding  common stock effective as of that date. The
terms of the then-outstanding  preferred stock, preferred stock warrants, common
stock  options  and common  stock  warrants  provided  for a similar one for two
adjustment on their  conversion and exercise  amounts and prices,  respectively.
The financial  statements  and footnote  disclosures  related to this split have
been adjusted accordingly.

     Earnings Per Share

Earnings  per share  has been  computed  by  dividing  the loss from  continuing
operations,  loss  from  discontinued  operations  and net loss by the  weighted
average common shares  outstanding.  No effect has been given to the exercise of
common  stock  options,  stock  warrants,   convertible  notes,  and  redeemable
preferred stock, since the effect would be antidilutive on continuing operations
for all reporting  periods.  The following  table  presents the  calculation  of
historical per share amounts (in thousands, except per share data):
<TABLE>
<CAPTION>

                                                              Year Ended December 31,
                                                          ---------------------------------
                                                             2001       2000       1999
                                                          ---------------------------------
<S>                                                       <C>        <C>        <C>
       Historical:
           Loss from continuing operations............... $  (27,062)$  (37,634)$   (8,293)
                                                          ========== ========== ==========
           Weighted average shares of common stock
           outstanding...................................     16,708     14,816        606
                                                          ========== ========== ==========
           Basic and diluted loss per share from
            continuing operations........................ $    (1.62)$    (2.54)$   (13.68)
                                                          ========== ========== ==========
           Loss from discontinued operations............. $       -- $   (1,479)$   (1,642)
                                                          ========== ========== ==========
           Weighted average shares of common stock
           outstanding...................................     16,708     14,816        606
                                                          ========== ========== ==========
           Basic and diluted loss per share from
            discontinued operations...................... $       -- $    (0.10)$    (2.71)
                                                          ========== ========== ==========
           Net loss...................................... $  (27,062)$  (39,113)$   (9,935)
                                                          ========== ========== ==========
           Weighted average shares of common stock
           outstanding...................................     16,708     14,816        606
                                                          ========== ========== ==========
           Basic and diluted net loss per share.......... $    (1.62)$    (2.64)$   (16.39)
                                                          ========== ========== ==========
</TABLE>


                                       31
<PAGE>


     Derivative Instruments

Effective January 1, 2001 the company adopted FASB Statement No. 133 "Accounting
for Derivative  Instruments  and Hedging  Activities" as amended.  The statement
establishes  accounting and reporting  standards for derivative  instruments and
hedging activities and requires  recognition of all derivatives at fair value in
the  financial  statements.  Implementation  of  the  standard  did  not  have a
significant effect on the Company's financial statements.

     Recent Accounting Pronouncements

In June 2001, the FASB issued SFAS No. 141,  "Business  Combinations."  SFAS 141
requires  that the  purchase  method  of  accounting  be used  for all  business
combinations  initiated  after  June 30,  2001.  SFAS 141 is  effective  for the
Company's  year  beginning  January 1, 2002.  The  company  does not believe the
impact of  adopting  SFAS 141 will have a  significant  effect on the  Company's
financial statements.

In June 2001,  the FASB issued SFAS No. 142,  "Goodwill and Other  Intangibles."
SFAS 142 changes the accounting for goodwill and other  intangible  assets.  The
standard  requires that  goodwill and other  intangible  assets with  indefinite
lives no longer be  amortized;  however,  such assets must be evaluated at least
annually for impairment.  SFAS 142 is effective for the Company's year beginning
January 1, 2002.  The company  does not believe the impact of adopting  SFAS 142
will have a significant effect on the Company's financial statements.

In August 2001, the FASB issued SFAS No. 144,  "Accounting for the Impairment or
Disposal of Long-Lived  Assets"  which will be effective for the Company's  year
beginning  January 1, 2002. SFAS 144 supercedes the guidance under SFAS 121 with
respect to accounting  for  impairment of long-lived  assets as well as changing
the presentation and accounting for certain  operations that may be discontinued
by an entity.  The company does not believe the impact of adopting SFAS 144 will
have a significant effect on the Company's financial statements.

     Reclassification

Certain  prior years  amounts have been  reclassified  to conform to the current
year's presentation.

2.      Discontinued Operations

In August  1999,  the Board of  Directors  voted and  authorized  management  to
dispose of the Company's  millimeter-wave products (MMWP) business segment. This
segment  consisted  of  the  development  and  manufacture  of   millimeter-wave
components  and  assemblies,  including  antennas  and  quasi-optical  products,
multiplexer  products,  and passive waveguide products.  On February 8, 2000 the
Company  completed  the  sale of  substantially  all of the  assets  of the MMWP
segment to Millitech, LLC for approximately $3.6 million.

Accordingly, the Company has presented the MMWP segment's operating results as a
discontinued operation.  The results of the MMWP operations have been segregated
from continuing operations and reported as a separate line item in the statement
of operations.

As a result of the sale,  the Company  received  proceeds of $2.0  million and a
subordinated  note on the  principal at 12%. The  principal  was payable in five
equal semi-annual  payments of $50,000 beginning on July 1, 2002 through July 1,
2004. On December 31, 2004, the entire remaining  principal  balance of $960,000
plus accrued interest was due.  Interest was payable  semi-annually on the first
days of January  and July of each year  during  the term of the note,  beginning
July 1, 2000. The Company had fully reserved this subordinated note, included in
other assets, at December 31, 2000. In February 2002, the Company negotiated the
early repayment of this note and,  accordingly,  as of December 31, 2001 reduced
its valuation allowance to reflect the amount of the note to be repaid.

For the year ended  December 31, 2000, the Company  recorded stock  compensation
expense of $2.8  million  as a result of the  accelerated  vesting of  incentive
stock  options for  employees  who left the Company and were hired by Millitech,
LLC,  and a gain on  disposition  of  approximately  $1,369,000  as a result  of
reassessing the net realizable  value of certain assets and liabilities  related
to the divestiture.

Sales for the MMWP segment were $0, $770,000, and $8,312,000 for the years ended
December 31, 2001, 2000, and 1999, respectively.  The provision for income taxes
was $0,  $0 and $0 for the  years  ended  December  31,  2001,  2000,  and 1999,
respectively.


3.      Restructuring Charges

In July 2001 the Company's  Board of Directors  approved the  Company's  plan to
exit its point-to-multipoint  product line. In connection with this decision the
Company recorded an $11.6  million  restructuring  charge for the year ended
December 31, 2001.

Restructuring charges consist of the following (in thousands):

                                                    Year ended
                                                   December 31,
                                                       2001
                                                   ---------
        Workforce reduction........................$  1,248
        Excess facility costs......................     700
        Contract settlement costs..................   1,128
        Write-down of leasehold improvements,
        equipment and intangible assets............   3,611
                                                   ---------
        Other restructuring costs                     6,687
                                                   ---------

        Inventory writedown........................   7,072
        Reduction in inventory commitments.......    (1,557)
        Reduction in warranty reserve..............    (388)
        Customer funded inventory..................    (164)
                                                   ---------
        Inventory restructuring cost                  4,962
                                                   ---------
                                                   $ 11,649
                                                   =========


Restructuring   charges  include  the   curtailment  of  certain   research  and
development   activities   through  facility   consolidations,   production  and
production support workforce reductions and contract settlement costs. Workforce
reduction charges included the cost of consultants and the cost of severance and
related  benefits of approximately  58 employees  affected by the  restructuring
activities.  Contract  settlement  costs  include  the  Company's  estimates  to
withdraw from certain contracts.  Certain leasehold improvements,  equipment and
intangible  assets  determined  to be impaired as a result of the  restructuring
activities  were written down to their  estimated net  realizable  value and are
included on the balance sheet as assets held for sale.

In connection  with the  restructuring  activities,  the Company also determined
that  certain  components  in  inventory  had  been  adversely  impacted  by the
restructuring activities.  Accordingly the company recorded an inventory related
restructuring charge of approximately $5 million for certain excess and obsolete
raw material,  work-in-process  and finished  goods. In accordance with Emerging
Issues Task Force 96-9,  "Classification of Inventory  Markdowns and Other Costs
Associated


                                       32
<PAGE>


with a  Restructuring,"  all  inventory  adjustments  are  recorded in inventory
restructuring  cost as a component of cost of sales for the year ended  December
31, 2001.

Of the  $11,649,000  in  restructuring  costs,  $9,400,000  relates to  non-cash
writedowns to net realizable  value of the Company's  inventories,  fixed assets
and other assets and $2,249,000 relates to cash paid or to be paid for workforce
reductions,  excess facility costs and contract costs. During 2001, $951,000 was
paid for such costs.

Remaining  accrued   restructuring  costs  at  December  31,  2001  consists  of
approximately  $642,000 for  facility  consolidations,  $202,000  for  workforce
reduction charges and $454,000 for contract terminations.

4.      Inventories

Inventories consist of the following (in thousands):

                                                December 31,
                                             ----------------
                                                2001    2000
                                             -------  -------
         Finished goods......................$   -- $  1,405
         Parts and subassemblies.............   126    4,960
         Work in process.....................     3    1,473
                                             ------  --------
                                             $  129 $  7,838
                                             ======  ========

5.      Property, Plant and Equipment

Property, plant and equipment consist of the following (in thousands):

                                                   December 31,
                                             -------------------------
                                                 2001        2000
                                             -----------  ------------
         Machinery and equipment.............$    10,070 $    15,952
         Furniture and fixtures..............        813         820
         Leasehold improvements..............      1,958       2,117
         Equipment under capital leases......      4,586       6,624
                                             -----------  ------------
                                                  17,427      25,513
         Less accumulated depreciation ......    (12,759)    (12,762)
                                             -----------  ------------
                                             $     4,668 $    12,751
                                             ===========  ============

The net book value of all  equipment  under  capital  leases  was  approximately
$1,395,000,  $3,728,000  and  $1,677,000  at December 31,  2001,  2000 and 1999,
respectively.

Depreciation  expense for the years ended  December 31, 2001,  2000 and 1999 was
approximately $3,358,000, $3,515,000, and $2,482,000, respectively.

6.      Accrued Expenses

Accrued expenses consist of the following (in thousands):

                                                                  December 31,
                                                                ---------------
                                                                  2001   2000
                                                                ------  -------
         Accrued payroll, commissions and related expenses......$  556 $ 1,071
         Accrued warranty expense...............................    25     412
         Accrued contract costs.................................    --      --
         Deferred revenue.......................................    --      94
         Accrued liabilities on discontinued operations.........    --      --
         Other accrued expenses.................................   222     193
                                                                ------  -------
                                                                $  803 $ 1,770
                                                                ======  =======

7.      Lines of Credit

In August 1999, the Company  entered into a revolving  line of credit  agreement
with  a  bank.  The  agreement  provided  for  an  initial  borrowing  of  up to
$1,000,000,  which was  increased  by  $500,000  upon the  Company's  raising an
additional  $3,000,000  in  stockholders'  equity and increased by $500,000 upon
receipt of a machinery and equipment appraisal,  for a total amount available of
$2,000,000.  On June 9, 2000, the Company revised the agreement with the bank to
increase the line of credit to $5,000,000  and extend the expiration of the line
from  August  19,  2000 to  November  30,  2000.  Interest  was  payable  on the
outstanding balance of the line at prime plus 1%. Prime was 8.5% at December 31,
1999.  The line was  collateralized  by  substantially  all of the assets of the
Company.


                                       33
<PAGE>


The Company was not in compliance with certain  covenants of the line during the
year ended  December  31, 2000 and obtained  waivers from the bank.  The line of
credit expired on November 30, 2000 and was not renewed by the Company.

In connection with the revolving line of credit  agreement,  the bank received a
warrant to purchase  44,445 shares of the Company's  Class E preferred  stock at
$2.25 per share (see Note 14). The warrants were recorded at their fair value of
$71,699 resulting in debt issuance costs of $71,699.  These costs were amortized
over the term of the line of credit.  The  warrant was  exercised  on August 11,
2000.

8.      Notes Payable

In April 1999,  the Company  received  $1,000,000 in proceeds from  subordinated
promissory  notes  to  certain  preferred  stockholders,   common  stockholders,
officers and directors as bridge financing. The notes bore interest at 9.75% and
were to be paid in full at the earlier of  December  31, 1999 or the sale of the
Company's  equity  securities  having  an  aggregate  sales  price  of at  least
$5,000,000.  The note  holders  received  warrants  for the  purchase of 100,000
shares of the  Company's  common  stock at an exercise  price of $1.00 per share
(see Note 14).  The  warrants  were  recorded  at their  fair  value of  $72,012
resulting  in a  discount  to the  notes of  $72,012.  This  discount  was fully
amortized as interest  expense when the notes were refinanced in September 1999.
The remaining outstanding warrants expire in July 2007.

In July 1999,  the Company  received an  additional  $1,000,000 in proceeds from
subordinated promissory notes issued to certain preferred  stockholders,  common
stockholders,  officers  and  directors  as bridge  financing.  The  notes  bore
interest  at 9.75% and were to be paid in full on the  earlier of  December  31,
1999 or the sale of the Company's  equity  securities  having an aggregate sales
price of at  least  $5,000,000.  The  note  holders  received  warrants  for the
purchase of 100,000 shares of the Company's common stock at an exercise price of
$1.00 per share (see Note 14). The warrants were recorded at their fair value of
$178,712  resulting  in a discount to the notes of $178,712.  This  discount was
fully amortized as interest  expense when the notes were refinanced in September
1999. The remaining outstanding warrants expire in July 2007.

The subordinated  promissory notes required repayment on the earlier of December
31, 1999 or at the time of sale of at least $5,000,000 of equity securities.  In
September  1999,  at the  noteholders'  election,  $2,000,000 of such notes were
repaid  through the issuance of $2,000,000 of Class E preferred  stock  (888,889
shares with a value of $2.25 per share),  which  converted to 444,444  shares of
common stock upon the Company's initial public offering on February 7, 2000 (see
Note 1).

9.      Long-Term Debt

Long-term debt consists of the following (in thousands):

                                                                 December 31,
                                                              ------------------
                                                                  2001     2000
                                                              ------------------
    Uncollateralized subordinated note, due June 2003,
      monthly principal payments of $8,333 with interest at
      10% (see Note 14)...................................... $    150 $    250
    Collateralized equipment notes, due April 2003 and
      November 2003, monthly principal and interest payments
      of $48,612, with interest at 12%.......................    1,059    1,487

                                                              --------  --------
                                                                 1,209    1,737
    Less unamortized debt discount...........................      (29)     (50)
    Less current portion.....................................     (562)    (507)
                                                              --------  --------
                                                              $    618 $  1,180
                                                              ========  ========

The maturities of long-term debt outstanding are as follows (in thousands):

                                                             December 31,
                                                                  2001
                                                              ---------
         2002.................................................$    583
         2003.................................................     626
         2004.................................................      --
                                                              ---------
                                                              $  1,209
                                                              =========



                                       34
<PAGE>


In May 1999, the Company entered into a senior loan and security agreement which
provides  for the  issuance  of up to  $2,000,000  in  promissory  notes.  As of
December  31,  2001  and  2000,  $1,059,000  and  $1,487,000,  respectively,  in
promissory  notes  were  outstanding  against  this  agreement.  The  notes  are
collateralized  by  machinery,  equipment,  intangible  and other  assets of the
Company.  The notes require an additional interest  compensation  payment at the
end of the term of the notes.  The  payment,  at the option of the  Company,  is
either 12.5% of the original principal of the note, or six months of payments in
the amount of 2.43% of the original  principal of the note. In conjunction  with
these notes,  the Company  issued 44,445 Class E preferred  stock  warrants (see
Note 14). The warrants were recorded at their fair value of $68,787 resulting in
a discount to the notes of $68,787.  This  discount  will be amortized  over the
term of the notes of four years and amounted to $20,940 and $17,196  during 2001
and 2000, respectively. The warrants were exercised on July 31, 2000.

In June 1999, the Company paid the balance of its uncollateralized  subordinated
note due June 1999 and issued a new uncollateralized  subordinated note due June
2003 to the same  lender  totaling  $400,000.  The  previous  note due June 1999
required  monthly  payments of $5,833 with interest at 10%. In conjunction  with
the new note due June 2003, the Company issued 20,000 common stock warrants that
expire July 2007 (see Note 14). The warrants  were  recorded at their fair value
of $14,977 resulting in a discount to the note of $14,977. This discount will be
amortized  over the term of the note of four  years and  amounted  to $3,744 and
$2,028  during  2000 and 1999,  respectively.  The  Company  also  extended  the
duration of the lender's  outstanding  Class A preferred  stock warrants to June
2003 (see Note 14).

The  subordinated  notes  contain  various  covenants.   In  1999,  the  lenders
permanently  modified  certain  covenant   requirements.   The  Company  was  in
compliance with all revised  covenants as of and for the year ended December 31,
2001.

10.     Leases

The Company leases its operating  facility and certain equipment under operating
and capital  leases which extend through 2006.  Certain  leases include  renewal
options.

Future minimum  annual lease  payments under these lease  agreements at December
31, 2001 are as follows (in thousands):

                                                         Operating Capital
         Year ending                                       Leases   Leases
         ------------                                   -------------------
         2002...........................................$    630 $  2,107
         2003...........................................     624      880
         2004...........................................     651      120
         2005...........................................     531        2
         2006...........................................     150       --
         2007...........................................      --       --
         -----                                          -------- --------

         Future minimum lease payments..................$  2,587 $  3,109
                                                        ==========

         Less amount representing interest..............             (241)
                                                                 ----------
         Present value of net minimum lease payments....            2,868
         Less current portion...........................           (1,912)
                                                                 ----------

         Long-term portion..............................         $    956
                                                                 ==========

The Company has a five-year  operating lease for its primary operating  facility
which extends through October 2005 and contains a five year renewal option.  The
building  lease requires the Company to pay  utilities,  insurance,  maintenance
costs and real  estate  taxes.  The  building  is leased  from an  affiliate  of
stockholders of the Company.

In addition,  the Company  leases  equipment  under  various  leases for periods
ranging from one to five years. Some of these leases contain options to purchase
the  equipment at the  termination  of the lease at a price equal to fair market
value.

Total  rental  expense  charged  to  operations   under  operating   leases  was
approximately $614,000,  $581,000, and $650,000 for the years ended December 31,
2001, 2000 and 1999, respectively.

11.     Incentive Compensation Plan

The Company maintains an incentive  compensation  plan, the details of which are
established  on an  annual  basis at the  Board of  Directors'  discretion.  The
Company recorded  compensation  expense of  approximately  $518,000 for the year



                                       35
<PAGE>


ended December 31, 2000. No compensation  expense was recognized under this plan
for the years ended December 31, 2001 and 1999.


                                       36
<PAGE>

12.     Income Taxes

The provision for income taxes consists of the following (in thousands):

<TABLE>
<CAPTION>

                                                             Year ended December 31,
                                                       -------------------------------------
                                                           2001        2000        1999
                                                       -------------------------------------
         Continuing operations:
         Current tax expense (benefit):
<S>                                                    <C>         <C>          <C>
              Federal................................. $   (6,826) $    (8,212) $    (3,071)
              State...................................     (1,742)      (2,095)        (551)
                                                        ----------  -----------  -----------
                                                           (8,568)     (10,307)      (3,622)
                                                        ----------  -----------  -----------
         Deferred tax expense (benefit):
              Federal.................................       6,826       8,212        3,071
              State...................................       1,742       2,095          551
                                                        ----------  -----------  -----------
                                                             8,568      10,307        3,622
                                                        ----------  -----------  -----------
         Income tax benefit related to continuing
         operations...................................          --          --           --
                                                        ----------  -----------  -----------

         Discontinued operations:
         Current tax expense:
              Federal................................. $        -- $        --  $      (508)
              State...................................          --          --         (148)
                                                        ----------  -----------  -----------
                                                                --          --         (656)
                                                        ----------  -----------  -----------
         Deferred tax expense:
              Federal.................................          --          --          508
              State...................................          --          --          148
                                                        ----------  -----------  -----------
                                                                --          --          656
                                                        ----------  -----------  -----------
         Income tax expense related to discontinued
         operations...................................          --          --           --
                                                        ----------  -----------  -----------

         Total income tax expense..................... $        -- $        --  $        --
                                                        ==========  ===========  ===========
</TABLE>

The provision for income taxes  differs from the amount  computed  utilizing the
federal statutory rate of 34% as follows:

                                                Year ended December 31,
                                             ----------------------------
                                              2001      2000    1999
                                             ----------------------------
         Federal Statutory rate..............  (34.0)%   (34.0)%   (34.0)%
         State taxes, net of federal effect..   (6.3)     (6.3)     (6.0)
         Other...............................    0.0       0.0       0.3
         Change in valuation allowance.......   40.3      40.3      39.7
                                             -------    -------  --------

                                                 0.0%      0.0%      0.0%
                                             =======    =======  ========

                                       37
<PAGE>



The tax effects of temporary  differences  that give rise to deferred tax assets
(liabilities) at December 31, 2001 and 2000 are as follows (in thousands):
<TABLE>
<CAPTION>

                                                        2001                   2000
                                                ---------------------  ---------------------
                                                 Current  Noncurrent    Current  Noncurrent
                                                -------- ------------  ---------------------
<S>                                              <C>         <C>         <C>        <C>
         Inventory reserves.................... $  9,162    $    --    $  8,963  $       --
         Reserve on assets held for sale           1,126         --          --          --
         Restructuring reserve.................      523         --          --          --
         Vacation liability....................      137         --        248           --
         Warranty..............................       10         --         166          --
         Allowance for doubtful accounts.......      101         --         101          --
         Deferred stock compensation...........       32         --          21          --
         Deferred revenue......................       --         --          38          --
         Other.................................      123         164        148         (85)
         Investment                                             (173)        --        (173)
         Property, plant and equipment.........       --       1,605         --          58
         Tax credit carryovers.................       --       1,664         --       1,272
         Net operating loss carryforwards......       --      25,618         --      19,202
                                                 -------     -------     ------     -------

         Gross deferred tax benefit............   11,214      28,878      9,685      20,274
         Valuation allowance...................  (11,214)    (28,878)    (9,685)    (20,274)
                                                 -------     -------     ------     -------
                                                 $    --    $     --    $    --    $     --
                                                 =======    ========    =======    ========
</TABLE>

At December 31, 2001, the Company has approximately  $64,663,000 ($46,327,000 in
2000) of net operating  loss  carryforwards  and $746,000  ($540,000 in 2000) of
investment and research and development tax credit  carryforwards  available for
federal  income  tax  purposes.  There  are  approximately  $60,223,000  of  net
operating losses ($41,888,000 in 2000) and approximately  $880,000 in investment
and  research  and  development  tax  credit  carryforwards  available  in  2001
($732,000 in 2000) for state tax purposes.

Net  operating  loss  carryforwards  expired in 2001 and will continue to expire
through 2021. It is possible that the net operating  loss  carryforward  amounts
that may be used in a single year may be limited.

13.     Redeemable Preferred Stock

On  February  7, 2000 the  Company  completed  an  initial  public  offering  of
4,600,000 shares of its common stock at $17.00 per share. The offering  resulted
in net proceeds to the Company of $71.1  million  after  deducting  underwriters
commission  and  offering  expenses.  Simultaneously  with the  closing  of the
initial  public  offering,  all of the Company's  then  outstanding  convertible
preferred  stock was  automatically  converted  into an aggregate of  10,488,405
shares of common stock.

As of December 31, 1999 the Company had issued and outstanding Class A, B, D and
E preferred  stock (see Note 1). Each of the classes had  redemption  rights,  a
liquidation  preference,  conversion  rights, and dividend rights as of December
31, 1999:

     o    Each Class A, B, D and E share may be  converted  at the option of the
          holder  into a share  of  common  stock at a ratio  of two  shares  of
          preferred to one share of common. Conversion would occur automatically
          upon a public  offering of common stock resulting in gross proceeds of
          at least  $15,000,000 and with an offering price of at least $4.50 per
          share. Each Class D and E share would  automatically be converted into
          common  stock  upon the  conversion  of 90% or more of the  authorized
          stock of the class.

     o    The Class A, B, D and E shares have a  liquidation  preference  in the
          amount  of  $3.25,  $3.25,  $1.80 and  $2.25,  respectively,  plus all
          declared and unpaid dividends.

     o    The  holders of Class A, B, D and E shares are  entitled  to  receive,
          when and as declared by the Board of Directors,  non-cumulative annual
          cash dividends of $.26, $.26, $.144 and $.18 per share,  respectively.
          No dividends have been declared by the Board of Directors.

     o    Certain of the classes of  preferred  stock have  liquidation  rights,
          voting  rights and cash  dividend  rights in  preference  to the other
          preferred stock.


                                       38
<PAGE>


     o    The  Company  shall  offer to redeem the Class A and Class B preferred
          shares at the rate of 20% per year at $3.25 per share,  plus an amount
          equal to all  declared and unpaid  dividends.  All Class A and Class B
          redemptions  can  be  waived  at  the  option  of  two-thirds  of  the
          respective Class A or Class B preferred  stockholders.  As part of the
          agreement  in 1998 to issue Class E preferred  stock,  the Class A and
          Class B preferred  stockholders  elected to postpone their  redemption
          rights until 2003.

     o    On October 21, 2003 and on the first and second anniversaries thereof,
          the  Company  shall  offer to  redeem  from  each  Class D and Class E
          preferred  holder, a maximum of one-third,  two-thirds and one hundred
          percent,  respectively,  of the total  number  of shares  held by each
          stockholder  at a price  equal  to the  greater  of $1.80  and  $2.25,
          respectively,  plus all  declared  and unpaid  dividends,  or the fair
          market  value as  determined  by the Board of  Directors.  The Class D
          preferred  stockholders  agreed to postpone their redemption from 2002
          to 2003 as part of the 1998 Class E preferred stock issuance.

In September  1999,  the Company  issued  6,666,667  shares of Class E preferred
stock with a value of $15,000,000. Cash proceeds were $13,000,000 and $2,000,000
of subordinated promissory notes were retired through the issuance of $2,000,000
(888,889 shares at a value of $2.25 per share) of Class E preferred stock.

14.     Stock Warrants

The Company has issued  stock  warrants  for its  preferred  and common stock as
follows:
<TABLE>
<CAPTION>

                                          Class A            Class E
                                      Preferred Stock    Preferred Stock      Common Stock
                                     ----------------------------------------------------------
                                               Exercise            Exercise             Exercise
                                                Price               Price                Price
                                    Number of    Per    Number of    Per     Number of    Per
                                      Shares    Share     Shares    Share      Shares    Share
                                      ------    -----     ------    -----      ------    -----
<S>                                     <C>       <C>    <C>         <C>  <C>            <C>
  Exercisable at December 31, 1998..    28,000 $  3.25       -- $     --    962,500 $     1.00
  Granted...........................        --     --    88,890      2.25   220,000      1.00
  Exercised.........................        --     --        --       --    (19,575)     1.00
                                       -------    ----  -------      ----    ------      ----

  Exercisable at December 31, 1999..    28,000    3.25   88,890      2.25 1,162,925      1.00
  Reverse stock split...............   (14,000)   6.50  (44,445)     4.50        --       --
  Exercised.........................        --     --   (44,445)     4.50  (264,404)     1.00
  Converted.........................   (14,000)   6.50       --       --     14,000      6.50
                                       -------    ----  -------      ----    ------      ----

  Exercisable at December 31, 2000..        --     --        --       --    912,521      1.08
  Granted...........................        --     --        --       --         --       --
  Exercised.........................        --     --        --       --         --       --
                                       -------    ----  -------      ----    ------      ----

  Exercisable at December 31, 2001..        --  $  --        -- $     --    912,521 $    1.08
                                       =======    ====   ======      ==== =========      ====
</TABLE>

The Company issued 20,000 common stock warrants during 1999 in conjunction  with
a subordinated note of $400,000 (see Note 9). In addition,  200,000 common stock
warrants were issued during the year ended December 31, 1999 in conjunction with
the bridge financing (see Note 8).

The  outstanding  common stock warrants have exercise  prices of $1.00 and $6.50
and expire as follows:

                                                Expiration
         Number of Warrants                        Date
        ---------------------                  --------------
        14,000.............................       June 2003
        630,464............................       September 2006
        268,057............................       July 2007

                                       39
<PAGE>



15.     Stock Options and Common Stock Issued

The Company has stock  option  plans that provide for the granting of options to
employees,  directors and consultants.  The plans permit the granting of options
to purchase a maximum of 5,060,334  shares of common stock at various prices and
require  that the  options  be  exercisable  at the  prices  and at the times as
determined  by the  Board of  Directors,  not to exceed  ten years  from date of
issuance.

As of December 31, 2001,  1,183,143  options are  available  for issuance  under
these plans.  Employee  stock options  granted prior to September 2000 generally
have a vesting requirement of four years whereby 20% of the options granted vest
at the time of issuance and the remainder  vest at a rate of 20% per year on the
anniversary  date of the issuance.  Employee stock options  granted in September
2000 and  thereafter  provide for vesting in the amount of 25% of the grant upon
the first  anniversary of the date of grant and quarterly  vesting in the amount
of 6.25% of the grant on the first day of each January,  April, July and October
following the first  anniversary of the date of grant until the option has fully
vested.

The aggregate stock option activity for these plans is as follows:

<TABLE>
<CAPTION>
                                                                                Weighted
                                                                   Number of     average
                                                                    Shares      exercise
                                                                                  price
                                                                 ---------------------------
<S>                                                                 <C>        <C>

        Balance, December 31, 1998 (677,503 exercisable)........    1,237,360  $   1.00
        Granted.................................................      801,735      5.02
        Exercised...............................................     (213,763)     1.04
        Canceled or expired.....................................      (78,569)     1.08
                                                                      ------- ---------

        Balance, December 31, 1999 (834,498 exercisable)........    1,746,763      2.83
        Granted.................................................    1,556,346      7.92
        Exercised...............................................     (372,101)     1.43
        Canceled or expired.....................................     (157,651)     8.55
                                                                      ------- ---------

        Balance, December 31, 2000 (845,652 exercisable)........    2,773,357      5.55
        Granted.................................................    2,018,500       .54
        Exercised...............................................       (8,525)     1.00
        Canceled or expired.....................................     (906,141)     4.46
                                                                      ------- ---------

        Balance, December 31, 2001 (1,794,826 exercisable)......    3,877,191 $    3.20
                                                                    =========      ====

</TABLE>


The following table summarizes  information  about stock options  outstanding at
December 31, 2001:

<TABLE>
<CAPTION>

                                   Options Outstanding                           Options Exercisable
                      --------------------------------------------------  -----------------------------------
                         Number     Weighted Average
                      Outstanding       Remaining                              Number             Weighted
                           At       Contractual Life   Weighted Average    Exercisable at         Average
      Exercise Price    12/31/01         (years)        Exercise Price        12/31/01         Exercise Price
--------------------- ------------ ------------------- -----------------  ---------------- ------------------
<C>        <C>          <C>               <C>             <C>                   <C>              <C>
$    .33 - $   0.81     1,884,685         9.4             $   .52               515,452           $   .52
$   1.00 - $   2.50     1,364,776         7.5             $  1.40               890,546           $  1.34
$   4.47 - $   6.83       309,127         8.2             $  6.05               134,463           $  5.73
$   8.00 - $  12.60       163,346         8.0             $ 11.05               107,900           $ 11.15
$  28.50 - $  31.28        58,531         7.9             $ 30.49                40,879           $ 30.74
$  40.25                   89,228         8.2             $ 40.25                39,306           $ 40.25
$  61.50                    7,500         8.1             $ 61.50                 3,000           $ 61.50

</TABLE>


The weighted  average  contractual  life of options  outstanding at December 31,
2001 is 8.3 years.

During the year ended  December 31, 1999,  the Company  issued 112,500 shares of
restricted  common stock at $2.50 per share to an officer in exchange for a note
receivable.  The note bears interest at 6.25% and matures in September  2009. In
the event the  individual  is no longer  employed  by the  Company,  the Company
retains the right to repurchase the shares.  This repurchase  right expires at a
rate of 20%  upon  issuance  and  20%  per  year  each  anniversary  date of the
issuance. The Company recognized $225,000 in deferred stock compensation for the
difference between the fair value of the stock and the



                                       40
<PAGE>


purchase price at the time of this transaction. For the years ended December 31,
2000 and 1999  respectively,  the Company recognized  approximately  $45,000 and
$58,000 in compensation  expense.  In September 2001, the Company reacquired the
112,500 shares,  forgave the remaining principal outstanding under the note, and
made a one-time payment of $47,000 to the former officer.



The Company recognized $257,000 in non-cash compensation expense during the year
ended December 31, 2000 as a result of  accelerated  vesting of stock options on
the  retirement of an employee.  The Company  granted  options to  non-employees
during the year ended December 31, 1999 and accordingly  recognized  $212,000 in
non-cash compensation expense.

The  Company  applies  APB  Opinion  No.  25,  "Accounting  for Stock  Issued to
Employees",  and  related  interpretations  in  accounting  for its  stock-based
compensation  plans. Had compensation  cost for the Company's stock option plans
been determined under SFAS No. 123,  "Accounting for Stock-Based  Compensation",
the  Company's  pro  forma net loss and net loss per  share  would  have been as
follows:

                                             Year ended December 31,
                                       ----------------------------------
                                           2001        2000        1999
                                       ----------------------------------
                                         (in thousands, except per share
                                                      data)
         Net loss:
             As reported...............  $(27,062) $ (39,113) $ (9,935)
             Pro forma.................   (28,248)   (40,939)  (10,533)
         Net loss per share
             As reported...............     (1.62)      (2.64)   (16.39)
             Pro forma.................     (1.69)      (2.76)   (17.38)


The above pro forma effects may not be  representative of the effects for future
years, as option grants typically vest over several years and additional options
are generally granted each year.

The fair  value of each  option  grant has been  estimated  on the date of grant
using the  minimum  value  pricing  model with the  following  weighted  average
assumptions:

                                                    2001      2000      1999
                                                  -------   -------   -------
         Risk-free interest rate..............      4.97%     5.54%     6.12%
         Expected life........................    6 years   6 years   6 years
         Volatility...........................       100%      100%       28%
         Dividend yield.......................        --        --        --

The weighted  average fair value of those options granted in 2001, 2000 and 1999
was $0.26, $3.92 and $3.17, respectively.

16.     Common and Preferred Stock Reserved

As a result of the outstanding stock warrants,  outstanding  stock options,  and
options  issuable under stock option plans,  the Company has reserved  5,972,856
shares of common stock at December 31, 2001, 4,372,881 shares of common stock at
December 31, 2000, and 15,708,284 shares of common stock, 28,000 shares of Class
A preferred  stock,  and 88,890 shares of Class E preferred stock as of December
31, 1999.

During the year ended  December 31, 1999,  the  stockholders  voted to authorize
4,500,000  shares of preferred  stock $.01 par value, to increase the authorized
shares  of the  Class E  preferred  stock  to  11,000,000  and to  increase  the
authorized  shares of common stock to  100,000,000.  No  additional  shares were
authorized during the years ended December 31, 2000 and 2001.

17.  Stockholder Rights Plan.

On May 16, 2001,  the Board of Directors  of Company  (the  "Board")  approved a
stockholder  rights plan (the  "Plan").  As part of the Plan, on May 16,2001 the
Company  declared a dividend of one preferred stock purchase right ("Right") for
each  outstanding  share of common stock to stockholders of record as of May 31,
2001.  Each Right  entitles the holder to buy one  one-thousandth  (1/1000) of a
share of a new series of preferred stock at an exercise price of $10, subject to
adjustment.  If a person or group  acquires 15 percent or more of the  Company's
outstanding common stock, holders of the Rights (other than the acquiring person
or group) will be able to purchase,  in exchange  for the  purchase  price , the
preferred  stock  equivalent  to shares of the  Company's  common stock having a
market value of twice the purchase price. In the event of a subsequent merger or
other  acquisition  of the Company,  holders of Rights (other than the acquiring
person or group) may acquire,  upon payment of the purchase price, shares of the
acquiring  entry (or an affiliate)  having a value of twice the purchase  price.
The rights will expire on May 18,2011  unless  earlier  redeemed by the Company.
Holders who, as of May 18,2001,  hold 15 percent or more of the Company's common
stock will not trigger the rights unless they exceed an ownership level equal to
the percentage of the Company's common stock  beneficially  owned by that person
on May 18, 2001 plus 1 percent of the Company's common stock  outstanding on May
18, 2001.

18. Segment Information

During 1998,  the Company  adopted the  provisions  of FASB  Statement  No. 131,
Disclosures  about  Segments  of an  Enterprise  and Related  Information.  FASB
Statement  No.  131  establishes   standards  for  disclosures  about  operating
segments, products and services,  geographic areas and major customers. Prior to
the  Company's  decision to  discontinue  its  millimeter-wave  products  (MMWP)
business segment (see Note 2), the Company  developed and manufactured  products
in two business segments,  the MMWP and broadband  connectivity  segments.  As a
result  of this  decision,  the  Company  now  operates  in only  the  broadband
connectivity  segment.  Products of the broadband  connectivity  segment used to
include  point-to-multipoint outdoor units(hubs and customer premises equipment)
and now include our FiberLeapTM products(access units and interface panels).


                                       41
<PAGE>


The broadband connectivity segment's sales by country are (in thousands):
<TABLE>
<CAPTION>

                                                             Year ended December 31,
                                                       -------------------------------------
                                                           2001        2000        1999
                                                       -------------------------------------
<S>                                                    <C>            <C>       <C>
         United States................................ $         20   $   1,020 $     1,156
         Canada.......................................        1,909      22,999       8,560

         Other countries..............................           --         734           4
                                                       -------------------------------------
                                                       $      1,929   $  24,753 $     9,720
                                                       =====================================
</TABLE>

The Company's  research and production  facilities and  accompanying  long-lived
assets are located in the United States.

Sales  to  one  customer   comprised  99%,  93%,  and  88%  of  total  broadband
connectivity  segment revenues in 2001, 2000, and 1999,  respectively.  No other
single  customer's  sales exceeded 10% of total broadband  connectivity  segment
revenues.

19.     Employee Savings and Profit-Sharing Plan

The  Company  sponsors  an  employee  savings  and  profit-sharing  plan for all
employees.  Full-time employees become eligible for participation after one-half
year of service.  The Company  provides a 75% (60% in 2000 and 1999) matching of
employee contributions,  up to a maximum of $2,500 ($2,000 in 2000 and 1999). An
additional  contribution  is  determined  at  the  discretion  of the  Board  of
Directors.

The Company's  contributions to this plan for matching of employee contributions
amounted to  approximately  $244,000,  $235,000 and $236,000 for the years ended
December 31, 2001, 2000 and 1999, respectively.

20.     Related-Party Transactions

The  Company had sales to a  stockholder  of  approximately  $0,  $186,000,  and
$1,355,000  during  2001,  2000,  and  1999,  respectively.  These  transactions
comprise subcontracts  associated with the stockholder's contracts with the U.S.
Government,  and are contracted under federal contracting guidelines.  The sales
and related accounts  receivable from this customer are included in discontinued
operations.

The Company sold and licensed its contraband  detection  technology to a limited
liability   company   (``LLC'')   established  and  partly  owned  by  a  former
stockholder/employee  in 1996. In return, the Company received a promissory note
receivable  of  $250,000  and a 19.9%  interest  in the LLC.  At all times,  the
Company  has  reserved  for the  entire  amount  due on the note  receivable  of
approximately  $200,000 and has no value  assigned to its 19.9%  interest in the
LLC. The Company subsequently  obtained a judgment against the LLC in the amount
of  approximately  $378,000.  In October  1999,  the Company  renegotiated  that
transaction  with the LLC and  involved  Millivision,  L.L.C.,  a joint  venture
between  the LLC and one other  entity.  The  Company  released  the LLC and the
former   stockholder/employee  from  substantially  all  claims,  including  the
remaining  outstanding  amount of the $250,000 note  receivable and the $378,000
judgment,  and the LLC released any claims to the intellectual property relating
to the Company's  contraband  detection systems business.  Millivision agreed to
pay  the  Company  royalties  in  the  minimum  amount  of  $200,000.  The  LLC,
Millivision and the former  stockholder/employee also agreed not to compete with
the Company with respect to broadband wireless telecommunications equipment. The
Company is currently negotiating another restructuring of that transaction.



                                       42
<PAGE>


21.     Contingencies

The  Company is subject  to  potential  liability  under  contractual  and other
matters  and  various  claims  and legal  actions  which are  pending  or may be
asserted. These matters arise in the ordinary course and conduct of the business
of the Company. While the outcome of all of the pending and potential claims and
legal actions against the Company cannot be forecast with certainty,  management
believes that such matters should not result in any liability which would have a
material  adverse  effect  on  the  Company's  financial  position,  results  of
operations, or cash flows.

22.     Selected Quarterly Financial Data (unaudited)

The following tables present unaudited quarterly  financial  information for the
quarters ended December 31, 2001 and 2000 (in thousands, except per share data).

<TABLE>
<CAPTION>


                                                             Quarter Ended
                                              --------------------------------------------
                                              March 31,   June 30,   Sept. 30   Dec. 31,
                                                 2001       2001       2001       2001
                                              --------------------------------------------

<S>                                           <C>        <C>        <C>        <C>
         Sales............................... $      522 $      968 $      431 $        8
         Cost of sales.......................      2,086      2,137      1,472        745
         Inventory restructuring cost........         --         --      4,962         --
         Charges relating to excess
           inventory on hand and on order....         --         --         --         --
         Gross margin (loss).................     (1,564)    (1,169)    (6,003)      (737)
         Loss from continuing operations.....     (5,103)    (4,442)   (14,983)    (2,534)
         Income (loss) from discontinued
         operations..........................         --         --         --         --
         Net loss............................     (5,103)    (4,442)   (14,983)    (2,534)
         Basic and diluted loss per share
           from continuing operations........      (0.30)     (0.27)     (0.90)     (0.15)
         Basic and diluted income (loss) per
           share from discontinued operations         --         --         --         --
         Basic and diluted net loss per share      (0.30)     (0.27)     (0.90)     (0.15)
<CAPTION>

                                                             Quarter Ended
                                              --------------------------------------------
                                              March 31,   June 30,   Sept. 30   Dec. 31,
                                                 2000       2000       2000       2000
                                              --------------------------------------------

<S>                                           <C>        <C>        <C>        <C>
         Sales............................... $   6,316  $   8,731  $   8,095  $   1,611
         Cost of sales.......................     6,514      8,543     10,225      4,328
         Charges relating to excess
           inventory on hand and on order....        --         --         --     17,744
         Gross margin (loss).................      (198)       188     (2,130)   (20,461)
         Loss from continuing operations.....    (3,583)    (4,569)    (5,896)   (23,586)
         Income (loss) from discontinued
         operations..........................    (2,848)       496        534        339
         Net loss............................    (6,431)    (4,073)    (5,362)   (23,247)
         Basic and diluted loss per share
           from continuing operations........     (0.37)     (0.28)     (0.36)     (1.41)
         Basic and diluted income (loss) per
           share from discontinued operations     (0.29)      0.03       0.03       0.02
         Basic and diluted net loss per share     (0.66)     (0.25)     (0.32)     (1.39)
</TABLE>

23.     Subsequent Event


                                       43
<PAGE>

In March 2002, the Company settled the pending  litigation  against Alcatel that
Telaxis had commenced in July 2001. The principal terms of the settlement are an
immediate,  one-time  payment of $1.7 million from Alcatel to Telaxis and mutual
general  releases.  The gain related to this  settlement will be recorded in the
Company's first quarter ended March 31, 2002.

Item  9.  Changes  in and  Disagreements  with  Accountants  on  Accounting  and
Financial Disclosure.

None.



                                       44
<PAGE>


                                    PART III


Item 10. Directors and Executive Officers of the Company.

Information appearing under the captions "Board of Directors, Executive Officers
and Key Employees" and "Section 16(a) Beneficial Ownership Reporting Compliance"
in our definitive  proxy  statement for our 2002 Annual Meeting of  Stockholders
(the "2002 Proxy Statement") is hereby incorporated by reference.

Item 11. Executive Compensation.

Information  appearing under the caption  "Executive  Compensation"  in our 2002
Proxy Statement is hereby incorporated by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management.

Information   appearing  under  the  caption  "Security   Ownership  of  Certain
Beneficial  Owners and Our Directors and Management" in our 2002 Proxy Statement
is hereby incorporated by reference.

Item 13. Certain Relationships and Related Transactions.

Information  appearing  under the caption  "Material  Relationships  and Related
Party  Transactions"  in our 2002  Proxy  Statement  is hereby  incorporated  by
reference.


                                       45
<PAGE>

                                     PART IV


Item 14. Financial Statements, Schedules, Reports on Form 8-K and Exhibits.

        (a)Documents filed as part of this Form 10-K:

           1.  Financial Statements and Financial Statement Schedule

     See Index to Financial  Statements under Item  8--Financial  Statements and
     Supplementary Data.

All other financial  statement  schedules have been omitted because they are not
required,  not  applicable,  or the  information to be included in the financial
statement  schedules  is  included  in the  financial  statements  or the  notes
thereto.

           3.  Exhibits

        See Exhibit Index.

        (b)Reports on Form 8-K

          We did not file any reports on Form 8-K during the three  months ended
          December 31, 2001.



                                       46
<PAGE>


<TABLE>
<CAPTION>

                                                        TELAXIS COMMUNICATIONS CORPORATION

                                                        VALUATION AND QUALIFYING ACCOUNTS
                                               For the years ended December 31, 1999, 2000 and 2001
                                                                  (in thousands)

                                                                     Column C
                                Column A            Column B         Additions         Column D  Column E
-------------------------------------------- ---------------------------------------------------------------
                                                   Balance at  Charged to  Charged to             Balance at
                                                   Beginning   Costs and     Other                  End of
                              Description          Of Period    Expenses    Accounts  Deductions    Period
-------------------------------------------- --------------------------------------------------------------

<S>                                          <C>            <C>         <C>         <C>        <C>
1999
Inventory reserve..........................  $       2,233  $      420  $    (625)  $   (231)  $    1,797
Allowance for doubtful accounts............            368         104       (415)        --           57
Note receivable allowance..................            --          --          --         --          --
Deferred tax valuation allowance...........          9,521       4,278         --         --       13,799
                                             -------------  ----------  ---------   --------   ----------
                                             $      12,122  $    4,808  $  (1,040)  $   (231)  $   15,653
                                             =============  ==========  ==========  ========   ==========

2000
Inventory reserve..........................  $       1,797  $    1,895  $  (2,052)  $     --   $    1,640
Allowance for doubtful accounts............             57         193         --         --          250
Note receivable allowance..................            --        1,210         --         --        1,210
Deferred tax valuation allowance...........         13,799      16,160         --         --       29,959
                                             -------------  ----------  ---------   --------   ----------
                                             $      15,653  $   19,458  $  (2,052)  $     --   $   33,059
                                             =============  ==========  ==========  ========   ==========

2001
Inventory reserve..........................  $       1,640  $       --  $      --   $ (1,468)  $      172
Allowance for doubtful accounts............            250          --         --         --          250
Note receivable allowance..................          1,210          --         --     (1,000)         210
Deferred tax valuation allowance...........         29,959      10,133         --         --       40,092
                                             -------------  ----------  ---------   --------   ----------
                                             $      33,059  $   10,133  $      --   $ (2,468)  $   40,724
                                             =============  ==========  ==========  ========   ==========

</TABLE>

                                       47
<PAGE>

                                  EXHIBIT INDEX


  Exhibit
  Number                           Description
------------ -------------------------------------------------------------------
<TABLE>
<CAPTION>

<S>     <C>
3.1     Restated Articles of Organization of the Company, as amended.**

3.2     Certificate of Vote of Directors Establishing a Class or Series of Stock.+

3.3      Amended and Restated By-laws of the Company.+

4.1      Form  of  certificate  evidencing  ownership  of  Common  Stock  of the
         Company.**

4.2      Rights  Agreement by and between the Company and Registrar and Transfer
         Company, as Rights Agent dated as of May 18, 2001.*****

4.3      Terms of Class  One  Participating  Cumulative  Preferred  Stock of the
         Company.*****
</TABLE>

4.4      Form of Right Certificate.*****

10.1     1986 Stock Plan of the Company.

10.2     1987 Stock Plan of the Company.

10.3     1988 Stock Plan of the Company.

10.4     1996 Stock Plan of the Company.

10.5     1997 Stock Plan of the Company.

10.6     1999 Stock Plan of the Company.

10.7     2001 Nonqualified Stock Plan of the Company.+

10.8     Employment  Agreement by and between the Company and John L. Youngblood
         dated as of December 19, 2000.****

10.9     Employment  Agreement by and between the Company and Ransom D. Reynolds
         dated as of December 19, 2000.****

10.10    Employment  Agreement  by and between the Company and Dennis C. Stempel
         dated as of December 19, 2000.****

10.11    Employment  Agreement  by and between the Company and David L.  Renauld
         dated as of December 19, 2000.****

10.12    Employment  Agreement  by and  between  the Company and Kenneth R. Wood
         dated as of December 19, 2000.****

10.13    Employment  Agreement  by and  between  the Company and Stephen L. Ward
         dated as of July 17, 2001.+

10.14    Lease  by and  between  the  Company  and  O'Leary-Vincunas  LLC  dated
         November 1, 2000.****

10.15    Fourth  Amended  and  Restated   Registration  Rights  Agreement  dated
         September 17, 1999.*

10.16    Registration  Rights  Agreement  by and  between the Company and Boston
         Federal Savings Bank dated August 20, 1999.

10.17    Purchase  Agreement  by  and  between  the  Company  and  Massachusetts
         Technology Development Corporation dated June 1988.*

                                       48
<PAGE>



  Exhibit
  Number                              Description
------------ -------------------------------------------------------------------

10.18    First  Amendment to the  Purchase  Agreement by and between the Company
         and Massachusetts Technology Development Corporation dated December 28,
         1988.**

10.19    Second  Amendment to the Purchase  Agreement by and between the Company
         and  Massachusetts  Technology  Development  Corporation dated June 17,
         1999.**

10.20    Form of Indemnification  Agreement,  a substantially similar version of
         which  was  entered  between  the  Company  and each of  Mssrs.  Doyle,
         Paladino,  Norbury,  Youngblood,  Renauld,  Reynolds,  and  Stempel  on
         September 18, 2000, between the Company and Ms. Armitage on October 31,
         2000,  between the Company and Mr. Ward on July 17,  2001,  between the
         Company and Mr. Amit on September 11, 2001, and between the Company and
         Mr. Goldwasser on December 18, 2001.***

23.1     Consent of PricewaterhouseCoopers LLP.++

________

All non-marked Exhibits listed above are incorporated herein by reference to the
exhibits to Form S-1 filed with the  Commission  on September 27, 1999 (File No.
333-87885).

     *    Incorporated herein by reference to the exhibits to Amendment No. 1 to
          Form S-1 filed  with the  Commission  on  October  15,  1999 (File No.
          333-87885).

     **   Incorporated herein by reference to the exhibits to Amendment No. 2 to
          Form S-1 filed with the  Commission  on  December  21,  1999 (File No.
          333-87885).

     ***  Incorporated  herein by  reference  to the exhibits to Form 10-Q filed
          with the Commission on November 14, 2000.

     **** Incorporated  herein by  reference  to the exhibits to Form 10-K filed
          with the Commission on March 28, 2001.

     *****Incorporated  herein by  reference  to the  exhibits to Form 8-K filed
          with the Commission on May 21, 2001.

     +    Incorporated  herein by  reference  to the exhibits to Form 10-Q filed
          with the Commission on August 10, 2001.

     ++   Filed herewith.




                                       49
<PAGE>


                                   SIGNATURES


Pursuant to the  requirements of Section 13 or 15(d) of the Securities  Exchange
Act of 1934,  Telaxis  has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.




                                     TELAXIS COMMUNICATIONS CORPORATION




                                     By:  /s/ John L. Youngblood
                                          -----------------------------
                                          John L. Youngblood,
                                          President and Chief Executive Officer

Date:  March 29, 2002


     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report has been signed below by the  following  persons on behalf of Telaxis and
in the capacities and on the dates indicated.

      Signature                            Title                    Date

By:/s/ John L. Youngblood      President, Chief Executive      March 29, 2002
   --------------------------  Officer and Director
    John L. Youngblood         (principal executive officer)

By:/s/ Dennis C. Stempel       Vice President, Chief           March 29, 2002
   --------------------------   Financial Officer
    Dennis C. Stempel           and Treasurer
                               (principal financial
                                and accounting officer)

By:/s/ Albert E. Paladino      Director                        March 29, 2002
   --------------------------
    Albert E. Paladino

By:/s/ Raphael H. Amit         Director                        March 29, 2002
   --------------------------
    Raphael H. Amit

By:/s/ Carol B. Armitage       Director                        March 29, 2002
   --------------------------
    Carol B. Armitage

By:/s/ Allan M. Doyle, Jr.     Director                        March 29, 2002
   --------------------------
    Allan M. Doyle, Jr.

By:/s/ Ralph A. Goldwasser     Director                        March 29, 2002
   --------------------------
    Ralph A. Goldwasser

By:/s/ David A. Norbury        Director                        March 29, 2002
   --------------------------
    David A. Norbury

                                       50