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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, 2002

                                       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 SmallCap 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. |X|

     Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes |_| No |X|

     As of June 28, 2002, the aggregate market value of the voting and
non-voting common equity held by non-affiliates of the Company was $8,688,861.
Shares of common equity held by each named executive officer and director 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 $.65, which is the price at which the common equity was last
sold on June 28, 2002.

     As of March 14, 2003, the aggregate market value of the voting and
non-voting common equity held by non-affiliates of the Company (as described in
the preceding paragraph) was $2,325,654. The aggregate market value has been
computed based on a price per share of $.17, which is the average of the high
and low sales prices on March 14, 2003. On such date, the Company had 16,708,313
shares of common stock outstanding.

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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
or any other subsequent events.

Item 1. Business.

Overview

     Our business is focused on the development and marketing of our
FiberLeap(TM) and EtherLeap(TM) products. Our FiberLeap(TM) products
transparently transmit fiber optic signals over a wireless link between two
access points. Using our FiberLeap(TM) 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 FiberLeap(TM) 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. We
also have a Gigabit Ethernet version of FiberLeap(TM), referred to as FL60-1250,
which enables native Gigabit Ethernet traffic at 1.25 Gbps, or Gigabits per
second.

     FiberLeap(TM) 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
FiberLeap(TM) 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.

     FiberLeap(TM) is designed to integrate directly and transparently into
fiber optic network infrastructure, thereby enabling carriers or enterprises to
deploy and support FiberLeap(TM) 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 previously announced that we have demonstrated technical feasibility of
our new EtherLeap(TM) product. EtherLeap(TM) is an 802.11-based Ethernet Wide
Area Network, or WAN, point-to-point radio operating at millimeter-wave
frequencies above 20 GHz. The initial EtherLeap(TM) models developed by us,
which are based specifically on an 802.11(b) system providing wireless
connectivity at up to 11 megabits per second (Mbps), operate at 24 GHz and 28
GHz. We have sold and delivered our first EtherLeap(TM) product. Prior to our
announcement relating to EtherLeap(TM), since July 2001, our business was
focused on our FiberLeap(TM) products. As a result, the following discussion
focuses primarily on our efforts relating to those FiberLeap(TM) products. In
the future, we expect to focus additional marketing, development and other
efforts on EtherLeap(TM) products, for which initial development is nearing
completion.

     Telaxis was formed as a Massachusetts corporation in January 1982 under the
name "Millitech Corporation." In 1995, we began to focus 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 October 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.

                                       2

<PAGE>


We have curtailed certain research and development activities and modified our
production activities through facility consolidations, capital equipment
reductions, and workforce reductions of approximately 58 employees in 2001 and
28 employees in 2002.

     FiberLeap(TM) demonstration units have been developed and tested, a new
marketing program was begun, and limited production was begun. We are also
planning to enter limited production of our new EtherLeap(TM) product, depending
upon the receipt of orders.

     On March 17, 2003, we entered into a definitive strategic combination
agreement with Young Design, Inc., a privately held Virginia corporation
("YDI"). Pursuant to the terms of that agreement, we have formed a subsidiary
that will merge with and into YDI and we will issue shares of our common stock
to the current stockholders of YDI. Telaxis will be the continuing corporation,
and our stockholders will continue holding our common stock following the
transaction. The transaction, which is expected to close on April 1, 2003, is
subject to certain conditions described in the definitive agreement.

     In connection with the combination, each outstanding share of YDI common
stock will be converted into the right to receive 2.5 shares of our common
stock. This exchange ratio will not be adjusted for changes in the price of our
common stock. We will assume each outstanding option to purchase shares of YDI
common stock and convert them into options to purchase shares of our common
stock. The exercise price and number of shares obtainable upon exercise of each
such option will be adjusted based on the exchange ratio. Based on shares
outstanding as of March 17, 2003, YDI stockholders will own approximately 69% of
the combined company and our stockholders will own approximately 31% of the
combined company.

     We expect to voluntarily de-list our common stock from the Nasdaq SmallCap
Market shortly before completing the transaction. After completion of the
transaction, we expect that our common stock will trade on the Over-the-Counter
Bulletin Board.

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
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
FiberLeap(TM) products are well suited to this market environment as they could
provide fiber network connectivity at the network edge faster and cheaper than
with new fiber optic cable.

     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 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 FiberLeap(TM) and EtherLeap(TM).

  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.


                                       3
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  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
FiberLeap(TM) products - rather than just fiber optic cable. In addition,
high-data-rate next generation fixed wireless LAN systems such as 802.11 could
create additional needs for LAN-to-LAN connectivity that could be met with
FiberLeap(TM) or EtherLeap(TM), depending upon the data rate required. The
higher data rate capability within the LAN could generate demand for higher
speed connections between LANs. FiberLeap(TM), with its OC-12 (622 Mbps) and
Gigabit Ethernet (1.25 Gbps) data rates, could potentially provide the fiber
optic connectivity that may be required by these new systems. EtherLeap(TM),
with its 11 Mbps data rate, could provide building-to-building Ethernet bridges.

  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, or 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 FiberLeap(TM).

  Native Gigabit Ethernet Trend

     For fiber carriers that are providing public access services and for
businesses providing and/or using LAN-to-LAN and SAN-to-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
advantages of native Gigabit Ethernet to be realized in many cases. We have
developed a version of FiberLeap(TM) that transmits native Gigabit Ethernet
traffic at 1.25 Gbps and it is currently being marketed.

  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
FiberLeap(TM) or EtherLeap(TM) could provide a redundant path of wireless
connectivity rather than cable-based connectivity.

Strategy

     Prior to our pending transaction with YDI, our objective was to be the
leading provider of wireless equipment addressing fiber and Ethernet network
connectivity markets worldwide, using frequencies above 20 GHz. Our strategies
for serving the fiber and Ethernet connectivity markets in the higher bands were
to:

     Develop and market wireless equipment that is simple and transparent to
fiber optic or Ethernet infrastructure. FiberLeap(TM) 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 FiberLeap(TM)


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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 FiberLeap(TM). The simplicity
of FiberLeap(TM) also enables us to address multiple markets with a common,
standard product. Similarly, EtherLeap(TM) has been designed to be transparent
to 802.11 Ethernet networks and is expected to provide ease of installation and
support while mitigating some of the security and interference concerns
associated with typical 802.11 infrastructures.

     Focus on high-value market segments where the FiberLeap(TM) value
proposition is most attractive. We focus our sales force on targeted
applications where the FiberLeap(TM) 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 FiberLeap(TM) 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 FiberLeap(TM) products and assist in our
selling process.

     Drive product requirements from the needs of the fiber and Ethernet 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 FiberLeap(TM) and EtherLeap(TM), we intend to
develop standard products to satisfy the expectations of carrier and enterprise
customers in a broad range of markets and applications. This strategy is
intended 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 FiberLeap(TM) to be the generic brand for its intended
application. In our marketing efforts, we position FiberLeap(TM) 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 FiberLeap(TM) 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 of millimeter-wave LMDS
          outdoor units intended for high-volume production;

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

     o    Proprietary, patented and patent pending FiberLeap(TM) and
          EtherLeap(TM) technologies.

     We exploit these capabilities to develop products with high standards of
performance, integrity, and reliability.

     Create barriers to entry through proprietary and patented technology. As we
continue to invest in the development of superior products, we 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 after completing internal manufacturing prove-out.
Given that we have recently terminated substantially all of our manufacturing
personnel, we currently have limited internal manufacturing capability. We
expect to outsource the manufacturing of our products after completing internal
manufacturing prove-out of our products.


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<PAGE>

Existing and Future Products

     The FiberLeap(TM) 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 FiberLeap(TM) 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 (1.25 Gbps). The use of
large amounts of unallocated millimeter-wave spectrum is the key to enabling
FiberLeap(TM) to be a simple product, while providing high data rates very
efficiently in terms of dollars per megabit per second.

  FiberLeap(TM) 2006

     Our initial FiberLeap(TM) product, FiberLeap(TM) 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, FiberLeap(TM) 2006 has
been demonstrated to be transparent to existing fiber networks. We commenced
limited production of the FiberLeap(TM) 2006 product in the first quarter of
2002.

     FiberLeap(TM) 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
obtain a license from the Federal Communications Commission, or FCC, to operate
in that frequency. However, we expect that customers will require FCC equipment
authorization, commonly called "type approval", of our FiberLeap(TM) products
before commercially deploying (and perhaps even buying) the products. We have
received type approval for our FiberLeap(TM) 2006 product.

     A FiberLeap(TM) 2006 product consists of two units, an Access Unit and a
FiberLeap(TM) Interface Panel (FLIP). The Access Unit contains the transmitter,
receiver, antenna, and other electronics for one end of a link. The Access Unit
is a self-contained unit connecting to the FLIP with a single cable that
incorporates fiber optic as well as power cables. The Access Unit 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 FiberLeap(TM) Access Unit. It
also contains status lights to indicate the health of the FiberLeap(TM) link.

  FiberLeap(TM) FL60-1250

     Our FiberLeap(TM) FL60-1250 product has all the attributes of our
FiberLeap(TM) 2006 product, except that it operates in a native Gigabit Ethernet
environment and provides data rates up to 1.25 Gbps. It has also received FCC
type approval.

     We commenced limited production of the FiberLeap(TM) 2006 product in the
first quarter of 2002 to validate our manufacturing processes and to enable us
to deliver initial products promptly upon receipt of orders. This limited
production run also included FiberLeap(TM) FL60-1250 links. Through February 28,
2003, we have had insignificant sales of our FiberLeap(TM) products.

  Future Products

     Our product strategy flows from our corporate strategies described earlier
in this section. In particular, prior to our pending transaction with YDI, our
goal is to develop wireless equipment that is simple and transparent to fiber
optic and Ethernet network infrastructures and that is responsive to network
connectivity market needs.

     In response to market needs, in September 2003 we announced that we had
demonstrated technical feasibility of our new EtherLeap(TM) product.
EtherLeap(TM) is an 802.11-based Ethernet WAN point-to-point radio


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operating at millimeter-wave frequencies above 20 GHz. In essence, EtherLeap(TM)
products will operate like 802.11 systems, but at much higher operating
frequencies than current 802.11 products that operate in the 2.4 GHz and 5.8 GHz
parts of the radio spectrum. EtherLeap(TM) will operate in the millimeter-wave
portion of the radio spectrum, which ranges up to 300 GHz. The initial
EtherLeap(TM) models that we have developed operate at 24 GHz and 28 GHz and are
based specifically on an 802.11(b) system providing wireless connectivity at up
to 11 Mbps. We have already sold and delivered our first EtherLeap(TM) product.

     Our engineers have a wide range of tools available, including the use of
various operating frequencies, to address FiberLeap(TM) and EtherLeap(TM)
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,
where FiberLeap(TM) and EtherLeap(TM) 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 with
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 do not have any significant customers for our FiberLeap(TM) or
EtherLeap(TM) products. We currently have limited internal marketing, sales, and
customer support capabilities as we recently terminated substantially all of our
marketing, sales, and customer support personnel.

     We are marketing FiberLeap(TM) 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
governmental users, 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.

     We began our FiberLeap(TM) marketing activities in mid-2001 and have
augmented our activities as FiberLeap(TM) demonstration links and marketing
materials have become available. We began our EtherLeap(TM) marketing activities
in late 2002. We continue to have ongoing discussions with numerous prospective
customers. The types of prospective customers currently being pursued, and their
potential applications of FiberLeap(TM) and EtherLeap(TM), are as follows:

     o    Governmental users -- providing LAN-to-LAN and SAN-to-SAN connectivity
          for a wide variety of governmental agencies and users

     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 or Ethernet network
          redundancy and reduced vulnerability

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

     o    Cellular carriers -- provide cellular backhaul for mobile phones
          networks, wireless Internet service providers or 802.11 hot spots


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Manufacturing Operations

     To date, all of the FiberLeap(TM) and EtherLeap(TM) demonstration links and
limited production units have been manufactured in our existing facilities. In
light of the lack of orders for our products and continued business uncertainty,
we terminated substantially all of our manufacturing personnel in September
2002. As a result, we currently have little internal manufacturing capability.
In the future, we intend to outsource the manufacturing of our products after
completing internal manufacturing prove-out of our products. At present, we do
not have arrangements with any manufacturer to manufacture our products, and we
may encounter difficulty in procuring manufacturing capacity. Moreover, we do
not have long-term supply agreements with any of the vendors of components used
in our products, which could make it difficult to obtain some components. Our
products contain components that must either be manufactured to our
specifications or in some cases obtained from a single source or a limited
number of sources, which could make it more difficult to obtain those
components.

Marketing, Sales and Customer Care

     Our FiberLeap(TM) and EtherLeap(TM) marketing, sales, and customer care
efforts have been conducted primarily by Telaxis employees and consultants. In
light of the lack of orders for our products and continued business uncertainty,
we recently terminated substantially all of our marketing, sales, and customer
service personnel. As a result, we currently have limited internal marketing,
sales, and customer support capabilities.

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 or Ethernet
network infrastructure and that is responsive to 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 FiberLeap(TM), 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 Telaxis.
Substantially all of our competitors are substantially larger than us 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 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
FiberLeap(TM) and EtherLeap(TM) products.

                                       8
<PAGE>

     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. Several companies have high-frequency,
high-data-rate millimeter-wave products similar to FiberLeap(TM), including
Terabeam Corporation (as a result of its acquisition of Harmonix Corporation)
and Loea, a division of Trex Enterprises. We believe several other companies are
using the 60, 70 and 80 GHz frequencies for products similar to our
FiberLeap(TM) products. 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 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 FiberLeap(TM) and EtherLeap(TM)
products. However, these technologies provide much lower data rates than our
FiberLeap(TM) products and serve different markets and therefore do not directly
compete with those products. We believe an element of the success of our
FiberLeap(TM) and EtherLeap(TM) products will be the proper positioning and
description of the capabilities of our products to minimize the chance of
confusion with other technologies.

     Many of these alternative technologies can take advantage of existing
installed infrastructure and have achieved significantly greater market
acceptance and penetration than our FiberLeap(TM) and EtherLeap(TM) 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 FiberLeap(TM) and EtherLeap(TM) products.

     The rapid technological developments within the fiber and Ethernet 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.

     We have been granted two material United States patents relating to our
antenna and access unit design, which will remain in force until September 2018
and 2019. In addition, we have eight material United States patent applications
pending. 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 a 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, 2003, we had 28 full-time employees. On that date, we
employed 17 people in engineering, 2 people in manufacturing operations, 1
person in marketing, sales and customer service, and 8 people


                                       9
<PAGE>

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 30,000 square feet of facilities comprised of one
building in South Deerfield, Massachusetts. The term of the lease expires in
October 2005. We expect that our current facilities will be adequate to meet
foreseen needs.

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 lawsuits also name one or more of the
underwriters in our initial public offering and certain of our officers and
directors. On April 19, 2002, the plaintiffs filed a single consolidated amended
complaint which supersedes the individual complaints originally filed. The
amended complaint alleges, among other things, violations of the registration
and antifraud provisions of the federal securities laws due to alleged
statements in and omissions from our initial public offering registration
statement concerning the underwriters' alleged activities in connection with the
underwriting of our shares to the public. The amended complaint seeks, among
other things, unspecified damages and costs associated with the litigation.
These lawsuits against us have been assigned along with, we understand,
approximately 1,000 other lawsuits making substantially similar allegations
against approximately 300 other publicly-traded companies and their public
offering underwriters to a single federal judge in the U.S. District Court for
the Southern District of New York for consolidated pre-trial purposes. On July
15, 2002, we, together with the other issuers named as defendants in these
coordinated proceedings, filed a collective motion to dismiss the consolidated
amended complaints on various legal grounds common to all or most of the issuer
defendants. In October 2002, all claims against our directors and officers who
had been parties to these lawsuits were dismissed without prejudice. In February
2003, the judge granted in part and denied in part our motion to dismiss the
consolidated amended complaints. The fraud claims against us were dismissed with
prejudice. The non-fraud claims were not dismissed. We deny any liability and
intend to vigorously defend the allegations against us.

     We are subject to potential liability under contractual and other matters
and various claims and legal actions which may be asserted. These matters arise
in the ordinary course and conduct of our business. While the outcome of the
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, 2002.


                                       10
<PAGE>

                                     PART II

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

Market Information

     Our common stock is quoted on The Nasdaq Stock Market's SmallCap Market,
under the symbol "TLXS." It is expected that our common stock will trade on the
Over-the-Counter Bulletin Board following completion of our announced strategic
combination with Young Design, Inc. ("YDI"). We currently expect that
transaction will be completed on April 1, 2003. In anticipation of that
transaction, we have sent a letter to the Nasdaq Stock Market requesting that
our common stock be delisted from the Nasdaq SmallCap Market at the close of
markets on March 31, 2003.

     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 2001                             High              Low
     ----------------                             ----              ---
     First Quarter (ended 3/31/01)                $2.78             $1.00
     Second Quarter (ended 6/30/01)               $1.44             $0.52
     Third Quarter (ended 9/30/01)                $0.73             $0.24
     Fourth Quarter (ended 12/31/01)              $0.94             $0.20

     Fiscal Year 2002                             High               Low
     ----------------                             ----               ---
     First Quarter (ended 3/31/02)                $1.77             $0.70
     Second Quarter (ended 6/30/02)               $1.41             $0.55
     Third Quarter (ended 9/30/02)                $0.79             $0.19
     Fourth Quarter (ended 12/31/02)              $0.33             $0.14

     As of March 14, 2003, the number of stockholders of record of our common
stock was approximately 258.

     We have never declared or paid any cash dividends on any class of our
common equity. We currently do not anticipate paying cash dividends in the
foreseeable future.

Equity Compensation Plan Information

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
Plan category                                                             Number of securities
                                                                          remaining available for
                          Number of securities    Weighted-average        future issuance under
                          to be issued upon       exercise price of       equity compensation
                          exercise of             outstanding options,    plans (excluding
                          outstanding options,    warrants and rights     securities reflected in
                          warrants and rights                             column (a))
                          (a)                     (b)                     (c)
-------------------------------------------------------------------------------------------------
<S>                            <C>                       <C>                    <C>
Equity compensation
plans approved by
security holders               2,390,391                 $3.93                    999,010
-------------------------------------------------------------------------------------------------
Equity compensation
plans not approved
by security holders              791,676                 $0.54                    701,294(1)
-------------------------------------------------------------------------------------------------
Total                          3,182,067                 $3.09                  1,700,304
-------------------------------------------------------------------------------------------------
</TABLE>

----------

(1)  Consists of shares available for future issuance under our 2001
     Nonqualified Stock Plan.

     On July 17, 2001, our board of directors adopted our 2001 Nonqualified
Stock Plan and reserved 1,500,000 shares of our common stock for issuance
pursuant to that plan. The 2001 plan provides for the grant of non-qualified
stock options, performance share awards, and stock awards (restricted or
unrestricted) to directors, officers, and employees. The compensation committee
of the board of directors generally administers the 2001 plan and recommends to
the board of directors or decides itself the terms of stock rights granted,
including the exercise price,


                                       11
<PAGE>

the number of shares that may be purchased under individual option awards, and
the vesting period of options. No more than forty-nine percent of the awards
granted under the 2001 plan may be granted to our directors and executive
officers. Compliance with this requirement will be measured on the earlier of
the date of the expiration of the 2001 plan or July 17, 2004, in which case
compliance will also be measured on each anniversary thereafter, unless
otherwise approved by The Nasdaq Stock Market, Inc. In addition, after July 17,
2004, no more than forty-nine percent of the awards granted under the 2001 plan
during any plan year may be granted to our directors and executive officers,
unless otherwise approved by The Nasdaq Stock Market, Inc. To the extent that
these limitations are not necessary for the 2001 plan to qualify as a broadly
based plan under the rules of The Nasdaq Stock Market, Inc., the limitations may
be relaxed. The board of directors may amend, modify, or terminate the 2001
stock plan at any time as long as the amendment, modification, or termination
does not impair the rights of plan participants under outstanding options or
other stock rights. For more information about our stock options, see Item 8,
Financial Statements and Supplementary Data, Notes to Financial Statements, Note
16.

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, 2002, we have applied approximately $59.4 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,
                                                ----------------------------------------------------------------
                                                  2002          2001          2000          1999          1998
                                                --------      --------      --------      --------      --------
                                                              (in thousands, except per share data)
<S>                                             <C>           <C>           <C>           <C>           <C>
Statement of Operations Data:
Sales .....................................     $     53      $  1,929      $ 24,753      $  9,720      $  2,386
Loss from continuing operations ...........      (12,464)      (27,062)      (37,634)       (8,293)      (11,253)
Basic and diluted loss per share from
   continuing operations ..................        (0.75)        (1.62)        (2.54)       (13.68)       (22.87)
</TABLE>

<TABLE>
<CAPTION>
                                                                          December 31,
                                                ----------------------------------------------------------------
                                                  2002          2001          2000          1999          1998
                                                --------      --------      --------      --------      --------
                                                                         (in thousands)
Balance Sheet Data:
<S>                                             <C>           <C>           <C>           <C>           <C>
Total assets ..............................     $ 14,359      $ 29,692      $ 65,538      $ 25,297      $ 14,955
Long-term debt and capital lease
   obligations, net of current portion ....          116         1,574         3,225         2,385         1,047
Total liabilities .........................        3,366         6,318        15,439        11,925         6,753
Redeemable preferred stock ................           --            --            --        47,793        32,793
Total stockholders' (deficit) equity ......       10,993        23,374        50,099       (34,421)      (24,591)
</TABLE>

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

Overview

     Our business is focused on the development and marketing of our
FiberLeap(TM) and EtherLeap(TM) products. Our FiberLeap(TM) products
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.


                                       12
<PAGE>

     Our FiberLeap(TM) 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 also have a Gigabit Ethernet version of FiberLeap(TM) which enables
native Gigabit Ethernet traffic at 1.25 Gbps. We previously announced in
September 2002 that we have demonstrated technical feasibility of our new
EtherLeap(TM) product. EtherLeap(TM) is an 802.11-based Ethernet Local Area
Network, or LAN, radio operating at millimeter-wave frequencies that can operate
in point-to-point, point-to-multipoint, and mesh architectures. The initial
EtherLeap(TM) models developed by us, which are based specifically on an
802.11(b) system providing wireless connectivity at up to 11 megabits per second
(Mbps), operate at 24 GHz and at 28 GHz. We sold and delivered our first
EtherLeap(TM) product in the third quarter of 2002. From July 2001 until this
announcement relating to EtherLeap(TM), our business was focused on our
FiberLeap(TM) products.

     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
does not address our millimeter-wave products business segment.

     Due to changing market conditions we made the decision to exit the
point-to-multipoint outdoor unit business in July 2001, and to focus all of our
resources on closing the connectivity gap in fiber networks. We curtailed
certain research and development activities and modified our production
activities through facility consolidations, capital equipment reductions, and
workforce reductions of approximately 58 employees in 2001. FiberLeap(TM) trial
and Beta units have been developed and tested, a new marketing program has been
initiated, and limited production has begun.

     The overall economic climate in the United States has declined since we
decided to focus on our FiberLeap(TM) and EtherLeap(TM) products. In particular,
telecommunication markets have experienced a severe downturn, which has been
highlighted by the bankruptcy filings of several former prominent
telecommunications companies. Telecommunication markets remain depressed, and we
cannot predict how long they will take to recover or the extent of any recovery.
This uncertainty in the telecommunications industry and in the larger economy
has made it very difficult to successfully launch our FiberLeap(TM) and
EtherLeap(TM) products and to build a business based on those products. We
consolidated our production and development facility in September 2002 resulting
in a reduction of approximately 50% of our facility space and associated costs,
and elimination of manufacturing personnel and equipment or their reallocation
to research and development activities. While we continue to talk with potential
purchasers of our FiberLeap(TM) and EtherLeap(TM) products, we do not have any
significant customers for those products and we cannot predict when (or if) we
will obtain significant customers. Our current financial position may be
inadequate to enable us to continue to pursue our efforts to build our
FiberLeap(TM) and EtherLeap(TM) business until more favorable market conditions
return.

     In light of these factors, our board decided that we should explore a wide
variety of strategic opportunities and alternatives. We have retained the
investment banking firm Ferris, Baker Watts as our financial adviser to assist
with the consideration of various strategic options. On March 17, 2003, we
entered into a definitive strategic combination agreement with Young Design,
Inc. ("YDI"), a privately held Virginia corporation. Following the closing of
the proposed transaction, which is expected to occur on April 1, 2003, the
combined entity may have a different operating structure than currently exists
at our Company. The following management's discussion and analysis addresses our
current operating structure and does not address any aspect of the proposed
strategic combination.

     For the year ended December 31, 2002, all of our sales were to customers
located in the United States. 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. Sales to customers located outside the United States may continue to
represent a significant portion of our total sales.


                                       13
<PAGE>

Critical Accounting Policies

     The preparation of our financial statements in accordance 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 periods. See Item 8, Financial Statements and
Supplementary Data, Notes to Financial Statements, Note 1 for a description of
the significant accounting policies used in the preparation of our financial
statements. The Company's management is required to make judgments and estimates
about the effect of matters that are inherently uncertain. Actual results could
differ from management's estimates. The most significant areas involving
management judgments and estimates are described below.

Revenue Recognition

     Sales under short-term contracts and for stock items are recognized when
deliveries are made and title passes to the customer and collection is
reasonably assured. 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 margins 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.

Inventory Valuation

     Inventory is stated at the lower of cost (standard cost, which approximates
actual) or market. Provisions are made to reduce excess or obsolete inventory to
its estimated net realizable value. The process for evaluating the value of
excess and obsolete inventory often requires us to make subjective judgments and
estimates concerning future sales levels, quantities and prices at which such
inventory will be able to be sold in the normal course of business. Accelerating
the disposal process or incorrect estimates of future sales potential may
necessitate future adjustments to these provisions.

Assets Held for Sale

     We have identified certain equipment as being surplus to the ongoing
operations of the business as we have exited certain product lines and
restructured certain of our operations. We continue to assess the net realizable
value of these assets and in the future, additional surplus assets may be
identified and adjustments to their net realizable value made.

Income Taxes

     The Company records a valuation allowance to reduce deferred tax assets to
the amount that is more likely than not to be realized. Deferred tax assets, net
of valuation allowance are $0 at December 31, 2002 and December 31, 2001.

     In assessing the need for a valuation allowance, we estimate future taxable
income, considering the feasibility of ongoing tax planning strategies and the
realizability of tax loss carryforwards. Valuation allowances related to
deferred tax assets can be impacted by changes to tax laws, changes to statutory
tax rates and future taxable income levels. An adjustment to the deferred tax
asset will increase income in the period the adjustment is made in the event
that we are able to realize deferred tax assets in the future in excess of the
net recorded amount.

Results of Operations

Years Ended December 31, 2002, 2001 and 2000

  Sales

     Sales decreased 97% to $53,000 in 2002 from $1.9 million in 2001. Sales
decreased 92% to $1.9 million in 2001 from $24.8 million in 2000. The decrease
in sales from 2000 to 2001 and 2002 resulted from a decrease in shipments of our
planar products from $23.4 million in 2000 to $1.9 million in 2001 and $0 in
2002 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.
Sales in units of our planar products were 565 in 2001 and 13,709 in 2000.

  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. Our results of operations subsequent to October 1, 2002 reflect
the elimination of dedicated manufacturing costs, which were previously included
in cost of sales. Cost of sales decreased $4.0 million to $2.4 million in 2002
from $6.4 million in 2001. Cost of sales decreased $23.2 million to $6.4 million
in 2001 from $29.6 million in 2000. The decrease in cost of sales from 2001 to
2002 was attributable primarily to decreased shipments of our
point-to-multipoint outdoor unit products, a significant decrease in our
manufacturing personnel and the elimination of dedicated manufacturing overhead
as of October 1, 2002. The decrease in cost of sales from 2000 to 2001 was
attributable primarily to decreased shipments of our point-to-multipoint outdoor
unit products and a significant decrease in our manufacturing personnel and
equipment. Gross losses were $2.5 million in 2002, $9.5 million in 2001, and
$22.6 million in 2000. The decline in gross loss from 2001 to 2002 was due to
the decrease in cost of sales and a $4.8 million decrease in inventory
restructuring cost. The decline in gross loss from 2000 to 2001 was due to the
decrease in cost of sales.


                                       14
<PAGE>

  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 $4.5
million in 2002 from $6.4 million in 2001. Gross research and development
expenses decreased 30% to $6.4 million in 2001 from $9.2 million in 2000. The
decrease from 2001 to 2002 is primarily attributable to reductions in personnel,
development material, capital equipment and related facilities and support
costs. 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. Some of our customers provided funding to offset our development costs
for specific products in 2001 and 2000. Customer funding of development projects
decreased 57% to $266,000 in 2001 from $612,000 in 2000. Net of customer
reimbursements, our research and development expenses decreased 28% to $4.5
million in 2002 from $6.2 million in 2001 and decreased 28% from $8.6 million in
2000.

  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 increased 1% to $6.9 million in 2002 from $6.8 million
in 2001. Selling, general and administrative expenses decreased 25% to $6.8
million in 2001 from $9.0 million in 2000. The increase from 2001 to 2002 was
due primarily to professional fees related to the evaluation of various
strategic alternatives, and an increase in the cost of Directors and Officer's
Liability insurance. 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.

  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 income and expenses. Total other income decreased
16% to $1.7 million in 2002 from $2.1 million in 2001. Total other income
decreased 21% to $2.1 million in 2001 from $2.6 million in 2000. The decrease in
total other income from 2001 to 2002 resulted from a decrease in interest and
dividends earned on cash and marketable securities to approximately $815,000 in
2002 from $1.7 million in 2001. Partially offsetting this decrease was income of
$1.2 million recorded in 2002 from the settlement of litigation. 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 $1.7 million
in 2001 from $3.0 million in 2000. Partially offsetting this decrease was $1
million recorded in 2001 for the reduction of the valuation allowance against a
note receivable. Interest expense decreased to $302,000 in 2002 from $578,000 in
2001 and decreased from $610,000 in 2000 due to the lower outstanding balances
for long term debt and capital lease obligations.



                                       15
<PAGE>

  Income Tax Benefit

     No tax benefit has been recorded in 2002, 2001 and 2000 due to the
uncertainty of future taxable income sufficient to realize the deduction of
current losses.

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, 2002, we had marketable securities of $3.8 million and cash
and cash equivalents of $7.9 million, including restricted cash of $100,000.

     At December 31, 2002, we had approximately $1.0 million in accrued
expenses primarily related to payroll and associated costs.

     At December 31, 2002, we had approximately $626,000 in long-term debt, of
which $50,000 is for a subordinated note due through June 2003 with an interest
rate of 10%, and $576,000 is for collateralized equipment notes due through
November 2003 with an interest rate of 12%. We paid $538,000 in the first
quarter of 2003 for final settlement of the collateralized equipment notes and
we applied our deposits with that lender of approximately $49,000. The total
remaining principal and interest due under this agreement was approximately
$613,000 at December 31, 2002, and the settlement resulted in savings of
approximately $27,000.

     At December 31, 2002, we had approximately $955,000 in capital lease
obligations, which are due through 2005. We paid $703,000 in the first quarter
of 2003 for full settlement of $720,000 of these capital lease obligations.

     Cash used in operating activities in 2002 was $9.9 million compared to
$17.2 million in 2001 and $30.4 million in 2000. Cash used in operating
activities has primarily represented funding of our net losses and inventory
build to meet expected future production requirements.

     Cash provided by investing activities in 2002 was $4.4 million compared to
$7.2 million in 2001 while cash used in investing activities in 2000 was $17.7
million. In 2002 and 2001, cash provided by investing activities resulted from
the maturity of marketable securities. In 2000, cash used in investing
activities related to the purchase of marketable securities and the purchase of
equipment used in our manufacturing and research and development facilities.

     Cash utilized by financing activities in 2002 was $2.5 million compared to
$2.0 million in 2001 while cash provided by financing activities in 2000 was
$69.4 million. In 2002 and 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.

     Our 2003 and future cash requirements will depend upon a number of factors,
including the timing and extent of growth in our FiberLeap(TM) and EtherLeap(TM)
product lines, the consummation of our pending strategic combination with YDI,
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. While we believe that our cash and marketable
securities balances at December 31, 2002 will provide sufficient capital to fund
our operations as currently forecasted, through December 31, 2003 and into 2004,
our capital needs may be higher or lower depending on whether we complete our
pending transaction with YDI, the results we achieve as a combined company with


                                       16
<PAGE>

YDI, assuming the transaction occurs, and other factors. Dependent upon 2003
results, we may not have sufficient cash to continue to operate for the
remainder of 2004.

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 exposed 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, 2002, we had cash and cash equivalents of $7.9 million,
including restricted cash of $100,000. 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, 2002, we had marketable
securities of $3.8 million which consisted of short-term, interest-bearing,
investment grade securities or direct or guaranteed obligations of the U.S.
government. These investments are exposed to interest rate risk and will
decrease in value if market interest rates increase. We believe a hypothetical
increase or decrease in market interest rates by 10 percent from the December
31, 2002 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 or decrease 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.

     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:


                                       17
<PAGE>

     o    Pending Transaction with Young Design, Inc. On March 17, 2003, we
          entered into a definitive agreement with Young Design, Inc. ("YDI")
          relating to a strategic combination of the two companies. Telaxis
          would be the surviving company and would issue a significant number of
          shares of its common stock to the current YDI stockholders. YDI would
          then become a wholly-owned subsidiary of Telaxis. There can be no
          assurance whatsoever that this contemplated transaction will be
          consummated due to the risks and uncertainties relating to and arising
          from our and YDI's desire and ability to satisfy the conditions to the
          closing of the transaction. Whether or not the transaction is
          completed, we will be expending substantial time and incurring
          substantial costs relating to the contemplated transaction and our
          directors, management, and employees may be interested in and
          distracted by the contemplated transaction. There are additional risks
          even if the transaction is completed, including, without limitation,
          risks relating to the ability of the companies to integrate
          effectively in a cost-effective, timely manner without material loss
          of employees, customers or suppliers, the risk that the expected
          synergies and other benefits of the combination will not be realized
          at all or to the extent expected, the risk that the contemplated cost
          savings from the transaction may not be fully realized or may take
          longer to realize than expected, reactions, either negative or
          positive, of investors, competitors, customers, suppliers, employees,
          and others to the transaction, the time and costs required to complete
          the contemplated transaction and then integrate the companies, costs
          and delays in implementing common systems and procedures, including
          financial accounting systems, risks associated with YDI's lack of
          experience operating as a public company, including the process of
          periodic financial reporting, risks associated with YDI's need to
          adopt and implement in a short period of time a substantial number of
          additional accounting controls, procedures, policies, and systems to
          facilitate timely and accurate periodic financial reporting, the
          expected need for the combined company to hire additional accounting
          staff, including individuals familiar with periodic financial
          reporting, the fact that the issuance of a very large number of shares
          of common stock may cause a substantial decline in the market price of
          the common stock, and the possible need or desire for a reverse split
          of Telaxis' common stock after completion of the transaction.

     o    Questionable Long-term Viability of the Company. At this point, we
          believe it would be difficult for Telaxis to survive as a standalone
          company over an extended period. We have substantially reduced our
          internal manufacturing, marketing, and sales capabilities. Much of
          this reduction resulted from our terminating substantially all of our
          manufacturing and marketing and sales personnel as well as many
          administrative and other personnel. In addition, we have reduced the
          size of our facilities. Based on these actions, we question whether
          Telaxis retains sufficient "critical mass" to survive as a long-term,
          viable standalone company even if our products gain market acceptance.

     o    Significant Change in our Business. In July 2001, we announced that we
          are going to focus on our FiberLeap(TM) product line and exit our old
          point-to-multipoint outdoor unit product line. In September 2002, we
          introduced our EtherLeap(TM) 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 as a standalone company would depend on our ability to
          develop, market, and gain market acceptance of our FiberLeap(TM) and
          EtherLeap(TM) products. We have limited experience with these new
          product lines and in the markets the FiberLeap(TM) and EtherLeap(TM)
          products address. We are still in the process of developing our
          FiberLeap(TM) and EtherLeap(TM) product lines. There can be no
          assurance that we will be successful in developing the FiberLeap(TM)
          or EtherLeap(TM) product lines or addressing the other issues inherent
          in entering a new line of business. We may be unable to realize the
          anticipated benefits from focusing on these product lines. We may be
          unable to successfully enter into the new areas of business addressed
          by our FiberLeap(TM) and EtherLeap(TM) products. We may incur
          unanticipated costs, liabilities, or delays in attempting to enter
          those new business areas. 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    Lack of Success in New Business. We have been trying to establish our
          new business based on FiberLeap(TM) and EtherLeap(TM) products for
          over eighteen months. We have had very limited success to date. Our
          revenue in 2002 was $53,000. We currently have no significant
          customers for our FiberLeap(TM) or EtherLeap(TM) products and have
          limited prospects for obtaining significant customers soon. 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 be reluctant to purchase our
          products given our pending transaction with YDI, uncertain future, and


                                       18
<PAGE>

          questionable long-term viability as a supplier and company. 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    Limited Capital. Our operations to date have required substantial
          amounts of capital. As of December 31, 2002, we had approximately
          $11.7 million in cash, cash equivalents, and marketable securities.
          Our future capital needs are difficult to predict given our pending
          transaction with YDI, uncertain future, and uncertain business
          outlook. Our capital requirements will depend on numerous factors,
          including those described in the preceding sentence, costs associated
          with our planned integration with YDI, the timing and extent of demand
          for our products and the associated working capital, manufacturing,
          and other costs, and the costs of our ongoing 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
          and the value of their holdings of our stock may be diluted,
          particularly given our current low stock price. Also, those
          newly-issued 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    Market Uncertainty for FiberLeap(TM) Products. We have limited
          experience with our new FiberLeap(TM) product line and in the markets
          our FiberLeap(TM) products address. Our FiberLeap(TM) products are
          very high data rate products most appropriate only for 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 FiberLeap(TM) products, particularly
          given the short operating range of our FiberLeap(TM) products
          (approximately 600 to 1,100 meters). Lack of a sufficiently large
          market could adversely affect our ability to sell our FiberLeap(TM)
          products at all or at the prices we need to achieve for a successful
          business. Further, while our FiberLeap(TM) 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 with these
          products. This difference could hinder, delay, or prevent sales of our
          FiberLeap(TM) products. We believe this difference has been a factor
          in the difficulty we have experienced to date in achieving commercial
          acceptance of our products. Our initial FiberLeap(TM) products operate
          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
          FiberLeap(TM) 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
          FiberLeap(TM) products due to the very high data rate transmission
          capabilities of those products. We may be unable to meet those
          criteria at all or on economic and other terms acceptable to us.

     o    Market Uncertainty for EtherLeap(TM) Products. We have limited
          experience with our new EtherLeap(TM) product line and in the markets
          our EtherLeap(TM) products address. Our EtherLeap(TM) products are, in
          essence, high-frequency 802.11(b) products. Given the high frequency
          operation of our EtherLeap(TM) products, we believe they are and will
          remain more expensive than typical 802.11-based products. Potential
          customers may not value the advantages of the high frequency operation
          of our EtherLeap(TM) products and be unwilling to pay the extra price
          to obtain these products. The market for 802.11-based products is
          extremely competitive and one in which there are relatively few
          barriers to entry. This competition could adversely affect our ability
          to sell our EtherLeap(TM) products at all or at the prices we need to
          achieve for a successful business. Also, the market demand for our
          EtherLeap(TM) products operating at any one frequency may be
          insufficient so we may need to develop other EtherLeap(TM) products
          operating at different frequencies. This development process may be
          long and expensive, even if ultimately successful.


                                       19
<PAGE>

     o    Continued Nasdaq Listing Issues. Our common stock is currently traded
          on the Nasdaq SmallCap Market. We plan to voluntarily de-list our
          common stock from the Nasdaq SmallCap Market shortly before the
          completion of our pending transaction with YDI.

          Even in the absence of the pending transaction with YDI, our common
          stock may well be involuntarily de-listed from the Nasdaq SmallCap
          Market. One of the requirements for continued listing on that market
          is that the minimum bid price of our stock must remain above $1.00.
          Our bid price has been below $1.00 for over six months. We received a
          letter dated January 15, 2003 from The Nasdaq Stock Market stating
          that, although our minimum bid price was below $1.00, we qualified for
          an extended grace period through July 7, 2003 to cure that deficiency.
          To cure the deficiency, our stock must attain a bid price of $1.00 or
          more for a period of 10 consecutive days before July 7, 2003. If our
          stock does not attain that minimum bid price, it will be subject to
          delisting from the Nasdaq SmallCap Market.

          There are other requirements for continued listing on the Nasdaq
          SmallCap Market, such as having a minimum of either (a) $2.5 million
          in stockholders' equity, (b) $35 million market value of listed
          securities, or (c) $500,000 in net income from continued operations
          (in the latest fiscal year or in two of the last three fiscal years),
          at least 500,000 publicly held shares, $1.0 million minimum value of
          publicly held shares, at least 300 round lot stockholders, and at
          least two market makers. Although we currently believe that we meet
          these other requirements, there can be no assurance that we will
          continue to meet these other continued listing requirements.

          Should our stock be delisted, voluntarily or involuntarily, from the
          Nasdaq SmallCap Market, we may apply to have our stock traded on the
          Over-The-Counter Bulletin Board. We do intend to apply, or to ask one
          of our market makers to apply, to have our stock traded on the
          Over-The-Counter Bulletin Board in connection with the pending
          transaction with YDI. There can be no assurance that our common stock
          will be timely admitted for trading on the Over-the-Counter Bulletin
          Board. This alternative 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.

          We may take actions to attempt to increase the bid price and market
          value of our stock and to reduce the number of shares outstanding.
          While there are numerous actions that could be taken to attempt to
          increase the bid price and market value 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.

     o    Pending Stockholder Litigation. We currently are party to the pending
          so-called "IPO litigation" occurring in the federal court in New York
          City. From June 12 to September 13, 2001 four purported securities
          class action lawsuits were filed against us, certain of our officers
          and directors, and certain of our initial public offering
          underwriters. 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. 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    Retention of Employees. Our success, both as a standalone company and
          as a combined company with YDI, depends in part on our ability to
          retain and motivate our current employees. We believe that a
          significant level of expertise is required to develop and market our
          products effectively and that the capabilities of our current
          employees increase the attractiveness of the company to potential
          strategic partners. We compete for such personnel with a number of
          other companies, many of which have substantially greater resources or
          better recent business success than us. There can be no assurance that
          we will be successful in retaining our employees. We have used
          retention bonuses and other methods for retention and may use such
          methods in the future, which results in extra costs. Our ability


                                       20
<PAGE>

          to retain and motivate our personnel may be adversely impacted by our
          current business uncertainty, our pending transaction with YDI, the
          multiple 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 retain and motivate qualified personnel could
          have a material adverse effect on our business, financial condition,
          and results of operations.

     o    Dependence on Third-Party Manufacturers. We currently have limited
          internal manufacturing capabilities. We currently expect to rely on
          independent manufacturers to provide full turnkey manufacturing of our
          complete products or important components of our products if and when
          we need to manufacture production quantities of our products. We
          currently have no agreements with third party contract manufacturers.
          The current uncertainty and historical fluctuation in our business and
          current limited needs for manufacturing may make contract
          manufacturers unwilling or reluctant to manufacture products for us in
          the future at all or on acceptable terms. 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 any 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. If we are unable to engage
          a third-party manufacturer or manufacturers, we may have to increase
          our internal manufacturing capability. We may be unable to do so at
          all or without significant expense given the current uncertainty in
          our business and recent workforce reductions.

     o    Inability to Predict Date of Profitability. We have incurred
          substantial losses and may not be profitable in the future. We have
          had little revenue to date from our current products. 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.

     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 our cash usage and amount of cash remaining at the
          end of each reporting period, costs associated with our pending
          transaction with YDI, the timing of obtaining customers for our
          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 limited ability to fulfill orders, our
          inability to obtain the components and test and manufacturing
          equipment at the prices and times and in the quantities we need, 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 developments relating to our pending transaction
          with YDI, announcements by us relating to customers for our products,
          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, 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    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 would increase our costs of
          production and lower our margins. The current uncertainty and
          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. Given that we are not
          manufacturing significant numbers of products, we


                                       21
<PAGE>

          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 development or shipments. 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 development and delivery of our products.

     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 FiberLeap(TM) and
          EtherLeap(TM) products) with the features, performance, cost, price,
          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 anticipated.
          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 as a standalone company, we would have
          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 believe that potential customers
          would expect us to commit to specified prices in any agreements we
          enter with them. The prices of products sold under these agreements,
          at least initially, would be based at least in part on our estimate of
          our costs to supply our FiberLeap(TM) and EtherLeap(TM) products.
          Given the early stage of development of our FiberLeap(TM) and
          EtherLeap(TM) product lines, it may be difficult for us to predict
          accurately the costs of producing these products. This difficulty is
          compounded by our limited internal manufacturing capability and lack
          of current third-party contract manufacturing relationships. We may
          have limited ability to increase our prices in the future. If we incur
          higher costs than estimated in performing under these agreements, 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


                                       22
<PAGE>

          and management personnel, cause product development or 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 would 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 FiberLeap(TM) and EtherLeap(TM) products, we
          have limited experience with the problems that could arise with these
          products.

     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 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 price, 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 broadband wireless access industry in
          which we now operate is 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.


                                       23
<PAGE>

     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 FiberLeap(TM) and
          EtherLeap(TM) products, such as lower cost, greater range, greater
          security, 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 FiberLeap(TM) and EtherLeap(TM)
          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, security and
          interference issues, 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.

     o    Government Regulation. Wireless equipment such as our current and
          contemplated FiberLeap(TM) and EtherLeap(TM) 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. If 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    Government Approvals. We believe that customers will require "type
          approval" of our FiberLeap(TM) and EtherLeap(TM) products from the
          United States Federal Communications Commission (FCC) before
          commercially deploying our FiberLeap(TM) and EtherLeap(TM) products.
          Further, customers may well require this "type approval" before buying
          or agreeing to buy our FiberLeap(TM) and EtherLeap(TM) products. While
          we now have type approval for initial versions of our FiberLeap(TM)
          products, we believe the lack of type approvals during our initial
          selling process was a factor hindering market acceptance of those
          products. We may need to obtain additional type approvals for our
          FiberLeap(TM) products. We will need to obtain type approval for our
          EtherLeap(TM) products. Obtaining the approvals may be a long,
          expensive process, even if we are ultimately successful. Delays in
          obtaining those approvals 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.

     o    International Issues. We may 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 2002, we had approximately
          $11.7 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,


                                       24
<PAGE>

          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,
          particularly given the relatively low recent trading volume of our
          common stock. 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.

          We expect to issue a large number of shares of our common stock in
          connection with the pending transaction with YDI. Those shares will
          initially be subject to some restrictions on resale by the current YDI
          stockholders due to the shares being issued in a private placement
          without registration of those shares with the SEC. We have agreed to
          register those shares with the SEC in the first half of 2004. The
          issuance of these shares could cause our stock price to fall. In
          addition, the registration of these shares for public trading could
          cause our stock price to fall. The sale of some or all of these shares
          could also cause our stock price to fall.

     o    Anti-Takeover Defenses. We have anti-takeover defenses (including a
          stockholder rights plan) 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. We expect to continue to review
          potential acquisitions and investment opportunities that could
          complement our current business or product offerings, augment our
          market coverage, enhance our technical capabilities, or that may
          otherwise offer growth or synergistic 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.


                                       25
<PAGE>

Item 8. Financial Statements and Supplementary Data.

                          INDEX TO FINANCIAL STATEMENTS

                                                                            Page
                                                                            ----
Report of Independent Accountants..........................................  27
FINANCIAL STATEMENTS
Balance Sheets.............................................................  28
Statements of Operations...................................................  29
Statement of Changes in Stockholders' (Deficit) Equity.....................  30
Statements of Cash Flows...................................................  31
Notes to Financial Statements..............................................  32
FINANCIAL STATEMENT SCHEDULE
Schedule II - Valuation and Qualifying Accounts............................  63


                                       26
<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, 2002 and 2001, and
the results of its operations and its cash flows for each of the three years in
the period ended December 31, 2002, 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.

     As discussed in Note 1 to the financial statements, the Company has
incurred losses and negative cash flows from operations and expects to incur
additional losses in 2003 as the Company continues its product
development efforts.


                                                  /s/ PRICEWATERHOUSECOOPERS LLP

Hartford, Connecticut
February 7, 2003, except for Note 24,
as to which the date is March 19, 2003


                                       27
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                                    ---------------------------
                                                                                                    December 31,    December 31,
                                                                                                        2002            2001
                                                                                                    -----------     -----------
<S>                                                                                                 <C>             <C>
Assets
Current assets
   Cash and cash equivalents .....................................................................  $     7,840     $    15,875
   Restricted cash ...............................................................................          100              --
   Marketable securities .........................................................................        3,792           5,588
   Trade accounts receivable, less allowance for doubtful accounts ($0 in 2002 and $250 in 2001) .           --             438
   Other accounts receivable .....................................................................            1             154
   Note receivable, less allowance of $210 in 2001 ...............................................           --           1,000
   Inventories ...................................................................................           34             129
   Assets held for sale ..........................................................................            5           1,659
   Other current assets ..........................................................................          105             102
                                                                                                    -----------     -----------

       Total current assets ......................................................................       11,877          24,945
   Property, plant and equipment, net ............................................................        2,412           4,668
   Other assets ..................................................................................           70              79
                                                                                                    -----------     -----------

       Total assets ..............................................................................  $    14,359     $    29,692
                                                                                                    ===========     ===========

Liabilities and Stockholders' Equity
Current liabilities
   Accounts payable ..............................................................................  $       311     $       169
   Accrued expenses ..............................................................................        1,030             803
   Accrued restructuring costs ...................................................................          452           1,298
   Current maturities of long-term debt ..........................................................          618             562
   Current maturities of capital lease obligations ...............................................          839           1,912
                                                                                                    -----------     -----------

       Total current liabilities .................................................................        3,250           4,744
   Long-term debt ................................................................................           --             618
   Capital lease obligations .....................................................................          116             956
                                                                                                    -----------     -----------

       Total liabilities .........................................................................        3,366           6,318

Commitments and contingencies
Stockholders' Equity
   Preferred stock, $.01 par value; authorized 4,500,000 shares in 2002 and 2001; none issued .....        --              --
   Common stock, $.01 par value; authorized 100,000,000 shares in 2002 and 2001;
      issued and outstanding 16,708,313 shares (16,630,698 shares in 2001) ........................        168             167
   Additional paid-in capital .....................................................................    124,700         124,623
   Accumulated other comprehensive income .........................................................          6               4
   Notes receivable ...............................................................................         --              (3)
   Treasury stock at cost (112,500 shares) ........................................................        (37)            (37)
   Accumulated deficit ............................................................................   (113,844)       (101,380)
                                                                                                    ----------     -----------

       Total stockholders' equity .................................................................     10,993          23,374
                                                                                                    ----------     -----------

Total liabilities and stockholders' equity ........................................................$    14,359     $    29,692
                                                                                                    ==========     ===========
</TABLE>

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


                                       28
<PAGE>

                       TELAXIS COMMUNICATIONS CORPORATION
                            STATEMENTS OF OPERATIONS
                      (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                                            Year ended December 31,
                                                                                       ----------------------------------
                                                                                         2002         2001         2000
                                                                                       --------     --------     --------
<S>                                                                                    <C>          <C>          <C>
Sales .............................................................................    $     53     $  1,929     $ 24,753
Cost of sales .....................................................................       2,378        6,440       29,610
Charges relating to excess inventory on hand and on order .........................          --           --       17,744
Inventory restructuring cost ......................................................         210        4,962           --
                                                                                       --------     --------     --------

Gross margin (loss) ...............................................................      (2,535)      (9,473)     (22,601)
Operating expenses
   Research and development, net ..................................................       4,476        6,174        8,623
   Selling, general and administrative ............................................       6,864        6,802        9,029
   Other restructuring costs ......................................................         322        6,687           --
                                                                                       --------     --------     --------

       Total operating expenses ...................................................      11,662       19,663       17,652
                                                                                       --------     --------     --------

Operating loss ....................................................................     (14,197)     (29,136)     (40,253)
                                                                                       --------     --------     --------

Other income (expense)
   Interest and other income ......................................................         815        1,677        3,243
   Income from settlement of litigation ...........................................       1,223           --           --
   Increase in valuation of note receivable .......................................          --        1,000           --
   Interest and other expense .....................................................        (305)        (603)        (624)
                                                                                       --------     --------     --------

       Total other income (expense) ...............................................       1,733        2,074        2,619
                                                                                       --------     --------     --------

Loss from continuing operations before income taxes ...............................     (12,464)     (27,062)     (37,634)
Income taxes ......................................................................          --           --           --
                                                                                       --------     --------     --------

Loss from continuing operations ...................................................     (12,464)     (27,062)     (37,634)
                                                                                       --------     --------     --------

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

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

Net loss ..........................................................................    $(12,464)    $(27,062)    $(39,113)
                                                                                       ========     ========     ========

Basic and diluted loss per share from:
   Continuing operations ..........................................................    $  (0.75)    $  (1.62)    $  (2.54)
                                                                                       --------     --------     --------

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

   Net loss .......................................................................    $  (0.75)    $  (1.62)    $  (2.64)
                                                                                       ========     ========     ========

Shares used in computing basic and diluted loss per share .........................      16,698       16,708       14,816
                                                                                       ========     ========     ========
</TABLE>

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


                                       29
<PAGE>

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

<TABLE>
<CAPTION>
                                            Common Stock            Additional                     Deferred
                                     ---------------------------      Paid-in        Notes          Stock
                                        Shares         Amount         Capital      Receivable    Compensation
                                     ------------   ------------   ------------   ------------   ------------
<S>                                  <C>            <C>            <C>            <C>            <C>
Balances, December 31, 1999 .......       843,872   $          8   $      1,224   $       (281)  $       (167)

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 ....................            --             --             --             --             56
Offering costs ....................            --             --         (6,330)            --             --
Other .............................            --             --          3,153             17            (48)
Conversion of preferred stock .....    10,488,405            105         47,688             --             --
Unrealized gain on investments ....            --             --             --             --             --
Net loss ..........................            --             --             --             --             --
Comprehensive loss ................            --             --             --             --             --
                                     ------------   ------------   ------------   ------------   ------------

Balances, December 31, 2000 .......    16,734,673            167        124,740           (331)          (159)

Exercise of common stock
  options .........................         8,525             --              8             --             --
Amortization of deferred stock
  compensation ....................            --             --             --             --             23
Purchase of treasury stock ........            --             --            (99)           282             99
Other .............................            --             --            (26)            46             37
Unrealized gain on investments ....            --             --             --             --             --
Net loss ..........................            --             --             --             --             --
Comprehensive loss ................            --             --             --             --             --
                                     ------------   ------------   ------------   ------------   ------------

Balances, December 31, 2001 .......    16,743,198            167        124,623             (3)            --

Exercise of common stock
  options .........................        43,524              1             33             --             --
Common stock grants ...............        34,091             --             29             --             --
Stock compensation expense ........            --             --             15             --             --
Write-off of note receivable ......            --             --             --              3             --
Unrealized gain on investments ....            --             --             --             --             --
Net loss ..........................            --             --             --             --             --
Comprehensive loss ................            --             --             --             --             --
                                     ------------   ------------   ------------   ------------   ------------

Balances, December 31, 2002 .......    16,820,813   $        168   $    124,700   $         --   $         --
                                     ============   ============   ============   ============   ============
</TABLE>

<TABLE>
<CAPTION>

                                                                   Accumulated
                                        Common                        Other
                                       Stock in      Accumulated  Comprehensive  Comprehensive
                                       Treasury        Deficit        Income          Loss           Total
                                     ------------   ------------   ------------   ------------   ------------
<S>                                  <C>            <C>            <C>            <C>            <C>
Balances, December 31, 1999 .......  $         --   $    (35,205)  $         --   $         --   $    (34,421)
Sale of common stock ..............            --             --             --             --         78,200
Exercise of common
  stock options ...................            --             --             --             --            659
Exercise of warrants ..............            --             --             --             --            133
Amortization of deferred stock
  compensation ....................            --             --             --             --             56
Offering costs ....................            --             --             --             --         (6,330)
Other .............................            --             --             --             --          3,122
Conversion of preferred stock .....            --             --             --             --         47,793
Unrealized gain on investments ....            --             --             --             --             --
Net loss ..........................            --        (39,113)            --        (39,113)       (39,113)
                                                                                  ------------
Comprehensive loss ................            --             --             --   $    (39,113)            --
                                     ------------   ------------   ------------   ============   ------------

Balances, December 31, 2000 .......            --        (74,318)            --                        50,099

Exercise of common stock
  options .........................            --             --             --             --              8
Amortization of deferred stock
  compensation ....................            --             --             --             --             23
Purchase of treasury stock ........           (37)            --             --             --            245
Other .............................            --             --             --             --             57
Unrealized gain on investments ....            --             --              4              4              4
Net loss ..........................            --        (27,062)            --        (27,062)       (27,062)
                                                                                  ------------
Comprehensive loss ................            --             --             --   $    (27,058)            --
                                     ------------   ------------   ------------   ============   ------------

Balances, December 31, 2001 .......           (37)      (101,380)             4                        23,374

Exercise of common stock
  options .........................            --             --             --             --             34
Common stock grants ...............            --             --             --             --             29
Stock compensation expense ........            --             --             --             --             15
Write-off of note receivable ......            --             --             --             --              3
Unrealized gain on investments ....            --             --              2              2              2
Net loss ..........................            --        (12,464)            --        (12,464)       (12,464)
                                                                                  ------------
Comprehensive loss ................            --             --             --   $    (12,462)            --
                                     ------------   ------------   ------------   ============   ------------

Balances, December 31, 2002 .......  $        (37)  $   (113,844)  $          6                  $     10,993
                                     ============   ============   ============                  ============
</TABLE>

    The accompanying notes are an integral part of these financial statements


                                       30
<PAGE>


                       TELAXIS COMMUNICATIONS CORPORATION
                            STATEMENTS OF CASH FLOWS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                                            Year ended December 31,
                                                                                        --------------------------------
                                                                                          2002        2001        2000
                                                                                        --------    --------    --------
<S>                                                                                     <C>         <C>         <C>
Cash flows from operating activities
  Net loss ..........................................................................   $(12,464)   $(27,062)   $(39,113)
  Adjustments to reconcile net loss to net cash utilized by operating activities:
   Depreciation and amortization ....................................................      2,059       3,401       3,644
   Non-cash restructuring costs .....................................................        532       9,400          --
   Gain on disposition of MMWP segment ..............................................         --          --      (1,369)
   Gain on dispositions of assets held for sale .....................................       (200)         --          --
   Non-cash compensation expense ....................................................         15          34       3,161
   Loss (gain) on the disposal of property and equipment ............................         --          84          (5)
   Write-off of note receivable ....................................................          3          --          --
   Note receivable valuation allowance adjustment ...................................         --      (1,000)         --
   Provision for excess inventory on hand and on order ..............................         --          --      17,744
   Changes in assets and liabilities
    Accounts receivable .............................................................        438       1,816          64
    Other accounts receivable .......................................................        153         143        (297)
    Inventories .....................................................................       (115)        637     (13,486)
    Other current assets ............................................................         (3)        384        (361)
    Reduction to other assets .......................................................          9          30          --
    Accounts payable and accrued expenses ...........................................        369      (6,297)       (360)
    Customer prepayments ............................................................         --         (54)        (67)
    Accrued restructuring costs .....................................................       (659)      1,298          --
                                                                                        --------    --------    --------

    Net cash utilized by operating activities .......................................     (9,863)    (17,186)    (30,445)
                                                                                        --------    --------    --------

Cash flows from investing activities
  Purchase of marketable securities .................................................    (16,463)    (22,167)    (24,529)
  Maturity of marketable securities .................................................     18,261      29,741      11,371
  Proceeds from sale of discontinued operations .....................................         --          --       1,990
  Additions to property and equipment ...............................................       (227)       (459)     (6,342)
  Proceeds from sale of assets held for sale ........................................      1,790         102          --
  Addition to intangible assets .....................................................         --          --        (246)
  Repayment of notes receivable .....................................................      1,000          --          17
                                                                                        --------    --------    --------

    Net cash provided (utilized) by investing activities ............................      4,361       7,217     (17,739)
                                                                                        --------    --------    --------

Cash flows from financing activities
  Transfer of restricted cash .......................................................       (100)         --          --
  Net repayment under line of credit ................................................         --          --        (500)
  Proceeds from capital lease obligations ...........................................         --         569          --
  Proceeds from note receivable .....................................................         --          46          --
  Repayments of long-term debt and capital lease obligations ........................     (2,496)     (2,644)     (2,716)
  Issuance of common stock upon exercise of options and warrants ....................         34           8         792
  Issuance of common stock ..........................................................         29          --      78,200
  Stock issuance costs ..............................................................         --          --      (6,330)
                                                                                        --------    --------    --------

    Net cash (utilized) provided by financing activities ............................     (2,533)     (2,021)     69,446
                                                                                        --------    --------    --------

Net (decrease) increase in cash and cash equivalents ................................     (8,035)    (11,990)     21,262
Cash and cash equivalents at beginning of period ....................................     15,875      27,865       6,603
                                                                                        --------    --------    --------

Cash and cash equivalents at end of period ..........................................   $  7,840    $ 15,875    $ 27,865
                                                                                        ========    ========    ========

Supplemental disclosure of cash flow information
  Cash paid during period for interest ..............................................   $    291    $    573    $    555
  Non-cash investing and financing activities:
   Equipment acquired under capital leases ..........................................         --         807       3,474
   Conversion of redeemable preferred stock .........................................         --          --      47,793
   Notes receivable for issuance of common stock ....................................         --          --          67
   Commitments recorded in accounts payable for inventory on order ..................         --          --       4,995
   Unrealized gain on investments ...................................................          2           4          --
</TABLE>

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


                                       31
<PAGE>

                       TELAXIS COMMUNICATIONS CORPORATION

                          NOTES TO FINANCIAL STATEMENTS

1. Description of Business and Summary of Significant Accounting Policies

  Overview of Business

     We currently develop and market FiberLeap(TM) and EtherLeap(TM) products.
FiberLeap(TM) transparently transmits 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. EtherLeap(TM) is an 802.11-based Ethernet Local Area
Network, or LAN, radio operating at millimeter-wave frequencies that can operate
in point-to-point, point-to-multipoint, and mesh architectures.

     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.

     In October 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, 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 (see Note 3),
FiberLeap(TM) trial and Beta units have been developed and tested, a new
marketing program has been initiated, and limited production has begun.

     In September 2002, we consolidated our production and development facility
to address the continued economic downturn in the global telecommunications
industry. The result of this consolidation was a reduction of approximately 50%
of our facility space and associated costs, and elimination of manufacturing
personnel and equipment or their reallocation to research and development
activities.

  Future Business Prospects

     The Company has incurred significant losses in recent years and may incur
additional losses in the future as the Company continues its product development
efforts. The Company is actively pursuing development and commercialization
opportunities for its technologies and new strategic relationships with partners
to fund its operations. The Company is subject to a number of risks similar to
other companies in the industry, including uncertainty of market acceptance of
products, uncertainty of regulatory approval, and the sources of and access to
additional financing. Management believes that such arrangements, the results of
forecasted operations and, if necessary, direct cost reductions, will generate
adequate cash flow to meet the Company's operational and capital requirements
through the remainder of 2003 and into 2004. Dependent upon 2003 results, the
Company may not have sufficient cash to continue to operate for the remainder of
2004.

  Use of Estimates and Critical Accounting Policies

     The preparation of the Company's financial statements in accordance 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 periods. On an ongoing basis, the
Company's management evaluates its estimates, including its allowance


                                       32
<PAGE>

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, assets held for sale, 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.

  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. At December 31, 2002, 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                                  2002       2001
          -----------                               ---------  ---------
          U.S. Government Securities..............  $   3,792  $   5,588
                                                    =========  =========

  Revenue Recognition

     Sales under short-term contracts and for stock items are recognized when
deliveries are made and title passes to the customer and collection is
reasonably assured. 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, 100% of
accounts receivable was due from one customer.


                                       33
<PAGE>

     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 Loss

     Comprehensive 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, 2002 and 2001
consisted of its reported net loss attributable to common shareholders, and
unrealized gains on marketable securities and totaled ($12,462) and ($27,058),
respectively. For the year ended December 31, 2000 comprehensive loss equaled
net loss.

  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. There were no customer-funded contracts in 2002.
Costs of approximately $626,000, and $1,788,000 are recorded net of the
associated customer funding of approximately $266,000, and $612,000 for the
years ended December 31, 2001, and 2000, 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. Provisions are made to reduce excess or obsolete
inventory to its estimated net realizable value. The process for evaluating the
value of excess and obsolete inventory often requires us to make subjective
judgments and estimates concerning future sales levels, quantities and prices at
which such inventory will be able to be sold in the normal course of business.
Accelerating the disposal process or incorrect estimates of future sales
potential may necessitate future adjustments to these provisions.

     The Company recorded charges of approximately $308,000 in 2002 and
$7,072,000 in 2001 to adjust inventory to its expected net realizable value. As
of December 31, 2002 and 2001, the Company had recorded inventory reserves of
$32,000 and $172,000, respectively, to reserve for excess and 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.

  Assets Held for Sale

     The Company has identified certain equipment as being surplus to the
ongoing operations of the business which resulted from our decision to exit
certain product lines and restructure certain of our operations. The Company
continues to assess the net realizable value of these assets and in the future,
additional surplus assets may be identified and adjustments to their net
realizable value made.


                                       34
<PAGE>

  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.

     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.

  Impairment of Long-Lived Assets

     The Company reviews long-lived assets and certain identifiable intangibles
for impairment whenever events or circumstances indicate that the carrying
amount may not be recoverable. To the extent that such carrying value may not be
recoverable, a writedown is recorded.

     Effective January 1, 2002, the Company adopted FASB Statement No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS 144
supersedes 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. Implementation of the
standard did not have a significant effect on the Company's financial
statements.

  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. The Company records a valuation allowance to reduce
deferred tax assets to the amount that is more likely than not to be realized.

     In assessing the need for a valuation allowance, we estimate future taxable
income, considering the feasibility of ongoing tax planning strategies and the
realizability of tax loss carryforwards. Valuation allowances related to
deferred tax assets can be impacted by changes to tax laws, changes to statutory
tax rates and future taxable income levels. An adjustment to the deferred tax
asset will increase income in the period the adjustment is made in the event
that we are able to realize deferred tax assets in the future in excess of the
net recorded amount.

  Stock-Based Compensation

     As more fully described in Note 16, the Company has stock option plans that
provide for the granting of options to officers, employees, directors, and
consultants. The Company applies APB Opinion 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its stock option
plans. The exercise price of stock options, set at the time of grant, is not
less than the fair market value per share at the date of grant. Options have a
term of ten years and generally vest after four years. 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:

<TABLE>
<CAPTION>
                                                                  Year ended December 31,
                                                          ----------------------------------------
                                                             2002           2001           2000
                                                          ----------     ----------     ----------
                                                            (in thousands, except per share data)
<S>                                                       <C>            <C>            <C>
     Net loss:
        As reported ..................................    $  (12,464)    $  (27,062)    $  (39,113)
        Add: Stock-based employee compensation
           expense included in net loss ..............            --             --             --
        Less: Total stock-based employee
           compensation expense determined
           under the minimum value pricing model .....        (1,780)        (1,746)        (2,704)
                                                          ----------     ----------     ----------
        Pro forma ....................................    $  (14,244)    $  (28,808)    $  (41,817)
                                                          ==========     ==========     ==========
     Net loss per share
        As reported ..................................    $    (0.75)    $    (1.62)    $    (2.64)
                                                          ==========     ==========     ==========
        Pro forma ....................................    $    (0.85)    $    (1.72)    $    (2.82)
                                                          ==========     ==========     ==========
</TABLE>

     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:

                                                 2002        2001         2000
                                             -----------   ---------   ---------
     Risk-free interest rate................    4.17%        4.97%       5.54%
     Expected life..........................  4.8 years     6 years     6 years
     Volatility.............................     100%        100%         100%
     Dividend yield.........................      --           --          --

     The weighted average fair value of those options granted in 2002, 2001 and
2000 was $0.61, $0.26 and $3.92, respectively.

                                       35
<PAGE>

  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,
                                                                              ----------------------------------
                                                                                2002         2001         2000
                                                                              --------     --------     --------
<S>                                                                           <C>          <C>          <C>
     Historical:
          Loss from continuing operations ................................    $(12,464)    $(27,062)    $(37,634)
                                                                              ========     ========     ========
          Weighted average shares of common stock outstanding ............      16,698       16,708       14,816
                                                                              ========     ========     ========
          Basic and diluted loss per share from continuing operations ....    $  (0.75)    $  (1.62)    $  (2.54)
                                                                              ========     ========     ========
          Loss from discontinued operations ..............................    $     --     $     --     $ (1,479)
                                                                              ========     ========     ========
          Weighted average shares of common stock outstanding ............      16,698       16,708       14,816
                                                                              ========     ========     ========
          Basic and diluted loss per share from discontinued operations ..    $     --     $     --     $  (0.10)
                                                                              ========     ========     ========
          Net loss .......................................................    $(12,464)    $(27,062)    $(39,113)
                                                                              ========     ========     ========
          Weighted average shares of common stock outstanding ............      16,698       16,708       14,816
                                                                              ========     ========     ========
          Basic and diluted net loss per share ...........................    $  (0.75)    $  (1.62)    $  (2.64)
                                                                              ========     ========     ========
</TABLE>

  Derivative Instruments

     Effective January 1, 2001 the Company adopted Statement of Financial
Accounting Standards (SFAS) 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 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS 146 changes the recognition
criteria and accounting for costs associated with exit and disposal activities,
including restructuring activities and nullifies the previous guidance. The
standard requires that the initial liability for costs associated with exit and
disposal activities be measured at fair value however, it prohibits the
recognition of a liability based solely on an entity's commitment to a plan. The
standard further provides a model for the accounting for one-time termination
benefits that is based on whether the benefit arrangement requires employees to
render future service (as defined) beyond a minimum retention period after the
communication date, and it requires that all other costs associated with an exit
or disposal activity be expensed as incurred, even if those costs are
incremental to other operating costs and will be incurred as a direct result of
the plan. SFAS 146 is effective for exit or disposal activities initiated after
December 31, 2002. The impact of adopting SFAS 146 may affect the timing and
recognition of any future restructuring activities of the Company.

     Effective December 31, 2002, the Company adopted the disclosure provisions
of FASB Statement No. 148, "Accounting for Stock-Based Compensation --
Transition and Disclosure -- an amendment of SFAS 123." The statement requires
additional disclosures for all Companies that award stock-based compensation,
including disclosure of the method used to account for stock-based compensation
and the compensation expense reported in net income compared to compensation
expense that would have been reported if the Company had adopted SFAS 123 for
all awards granted, modified or settled since December 15, 1994. Implementation
of the standard resulted in additional disclosures in Note 1 of the Company's
financial statements.


                                       36
<PAGE>

  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 for $1.2 million with interest 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 repayment of this note and agreed to
reduce the outstanding principal amount from $1.2 million to $1.0 million. The
Company reduced its valuation allowance as of December 31, 2001 to reflect the
amount of the note to be repaid, and the $1.0 million amount was paid in
February 2002.

     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 $770,000 for the year ended
December 31, 2000. The provision for income taxes
was $0 for the year ended December 31, 2000.

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 and $532,000 for the year ended December 31, 2002.


                                       37
<PAGE>

     Restructuring charges consist of the following (in thousands):

<TABLE>
<CAPTION>
                                                                                  Year ended December 31,
                                                                                 -------------------------
                                                                                    2002           2001
                                                                                 ----------     ----------
<S>                                                                              <C>            <C>
     Workforce reduction ....................................................    $       --     $    1,248
     Excess facility costs ..................................................          (139)           700
     Contract settlement costs ..............................................            --          1,128
     Write-down of leasehold improvements, equipment and intangible assets ..           461          3,611
                                                                                 ----------     ----------
                                                                                        322          6,687
     Other restructuring costs:
     Inventory writedown ....................................................           210          7,072
     Reduction in inventory commitments .....................................            --         (1,558)
     Reduction in warranty reserve ..........................................            --           (388)
     Customer funded inventory ..............................................            --           (164)
                                                                                 ----------     ----------
     Inventory restructuring cost ...........................................           210          4,962
                                                                                 ----------     ----------

                                                                                 $      532     $   11,649
                                                                                 ==========     ==========
</TABLE>

     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 $210,000 in 2002 and approximately $5 million in
2001 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 with a Restructuring," all
inventory adjustments are recorded in inventory restructuring cost as a
component of cost of sales for the years ended December 31, 2002 and 2001.

     Of the $11,649,000 in restructuring costs in 2001, $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.

     In 2002, the Company also recorded an additional non-cash restructuring
charge of $461,000 due to a decrease in the estimated net realizable value of
assets held for sale and reduced its estimate of accrued restructuring costs by
$139,000, due to the termination of a lease on a research and development
facility for less than the remaining obligation.

     Approximately $1.7 million was paid for restructuring costs in 2001 and
2002. Remaining accrued restructuring costs at December 31, 2002 consist of
approximately $352,000 for facility consolidations and $100,000 for contract
terminations.

4. Restricted Cash

     At December 31, 2002, the Company has $100,000 of restricted cash
classified as a current asset. These funds are restricted by the terms of a
standby letter of credit which satisfies certain financial obligations of the
Company.

5. Inventories

     Inventories consist of the following (in thousands):


                                       38
<PAGE>

                                                               December 31,
                                                           --------------------
                                                             2002        2001
                                                           --------    --------
     Parts and subassemblies ..........................    $     34    $    126
     Work in process ..................................          --           3
                                                           --------    --------
                                                           $     34    $    129
                                                           ========    ========

6. Assets Held for Sale

     In July 2001, certain assets were determined to be impaired as a result of
the Company's decision to exit the point-to-multipoint outdoor unit product
line. These assets were written down by approximately $2.9 million to their
estimated net realizable value and are included on the balance sheet as assets
held for sale. In 2002, the value of these assets was further reduced by
$461,000 as the Company updated its assessment of their estimated net realizable
value.

     The Company has continued to assess the utilization and importance of
certain assets in the ongoing operations of the business and the allocation of
values between assets held for sale and property, plant and equipment for
certain test equipment components. As a result of this continuing assessment,
additional property, plant and equipment with a net book value of $445,000 was
identified as assets held for sale in 2002.

     Substantially all of the assets held for sale were sold at auction in
October 2002, generating net proceeds of approximately $1.6 million. The gain on
sale of these assets of $200,000 was recorded in 2002. (See Notes 10 and 11.)

7. Property, Plant and Equipment

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

                                                               December 31,
                                                           --------------------
                                                             2002        2001
                                                           --------    --------
     Machinery and equipment ..........................    $ 10,303    $ 10,070
     Furniture and fixtures ...........................         723         813
     Leasehold improvements ...........................       1,199       1,958
     Equipment under capital leases ...................       3,029       4,586
                                                           --------    --------
                                                             15,254      17,427
     Less accumulated depreciation ....................     (12,842)    (12,759)
                                                           --------    --------
                                                           $  2,412    $  4,668
                                                           ========    ========

     The net book value of all equipment under capital leases was approximately
$531,000, $1,395,000, and $3,728,000 at December 31, 2002, 2001, and 2000,
respectively.

     Depreciation expense for the years ended December 31, 2002, 2001, and 2000
was approximately $2,038,000, $3,358,000, and $3,515,000, respectively.

8. Accrued Expenses

     Accrued expenses consist of the following (in thousands):

                                                               December 31,
                                                           --------------------
                                                             2002        2001
                                                           --------    --------
     Accrued payroll and related expenses .............    $    873    $    556
     Accrued warranty expense .........................          10          25
     Other accrued expenses ...........................         147         222
                                                           --------    --------
                                                           $  1,030    $    803
                                                           ========    ========


                                       39
<PAGE>

9. 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. 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. 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.
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 15). 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.

10. Long-Term Debt

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

<TABLE>
<CAPTION>
                                                                                     December 31,
                                                                                 ---------------------
                                                                                   2002         2001
                                                                                 --------     --------
<S>                                                                              <C>          <C>
     Uncollateralized subordinated note, due June 2003, monthly principal
        payments of $8,333 with interest at 10% (see Note 15) ...............    $     50     $    150
     Collateralized equipment notes, due April 2003 and November 2003,
        monthly principal and interest payments of $48,612, with
        interest at 12% .....................................................         576        1,059
                                                                                 --------     --------
                                                                                      626        1,209
     Less unamortized debt discount .........................................          (8)         (29)
     Less current portion ...................................................        (618)        (562)
                                                                                 --------     --------
                                                                                 $     --     $    618
                                                                                 ========     ========
</TABLE>

     All long-term debt matures in 2003.

     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, 2002 and 2001, $576,000 and $1,059,000, 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 15). 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 $17,196 during 2002, 2001 and 2000 respectively.
The warrants were exercised on July 31, 2000.

     The Company's sale of certain assets (see Note 6) is an event of default
under the agreement. The amount outstanding at December 31, 2002 of $576,000 is
due and payable upon demand by the lender and the Company was in the process of
negotiating a settlement with the lender (see Note 24).

     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. In conjunction with the
new note due June 2003, the Company issued 20,000 common stock warrants that
expire July 2007 (see Note 15). 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, $3,744
and $2,028 during 2002, 2001 and 2000, respectively.

                                       40
<PAGE>

11. 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, 2002 are as follows (in thousands):

                                                       Operating       Capital
     Year ending                                         Leases        Leases
     -----------                                       ----------    ----------
     2003 .........................................    $      392    $      880
     2004 .........................................           320           120
     2005 .........................................           291             2
     2006 .........................................           100            --
                                                        ----------    ----------

     Future minimum lease payments ................    $    1,103    $    1,002
                                                       ==========

     Less amount representing interest ............                         (47)
                                                                     ----------
     Present value of net minimum lease payments ..                         955
     Less current portion .........................                        (839)
                                                                     ----------

     Long-term portion ............................                  $      116
                                                                     ==========

     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.

     The Company's sale of leased assets (see Note 6) was an event of default
under the terms of certain capital lease agreements. The amount outstanding at
December 31, 2002 of $720,000 was due and payable upon demand by the lessor, and
the Company was in the process of negotiating a settlement with the lessor (see
Note 24).

     Total rental expense charged to operations under operating leases was
approximately $690,000, $614,000, and $581,000 for the years ended December 31,
2002, 2001 and 2000, respectively.

12. 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. No
compensation expense was recognized under this plan for the years ended December
31, 2002 and 2001. The Company recorded compensation expense of approximately
$518,000 for the year ended December 31, 2000.


                                       41
<PAGE>

13. Income Taxes

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

<TABLE>
<CAPTION>
                                                                         Year ended December 31,
                                                                 ---------------------------------------
                                                                    2002           2001           2000
                                                                 ---------      ---------      ---------
<S>                                                              <C>            <C>            <C>
     Continuing operations:
     Current tax expense (benefit):
            Federal .........................................    $ (15,702)     $  (6,826)     $  (8,212)
            State ...........................................       (4,007)        (1,742)        (2,095)
                                                                 ---------      ---------      ---------
                                                                   (19,709)        (8,568)       (10,307)
                                                                 ---------      ---------      ---------
     Deferred tax expense (benefit):
            Federal .........................................       15,702          6,826          8,212
            State ...........................................        4,007          1,742          2,095
                                                                 ---------      ---------      ---------
                                                                    19,709          8,568         10,307
                                                                 ---------      ---------      ---------
     Income tax benefit related to continuing operations ....           --             --             --
                                                                 ---------      ---------      ---------

     Discontinued operations:
     Current tax expense:
            Federal .........................................    $      --      $      --      $      --
            State ...........................................           --             --             --
                                                                 ---------      ---------      ---------
                                                                        --             --             --
                                                                 ---------      ---------      ---------
     Deferred tax expense:
            Federal .........................................           --             --             --
            State ...........................................           --             --             --
                                                                 ---------      ---------      ---------
                                                                        --             --             --
                                                                 ---------      ---------      ---------
     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:

<TABLE>
<CAPTION>
                                                                         Year ended December 31,
                                                                 ---------------------------------------
                                                                    2002           2001           2000
                                                                 ---------      ---------      ---------
<S>                                                              <C>            <C>            <C>
     Federal statutory rate .................................        (34.0)%        (34.0)%        (34.0)%
     State taxes, net of federal effect .....................         (6.3)          (6.3)          (6.3)
     Other ..................................................          0.0            0.0            0.0
     Change in valuation allowance ..........................         40.3           40.3           40.3
                                                                 ---------      ---------      ---------
                                                                       0.0%           0.0%           0.0%
                                                                 =========      =========      =========
</TABLE>


                                       42
<PAGE>

     The tax effects of temporary differences that give rise to deferred tax
assets (liabilities) at December 31, 2002 and 2001 are as follows (in
thousands):

<TABLE>
<CAPTION>
                                                               2002                        2001
                                                     -----------------------     -----------------------
                                                      Current     Noncurrent      Current     Noncurrent
                                                     --------     ----------     --------     ----------
<S>                                                  <C>          <C>            <C>          <C>
     Inventory reserves ....................         $      9     $       --     $  9,162     $       --
     Reserve on assets held for sale .......               --             --        1,126             --
     Restructuring reserve .................              182             --          523             --
     Vacation liability ....................               94             --          137             --
     Warranty ..............................                4             --           10             --
     Allowance for doubtful accounts .......               --             --          101             --
     Deferred stock compensation ...........               32             --           32             --
     Loss on disposition of assets .........             (867)            --           --             --
     Other .................................              242            146          123            164
     Investment ............................               --           (173)          --           (173)
     Property, plant and equipment .........               --          1,073           --          1,605
     Tax credit carryovers .................               --          1,868           --          1,664
     Net operating loss carryforwards ......               --         43,441           --         25,618
                                                     --------     ----------     --------     ----------

     Gross deferred tax asset (liability)...             (304)        46,355       11,214         28,878
                                                     --------     ----------     --------     ----------
     Valuation allowance ...................              304        (46,355)     (11,214)       (28,878)
                                                     --------     ----------     --------     ----------
     Net deferred tax asset (liability) ....         $     --     $       --     $     --     $       --
                                                     ========     ==========     ========     ==========
</TABLE>

     At December 31, 2002, the Company has approximately $109,278,000
($67,103,000 in 2001) of net operating loss carryforwards and $846,000 ($741,000
in 2001) of investment and research and development tax credit carryforwards
available for federal income tax purposes. There are approximately $103,335,000
of net operating losses ($61,160,000 in 2001) and approximately $985,000 in
investment and research and development tax credit carryforwards available in
2002 ($849,000 in 2001) 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.

14. 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 underwriter's
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.


                                       43
<PAGE>

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

     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.

15. 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
                                       Number of      Price Per   Number of      Price Per   Number of      Price Per
                                         Shares         Share       Shares         Share       Shares         Share
                                       ----------    ----------   ----------    ----------   ----------    ----------
<S>                                       <C>        <C>              <C>       <C>           <C>          <C>
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
Granted ............................           --            --           --            --           --            --
Exercised ..........................           --            --           --            --           --            --
                                       ----------    ----------   ----------    ----------   ----------    ----------

Exercisable at December 31, 2002 ...           --    $       --           --    $       --      912,521    $     1.08
                                       ==========    ==========   ==========    ==========   ==========    ==========
</TABLE>

     In 1999, 200,000 common stock warrants with an exercise price of $1.00 per
share were issued in conjunction with  promissory notes for bridge
financing. In addition, the Company issued 20,000 common stock warrants during
1999 in conjunction with a subordinated note (see Note 10). 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


                                       44
<PAGE>

16. 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 4,882,370 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, 2002, 1,700,304 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 generally 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. Certain employee stock options granted in July 2001
provide for vesting in the amount of 25% upon grant and quarterly vesting in the
amount of 6.25% of the grant on the first day of January, April, July, and
October following the date of grant until the options have fully vested.


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

<TABLE>
<CAPTION>
                                                                                Weighted
                                                                Number of    average exercise
                                                                  Shares          price
                                                                ---------    ----------------
<S>                                                             <C>          <C>
     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
     Granted ...............................................      109,500                0.84
     Exercised .............................................      (43,524)               0.77
     Canceled or expired ...................................     (761,101)               3.47
                                                                ---------    ----------------

     Balance, December 31, 2002 (2,137,114 exercisable) ....    3,182,066    $           3.09
                                                                =========    ================
</TABLE>

     The following table summarizes information about stock options outstanding
at December 31, 2002:

<TABLE>
<CAPTION>
                                              Options Outstanding                       Options Exercisable
                              -------------------------------------------------   -------------------------------
                                 Number     Weighted Average
                              Outstanding       Remaining                             Number          Weighted
                                   At       Contractual Life   Weighted Average   Exercisable at      Average
            Exercise Price      12/31/02         (years)        Exercise Price       12/31/02      Exercise Price
          -----------------   -----------   ----------------   ----------------   --------------   --------------
<S>                            <C>                 <C>              <C>               <C>              <C>
          $  0.33 - $  0.81    1,593,494           8.5              $  0.53           881,035          $  0.53
          $  1.00 - $  2.50    1,116,348           6.6              $  1.40           915,584          $  1.36
          $  4.47 - $  6.83      200,375           7.2              $  5.92           133,671          $  5.69
          $  8.00 - $ 12.60      145,596           7.0              $ 11.01           118,424          $ 11.05
          $ 28.50 - $ 31.28       47,672           7.5              $ 30.60            39,694          $ 30.77
          $ 40.25                 78,581           7.3              $ 40.25            48,706          $ 40.25
</TABLE>

     The weighted average contractual life of options outstanding at December
31, 2002 is 7.6 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 purchase price at the
time of this transaction. For the year ended December 31, 2000 the Company
recognized approximately $45,000 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.

                                       45
<PAGE>


     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, 2002 and accordingly recognized $15,000 in
non-cash compensation expense.

17. 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
5,794,891 shares of common stock at December 31, 2002, and 5,972,856 shares of
common stock at December 31, 2001.

18. Stockholder Rights Plan

     On May 16, 2001, the Board of Directors of the 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 entity (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.

     In September 2002, the Board approved Amendment No. 1 to the Plan which
would have allowed certain named parties to acquire 15 percent or more of the
Company's outstanding common stock without triggering the Rights. (See Note 24).

19. Segment Information

     The Company has 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 FiberLeap(TM) products (access units and interface panels).


                                       46

<PAGE>

     The broadband connectivity segment's sales by country are (in thousands):

                                                 Year ended December 31,
                                             ------------------------------
                                               2002       2001       2000
                                             --------   --------   --------
     United States .......................   $     53   $     20   $  1,020
     Canada ..............................         --      1,909     22,999
     Other countries .....................         --         --        734
                                             --------   --------   --------
                                             $     53   $  1,929   $ 24,753
                                             ========   ========   ========

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

     Sales to one customer comprised 76%, 14%, and 10% in 2002 and 99% and 93%
of total broadband connectivity segment revenues in 2001 and 2000, respectively.
No other single customer's sales exceeded 10% of total broadband connectivity
segment revenues.

20. 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 the first day
of the month following their employment date. The Company provided a 75%
matching of employee contributions in 2002 and 2001 (60% in 2000) up to a
maximum of $2,500 in 2002 and 2001 ($2,000 in 2000). 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 $136,000, $244,000 and $235,000 for the
years ended December 31, 2002, 2001 and 2000, respectively.

21. Related-Party Transactions

     The Company had sales to a stockholder of approximately $0, $0, and
$186,000 during 2002, 2001, and 2000, 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 received $100,000 in royalty payments in 2002 from Millivision,
L.L.C., a joint venture between a LLC established and partly owned by a former
stockholder/employee and one other entity. The royalty payments related to
licenses for certain patents that are owned by the Company.

22. 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. One of the pending legal actions is a consolidated complaint
alleging violations of federal securities laws concerning the underwriters'
alleged activities in connection with the Company's initial public offering in
February 2000. 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.


                                       47
<PAGE>

23. Selected Quarterly Financial Data (unaudited)

     The following tables present unaudited quarterly financial information for
the quarters ended December 31, 2002 and 2001 (in thousands, except per share
data).

<TABLE>
<CAPTION>
                                                                           Quarter Ended
                                                            --------------------------------------------
                                                            March 31,   June 30,    Sept. 30    Dec. 31,
                                                              2002        2002        2002        2002
                                                            --------    --------    --------    --------
<S>                                                         <C>         <C>         <C>         <C>
     Sales ..............................................   $      5    $      8    $     40    $     --
     Cost of sales ......................................        798         868         712          --
     Inventory restructuring cost .......................         --          --         210          --
     Gross margin (loss) ................................       (793)       (860)       (882)         --
     Net loss ...........................................     (1,943)     (4,037)     (3,857)     (2,627)
     Basic and diluted net loss per share ...............      (0.12)      (0.24)      (0.23)      (0.16)
</TABLE>

<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          --
     Gross margin (loss) ................................     (1,564)     (1,169)     (6,003)       (737)
     Net loss ...........................................     (5,103)     (4,442)    (14,983)     (2,534)
     Basic and diluted net loss per share ...............      (0.30)      (0.27)      (0.90)      (0.15)
</TABLE>


                                       48

<PAGE>

24. Subsequent Events

     On March 17, 2003, the Company entered into a definitive strategic
combination agreement with Young Design, Inc. ("YDI"), a privately held Virginia
Company. Under the proposed transaction, Telaxis would be the continuing
corporation and YDI would become a wholly-owned subsidiary of Telaxis. YDI
stockholders would receive 2.5 shares of Telaxis common stock for each share of
YDI common stock. The transaction is expected to close on April 1, 2003.

     The Company sold certain assets in October 2002 (see Note 6) that were
collateral to various capital lease and equipment note agreements. While the
sale of the assets was an event of default under the financing agreements, the
Company was in the process of negotiating resolutions. The Company reached
resolution by making final payments in full settlement of both obligations in
March 2003. The total remaining principal and interest due under these
agreements, less applied deposits, was $1.3 million at December 31, 2002. The
total amounts paid to the lenders subsequent to December 31, 2002 were
approximately $1.2 million and included a discount from the total obligations
outstanding.

     In March 2003, the Board of Directors of the Company approved Amendment No.
2 to the Company's Stockholder Rights Plan which would allow certain named
parties to acquire 15 percent or more of the Company's outstanding common stock
without triggering the Rights. This amendment also rescinded Amendment No. 1
(see Note 18).

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

     None.


                                       49

<PAGE>

                                    PART III

Item 10. Directors and Executive Officers of the Company.

     Our directors, executive officers and key employees are set forth in the
following table. It is expected that there would be a significant change in our
officers and directors following completion of the pending transaction with YDI,
which is expected to be completed on April 1, 2003.

Name                       Age   Position
----                       ---   --------
Albert E. Paladino, Sc.D..  70   Chairman of the Board of Directors
Carol B. Armitage.........  45   Director
Allan M. Doyle, Jr........  73   Director
Ralph A. Goldwasser.......  55   Director
David A. Norbury..........  52   Director
John L. Youngblood, Ph.D..  62   President, Chief Executive Officer and Director
Dennis C. Stempel.........  40   Senior Vice President Finance and Operations,
                                 Chief Financial Officer and Treasurer
David L. Renauld..........  37   Vice President, Legal and Corporate Affairs,
                                 Secretary and Clerk
Kenneth R. Wood(1)........  48   Vice President, Engineering

----------
(1) Key employee

     Dr. Albert E. Paladino has been our Chairman of the Board since January
1992 and a director since March 1984. Since December 1998, he has been a private
investor. He was a General Partner of Advanced Technology Ventures, a venture
capital firm, from 1981 through 1998. He is a member of the board of directors
of TranSwitch Corporation, a publicly-traded developer of semiconductor
solutions for the communications markets, and is chairman of the board of
directors of RF Micro Devices, a publicly-traded manufacturer of radio frequency
integrated circuit components. His prior experience includes senior management
positions with Raytheon Company, GTE Laboratories, the Congressional Office of
Technology Assessment and the National Institute of Standards and Technology.
Dr. Paladino holds a B.S. and an M.S. in engineering from Alfred University and
an Sc.D. in materials science from the Massachusetts Institute of Technology

     Carol B. Armitage has been a director since October 2000. Since January
1998, she has been a consultant to companies involved in broadband
communications. From September 1995 to December 1997, she served in several
senior management roles at General Instrument, where her last position was as
Senior Vice President, Technology and Strategy. From 1979 to September 1995, she
held various engineering and management positions at Bell Laboratories,
including Director in the wideband access division. Ms. Armitage holds a B.S. in
electrical engineering from the University of Delaware and an M.S. in electrical
engineering from Princeton University.

     Allan M. Doyle, Jr. has been a director since March 1984. From 1964 to May
1996, Mr. Doyle served as a member of the board of directors of Kollmorgen
Corporation, which at the time was a publicly-traded manufacturer of
high-performance electro-optical and electronic motion control products. Before
his retirement in 1990, he served as Vice Chairman of the board of directors of
Kollmorgen, and before that he served as Chief Financial Officer. From 1990 to
1993, Mr. Doyle was an Associate Professor of Management at Union College. Mr.
Doyle holds a B.A. in industrial administration from Union College and an M.B.A.
from the Columbia University School of Business.

     Ralph A. Goldwasser has been a director since December 2001. Since March
2001, he has been a consultant to several technology companies. From January
2000 to December 2001, Mr. Goldwasser was Executive Vice President and Chief
Financial Officer of Adero Inc., a development stage company that provided
global turnkey content distribution network services enabling rapid deployment
of Web content worldwide. From June 1998 to January 2000, he was Senior Vice
President and Chief Financial Officer of Avici Systems Inc., a publicly-traded
developer of next-generation Internet backbone routing platforms. From 1983 to
October 1997, he held various financial and management positions at BBN Inc.,
where his last position was Senior Vice President and Chief Financial Officer.
BBN was a publicly-traded internetworking company that provided comprehensive
Internet services and related technologies and was acquired by GTE Corporation
in 1997. Mr. Goldwasser holds a B.E. in electrical engineering from City College
of New York and an M.B.A from New York University. He is also a Certified Public
Accountant.

                                       50
<PAGE>


     David A. Norbury has been a director since September 1999. From September
1992 to January 2003, Mr. Norbury was President and Chief Executive Officer of
RF Micro Devices. Since September 1992, he has been, and still is, a director of
RF Micro Devices. Mr. Norbury holds a B.S. in electrical engineering from the
University of Michigan, an M.S. in electrical engineering from Stanford
University, and an M.B.A. from Santa Clara University.

     Dr. John L. Youngblood has been our Chief Executive Officer and a director
since June 1992, and our President since March 1993. From August 1991 to June
1992, he was a management consultant. From May 1991 to August 1991, Dr.
Youngblood served as Executive Vice President of IMO Industries, a manufacturer
of analytical and optical instruments, electronic and mechanical controls, and
power transmission products. From January 1985 to May 1991, he held various
positions, including Chairman, Chief Executive Officer and President, at
Kollmorgen Corporation, which at the time was a publicly-traded manufacturer of
high-performance electro-optical and electronic motion control products. He
holds a B.S. in electrical engineering from the University of Texas at
Arlington, and both an M.S. and a Ph.D. in electrical engineering from Oklahoma
State University.

     Dennis C. Stempel has been our Senior Vice President Finance and
Operations, Chief Financial Officer, and Treasurer since May 2002. From April
1999 to May 2002, Mr. Stempel served as our Vice President, Chief Financial
Officer, and Treasurer. From November 1998 to April 1999, Mr. Stempel served as
our Director of Finance. From April 1996 to November 1998, he served as a
controller at Pratt & Whitney, a division of United Technologies Corporation and
a manufacturer of aircraft engines and space propulsion systems. From March 1993
to April 1996, he served as the Director of Finance for Anocoil Corporation, a
manufacturer of lithographic printing plates. He worked for Coopers & Lybrand
from 1989 to 1993, including serving as a certified public accountant from 1992
to 1993. Mr. Stempel holds a B.S. in accounting from the University of
Massachusetts.

     David L. Renauld has been our Vice President, Legal and Corporate Affairs
and Secretary since November 1999. He has been our Clerk since May 1999. From
January 1997 to November 1999, he was an attorney with Mirick, O'Connell,
DeMallie & Lougee, LLP, a law firm in Worcester, Massachusetts. From September
1991 to December 1996, he was an attorney with Richards, Layton & Finger, a law
firm in Wilmington, Delaware. Mr. Renauld holds a B.A. in mathematics/arts from
Siena College and a J.D. from Cornell University.

     Kenneth R. Wood has been our Vice President, Engineering since December
1997. From April 1990 to December 1997, he was our Senior Microwave Engineer and
Program Manager. Mr. Wood holds a B.S. in electrical engineering from the
University of Pretoria and an M.S. in microwaves from the University of London.

     Our board of directors is divided into three classes, with one class of
directors elected each year at the annual meeting of stockholders for a
three-year term of office. Mssrs. Doyle and Goldwasser serve in the class whose
terms expire in 2003. Ms. Armitage serves in the class whose terms expire in
2004. The other director position in this 2004 class is currently vacant. Mssrs.
Paladino, Norbury, and Youngblood serve in the class whose terms expire in 2005.
Our executive officers are elected annually by the directors and serve at the
discretion of the directors. There are no family relationships among our
directors and executive officers.

Committees of the Board of Directors

     Our board of directors has assigned certain responsibilities to the Audit
Committee, the Compensation Committee, the Finance and Executive Committee, and
the Nominating Committee.

     The members of our Audit Committee during 2002 were Mr. Doyle (Chair), Dr.
Paladino, and Mr. Goldwasser. The Audit Committee reviews and evaluates our
audit and control functions, reviews the results and scope of the audit and
other services provided by our independent auditors, makes recommendations to
the board of directors regarding the selection of independent auditors, and
performs such other duties as may from time to time be determined by the board
of directors.

     The members of our Compensation Committee during 2002 were Dr. Paladino
(Chair), Mr. Doyle, Ms. Armitage, and Dr. Youngblood. The Compensation Committee
reviews the compensation and benefits of our executive officers, recommends and
approves stock option grants under our stock option plans, makes


                                       51
<PAGE>

recommendations to the board of directors regarding compensation matters, and
performs such other duties as may from time to time be determined by the board
of directors.

     The members of our Finance and Executive Committee during 2002 were Dr.
Paladino (Chair), Mr. Doyle, and Dr. Youngblood. The Finance and Executive
Committee maintains continuity between the board of directors and our executive
officers, acts on behalf of the board of directors between meetings but refers
any major decisions to the full board of directors, and performs such other
duties as may from time to time be determined by the board of directors.

     The members of our Nominating Committee during 2002 were Ms. Armitage
(Chair), Dr. Paladino, and Dr. Raphael H. Amit (until his resignation from the
board of directors in October 2002). The Nominating Committee recommends
candidates for membership on the board of directors based on
committee-established guidelines, consults with the Chairman of the Board on
committee assignments, considers candidates for the board of directors proposed
by stockholders, and performs such other duties as may from time to time be
determined by the board of directors.

Section 16(a) Beneficial Ownership Reporting Compliance

     Section 16(a) of the Exchange Act requires our directors and executive
officers and persons who own more than ten percent of our common stock
(collectively, "Reporting Persons") to file with the SEC initial reports of
ownership and reports of changes in ownership of our common stock. Each
Reporting Person is required by SEC regulation to furnish us with copies of
these Section 16(a) reports. Based on our records and other information, we
believe that all of these filing requirements were met with respect to our last
fiscal year (which ended on December 31, 2002).

Item 11. Executive Compensation.

     Summary Compensation. The following table summarizes the compensation
earned for services rendered to us in all capacities during 2002 by our Chief
Executive Officer and our other executive officers during 2002. We refer to
these executives as our "named executive officers" elsewhere in this Form 10-K.


                                       52
<PAGE>

                           Summary Compensation Table
                            For 2000, 2001, and 2002

<TABLE>
<CAPTION>
                                                                                        Long-Term
                                                                                      Compensation
                                                                                 -----------------------
                                                     Annual Compensation                 Awards
                                             ---------------------------------   -----------------------
                                                                                 Restricted   Securities
                                                                  Other Annual      Stock     Underlying       All Other
Name and                                     Salary     Bonus     Compensation     Award(s)     Options      Compensation
Principal Position                   Year      ($)       ($)          ($)            ($)          (#)            ($)(a)
---------------------------------    ----    -------    ------    ------------   ----------   ----------     ------------
<S>                                  <C>     <C>        <C>            <C>            <C>       <C>           <C>
John L. Youngblood ..............    2002    255,216         0         0              0               0        3,730(b)
   President and Chief               2001    255,216         0         0              0         100,000        3,738(c)
   Executive Officer                 2000    239,609     5,561         0              0          53,580        2,114

Stephen L. Ward(d) ..............    2002    225,004    30,000(e)      0              0               0          380(f)
   Executive Vice President,         2001     99,521         0         0              0         300,000          126(f)
   Marketing and Sales

Dennis C. Stempel ...............    2002    157,498         0         0              0          20,000        3,759(g)
   Senior Vice President,            2001    157,498         0         0              0         100,000        2,732(h)
   Finance and Operations,           2000    151,083     2,062         0              0          25,385        2,114
   Chief Financial Officer, and
   Treasurer

David L. Renauld ................    2002    153,774         0         0              0          10,000        3,499(i)
   Vice President, Legal and         2001    153,774         0         0              0         100,000        3,571(j)
   Corporate Affairs, Secretary      2000    150,491     3,243         0              0          37,750       27,043(k)
   and Clerk
</TABLE>

----------
(a)  Unless otherwise indicated, amounts in this column consist of matching
     amounts of $2,000 contributed by Telaxis to a defined contribution plan for
     the named executive officers and premiums on term life insurance of $114
     paid by Telaxis.

(b)  Represents matching amounts of $2,500 contributed by Telaxis to a defined
     contribution plan for Mr. Youngblood, premiums on term life insurance of
     $445 paid by Telaxis, and reimbursement of tax return preparation expenses
     of $785.

(c)  Represents matching amounts of $2,500 contributed by Telaxis to a defined
     contribution plan for Mr. Youngblood, premiums on term life insurance of
     $443 paid by Telaxis, and reimbursement of tax return preparation expenses
     of $795.

(d)  Mr. Ward became our Executive Vice President, Marketing and Sales in July
     2001. He held that position until January 2003.

(e)  In connection with our hiring Mr. Ward in July 2001, we agreed to pay him a
     cash bonus of $30,000 in January 2002. In February 2002, Mr. Ward chose to
     receive this bonus in stock rather than cash and therefore was issued
     34,091 shares of Telaxis common stock (which had a fair market value of
     $0.88 per share on the date of issuance for an aggregate fair market value
     of $30,000).

(f)  Represents premiums on term life insurance paid by Telaxis.

(g)  Represents matching amounts of $2,500 contributed by Telaxis to a defined
     contribution plan for Mr. Stempel, premiums on term life insurance of $233
     paid by Telaxis, and reimbursement of tax return preparation expenses of
     $1,026.

(h)  Represents matching amounts of $2,500 contributed by Telaxis to a defined
     contribution plan for Mr. Stempel and premiums on term life insurance of
     $232 paid by Telaxis.

(i)  Represents matching amounts of $2,500 contributed by Telaxis to a defined
     contribution plan for Mr. Renauld, premiums on term life insurance of $225
     paid by Telaxis, and reimbursement of tax return preparation expenses of
     $774.

(j)  Represents matching amounts of $2,500 contributed by Telaxis to a defined
     contribution plan for Mr. Renauld, premiums on term life insurance of $224
     paid by Telaxis, and reimbursement of tax return preparation expenses of
     $847.

(k)  Represents reimbursement of relocation expenses of $24,929, matching
     amounts of $2,000 contributed by Telaxis to a defined contribution plan for
     Mr. Renauld, and premiums on term life insurance of $114 paid by Telaxis.

     Option Grants in 2002. The following table provides information regarding
all options granted to our named executive officers in 2002. Amounts reported in
the last two columns of the table represent hypothetical values that the holder
could realize by exercising the options immediately before their expiration,
assuming the value of our common stock appreciates at the specified compounded
annual rates over the terms of the options. These numbers are calculated based
on the SEC's rules and do not represent our estimate of future stock price
growth. Actual gains, if any, on stock option exercises and common stock
holdings will depend on the timing of exercise and the future performance of our
common stock. We may not achieve the rates of appreciation assumed in this
table, and the named executive officers may not receive the calculated amounts.
This table does not take into account any appreciation or depreciation in the
price of our common stock from the date of grant to the current date.


                                       53
<PAGE>

The values shown are net of the option exercise price, but do not include
deductions for taxes or other expenses associated with the exercise.

                              Option Grants in 2002

<TABLE>
<CAPTION>
                                                                                                     Potential
                                                         Individual Grants                      Realizable Value at
                                    --------------------------------------------------------       Assumed Annual
                                     Number of                                                 Rates of Stock Price
                                    Securities     Percent of Total                               Appreciation for
                                    Underlying    Options Granted to   Exercise                     Option Term
                                      Options        Employees in        Price    Expiration   --------------------
            Name                    Granted (#)    Fiscal Year (%)     ($/Share)     Date      5%($)         10%($)
            ----                    -----------   ------------------   ---------  ----------   -----         ------
<S>                                    <C>               <C>             <C>        <C>        <C>           <C>
John L. Youngblood...............           0                0             --            --       --             --
Stephen L. Ward..................           0                0             --            --       --             --
Dennis C. Stempel................      10,000            25.97           1.00       5/21/12    6,289         15,937
                                       10,000            25.97           0.38       8/29/12    2,390          6,056
David L. Renauld.................      10,000            25.97           0.38       8/29/12    2,390          6,056
</TABLE>

     All options were granted at fair market value on the date of grant as
determined by our board of directors. The board of directors determined the fair
market value of our common stock based on the trading value of our stock on the
date of grant.

     Each of these options, with the exception of Mr. Stempel's grant for 10,000
shares that expires on May 21, 2012 (which vested in full on the date of grant),
vests over a three-year period, vesting as to 25% of the shares that may be
purchased under the option on the date of grant and as to an additional 6.25% on
the first day of January, April, July, and October following the date of grant
until the option has fully vested. All of the unvested options become fully
vested upon the occurrence of any of the following events:

     o    a merger or consolidation of our company with any other company,

     o    the sale of substantially all of our assets, or

     o    the sale of more than 50% of our outstanding stock to an unrelated
          person or group.

     All stock options granted to the named executive officers in 2002, with the
exception of Mr. Stempel's grant for 10,000 shares that expires on May 21, 2012,
terminate on the earlier of:

     o    two years after the date of his death or disability or the date of
          termination of the executive's employment, or

     o    10 years from the date of grant.

     The stock options granted to Mr. Stempel that expire on May 21, 2012
terminate on the earliest of:

     o    two years after the date of termination of his employment if he ceases
          to be employed by us except as a result of his death or disability,

     o    one year after his death or disability, or

     o    10 years from the date of grant.

     Fiscal Year-End Option Values. The following table provides information
regarding the value of all unexercised options held by the named executive
officers at the end of 2002. The value of unexercised in-the-money options
represents the difference between the fair market value of our common stock on
December 31, 2002 ($0.18 per share) and the option exercise price, multiplied by
the number of shares underlying the option. For purposes of stock option
exercises, we have assumed the fair market value of our common stock to be the
closing price on the day of exercise.


                                       54
<PAGE>

                        2002 Aggregated Option Exercises
                        and Fiscal Year-End Option Values

<TABLE>
<CAPTION>
                                                                    Number of Shares of
                                                                  Common Stock Underlying         Value of Unexercised In-
                                                                   Unexercised Options at           the-Money Options at
                                    Shares                           Fiscal Year-End (#)             Fiscal Year-End ($)
                                 Acquired on        Value      -----------------------------    -----------------------------
              Name               Exercise (#)   Realized ($)   Exercisable     Unexercisable    Exercisable     Unexercisable
            --------             ------------   -----------    -----------     -------------    -----------     -------------
<S>                                  <C>           <C>           <C>              <C>                <C>              <C>
John L. Youngblood.............          0             0         378,402           97,679            0                0
Stephen L. Ward................          0             0         118,750          181,250            0                0
Dennis C. Stempel..............          0             0         134,241           74,644            0                0
David L. Renauld...............      3,000         1,260         118,166           77,984            0                0
</TABLE>

Employment Agreements and Change-of-Control Provisions

     In January 1994, we entered into an employment agreement with Dr.
Youngblood. In December 2000, we revised the employment agreement with Dr.
Youngblood and entered into employment agreements with Mssrs. Stempel and
Renauld, all having substantially the same terms (other than position and
salary). Each employment agreement has an original term of 24 months and then
renews automatically on a quarterly basis, provided that the agreement has not
terminated before the renewal date. The annual compensation for each officer is
initially set at an annual base salary in the following amount: Dr. Youngblood -
$255,216, Mr. Stempel - $157,497, and Mr. Renauld - $153,774. We currently
furnish Dr. Youngblood with a company automobile at our expense. Mssrs. Stempel
and Renauld are entitled to an annual car allowance of $7,800.

     Each of Mssrs. Youngblood, Stempel, and Renauld are entitled to receive
severance payments for either eleven months or twenty-four months after
termination of his employment depending on the circumstances under which his
employment terminates. If we terminate an officer's employment for cause, he
will not be entitled to severance payments. The maximum 24-month severance
period will only apply if we terminate an officer's employment without cause
after we undergo a "change of control" that was not approved by a majority of
our board of directors. A "change of control" is defined in each employment
agreement to include the completion of a merger or consolidation of Telaxis with
any other entity (other than a merger or consolidation in which Telaxis is the
surviving entity and is owned at least 50% collectively by persons who were
stockholders of Telaxis before the transaction), the sale of substantially all
of Telaxis' assets to another entity, any transaction that results in a person
or group holding 50% or more of the combined voting power of Telaxis'
outstanding securities, or changes to Telaxis' board of directors that result in
the persons who were either directors on the date of the employment agreement or
their nominated successors no longer comprising a majority of the board. See
Item 13 -- "Material Relationships and Related Party Transactions" below.

     Under the stock option agreements, a large portion of the unvested options
held by Mssrs. Youngblood, Stempel, and Renauld will vest and become immediately
exercisable upon the occurrence of any of the following events:

     o    our merger or consolidation with another company,

     o    the sale of substantially all of our assets to another company, or

     o    the sale of more than 50% of our outstanding capital stock to an
          unrelated person or group.

     In July 2001, we entered into an employment agreement with Mr. Ward having
substantially similar terms as the agreements with Mssrs. Stempel and Renauld
(other than position and salary). Mr. Ward's annual base salary was set at
$225,004. We terminated Mr. Ward's employment agreement in connection with his
leaving Telaxis' employment. See Item 13 -- "Material Relationships and Related
Party Transactions" below.

Director Compensation

     We pay all non-employee directors:

     o    a $10,000 annual retainer for serving on the board


                                       55
<PAGE>

     o    a $2,000 annual retainer for serving as chairman of a standing
          committee of the board

     o    $1,000 for each board meeting attended in person

     o    $500 for each committee meeting attended in person

     We will also reimburse our non-employee directors for reasonable expenses
incurred in attending meetings of the board of directors and its committees.

     In addition to cash compensation, we intend to grant, at a minimum, the
following rights to acquire shares of our common stock:

     o    a non-qualified stock option to purchase 12,000 shares of our common
          stock that vests in three equal annual installments beginning on the
          date of grant to each new non-employee director elected or appointed
          to the board

     o    a fully vested, non-qualified stock option to purchase 9,000 shares of
          our common stock to each incumbent non-employee director immediately
          following each annual meeting of stockholders, as long as the director
          has served at least one complete year before the date of the annual
          meeting and continues to serve as a director after the meeting

     In May 2002, we granted an option to purchase 9,000 shares of our common
stock at $1.00 per share to Dr. Paladino, Ms. Armitage, Mr. Doyle, and Mr.
Norbury in accordance with this standard policy.

     In 2002, we paid Dr. Paladino a retainer of $60,000 per year for his
services as chairman of the board of directors of our Company.

Compensation Committee Interlocks and Insider Participation

     The board of directors has a compensation committee consisting of four of
our directors - Drs. Paladino and Youngblood and Mr. Doyle and Ms. Armitage. Dr.
Youngblood, our President and Chief Executive Officer, served as a member of our
compensation committee during 2002. Dr. Youngblood participated in discussions
regarding the compensation of our executive officers. None of our executive
officers served as a member of the board of directors or compensation committee
of any other entity that has one or more executive officers serving as a member
of our board of directors or compensation committee. We note that Dr. Paladino
serves as chairman of the board of directors and a member of the compensation
committee of RF Micro Devices, of which Mr. Norbury, one of our directors, was
Chief Executive Officer until January 2003.

Board Compensation Committee Report on Executive Compensation

Overall Policy

     Our executive compensation program is designed to be closely linked to
corporate performance and return to stockholders by linking a significant
portion of executive compensation to our success. The overall objectives of this
strategy are to provide competitive salaries necessary to attract and retain the
highest quality talent, to reward performances that accomplish our goals and
priorities, and to provide incentives that link the executive officers'
opportunities for financial reward with that of the stockholders.

     The Compensation Committee is responsible for setting and administering the
policies that govern the compensation of our executive officers. Generally, the
three principal components of the compensation program for executive officers
are base salary, bonus, and equity-based incentives (typically stock options),
although awards are not necessarily granted in all three categories every year.
In reaching decisions on compensation, the Compensation Committee also takes
into account the full compensation package provided by Telaxis to the officers,
including severance plans, insurance, and benefits generally available to all
employees of Telaxis.

     This report addresses our compensation policies as they relate to
compensation reported for 2002.


                                       56
<PAGE>

Salary Administration

     The ranges of appropriate base salaries for executives are determined based
in part on analysis of salary data on positions of comparable responsibility
within the telecommunications industry. Salaries of executive officers are
reviewed annually, and any adjustments are made by evaluating the performance of
Telaxis and of each executive officer and taking into account any change in the
executive's responsibilities. Exceptional performances are generally compensated
with performance-related bonuses rather than raising base salaries, reflecting
the Compensation Committee's increasing emphasis on linking pay to performance
criteria. The Compensation Committee elected not to increase the base salaries
of our named executive officers in 2002.

Bonus Program

     Executives are eligible to receive bonuses based on the overall performance
of Telaxis and based on individual achievement. Bonuses are awarded based upon
the recommendation of the Chief Executive Officer and the Compensation
Committee's evaluation of the executive officer's achievement of his or her
goals. In 2002, the Compensation Committee awarded no cash bonuses to the named
executive officers. See Item 11 - "Executive Compensation - Summary Compensation
Table in 2000, 2001, and 2002."

Stock Option Program

     Under our active stock plans, we may grant stock options and stock
appreciation rights to any or all of our directors, employees, officers, and
consultants. The Compensation Committee believes that long-term incentive
awards, such as stock options, link the executive's opportunity for financial
reward with that of the stockholders, in that the value of an executive's stock
options increases as the value of the stockholders' stock increases. The
Compensation Committee granted options to executive officers in order to
continue to incentivize the officers towards the achievement of our long-term
goals.

     In 2002, the Compensation Committee granted options for 30,000 shares of
our common stock in the aggregate to the named executive officers, other than
Dr. Youngblood. See Item 11 - "Executive Compensation - Option Grants in 2002."

Compensation of the Chief Executive Officer

     Dr. Youngblood's 2002 base compensation was pursuant to an employment
contract negotiated with Telaxis in 1994 as revised in December 2000. In 2000,
the Compensation Committee elected to increase Dr. Youngblood's base
compensation by approximately sixteen percent (16%). This increase was both a
market adjustment for Dr. Youngblood's salary and a merit increase. The
Compensation Committee elected not to increase Dr. Youngblood's base
compensation in 2001 or in 2002. The Compensation Committee's determination of
the amount of Dr. Youngblood's bonus was made after a review of the achievement
of Dr. Youngblood's goals for the year. The Compensation Committee did not award
Dr. Youngblood any cash bonus in 2002. See Item 11 - "Executive Compensation -
Summary Compensation Table in 2000, 2001, and 2002." Dr. Youngblood was not
granted any options for shares of our common stock in 2002. See Item 11 -
"Executive Compensation - Option Grants in 2002."

Policy Regarding Section 162(m) of the Internal Revenue Code

     Section 162(m) of the Internal Revenue Code limits Telaxis' ability to
deduct, for income tax purposes, compensation in excess of $1.0 million paid to
the chief executive officer and the four most highly compensated officers of
Telaxis (other than the chief executive officer) in any year, unless the
compensation qualifies as "performance-based compensation." The aggregate base
salaries, bonuses and non-equity compensation of each of Telaxis' officers have
not historically exceeded, and are not in the foreseeable future expected to
exceed, the $1.0 million limit. The Compensation Committee's policy with respect
to equity compensation is that it would prefer to cause the compensation to be
deductible by Telaxis; however, the Compensation Committee also weighs the need
to provide appropriate incentives to Telaxis' officers against the potential
adverse tax consequences that may result under Section 162(m) from the grant of
equity compensation that does not qualify as performance-based compensation. The
Compensation Committee has granted and may continue to grant equity compensation
to Telaxis' officers that does not qualify as performance-based compensation
that could be in excess of the Section 162(m) limits in circumstances when the
Committee believes such grants are appropriate.


                                       57
<PAGE>

                             Compensation Committee

                          Albert E. Paladino, Chairman
                               Allan M. Doyle, Jr.
                                Carol B. Armitage
                               John L. Youngblood

Stock Performance Graph

     The graph below provides an indicator of the cumulative total shareholder
return for our common stock for the period beginning on the date of the initial
public offering of our common stock (February 2, 2000) through the end of our
most recently-completed fiscal year (December 31, 2002), as compared to the
returns of (i) The Nasdaq Stock Market (U.S.) and (ii) the Nasdaq Electronic
Components Stocks Index during the same period. The graph assumes that $100 was
invested on February 2, 2000 in our common stock (at the initial offering price
of $17.00) and in The Nasdaq Stock Market (U.S.) and the Nasdaq Electronic
Components Stocks Index and that, as to the indices, dividends were reinvested.
We have not, since our inception, paid any dividends on our common stock.

                              [LINE GRAPH OMITTED]

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
                               February 2, 2000    December 31, 2000    December 31, 2001    December 31, 2002
--------------------------------------------------------------------------------------------------------------
<S>                                  <C>                <C>                   <C>                 <C>
Telaxis                              $100               $10.66                $4.24                $1.06
--------------------------------------------------------------------------------------------------------------
Nasdaq Stock Market (U.S.)           $100               $60.49                $47.99              $33.17
--------------------------------------------------------------------------------------------------------------
Nasdaq Electronic Components         $100               $68.01                $46.34              $24.82
--------------------------------------------------------------------------------------------------------------
</TABLE>

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

     The following table provides information regarding the beneficial ownership
of our outstanding common stock by:

     o    each person or group that we know owns more than 5% of the common
          stock,

     o    each of our directors,

     o    each of our named executive officers, and

     o    all of our directors and named executive officers as a group (other
          than Mr. Ward who is no longer an employee).

     Amounts are as of March 14, 2003 for our directors and named executive
officers. Amounts for 5% stockholders are reported as of the date such
stockholders reported such holdings in filings under the Securities Exchange Act
of 1934, as amended, unless more recent information was provided.

     Beneficial ownership is determined under rules of the SEC and includes
shares over which the indicated beneficial owner exercises voting and/or
investment power. Shares of common stock that we may issue upon the exercise of
options or warrants currently exercisable or exercisable within 60 days of March
14, 2003 are deemed


                                       58
<PAGE>

outstanding for computing the percentage ownership of the person holding the
options or warrants but are not deemed outstanding for computing the percentage
ownership of any other person. Except as we otherwise indicate, we believe the
beneficial owners of the common stock listed below, based on information
furnished by them, have sole voting and investment power over the number of
shares listed opposite their names. Unless we otherwise indicate, the address
for each stockholder below is c/o Telaxis Communications Corporation, 20
Industrial Drive East, South Deerfield, Massachusetts 01373.

<TABLE>
<CAPTION>
                                                            Shares Issuable      Number of Shares
                                                              pursuant to          Beneficially
                                                              Warrants and       Owned (Including
                                                          Options Exercisable     the Number of
                                                                 within               Shares
                                                               60 days of          shown in the        Percentage of
Name of Beneficial Owner                                     March 14, 2003       first column)      Shares Outstanding
------------------------                                  -------------------    ----------------    ------------------
<S>                                                              <C>                 <C>                    <C>
SVM Star Ventures Group(1)
   Possart Strasse No. 9
   81679 Munich, Germany ...............................               0             2,630,558              15.7
Dr. Meir Barel(2) ......................................               0             2,719,058              16.3
Albert E. Paladino .....................................         104,039               182,081               1.1
Carol B. Armitage(3) ...................................          24,125                29,875                 *
Allan M. Doyle, Jr .....................................          47,375                71,216                 *
Ralph A. Goldwasser ....................................           4,000                 8,000                 *
David A. Norbury .......................................          30,875               176,986               1.1
John L. Youngblood .....................................         407,523               433,353               2.5
Stephen L. Ward(4) .....................................         137,500               433,991               2.6
Dennis C. Stempel ......................................         157,246               169,457               1.0
David L. Renauld(5) ....................................         136,698               148,198                 *
All current executive officers and directors as a group
  (8 persons) ..........................................         911,881             1,219,166               6.9
</TABLE>

----------
*    Less than 1%.

(1)  Represents (a) 1,111,111 shares held by Star Growth Enterprise, (b) 517,992
     shares held by SVE Star Ventures Enterprises No. V, (c) 285,768 shares held
     by SVM Star Ventures Management GmbH Nr. 3 ("SVM 3"), (d) 91,963 shares
     held by SVM Star Ventures Management GmbH Nr. 3 & Co. Betelligungs KG Nr.
     2, and (e) 623,724 shares held by SVE Star Ventures Enterprises No. VII.
     SVM 3 manages the investments of these entities. Dr. Meir Barel is the sole
     director and primary owner of SVM 3. SVM 3 and Dr. Barel each have the sole
     power to vote or direct the vote, and the sole power to dispose or direct
     the disposition of, the shares beneficially owned by the entities listed
     above. Dr. Barel disclaims beneficial ownership of the shares beneficially
     held by those entities, except for his pecuniary interest in those shares.

(2)  Dr. Meir Barel is the sole director and primary owner of SVM 3. SVM 3 and
     Dr. Barel each have the sole power to vote or direct the vote, and the sole
     power to dispose or direct the disposition of, the shares beneficially
     owned by the entities listed in note 1 above. Dr. Barel disclaims
     beneficial ownership of the shares beneficially held by those entities,
     except for his pecuniary interest in those shares. The shares listed
     represent the 2,630,558 shares beneficially held by the Star group
     described in note 1 above together with 88,500 shares held by Dr. Barel
     directly. Dr. Barel's address is the same as the address for SVM Star
     Ventures Group.

(3)  Ms. Armitage has joint ownership and voting and investment power with her
     husband of 2,000 shares of our common stock.

(4)  Mr. Ward was our Executive Vice President, Marketing and Sales until
     January 2003. Includes 162,000 shares of our common stock held by members
     of Mr. Ward's immediate family.

(5)  Mr. Renauld has joint ownership and voting and investment power with his
     wife of 5,000 shares of our common stock.

     For information about our equity compensation plans, see Item 5 - Market
for Registrant's Common Equity and Related Stockholder Matters above.

Item 13. Certain Relationships and Related Transactions

     Stephen L. Ward's last day of employment with Telaxis was in January 2003.
Mr. Ward had been our Executive Vice President Marketing and Sales. In January
2003, we entered into a letter agreement with Mr. Ward that terminated his
employment agreement that had been signed in July 2001 and that specified the
terms for Mr. Ward's separation from service. Mr. Ward received a separation
payment of $131,252 (an amount equal to seven months of his base salary) which
was paid shortly after his last day of employment. His employment agreement had
provided for separation payments in an amount equal to twelve months of his base
salary payable over twelve months. We also agreed to make the payments to
continue Mr. Ward's health and dental benefits under COBRA


                                       59
<PAGE>

through August 31, 2003. Mr. Ward's rights under his option agreements remained
unchanged. Mr. Ward provided a general release to us and agreed to comply with
confidentiality, insider trading, non-solicitation, and non-competition
provisions.

     In August 2002, we amended the employment agreements of Dennis C. Stempel
and David L. Renauld. In January 2003, we made the same amendments to the
employment agreements of John L. Youngblood and Kenneth R. Wood, a key employee
of ours. These amendments address the amount of severance the employees would be
entitled to receive if the employee's employment is involuntarily terminated for
reasons other than cause or if the employee terminates his employment for good
reason, as defined in the employment agreements, after a change of control of
Telaxis. The amendments reduced the amount of severance in those circumstances
from twelve months to eleven months and provided that the full amount would be
paid on the last day of employment rather than over twelve months. The
amendments removed the provision reducing severance payments by amounts earned
by the employee at subsequent employment. The amendments also removed the
requirement for us to continue to provide benefits (or cash in lieu thereof) to
the employee for the twelve-month period following termination of employment.
The employees also agreed to provide consultation and advice to us for a period
of up to three months following termination of his employment.

     In January 2003, we made further amendments to the employment agreements of
Messrs. Stempel and Renauld. We had told Messrs. Stempel and Renauld in the
summer of 2002 that their employment was going to be involuntarily terminated
for reasons other than cause but that their last day of employment had not yet
been established. The January 2003 amendments specify that the employee's last
day of employment will be established either by us upon thirty days notice to
the employee or by the employee upon thirty days notice to us. However the date
is set, the termination will be treated as an involuntary termination by us
without cause entitling the employee to the separation benefits specified in his
employment agreement, as amended; provided, however, to be entitled to the
separation benefits, Mr. Stempel can only establish a last day of employment of
March 31, 2003 or later and Mr. Renauld can only establish a last day of
employment of May 31, 2003 or later.

     In August 2002, we amended certain stock option agreements of Messrs.
Stempel and Renauld. In January 2003, we made the same amendments to certain
stock option agreements of Messrs. Youngblood and Wood. These amendments
increased the post-termination exercise period for certain options from three
months to two years. These amendments also increased the number of unvested
options that would be accelerated upon a change of control of Telaxis. All of
the affected stock options had exercise prices higher than the market price of
our common stock on the dates of the amendments and as of March 14, 2003. The
following table summarizes the changes made by the amendments based on options
vested as of March 14, 2003.

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
                     Number of Additional Stock Options     Number of Stock Options with Post-
                     That Would Accelerate upon a Change   Termination Exercise Period Extended
Name of Employee                 in Control                            to Two Years
-----------------------------------------------------------------------------------------------
<S>                                <C>                                    <C>
John L. Youngblood                 18,750                                 306,030
-----------------------------------------------------------------------------------------------
Dennis C. Stempel                  18,750                                  94,286
-----------------------------------------------------------------------------------------------
David L. Renauld                   18,750                                  34,971
-----------------------------------------------------------------------------------------------
Kenneth R. Wood                    14,072                                 116,671
-----------------------------------------------------------------------------------------------
</TABLE>

     In 2002, we paid Dr. Paladino a retainer of $60,000 per year for his
services as chairman of the board of directors of our Company.

Our Policy on Interested Transactions

     We have adopted a policy whereby contracts and business arrangements with
our officers, directors, or stockholders or entities for whom they serve as
officers, directors, trustees, or members must be on an arm's-length basis and
approved by the board of directors. Our articles of organization and by-laws
require approval of the contract or transaction by a majority of the independent
directors who have no interest in the contract or transaction.

Item 14. Controls and Procedures

     (a) Disclosure controls and procedures. Within 90 days before filing this
report, we evaluated the effectiveness of the design and operation of our
disclosure controls and procedures. Our disclosure controls and procedures are
the controls and other procedures that we designed to ensure that we record,
process, summarize and report in a timely manner the information we must
disclose in reports that we file with or submit to the SEC. Our disclosure
controls and procedures include a significant portion of our internal accounting
controls. John L. Youngblood, our President and Chief Executive Officer, and
Dennis C. Stempel, our Senior Vice President and Chief Financial Officer,
supervised and participated in this evaluation. Based on this evaluation, Dr.
Youngblood and Mr. Stempel concluded that, as of the date of their evaluation,
our disclosure controls and procedures were reasonably effective.

                                       60

<PAGE>

     (b) Internal controls. Since the date of the evaluation described above,
there have not been any significant changes in our internal accounting controls
or in other factors that could significantly affect those controls. There were
no significant deficiencies or material weaknesses identified in the evaluation,
and therefore, no corrective actions were taken.


                                       61
<PAGE>

                                     PART IV

Item 15. Financial Statements, Schedules, Reports on Form 8-K and Exhibits.

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

          1. Financial Statements

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

          2. Financial Statement Schedule

     Schedule II--Valuation and Qualifying Accounts

     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, 2002.

     (c) Certification under Sarbanes-Oxley Act of 2002

     Our chief executive officer and chief financial officer have furnished to
the Securities and Exchange Commission the certification with respect to this
report that is required by Section 906 of the Sarbanes-Oxley Act of 2002.


                                       62
<PAGE>

                       TELAXIS COMMUNICATIONS CORPORATION

                        VALUATION AND QUALIFYING ACCOUNTS
              For the years ended December 31, 2000, 2001 and 2002
                                 (in thousands)

<TABLE>
<CAPTION>
                                                       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>
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
                                   ==========   ==========    ==========    ==========    ==========

2002
Inventory reserve                  $      172   $       --    $       --    $     (140)   $       32
Allowance for doubtful accounts           250           --            --          (250)           --
Note receivable allowance                 210           --            --          (210)           --
Deferred tax valuation allowance       40,092        5,959            --            --        46,051
                                   ----------   ----------    ----------    ----------    ----------
                                   $   40,724   $    5,959    $       --    $     (600)   $   46,083
                                   ==========   ==========    ==========    ==========    ==========
</TABLE>


                                       63
<PAGE>

                                  EXHIBIT INDEX

Exhibit
 Number                               Description
-------  -----------------------------------------------------------------------
 2.1     Agreement and Plan of Merger by and between the Company and Young
         Design, Inc. dated as of March 17, 2003.++++

 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     Amendment No. 1 to Rights Agreement by and between the Company and
         Registrar and Transfer Company, as Rights Agent dated as of September
         9, 2002.++

 4.4     Amendment No. 2 to Rights Agreement by and between the Company and
         Registrar and Transfer Company, as Rights Agent dated as of
         March 17, 2003.++++

 4.5     Terms of Class One Participating Cumulative Preferred Stock of the
         Company.*****

 4.6     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    Amendment 1 to Employment Agreement by and between the Company and John
         L. Youngblood dated as of January 24, 2003.+++++

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

 10.11   Amendment 1 to Employment Agreement by and between the Company and
         Dennis C. Stempel dated as of August 29, 2002.+++

 10.12   Amendment 2 to Employment Agreement by and between the Company and
         Dennis C. Stempel dated as of January 24, 2003.+++++

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

 10.14   Amendment 1 to Employment Agreement by and between the Company and
         David L. Renauld dated as of August 29, 2002.+++

 10.15   Amendment 2 to Employment Agreement by and between the Company and
         David L. Renauld dated as of January 24, 2003.+++++


                                       64
<PAGE>

Exhibit
 Number                               Description
-------  -----------------------------------------------------------------------
 10.16   Employment Agreement by and between the Company and Kenneth R. Wood
         dated as of December 19, 2000.****

 10.17   Amendment 1 to Employment Agreement by and between the Company and
         Kenneth R. Wood dated as of January 24, 2003.+++++

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

 10.19   Letter agreement by and between the Company and Stephen L. Ward dated
         January 9, 2003.+++++

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

 10.21   First Amendment to Lease by and between the Company and
         O'Leary-Vincunas LLC dated January 20, 2003.+++++

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

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

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

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

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

 10.27   Form of Indemnification Agreement, a substantially similar version of
         which was entered between the Company and each of Mssrs. Doyle,
         Paladino, Norbury, Youngblood, Renauld, 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.
         Raphael H. Amit (a former director of the Company) on September 11,
         2001, and between the Company and Mr. Goldwasser on December 18,
         2001.***

 10.28   Indemnification Agreement, dated as of March 17, 2003, by and among
         Telaxis Communications Corporation, Merry Fields, LLC, Concorde Equity,
         LLC, and Michael F. Young.++++

 23.1    Consent of PricewaterhouseCoopers LLP.+++++

 99.1    Investor Agreement, dated as of March 17, 2003, by and between Telaxis
         Communications Corporation and Concorde Equity, LLC.++++

 99.2    Investor Agreement, dated as of March 17, 2003, by and between Telaxis
         Communications Corporation and Michael F. Young.++++

----------
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.

   ++    Incorporated herein by reference to the exhibits to Form 8-K
         filed with the Commission on September 12, 2002.

  +++    Incorporated herein by reference to the exhibits to Form 10-Q
         filed with the Commission on November 14, 2002.

 ++++    Incorporated herein by reference to the exhibits to Form 8-K
         filed with the Commission on March 20, 2003.

+++++    Filed herewith.


                                       65
<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 31, 2003

     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 Officer   March 31, 2003
    -----------------------  and Director (principal executive
       John L. Youngblood    officer)


By: /s/ Dennis C. Stempel    Senior Vice President, Finance and   March 31, 2003
    -----------------------  Operations, Chief Financial Officer
       Dennis C. Stempel     and Treasurer (principal financial
                             and accounting officer)


By: /s/ Albert E. Paladino   Director                             March 31, 2003
    -----------------------
       Albert E. Paladino


By: /s/ Carol B. Armitage    Director                             March 31, 2003
    -----------------------
       Carol B. Armitage


By: /s/ Allan M. Doyle, Jr.  Director                             March 31, 2003
    -----------------------
      Allan M. Doyle, Jr.


By: /s/ Ralph A. Goldwasser  Director                             March 31, 2003
    -----------------------
      Ralph A. Goldwasser


By: /s/ David A. Norbury     Director                             March 31, 2003
    -----------------------
       David A. Norbury


                                       66
<PAGE>

                                 CERTIFICATIONS

     I, John L. Youngblood, certify that:

     1. I have reviewed this annual report on Form 10-K of Telaxis
Communications Corporation;

     2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

     3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

     4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

          a) designed such disclosure controls and procedures to ensure that
     material information relating to the registrant, including its consolidated
     subsidiaries, is made known to us by others within those entities,
     particularly during the period in which this annual report is being
     prepared;

          b) evaluated the effectiveness of the registrant's disclosure controls
     and procedures as of a date within 90 days prior to the filing date of this
     annual report (the "Evaluation Date"); and

          c) presented in this annual report our conclusions about the
     effectiveness of the disclosure controls and procedures based on our
     evaluation as of the Evaluation Date;

     5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):

          a) all significant deficiencies in the design or operation of internal
     controls which could adversely affect the registrant's ability to record,
     process, summarize and report financial data and have identified for the
     registrant's auditors any material weaknesses in internal controls; and

          b) any fraud, whether or not material, that involves management or
     other employees who have a significant role in the registrant's internal
     controls; and

     6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date: March 31, 2003


/s/ John L. Youngblood
----------------------
John L. Youngblood
President & CEO


                                       67
<PAGE>

                                 CERTIFICATIONS

     I, Dennis C. Stempel, certify that:

     1. I have reviewed this annual report on Form 10-K of Telaxis
Communications Corporation;

     2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

     3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

     4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

          a) designed such disclosure controls and procedures to ensure that
     material information relating to the registrant, including its consolidated
     subsidiaries, is made known to us by others within those entities,
     particularly during the period in which this annual report is being
     prepared;

          b) evaluated the effectiveness of the registrant's disclosure controls
     and procedures as of a date within 90 days prior to the filing date of this
     annual report (the "Evaluation Date"); and

          c) presented in this annual report our conclusions about the
     effectiveness of the disclosure controls and procedures based on our
     evaluation as of the Evaluation Date;

     5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):

          a) all significant deficiencies in the design or operation of internal
     controls which could adversely affect the registrant's ability to record,
     process, summarize and report financial data and have identified for the
     registrant's auditors any material weaknesses in internal controls; and

          b) any fraud, whether or not material, that involves management or
     other employees who have a significant role in the registrant's internal
     controls; and

     6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date: March 31, 2003


/s/ Dennis C. Stempel
---------------------
Dennis C. Stempel
Senior Vice President, Finance and Operations, CFO & Treasurer


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