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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-K



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|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------



FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003



OR



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



FOR THE TRANSITION PERIOD FROM [            ] TO
[            ]



COMMISSION FILE NUMBER: 000-28217



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AIRNET COMMUNICATIONS CORPORATION

(Exact name of registrant as specified in its charter)



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



REGISTRANTS
TELEPHONE NUMBER, INCLUDING AREA CODE:

(321) 984-1990



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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

NONE



SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:



COMMON STOCK, PAR VALUE $.001 PER SHARE

(TITLE OF CLASS)



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



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



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



The aggregate market value of shares held by non-affiliates as of June 30,
2003, the last business day of the registrants most recently completed second fiscal quarter, was $14,970,804 (based on a closing price on June 30, 2003 on Nasdaq of $1.07 per share). As of February 20, 2004, 49,966,935 shares of the
Registrants Common Stock were outstanding.



DOCUMENTS
INCORPORATED BY REFERENCE:

NONE



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TABLE OF CONTENTS



|         |  |                                                                                       |  |     
|-------- |  | ------------------------------------------------------------------------------------- |  | ----
|ITEM     |  | DESCRIPTION                                                                           |  | PAGE
|         |  | PART I                                                                                |  |     
|Item 1.  |  | Business                                                                              |  | 1   
|Item 2.  |  | Properties                                                                            |  | 8   
|Item 3.  |  | Legal Proceedings.                                                                    |  | 9   
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                   |  | 9   
|         |  |                                                                                      
|         |  | PART II                                                                               |  |     
|         |  |                                                                                      
|Item 5.  |  | Market for Registrants Common Equity and Related Stockholder Matters                 |  | 10  
|Item 6.  |  | Selected Financial Data                                                               |  | 11  
|Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 12  
|Item 7A. |  | Quantitative and Qualitative Disclosure About Market Risk                             |  | 35  
|Item 8.  |  | Financial Statements and Supplementary Data                                           |  | 35  
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure  |  | 37  
|Item 9A. |  | Controls and Procedures                                                               |  | 37  
|         |  |                                                                                      
|         |  | PART III                                                                              |  |     
|         |  |                                                                                      
|Item 10. |  | Directors and Executive Officers of the Registrant                                    |  | 38  
|Item 11. |  | Executive Compensation                                                                |  | 43  
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management                        |  | 46  
|Item 13. |  | Certain Relationships and Related Transactions                                        |  | 48  
|Item 14. |  | Principal Accountant Fees and Services                                                |  | 50  
|         |  |                                                                                      
|         |  | PART IV                                                                               |  |     
|         |  |                                                                                      
|Item 15. |  | Exhibits, Financial Statement Schedule, and Reports on Form 8-K                       |  | 50  



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TRADEMARK AND TRADE NAMES



The stylized Airnet mark, AirNet®, AdaptaCell®, AirSite®, Backhaul Free,
RapidCell, and SuperCapacity are trademarks of AirNet Communications Corporation.



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



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



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PART I



ITEM 1. BUSINESS



OVERVIEW



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



We began marketing our GSM base stations in the beginning of 1996 and shipped our first GSM base station in May 1997. Through December 31, 2003, our base
stations were being used in twenty-five deployed systems. Worldwide, we sell our products through our direct sales force, as well as through agents, resellers, and original equipment manufacturers (OEMs).



From our inception in January 1994 through May 1997, our operations consisted
principally of start-up activity associated with the design, development, and marketing of our products. We did not generate significant revenues until 1998 and have generated $114.0 million in net revenues from our inception through December 31,
2003. We have incurred substantial losses since commencing operations, and as of December 31, 2003, we had an accumulated deficit of $242.9 million. We have not achieved profitability on a quarterly or annual basis. As we continue to build our
customer and revenue base, we expect to continue to incur net losses at least through 2004. We will need to generate significantly higher revenues in order to support research and development, sales and marketing and general and administrative
expenses, and to achieve and maintain profitability. See Liquidity, Capital Resources and Going Concern in Item 7.



We provide base stations and other wireless telecommunications infrastructure products designed to support the GSM, or Global System for Mobile
Communications, system of mobile voice and data transmission. We market our products worldwide to operators of wireless networks and to certain military and public safety organizations. A base station is a key component of a wireless network that
receives and transmits voice and data signals over radio frequencies. We designed our base stations to be easier to deploy and upgrade and to have lower operating costs than other existing base stations.



Product Overview. Our system features four innovative base station
products:



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



Adaptive array SuperCapacity base station.The broadband architecture of our flagship AdaptaCell base station makes it the ideal platform to
deliver integrated software algorithms that will permit the addition of an adaptive array antenna feature. Adaptive array technology focuses radio signals on individual handset antennas instead of spreading the signals over the entire cell covered
by one base station as well as blocks the strongest interference which significantly increases performance, capacity and high speed data rates. The AirNet adaptive array SuperCapacity base station provides network operators with a potentially
compelling value proposition. The adaptive array technology, licensed by AirNet from ArrayComm, Inc., improves capacity, call quality, and high-speed data performance while reducing the number of cell sites required by up to a factor of 6x. In order
to support capacity deployments on traditional wireless systems, operators must re-use their spectrum. This re-use of spectrum creates additional voice channels but inherently increases interference, degrading the quality of service provided by the
network. In contrast, the AirNet SuperCapacity base station utilizing adaptive array processing reduces interference, improves voice quality, conserves signal power by focusing and receiving energy only in desired locations, and increases capacity
by up to 6x.



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RapidCell base station. Our RapidCell base station is a miniaturized version of the AdaptaCell
base station. The AirNet RapidCell base station is about the size of a large suitcase and can support up to 12 GSM carriers or 96 traffic channels configured for rapid deployment for use by emergency first responders or the military. Radio
interoperability is a significant issue for both military and public safety communications systems. In the event of an emergency situation, local law enforcement, State Police, FEMA, Fire Departments, Civil Defense authorities and the National Guard
are often first to respond. Each of these agencies have procured communications systems that meet their individual needs. Unfortunately, these communications systems are sometimes incompatible such that one agency cannot use their system to
communicate with other agencies. A multi-band or multi-protocol base station could serve as a communications link between the agencies. AirNet has already demonstrated up to three different GSM bands in a single, RapidCell base station in a secure
mode. In the future, we believe the RapidCell could be enabled to address the multi-protocol requirements of emergency first responders and the military.



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



Market
Overview. Like other wireless infrastructure suppliers, we have experienced the adverse effects of the global downturn in telecommunications infrastructure spending. We have historically relied upon an integrated suite of infrastructure products
for all our salesa product line that was optimized to meet the needs of the initial-coverage and coverage-limited segments of the wireless infrastructure market. Through sales of the AdaptaCell base station together with the AirSite Backhaul
Free base station, these are market segments where we believe our products enjoy a competitive advantage. Unfortunately, the slowdown in infrastructure spending, particularly in our North America markets, has adversely affected demand in all
segments of the infrastructure market.



In response, we
undertook a major restructuring starting in mid 2001 to better leverage our technology base and entrepreneurial culture to target new market opportunities for our GSM products. We have redirected our activities to focus on three applications for our
products: (1) we have developed our adaptive array SuperCapacity base station for high capacity voice and 2.5G high speed data markets (for example GPRS and EDGE); (2) our traditional GSM infrastructure, including the AdaptaCell base station and the
AirSite Backhaul Free base station, serve wireless markets that require a cost-effective coverage based solution; and (3) the growing market for secure, adaptable wireless infrastructure for governmental and public safety applications is served by
our compact, rapidly deployable RapidCell base station.



The
government and public safety market includes radio communications needs for local, state, and federal government agencies, foreign governments and military communications. Our RapidCell base station and AirSite products provide flexible and unique
communications platforms capable of supporting these applications.



We continue to make progress in the development of our SuperCapacity base station utilizing adaptive array technology. This new base station is built on our current software-defined AdaptaCell base station platform by integrating adaptive
array technology and is expected to be commercially released this year. Adaptive array technology dramatically increases the operators spectral efficiency resulting in tremendous increases in network performance at a reduced cost. This is
accomplished by focusing transmitted radio signals on individual handset antennas instead of spreading them over the entire cell and by deliberately not broadcasting radio signals toward detected co-channel users. This technology also cancels or
blocks the strongest interference in the receiver. This new base station is designed to benefit operators in the transition from current wireless standards to the new GPRS (providing high-speed wireless data in packet format) and Enhanced Data rates
for GSM Evolution (or EDGE, providing yet higher speed) standards. Several customers, potential customers and wireless experts have



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repeatedly participated in drive testing our multi-cell GSM network utilizing the AirNet SuperCapacity base station. Specifically, the test demonstrated
multiple, adjacent adaptive array cell sites with multiple co-channel interferers, and demonstrated a frequency reuse scheme of N=1 incorporating high-speed handovers. N=1 frequency reuse implies the reuse of a same frequency channel in adjacent
cells and is an important feature for network operators because it affords a significant increase in network capacity by allowing simultaneous multiple users on the same timeslot, on the same frequency, in adjacent cells. This is otherwise not
possible in traditional GSM networks. This feature enables previously unattainable capacity improvements and dramatically reduces the need to add cell sites in order to meet increasing subscriber counts and higher speed data requirements, such as
EDGE. We plan to market the enhanced frequency reuse feature by targeting GSM carriers who are faced with limited spectrum in many markets, need to increase capacity, and/or are introducing EDGE into their networks. There are risks associated with
new product introductions and some of these risks are outlined in the risk factors set forth in Item 7 below and elsewhere in this document.



Our portfolio of broadband software defined radio (or SDR) technology and our entrepreneurial tradition lend themselves to exploiting numerous new
opportunities in the wireless arena. We believe these new opportunities driven by recent developments both inside and outside the company offer a tremendous potential for growth and success. SDR technology allows us to readily reprogram
our wireless infrastructure products to address new markets and new opportunities in a cost effective manner. The development and acceptance of SDR technology in the marketplace has created new opportunities for us outside our core industry. Due to
our significant portfolio of basic SDR intellectual property, it is now possible for us to explore licensing our technology in a variety of applications to third parties or other strategic relationships. Accordingly, we have engaged a licensing firm
to assist us in developing and pursuing a technology licensing program.



We continue to develop and exploit leading edge technology and as of December 31, 2003, we had 51 domestic patents granted, and 18 patent applications pending. We received the 1998 GSM World Award for Best Technical Innovation from the GSM
Association, an international body with members from over 150 countries, in recognition of our innovative infrastructure.



On October 23, 2002 we received certification under the ISO 9001:2000 standard. ISO 9001:2000 is the globally recognized standard for QMS aimed at
consistently producing and delivering the highest quality products and services necessary to achieve complete customer satisfaction.



PRODUCTS



Our base station subsystem products currently support the GSM system for wireless voice and data communications services. We chose to develop products
based on this standard both because it is the leading accepted standard in the world and because the interfaces, or connections, between the various pieces that make up the GSM base station subsystem are well defined and publicly documented.
According to the GSM World, GSM subscribers are expected to exceed over 1 billion worldwide in the first quarter of 2004. One of these interfaces, the connection between the mobile switching center (MSC) and the base station controller, and
ultimately the base stations that compose the base station subsystem, is referred to as the A-interface. This A-interface allows wireless operators to connect our base station subsystem equipment to an existing operators mobile switching
center. It is this standard interface that makes any existing GSM operator a potential customer for our base station subsystem equipment. We are currently marketing the base station subsystem in four standard configurations, the GSM-850, GSM-900,
GSM-1800 and GSM-1900, operating at 850 MHz, 900 MHz, 1800 MHz and 1900 MHz respectively. Our products have been deployed with customers using the following MSC providers: Nortel, Alcatel, Lucent, Nokia, Siemens, TECORE, Spatial Wireless, and Telos.



Our base station subsystem features four unique base station
products: the AdaptaCell broadband, software-defined base station, the adaptive array SuperCapacity base station, the RapidCell base station, and the AirSite Backhaul Free base station. We also offer a Base Station Controller, a Transcoder Rate
Adaption Unit, an Operations and Maintenance Center (radio), Mobile Switching Center, Serving GPRS Support Node (SGSN), and Gateway GPRS Support Node (GGSN).



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



Adaptive array SuperCapacity base station: We previously announced
plans to introduce the AdaptaCell SuperCapacity base station which allows up to 12/12/12 (288 total channels) in limited channel spectrum. This new base station is built on our current software-defined AdaptaCell base station platform using adaptive
array technology licensed from ArrayComm, Inc. Adaptive array technology dramatically increases the operators spectral efficiency resulting in tremendous increases in network performance by focusing radio signals on individual handset antennas
instead of spreading them over the entire cell. The new base station is designed to benefit operators in the transition from current wireless standards to the new GPRS (General Packet Radio Service) standard, providing high-speed wireless data in
packet format and the EDGE Enhanced Data rates for GSM Evolution, (also known as Enhanced GPRS or EGPRS) standard, providing yet higher speed. In order to support capacity deployments on traditional wireless systems, operators must re-use their
spectrum. This re-use of spectrum creates additional voice channels but inherently increases interference, degrading the quality of service provided by the network. In contrast, the AirNet SuperCapacity base station utilizing adaptive array
processing reduces interference, improves voice quality, conserves signal power by focusing and receiving energy only in desired locations, and increases capacity by up to 6x. When our development work is completed, the new base station will provide
increased capacity and higher data rates without the need to deploy additional base stations, while avoiding decreases in cell coverage area.



RapidCell base station:Our RapidCell base station is miniaturized version of the AdaptaCell base station. The AirNet RapidCell base station is
about the size of a large suitcase and can support up to 12 GSM carriers or 96 traffic channels configured for rapid deployment for use by emergency first responders or the military. Radio interoperability is a significant issue for both military
and public safety communications systems. In the event of an emergency situation, local law enforcement, State police, FEMA, Fire Departments, Civil Defense authorities and the National Guard are often first to respond. Each of these agencies has
procured communications systems that meet their individual needs. Unfortunately, these communications systems are sometimes incompatible such that one agency cannot use their system to communicate with other agencies. A multi-band or multi-protocol
base station could serve as a communications link between the agencies. AirNet has already demonstrated up to three different GSM bands in a single, RapidCell base station in a secure mode. In the future, we believe the RapidCell could be enabled to
address the multi-protocol requirements of these agencies also.



AirSite Backhaul Free base station: The AirSite Backhaul Free base station is a compact wireless base station that includes its own wireless backhaul system. By contrast, other existing base stations must be connected to the rest of
the system using expensive physical communications links, usually digital T-1/E-1 telephone lines or microwave. The AirSite Backhaul Free base station is a full featured GSM base station, meaning it has a unique cell ID for billing and
911 emergency identification purposes, offers the same geographic coverage as other existing base stations, and has configuration, fault, and error detection integrated into the Operations and Maintenance Center (radio). The AirSite
Backhaul Free base station operates by receiving a subscribers wireless telephone signal and transmitting it to the AdaptaCell base station. The AdaptaCell base station then sends the signal over a T-1/E-1 line or microwave to the base station
controller and on to the mobile switching center. In reverse, digitized voice signals come from the mobile switching center to the base station controller and then to the serving AdaptaCell base station, which then transmits the signal to the
AirSite Backhaul Free base station. The AirSite Backhaul Free base station then transmits the signal to the subscriber.



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



To support packet
data services (i.e. GPRS and EGPRS) the BSC supports an optional packet control unit (PCU). The PCU manages distribution of packet data to and from GPRS-enabled mobile units via the base stations attached to the base station controller and GPRS
network components, namely the SGSN (Serving GPRS Support Node) and GGSN (Gateway GPRS Support Node).



Transcoder Rate Adaption Unit: In most telecommunications systems, digitized voice requires 64 Kbps of bandwidth to accurately convey human speech.
Our transcoder rate adaptation unit compresses a standard 64 Kbps voice stream to a GSM-standardized 16 Kbps. This means that the digital T-1/E-1 telephone line or microwave used to connect the base station controller to the mobile switching center
can carry four times as many voice conversations as it normally would. This makes it less expensive to attach a base station subsystem to its associated mobile switching center. Additionally, AirNet is developing software to support adaptive
multirate (AMR) speech coding. This feature increases voice capacity of GSM networks while maintaining the current high levels of voice quality.



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



In addition to the previously described products, AirNet also provides for sale other GSM network components manufactured by others in order to provide
complete voice and data systems to our customers. These include the MSC, SGSN, and GGSN.



Mobile Switching Center: The MSC interfaces to one or more base station controllers via the A-interface, previously mentioned. This MSC provides mobility management and switching to connect a caller on a mobile
unit to a caller on another mobile unit or a caller on the wireline public switching telephone network (PSTN). The MSC supports other functions such authentication of mobile subscribers to prevent fraud. Additionally, the MSC supports features
familiar to users of telephone systems such as call forwarding, call waiting, call conferencing, etc. The MSC may also interface to voice mail systems, short message service centers (SMSC), billing systems as well as other mobile switching centers.



Serving GPRS Support Node: The SGSN provides a mobility
management function that tracks a GPRS mobile from one base station to another in order to route data packets to and from the mobile subscriber. The SGSN interfaces to the PCU in the base station controller and to the GGSN. Additionally, the SGSN
supports other functions such as authentication of GPRS mobile subscribers as well as provides information on mobile subscriber usage for billing purposes.



Gateway GPRS Support Node: The GGSN is the gateway between the GPRS network and an external data network such as the Internet, supporting routing
of data packets between the GPRS network and the external packet data network. The GGSN and SGSN may be combined into one physical unit, the GPRS Support Node (GSN).



CUSTOMERS



Each of the three customers, TECORE Inc. (TECORE), the U.S. Government, and Hafatel/Guam Wireless accounted for approximately 10% of more of our revenues
for the fiscal year ended December 31, 2003 for product and services, with one customer, TECORE, accounting for $6.7 million, or 42.7% of our revenue for the year. The U.S. government accounted for $4.5 million, or 28.5% of our revenue for the year,
and Hafatel/Guam Wireless accounted for $2.2 million or 14.1% of our revenue for the year. Together these three customers accounted for approximately 85% of our revenues for the year. See note 14 of Notes to Financial Statement for financial
information regarding our customers.



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SALES AND MARKETING



Our worldwide sales and marketing efforts are conducted through a network of original equipment manufacturers, or OEMs, agents, resellers and our direct
sales force. We currently have a staff of five in sales and sales support.



Sales in the North American PCS market may be impeded due to roaming considerations, decreased capital spending, and MSC price performance issues. Because our direct sales force is small, our worldwide sales strategy
depends primarily on the use of OEMs to sell our products and to increase our revenue. We currently have four key OEMs: TECORE, a previously announced but undisclosed top 5 communications equipment company, an undisclosed OEM which will
concentrate on RapidCell sales, and a regional OEM reseller located in the Middle East.



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



RESEARCH AND PRODUCT DEVELOPMENT



We spent $9.2 million in 2003, $12.5 million in 2002, $25.6 million in 2001
on research and product development. As of December 31, 2003, 56 of our 106 employees were engaged in research and product development, including hardware and software engineering. We expect to hire additional employees to engage in research and
product development during 2004 in order to staff research and development efforts funded by both strategic partners/customers and Company funded projects.



Our current product development plans focus on the adaptive array technology for our SuperCapacity base station, EDGE, RapidCell, product cost reductions
and end of life component considerations and features for major operators by taking advantage of the evolution of digital signal processors and other digital components to reduce the cost of our base stations.



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



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



MANUFACTURING AND BACKLOG



We currently use a limited number of third-party
contractors to manufacture most of our primary components and subassemblies for our products. As a result, our in-house customer fulfillment operations consist primarily of quality control, final assembly, and product integration and testing.
Circuit boards, electronic and mechanical parts, and other component assemblies are purchased from OEMs and other selected suppliers. An in-house staff sets standards and monitors the quality control of our contract manufacturers. The majority of
our proprietary radio frequency (RF) assemblies are currently built by a top-tier contract manufacturer.



Our product backlog was approximately $4.3 million at December 31, 2003 as compared to $4.0 million at December 31, 2002. We typically include a contract
in backlog when signed by the customer and a deposit is received from the customer if required by the contract.



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



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



COMPETITION



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



We have been negatively impacted by the reduction in global demand for
telecommunications infrastructure equipment. As a result of the reduction in global demand, our competitors have been bundling Mobile Switch Centers (MSCs) together with base stations at deeply discounted pricing levels. These actions are targeting
our traditional customer base and have resulted in intense price performance competition. This price competition has substantially reduced opportunities for us to expand or continue sales of coverage solution products to small/medium
sized PCS operators in North America.



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



PROPRIETARY RIGHTS



We consider our technologies proprietary and seek to
protect our intellectual property rights. As of December 31, 2003, we had 51 domestic patents granted, and 18 domestic patent applications pending. In addition, we are seeking patent protection for our inventions in foreign countries. One of the
issued domestic patents was based upon proprietary rights originally obtained from Harris Corporation, one of our stockholders, and is subject to a non-exclusive cross license to a third party. We also obtained from Harris Corporation a
royalty-free, worldwide, non-exclusive right and license to use six other patents in the manufacture and sale of products covered by these patents. Our patents cover the basic architecture of the system, sub-components, and frequency reuse planning
schemes. The Company has engaged a consulting firm that is an expert in technology licensing to consider monetizing our patent portfolio through the grant of royalty bearing, non-exclusive licenses. The Company believes that certain of its patents
may have applications in other technologies beyond GSM.



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



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resorting to litigation. The Company has a relationship with a law firm that specializes in patent enforcement. This firm will look for licensing
opportunities for our patents but there can be no assurances that they will be successful.



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



We also rely upon copyright and trade secret laws. Source code for our own
proprietary software is protected as an unpublished copyrighted work, as a trade secret, and for certain customers the source code is escrowed.



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



GOVERNMENT REGULATION



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



EMPLOYEES



As of December 31, 2003, we had 106 employees. Of these individuals, 56 were in research and product development. We also retain independent contractors
from time to time.



Most of our employees did not receive any
merit increases in 2002 or in 2003 and none are planned in 2004. In January 2003 we postponed the payment of bonuses to employees and suspended the company matching contributions to the 401(K) plan. These items may create an impediment to the
retention of our key employees.



None of our employees are
represented by a labor union, and we believe that our relations with our employees are good. However, we cannot guarantee retention of key employees due to the issues noted above.



One half of the employee $0.01 stock options issued in September 2003 will vest in September 2004 and the remaining options
will vest in September 2005. Vesting may impact our ability to retain key employees.



ITEM 2. PROPERTIES



Our
headquarters consist of approximately 41,000 square feet of space leased through December 31, 2004, located at 3950 Dow Road in Melbourne, Florida. The space also houses the primary manufacturing and product



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engineering operation. Additional space of approximately 20,000 square feet at the Trio Complex in Melbourne, Florida, is leased through December 31, 2005
for final assembly and testing. The lease for the Dow Road facility gives us the right to terminate any time after June 2002 with a six-month notice. We believe that these facilities will be adequate to meet our requirements at least through 2004
and that suitable additional or substitute space will be available if needed.



ITEM 3. LEGAL PROCEEDINGS



The
Company, the members of the underwriting syndicate involved in our initial public offering and two of our former officers have been named as defendants in a class action lawsuit filed on November 16, 2001 in the United States District Court for the
Southern District of New York. The action, number 21 MC 92 (SAS), alleges that the defendants violated federal securities laws and seeks unspecified monetary damages and certification of a plaintiff class consisting of all persons and entities who
purchased, converted, exchanged or otherwise acquired shares of our common stock between December 6, 1999 and December 6, 2000, inclusive. Specifically, the complaint charges the defendants with violations of Sections 11 and 15 of the Securities Act
of 1933 and Section 10(b) of the Securities Exchange Act of 1934. In substance, the allegations are that the underwriters of our initial public offering charged commissions in excess of those disclosed in the initial public offering materials and
that these actions were not properly disclosed. We do not know whether the claims of misconduct by the underwriters have merit but at this time we believe the claims against us are without merit and intend to defend this matter when appropriate.
Under the terms of the Underwriting Agreement, we have claims against the underwriters of the initial public offering for indemnification and reimbursement of all of the costs and any damages incurred in connection with this lawsuit and we intend to
pursue those claims vigorously. On July 15, 2002 the Issuers Committee filed a Motion to Dismiss on behalf of all issuers and individual defendants in similar lawsuits. In February 2003, the Motion to Dismiss was granted in part (with respect
to the Company) and denied in part (with respect to all issuer defendants). Discovery in this litigation is commencing while settlement talks between the plaintiffs and the issuers continue. The claims against our two former officers named in the
class action lawsuit have been dismissed without prejudice. The issuer defendants and the plaintiffs have since drafted and agreed upon a settlement, which is pending approval by the court. Pending approval, the individual tolling agreements
dismissing the named individual defendants have been extended, so that the individual defendants will be covered by the settlement as well. While awaiting court approval of the settlement, the issuers, including the Company, have complied with
discovery obligations specified in the Settlement, by providing a limited number of documents.



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



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



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



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



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PART II



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



See Status of our Common Stock listing on Nasdaq National Market in Item 7.



Our common stock has been listed on the NASDAQ National Market System under the symbol ANCC since December 7, 1999. There is
no established trading market for the shares underlying the Senior Secured Convertible Note that we issued in August 2003, nor is there a trading market for outstanding warrants we issued and sold in June and August 1999. The following table sets
forth the high and low sales prices for our common stock as reported by NASDAQ for the periods indicated:



|                             |  |     |      |      |   |     
|---------------------------- |  | --- | ---- | ---- | - | ----
|                             |  | LOW |      | HIGH
|YEAR ENDED DECEMBER 31, 2003 |  |     |      |      |   |     
|First Quarter                |  | $   | 0.31 |      | $ | 0.62
|Second Quarter               |  | $   | 0.29 |      | $ | 1.37
|Third Quarter                |  | $   | 0.74 |      | $ | 1.63
|Fourth Quarter               |  | $   | 0.80 |      | $ | 1.30
|                             |  |    
|YEAR ENDED DECEMBER 31, 2002 |  |     |      |      |   |     
|First Quarter                |  | $   | 0.42 |      | $ | 2.98
|Second Quarter               |  | $   | 0.71 |      | $ | 2.42
|Third Quarter                |  | $   | 0.55 |      | $ | 1.30
|Fourth Quarter               |  | $   | 0.47 |      | $ | 1.12



We had 412
stockholders of record as of February 20, 2004. This number does not include the number of persons whose stock is in nominee or in street name accounts through brokers.



We have not paid dividends and do not anticipate paying cash dividends in the foreseeable future. We have a retained
earnings deficit, and we expect to retain future earnings for use in our businesses.



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ITEM 6. SELECTED FINANCIAL DATA



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



|                                                                         |  |                          |           |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|------------------------------------------------------------------------ |  | ------------------------ | --------- | - | ---- | - | ---------- | ---- |  | - | ---------- | - |  | ---- | ---------- | - |  | - | ---------- | -
|                                                                         |  | YEARS ENDED DECEMBER 31, |          
|                                                                         |  | 1999                     |           |   | 2000 |   |            | 2001 |  |   | 2002       |   |  | 2003 |           
|STATEMENT OF OPERATIONS DATA:                                            |  |                          |           |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Net revenues                                                             |  | $                        | 17,756    |   |      | $ | 34,332     |      |  | $ | 14,544     |   |  | $    | 23,026     |   |  | $ | 15,785     |  
|Cost of revenues                                                         |  |                          | 10,981    |   |      |   | 23,902     |      |  |   | 16,717     |   |  |      | 17,415     |   |  |   | 11,144     |  
|Write down of obsolete and excess inventory                              |  |                          | 263       |   |      |   | 7,302      |      |  |   | 8,759      |   |  |      | 145        |   |  |   | 384        |  
|                                                                         |  |                          |           |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Gross profit (loss)                                                      |  |                          | 6,512     |   |      |   | 3,128      |      |  |   | (10,932    | ) |  |      | 5,466      |   |  |   | 4,257      |  
|                                                                         |  |                          |           |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Operating expenses (gains)                                               |  |                          |           |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Research and development                                                 |  |                          | 15,853    |   |      |   | 29,635     |      |  |   | 25,563     |   |  |      | 12,544     |   |  |   | 9,208      |  
|Sales and marketing                                                      |  |                          | 4,748     |   |      |   | 10,448     |      |  |   | 11,936     |   |  |      | 5,432      |   |  |   | 2,584      |  
|General and administrative                                               |  |                          | 3,097     |   |      |   | 12,741     |      |  |   | 11,645     |   |  |      | 3,039      |   |  |   | 6,405      |  
|Gain on vendor settlements                                               |  |                          |          |   |      |   |           |      |  |   | (1,922     | ) |  |      | (704       | ) |  |   |           |  
|Loss on disposal or write-down of equipment                              |  |                          | 2         |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   |           |  
|                                                                         |  |                          |           |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Total operating expenses                                                 |  |                          | 23,700    |   |      |   | 52,824     |      |  |   | 47,222     |   |  |      | 20,311     |   |  |   | 18,197     |  
|                                                                         |  |                          |           |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Loss from operations                                                     |  |                          | (17,188   | ) |      |   | (49,696    | )    |  |   | (58,154    | ) |  |      | (14,845    | ) |  |   | (13,940    | )
|                                                                         |  |                          |           |   |     
|Non-cash debt conversion interest charge                                 |  |                          |          |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   | (10,000    | )
|Interest charged on convertible debt                                     |  |                          |          |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   | (577       | )
|Other income, net                                                        |  |                          | 609       |   |      |   | 4,672      |      |  |   | 542        |   |  |      | 397        |   |  |   | 84         |  
|                                                                         |  |                          |           |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Net loss                                                                 |  |                          | (16,579   | ) |      |   | (45,024    | )    |  |   | (57,612    | ) |  |      | (14,448    | ) |  |   | (24,433    | )
|Accretion of discountSeries B Preferred                                 |  |                          |          |   |      |   |           |      |  |   | (1,036     | ) |  |      | (7,495     | ) |  |   |           |  
|Accretion of cumulative preferred dividends.                             |  |                          | (18,647   | ) |      |   |           |      |  |   | (1,500     | ) |  |      | (2,400     | ) |  |   |           |  
|Conversion inducement (non-cash)                                         |  |                          |          |   |      |   |           |      |  |   |           |   |  |      |           |   |  |   | (7,895     | )
|                                                                         |  |                          |           |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Net loss attributable to common stockholders                             |  | $                        | (35,226   | ) |      | $ | (45,024    | )    |  | $ | (60,148    | ) |  | $    | (24,343    | ) |  | $ | (32,328    | )
|                                                                         |  |                          |           |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Net loss per share attributable to common stockholdersbasic and diluted |  | $                        | (18.31    | ) |      | $ | (1.91      | )    |  | $ | (2.53      | ) |  | $    | (1.02      | ) |  | $ | (0.97      | )
|                                                                         |  |                          |           |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Shares used in calculating basic and diluted loss per common share.      |  |                          | 1,923,360 |   |      |   | 23,579,467 |      |  |   | 23,783,637 |   |  |      | 23,822,913 |   |  |   | 33,304,579 |  
|                                                                         |  |                          |           |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|CASH FLOW DATA:                                                          |  |                          |           |   |      |   |            |      |  |   |            |   |  |      |            |   |  |   |            |  
|Net cash used in operating activities                                    |  | $                        | (15,111   | ) |      | $ | (62,601    | )    |  | $ | (48,177    | ) |  | $    | (1,137     | ) |  | $ | (7,170     | )
|Net cash used in investing activities                                    |  |                          | (1,472    | ) |      |   | (8,700     | )    |  |   | (3,149     | ) |  |      | (38        | ) |  |   | (218       | )
|Net cash provided by (used in) financing activities                      |  |                          | 109,425   |   |      |   | (254       | )    |  |   | 27,160     |   |  |      | (321       | ) |  |   | 9,243      |  



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|                           |  |      |         |      |   |        |  |      |        |      |   |        |  |   |       
|-------------------------- |  | ---- | ------- | ---- | - | ------ |  | ---- | ------ | ---- | - | ------ |  | - | ------
|                           |  | 1999 |         | 2000 |   | 2001   |  | 2002 |        | 2003
|BALANCE SHEET DATA:        |  |      |         |      |   |        |  |      |        |      |   |        |  |   |       
|Cash and cash equivalents  |  | $    | 100,422 |      | $ | 28,867 |  | $    | 4,702  |      | $ | 3,205  |  | $ | 5,060 
|Working capital            |  |      | 104,475 |      |   | 49,118 |  |      | 23,431 |      |   | 12,263 |  |   | 13,313
|Total assets               |  |      | 131,013 |      |   | 92,134 |  |      | 49,875 |      |   | 30,830 |  |   | 30,056
|Long-term obligations      |  |      | 201     |      |   | 216    |  |      | 2,070  |      |   | 837    |  |   | 10,691
|Total stockholders equity |  |      | 108,263 |      |   | 64,223 |  |      | 18,368 |      |   | 22,037 |  |   | 10,564



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



The following discussion should be read in conjunction with our consolidated financial statements and related notes presented elsewhere in this Form 10-K.
This report on Form 10-K contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1993, as amended. The words, expects,
anticipates, believes, intends, plans and similar expressions identify forward-looking statements. In addition, any statements, which refer to expectations, projections or other characterizations of
future events or circumstances, are forward-looking statements. We undertake no obligation to publicly disclose any revisions to these forward-looking statements to reflect events or circumstances occurring subsequent to filing this Form 10-K with
the Securities and Exchange Commission. These forward-looking statements are subject to risks and uncertainties, including, without limitation, those discussed below in Risk Factors. Accordingly, our future results may differ materially
from historical results or from those discussed or implied by these forward-looking statements.



RESULTS OF OPERATIONS



OVERVIEW



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



From our inception in January 1994 through May 1997, our operations consisted
principally of start-up activity associated with the design, development, and marketing of our products. We did not generate significant revenues until 1998 and have generated only $114.0 million in net revenues from our inception through December
31, 2003. We have incurred substantial losses since commencing operations, and as of December 31, 2003, we had an accumulated deficit of $242.9 million. We have not achieved profitability on a quarterly or annual basis. As we continue to build our
customer and revenue base we expect to continue to incur net losses at least through 2004. We will need to generate significantly higher revenues in order to support research and development, sales and marketing and general and administrative
expenses, and to achieve and maintain profitability. See Liquidity, Capital Resources, and Going Concern below.



We began marketing our GSM base stations in the beginning of 1996 and shipped our first GSM base station in May 1997. Through December 31, 2003, our base
stations were being used in twenty-five deployed systems. We currently sell and market our products in the U.S. through our direct sales force. Internationally, we sell our products through our direct sales force, as well as through agents and OEMs.
Our revenues are derived



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from sales of a product line based on the GSM standard. We generate a substantial portion of our revenues from a limited number of customers, with three
customers accounting for 85.3% of our net revenues during the fiscal year ended December 31, 2003. For the fiscal years ended December 31, 2001, 2002, and 2003, our revenue from direct sales to international customers was 19.2%, 29.1%, and 1.7%,
respectively. In addition, revenue from OEM sales for international deployments were 14.1%, 49.0% and 39.8% for the years ended December 31, 2001, 2002, and 2003, respectively.



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



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



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



| |  | Demand for our products and services;
| | - | -------------------------------------



| |  | New product introductions, both by AirNet and our competitors;
| | - | --------------------------------------------------------------



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



| |  | The mix of base stations and other products sold;
| | - | -------------------------------------------------



| |  | The mix of sales channels through which our products and services are sold;
| | - | ---------------------------------------------------------------------------



| |  | Engineering cost reduction successes;
| | - | -------------------------------------



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



| |  | The mix of domestic and international sales; and
| | - | ------------------------------------------------



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



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



Research and development expenses consist
primarily of expenses incurred in the design, development and support of our proprietary technology. We expect research and development expenses to increase in 2004 as we further the development of our core technology. Research and development
associated with future products will depend on customer requirements. We may, however, incur costs in connection with the development of the



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software needed to upgrade our base stations to support emerging wireless high-speed data transmission standards. The cost incurred for software development
performed by third parties through development agreements are carried on the balance sheet as an intangible asset until the product is deployed. Subsequent to deployment the cost is amortized over the life of the product. As of December 31, 2003 one
of the two products that were being capitalized is being marketed and the amortization began in the fourth quarter of 2003.



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



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



RELATED PARTY TRANSACTIONS



See Item 13 regarding a description of related party transactions during
2003.



CONTRACTUAL OBLIGATIONS



The following table summarizes our significant contractual obligations at
December 31, 2003, and the effect such obligations are expected to have on our liquidity and cash flows in future periods.



|                                            |  |                        |        |                  |   |             |  |             |     |  |   |       
|------------------------------------------- |  | ---------------------- | ------ | ---------------- | - | ----------- |  | ----------- | --- |  | - | ------
|                                            |  | Payments Due by Period
|In thousands                                |  | Total                  |        | Less than 1 year |   | 1 - 3 years |  | 3 - 5 years
|Operating lease obligations                 |  | $                      | 712    |                  | $ | 452         |  | $           | 248 |  | $ | 12    
|Capital lease obligations                   |  |                        | 72     |                  |   | 67          |  |             | 5   |  |   |      
|Other purchase obligations and commitments1 |  |                        | 2,837  |                  |   | 2,837       |  |             |    |  |   |      
|Long-term debt obligations2                 |  |                        | 22,574 |                  |   |            |  |             |    |  |   | 22,574
|                                            |  |                        |        |                  |   |             |  |             |     |  |   |       
|Total                                       |  | $                      | 26,195 |                  | $ | 3,356       |  | $           | 253 |  | $ | 22,586
|                                            |  |                        |        |                  |   |             |  |             |     |  |   |       

---

|1 | Includes purchase obligations that are not recorded as liabilities on our balance sheet as we have not yet received the material or taken title to the property. Also
includes commitments remaining on our EDGE software licensing agreement as described in Note 4 to the financial statements.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2 | Includes accrued interest on the Bridge Loan of $160,741 through its maturity date of August 13, 2003 and accrued interest on installments received on the Securities
Purchase Agreement Note through January 7, 2004.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Certain remaining obligations under our agreement with ArrayComm (see Note 4 to the financial statements) are not included above as they are contingent upon the shipment of 100 SuperCapacity base stations, which cannot be defined at this
point.



OFF-BALANCE SHEET ARRANGEMENTS



As of December 31, 2003, we have two off-balance sheet arrangements. The
first is the tax benefit of our accumulated Net Operating Losses (see Note 12 to the financial statements for a full description.) The second is an advanced payment agreement with a customer. We do not book this advanced payment until payment is
received and then it is booked as a customer deposit.



YEAR ENDED DECEMBER
31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002



Net
revenues: Net revenues decreased $7.2 million or 31.3% from $23.0 million for the year ended December 31, 2002 to $15.8 million for the year ended December 31, 2003. This decrease was largely attributed to completion of a project in Central Asia,
which accounted for $11.3 million of the revenue and a project in Africa, which accounted for $4.9 million of the revenue for the year ended December 31, 2002 compared to $6.7 million and $0.2 million, respectively for the year ended December 31,
2003. The $9.3 million reduction in revenue associated with these two projects was partially offset by a $4.5 million increase in customer funded development revenue. During 2003 revenue trends were mixed. Domestic hardware revenues were down,



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customer funded development and services revenue trended up and international revenues trended down primarily because of the completion of the Central Asia
project. We recognize the need for revenue growth to obtain profitability and sustain positive cash flow from operations. Through a series of expense reduction efforts and product cost initiatives, we estimate that we can be cash flow positive from
operations with revenue of approximately $12 million per quarter based on the 2003 margin rate. To address the need for revenue growth, our selling strategy shifted in 2002 from a direct sales strategy to relying primarily on OEMs and agents to sell
and distribute our products. To this end, we signed OEM agreements with three new OEMs during 2003. These new OEMs include a big five communications equipment provider, a major defense contractor and a Middle East OEM. With a direct
sales and marketing staff of five, OEM and agent revenue are critical to our survival.



Gross Profit: Gross profit decreased $1.2 million from $5.5 million for the year ended December 31, 2002 to $4.3 million for the year ended December 31, 2003. The gross profit margin was 23.7% for 2002 and 27.0% for
2003. The increase in the gross profit margin was primarily attributable to a shift in the composition of business to more service and customer funded development revenues. Based upon our estimated view that the telecommunications market will
experience a turnaround in the future, our improved product mix, successful implementation of cost reductions, and the refocus of our sales efforts toward the SuperCapacity AdaptaCell and RapidCell base stations, we believe our gross margin
percentage will be flat to improved in the second half of 2004 if revenue levels meet projections. However, future market conditions and economic conditions could affect the achievement of this objective. Cost of goods sold also includes
approximately $48,000 of non-cash stock compensation expense.



Research and development: Research and development expenses decreased $3.3 million or 26.4% from $12.5 million for the year ended December 31, 2002 to $9.2 million for the year ended December 31, 2003. This decrease was due primarily to
$1.7 million of research and development resources being redirected to work on direct cost of sales activities. In addition there was a decrease in labor of $0.8 million including benefits, bonus accrual of $0.7 million, use of outside services of
$0.3 million and a decrease in other departmental activities of $0.3 million. The expenses included $0.8 million of non-cash stock compensation expense in 2003 compared with $0 in 2002. We began recruiting efforts to increase the size of the
engineering organization in the fourth quarter of 2003. We are expecting Research and Development costs to trend upward in 2004 for two reasons: (1) the current efforts to increase engineering headcount and (2) the research and development portion
of non-cash stock compensation expense is expected to increase from $0.7 million in 2003 to approximately $1.8 million in 2004.



Sales and marketing: Sales and marketing expenses decreased $2.8 million or 51.9% from $5.4 million for the year ended December 31, 2002 to $2.6 million
for the year ended December 31, 2003. The $2.8 million reduction included $0.6 million of labor that was redirected to work on direct cost of sales activities, a $1.1 million reduction in labor and benefit costs, a $0.2 million reduction in travel
expenses and $0.2 million reduction in demonstration equipment. The expenses for the year ended December 31, 2003 included $0.2 million of non  cash stock compensation expense in 2003 compared with $0 in 2002. We are expecting Sales and
marketing costs to trend upward in 2004 for two reasons: (1) increased revenue should result in increased sales commissions and (2) the sales and marketing related portion of non-cash stock compensation expense is expected to increase from $0.2
million in 2003 to approximately $0.8 million in 2004.



General
and administrative: General and administrative expenses increased $3.4 million or 113.3% from $3.0 million for the year ended December 31, 2002 to $6.4 million for the year ended December 31, 2002. The $3.4 million increase in expenses was primarily
attributable to non-cash compensation expense of $2.7 million recognized for the year ended December 31, 2003 compared to $0 in 2002. Also, 2002 reflected a $2.4 million reduction in expenses due to the recovery of receivables previously accounted
for in the provision for doubtful accounts. These expenses were partially offset by reductions in other areas. We believe that general and administrative expenses will increase in 2004 as the general and administrative portion of non-cash stock
compensation expense is expected to increase from $2.7 million in 2003 to over $6.5 million in 2004.



Gain on vendor settlements: We recorded a gain on vendor settlements of $703,618 during 2002 while no gain exists during 2003.



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Cash Flow used in Operations: Cash flow used in operations was ($7.2) million in 2003 compared to ($1.1)
million in 2002. The $6.2 million increase in the use of cash was attributable to reductions in inventories and accounts receivable in 2002 that were not matched in 2003. Going forward, the Companys 2004 business plan, which assumes revenue of
$24  28 million, may not require additional funding through 2004 provided that TECORE continues to make the $1.0 million quarterly debt installment payments outlined in Note 8 to the financial statements. However, because there can be no
guarantee that the business plan targets can be achieved, we have retained an investment advisor to recommend potential new funding sources. This letter agreement is detailed in Note 17 to the financial statements. There can be no assurances that
this investment advisor will be successful in identifying new funding sources acceptable to the Company and its security holders.



There are three significant non-cash charges, associated with the Securities Purchase Agreement transaction detailed in Note 8 to the financial
statements, included in our 2003 results: a Compensation Expense Charge, a Debt Conversion Charge, and a Conversion Inducement Charge. These charges are explained below.



Non-cash Compensation Expense: Non-cash stock compensation expense was $3.7 million, $0.2 million and $0.2 million for the
year ended December 31, 2003, 2002, and 2001 respectively. These charges are reflected as compensation expense and are included in the operating expenses as engineering, marketing/selling and general and administrative or cost of sales based on the
department in which the employee who receives the stock options is working. Effective with the closing of the $16.0 million Investment (as described in Note 8 to the financial statements) under the Securities Purchase Agreement, we amended our stock
option plan with the approval of our shareholders. Under the amended plan the number of options available for grant was increased to 30,742,986. After the closing of the $16.0 million Investment, 20,081,926 options at an exercise price of $0.01 per
share were granted to employees. The granting of the non-qualified stock options to employees will result in a non-cash charge to our earnings of $19.1 million amortized ratably over the two-year vesting period ending in September 2005.



Non-cash Debt Conversion Interest Charge: As a result of the conversion
feature embedded in the Senior Debt instruments, which permits the conversion of the debt into our common stock at any time at a specified conversion price, we recorded a charge to interest expense representing the intrinsic value of the conversion
feature, limited to the total cash proceeds received from the funding. Accordingly, a charge of $9 million was recorded to interest expense on the closing date of the $16.0 million Investment. We received an additional payment of $1.0 million, due
by September 30, 2003, on October 8, 2003 and accordingly, we recorded an additional charge related to the beneficial conversion feature embedded in the notes as a charge to interest expense in the fourth quarter of 2003. In January 2004 we received
an additional payment of $1.0 million from TECORE and therefore an additional charge to interest expense of $1.0 million will be made in the first quarter of 2004. Assuming TECORE makes the five remaining $1 million installment payments for its
purchase of the TECORE Note, we will record additional non-cash charges to interest expense, with respect to each installment paid, up to an additional $1.0 million in each quarter thereafter through March 2005. The actual charge to earnings was
determined based on the intrinsic value of the conversion feature on the date of the closing of the Investment under the Securities Purchase Agreement.



Conversion Inducement Charge: This non-cash charge resulted from inducement charges associated with the conversion of our Series B Convertible Preferred
Stock by each of the three holders of that series of preferred stock: Mellon Ventures, L.P. (Mellon), Tandem PCS Investments, L.P. (Tandem) and SCP Private Equity Partners II, L.P. (SCP II). This charge resulted in an increase in the loss
attributable to common stockholders of $7.9 million for the year ended December 31, 2003 taking into account the value of the $500,000 paid to each of Mellon and Tandem, the 4,625,347 shares of common stock issued to SCP II and the shares of common
stock issued to the holders upon conversion. The $16 million convertible note Investment required voluntary conversion by the holders of Series B Convertible Preferred Stock. The holders converted their preferred shares to common stock at a
conversion price of $1.57 per share (half of the effective conversion price but well above the conversion price of $0.1081 per share defined in the Securities Purchase Agreement, see Note 8 to the financial statements), effectively waiving their
full ratchet anti-dilution adjustment rights and giving up all of their rights and privileges



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as preferred stockholders, including their liquidation preferences. The holders who converted their preferred shares into common stock also waived their
accrued dividends in the aggregate amount of $5.4 million



YEAR ENDED
DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001



Net revenues: Net revenues increased $8.5 million or 58.6% from $14.5 million for the year ended December 31, 2001 to $23.0 million for the year ended December 31, 2002. This increase in revenues was a result of two major orders received
for installations ultimately in the overseas market.



Gross
Profit: Gross profit increased $16.4 million from a loss of $10.9 million for the year ended December 31, 2001 to $5.5 million for the year ended December 31, 2002. The gross profit margin was (75.2%) for 2001 and 23.9% for 2002. The increase in the
gross profit margin was primarily attributable to a substantial decrease in inventory related charges, including write-downs for certain obsolete and excess inventory of $8.8 million during 2001 and our ability to leverage existing inventory to
support the increase in revenue without significant procurement of new material. In addition, warranty expense decreased by $2.2 million in the period ended December 31, 2002 versus the year ended December 31, 2001.



Research and development: Research and development expenses decreased $13.1
million or 50.8% from $25.6 million for the year ended December 31, 2001 to $12.5 million for the year ended December 31, 2002. This decrease was due to previously announced actions taken in the second and third quarters of 2001 to reduce operating
expenses which included actions to focus development in the areas with the greatest near-term potential. The $13.1 million dollar decrease included a $6.3 million reduction in labor and benefit costs, a $3.6 million reduction in consulting and
subcontractor expenses, a $1.0 million reduction in expensed R&D equipment, a $0.5 million reduction in travel and recruiting expenses, and a $0.4 million reduction in leased equipment. The research and development expenses for the year ended
December 31, 2002 included an accrual of approximately $0.7 million for bonuses accrued under a Board approved bonuses program that were scheduled to be paid in January 2003.



Sales and marketing: Sales and marketing expenses decreased $6.5 million or 54.6% from $11.9 million for the year ended
December 31, 2001 to $5.4 million for the year ended December 31, 2002. This decrease was due to previously announced actions taken in the second and third quarters of 2001 to reduce operating expenses. The $6.5 million reduction included a $2.4
million reduction in labor and benefit costs, a $1.0 million reduction in consulting and subcontractor expenses, a $1.2 million reduction in travel expenses and $0.4 million reduction in trade show expenses. The sales and marketing expenses for the
year ended December 31, 2002 included an accrual of approximately $0.3 million for bonuses accrued under a Board approved bonuses program that were scheduled to be paid in January 2003, but were deferred.



General and administrative: General and administrative expenses decreased
$8.6 million or 74.1% from $11.6 million for the year ended December 31, 2001 to $3.0 million for the year ended December 31, 2002. The $8.6 million reduction in expenses was primarily attributable to the recovery of receivables previously accounted
for in the provision for doubtful accounts of $2.4 million. In addition, there was a reduction in the provision for doubtful accounts of $5.0 million, and a $1.0 million reduction in outside legal services. Savings initiatives were also accomplished
through a reduction in the aggregate workforce of the Company, consolidation of facilities, and an adjustment in certain business functions, streamlining the organization. The general and administrative expenses for the year ended December 31, 2002
included an accrual of approximately $0.2 million for bonuses accrued under a Board approved bonuses program that were scheduled to be paid in January 2003, but were deferred.



Gain on vendor settlements: We recorded a gain on vendor settlements of $703,618 during 2002 as compared to $1,921,605
during 2001. The fiscal year 2002 gain was a result of the finalization of a Company program to enter into agreements with certain vendors to settle outstanding payables in exchange for releasing the Company from future obligations.



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LIQUIDITY, CAPITAL RESOURCES, AND GOING CONCERN



The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business; and, as a consequence, the financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts
and classifications of liabilities that might be necessary should we be unable to continue as a going concern. We have experienced net operating losses and negative cash flows since inception and, as of December 31, 2003, we had an accumulated
deficit of $242.9 million. Cash used in operations and to fund capital expenditures for the years ended December 31, 2003 and 2002 was $7.4 million and $1.4 million, respectively. We expect to have an operating loss in 2004. At December 31, 2003,
our principal source of liquidity was $5.1 million of cash and cash equivalents the remaining proceeds from the August 2003 senior secured convertible debt funding of $10.0 million described in Note 8 to our financial statements, and six additional
$1.0M quarterly installment payments associated with the funding described in Note 8 (one of which has already been received in fiscal year 2004). Such conditions raise substantial doubt that we will be able to continue as a going concern without
receiving additional funding. As of March 5, 2004 our cash balance was $3.2 million. In addition, on the same date we had a revenue backlog of $4.4 million. Our current 2004 operating plan projects that cash available from planned revenue combined
with the $3.2 million on hand at March 5, 2004 and the additional $1.0 million quarterly funding payments may be adequate to defer the requirement for new funding until 2005. There can be no assurances that the installments will be received as
planned, if at all, or that the anticipated installment payments on the debt financing combined with actual revenue will be adequate to sustain operations through 2004.



Our future results of operations involve a number of significant risks and uncertainties. The worldwide market for
telecommunications products such as ours has seen dramatic reductions in demand as compared to the late 1990s and 2000. It is uncertain as to when or whether market conditions will improve. We have been negatively impacted by this reduction in
global demand and by our weak balance sheet. Other factors that could affect our future operating results and cause actual results to vary from expectations include, but are not limited to, dependence on key personnel, dependence on a limited number
of customers (with three customers accounting for 85% of the revenue for 2003), ability to design new products, the erosion of product prices, ability to overcome deployment and installation challenges in developing countries which may include
political and civil risks and risks relating to environmental conditions, product obsolescence, ability to generate consistent sales, ability to finance research and development, government regulation, technological innovations and acceptance,
competition, reliance on certain vendors and credit risks. Our ultimate ability to continue as a going concern for a reasonable period of time will depend on increasing our revenues and/or reducing our expenses and securing enough additional funding
to enable us to reach profitability. Our historical sales results and our current backlog do not give us sufficient visibility or predictability to indicate when the required higher sales levels might be achieved, if at all.



If we are unable to receive the outstanding installment payments from the
August 2003 debt financing, we will have to seek additional funding or dramatically reduce our expenditures and it is likely that we will be required to discontinue operations. It is unlikely that we will achieve profitable operations in the near
term and therefore it is likely our operations will continue to consume cash in the foreseeable future. We have limited cash resources and therefore we must reduce our negative cash flows or secure additional funding in the near term to continue
operations. On February 9, 2004 we signed a non-exclusive agreement an investment advisor to explore the possibility of raising additional financing (see Note 17, Subsequent Events, to these financial statements). Any such placement would require
the approval of our senior noteholders, and would likely be subject to additional conditions, and there can be no assurances that we will be able to find such financing. Likewise, there can be no assurances that we will succeed in achieving our
goals and failure to do so in the near term will have a material adverse effect on our business, prospects, financial condition and operating results and our ability to continue as a going concern. As a consequence, we may be forced to seek
protection under the bankruptcy laws. In that event, it is unclear whether we could successfully reorganize our capital structure and operations, or whether we could realize sufficient value for our assets to satisfy fully our debts. Accordingly,
should we file for bankruptcy, there is no assurance that our stockholders would receive any value.



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On January 24, 2003, we entered into a Bridge Loan Agreement (the Loan Agreement), with TECORE, Inc., a
Texas corporation (TECORE), and SCP Private Equity Partners II, L.P., a Delaware limited partnership (SCP II, which together with TECORE, we call the Lenders), pursuant to which each of the Lenders agreed to loan us up to $3.0 million (collectively,
the Commitments or Bridge Loans), for an aggregate interim financing of $6.0 million. We were allowed to draw down the balance of the Commitment at our discretion upon compliance with certain conditions set forth in the Loan Agreement. The annual
interest rate on the Bridge Loans was 2% plus prime rate as quoted in The Wall Street Journal. The Bridge Loans were due on May 24, 2003 but the due date was extended until the closing of the $16.0 million (the Investment) by the Lenders
discussed below.



On June 5, 2003, we entered into a Securities
Purchase Agreement with TECORE and SCP II (the Purchase Agreement) for the issuance and sale to SCP II and TECORE of senior secured convertible notes (the Notes) in the principal amount of the Investment. The Notes are collateralized by a security
interest in all of our assets, including without limitation our intellectual property, in favor of the Lenders under the terms and conditions of the Purchase Agreement. The Purchase Agreement was attached as an exhibit to our Form 8-K filed with the
SEC on June 9, 2003.



On August 8, 2003 our stockholders
approved the Investment under the Purchase Agreement and related transactions, and the Investment closed on August 13, 2003. On that date, we issued Notes of $4 million and $12 million to SCP II and TECORE, respectively, and immediately received $8
million in proceeds ($4 million each from SCP and TECORE). Upon the closing of the Investment, the principal balance of the Bridge Loans ($6 million) was due and paid from the proceeds of the Investment. The interest accrued on these Bridge Loans
was deferred by the Lenders and will be due and payable four years from the closing date under the Purchase Agreement. The interest at the rate of 12% per annum will compound on the amount of interest deferred under the Bridge Loans.



NET CASH USED IN OPERATING ACTIVITIES



Net cash used in operating activities was approximately $48.2 million in
2001, $1.1 million in 2002, and $7.2 million in 2003. For the year ended December 31, 2003 the cash provided through customer deposits and a reduction in inventories was offset by an increase in accounts receivable, decreases in accounts payable and
deferred revenue, and the net loss incurred. We were able to reduce our inventory balance through fulfillment of customer orders. As of December 31, 2003, our net accounts receivable balance was $3.8 million. Of this balance 66% is attributable to
two customers. In addition, our inventory balance includes $1.4 million of slow moving inventory as of December 31, 2003. We believe that the $1.4 million is realizable inventory but there can be no assurance of the value that will actually be
realized from the sale of this inventory. As of December 31, 2003 we had $1.3 million of finished goods inventory at one customer location. We have filed a UCC-1 perfecting our security interest in the inventory at this customer location. During the
year ended December 31, 2002 the use of cash in operating activities resulted from the net loss, which was offset by a significant reduction in inventories and accounts receivable. The $6.2 million increase in the use of cash from the year ended
December 31, 2002 to the year ended December 31, 2003 was attributable to reductions in inventories and accounts receivable in 2002 that were not matched in 2003. Going forward, the Companys 2004 business plan, which assumes revenue of $24
 28 million, may not require additional funding through 2004 provided that TECORE continues to make the $1.0 million quarterly debt installment payments outlined in Note 8 to the financial statements. However, given that there can be no
guarantee that the business plan targets can be achieved, we have retained an investment advisor to recommend new funding sources. This letter agreement is detailed in Note 17 to the financial statements. During the year ended December 31, 2001 the
significant use of cash by operating activities was the result of the net losses together with the payment of accrued expenses associated with a reduction in workforce and the reduction in accounts payable resulting from the vendor settlements
offset by reductions in inventories and accounts receivable. Except for sales to OEMs or to customers under agreements providing for acceptance concurrent with shipment, our customers are billed as contractual milestones are met. Deposits ranging
between 10% and 50% of the contracted amount typically are received at the inception of the contract and an additional percentage of the contracted amount is generally billed upon shipment. The terms vary from contract to contract



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but are always agreed to in the initial contract. Most of the remaining unbilled amounts are invoiced after a customer has placed the products in service,
completed specified acceptance testing procedures or has otherwise accepted the product. Collection of the entire amounts due under our contracts to date have lagged behind shipment of our products due to the time period between shipment and
fulfillment of all of our applicable post-shipment contractual obligations, the time at which we bill the remaining balance of the contracted amount. This lag will require an increase in investments in working capital as our revenues increase. As of
December 31, 2003, our total notes receivable balance was $0.3 million, all of which was attributable to one customer. The customer is making monthly payments of principal and interest to satisfy this note receivable.



NET CASH USED IN INVESTING ACTIVITIES



We used net cash for capital expenditures of approximately $3.1 million,
$0.2 million, and $0.2 million for the years ended December 31, 2001, 2002, and 2003, respectively. During 2002 and 2003, we significantly reduced the level of capital expenditures from the level in 2001, as the physical assets available are
adequate to meet our needs at this time. Our capital expenditures for testing and manufacturing equipment used during final assembly of our products will increase if our revenues increase.



We lease our primary manufacturing and office facilities under long-term
non-cancelable operating leases. We also have operating leases for certain other furniture, equipment and computers. We used net cash for operating leases of approximately $1.4 million, $0.6 million and $0.5 million for the years ended December 31,
2001, 2002, and 2003, respectively. Future minimum payments for operating leases (including payments under our new lease for final assembly and testing facilities in Melbourne, Florida) aggregated through the year 2005 were approximately $0.7
million as of December 31, 2003 and we expect to spend approximately $0.5 million for those leases in 2004.



NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES



Net cash provided by financing activities for the year ended December 31, 2003 was $9.2 million resulted primarily due to the receipt of the initial $10.0 million in proceeds from the Investment discussed previously
and also in Note 8 to our financial statements. In addition we collected $0.2 million from an outstanding non-recourse loan with our CEO. The non-recourse loan was paid in full with accrued interest in September 2003. We had $10.0 million in debt
outstanding pursuant to the Investment under the Purchase Agreement as of December 31, 2003. As of February 6, 2004 the investors have advanced a total of $11.0 million to us, the most recent advance of $1.0 million having been made on January 6,
2004. There can be no assurance that the installments scheduled each quarter for the remainder of this year will be fulfilled as scheduled, if at all.



Net cash used in financing activities for the year ended December 31, 2002 was $0.3 million resulting primarily from the payments on capital leases of
$0.3 million. We had no debt facilities outstanding as of December 31, 2002.



Net cash provided by financing activities for the year ended December 31, 2001 was $27.2 million and was due to net proceeds received from the sale of the Series B Preferred Stock in May 2001 of $30.0 million (a
portion of which was used to reduce accounts payable in our vendor settlement program).



We lease certain computer and test equipment under capital lease arrangements. We used net cash for capital leases of approximately $1.3 million, $0.3 million and $0.1 million for the years ended December 31, 2001,
December 31, 2002 and December 31, 2003, respectively. Future minimum payments for capital leases aggregated through the year 2005 were approximately $71,899 as of December 31, 2003.



CRITICAL ACCOUNTING POLICIES AND ESTIMATES



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



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



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



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



Long-lived AssetsWe review long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Long-lived assets totaled $7.9 million as of December 31, 2003 including licensing and software development costs. Upon our
determination that the carrying value of the asset is impaired, we would record an impairment charge or loss. Unsuccessful product marketing or continued substantial operating losses could result in an inability to recover the carrying value of the
investment; and therefore, might require an impairment charge in the future.



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



Recent PronouncementsIn June 2002 the FASB issued Statement
No. 146, Accounting for Costs Associated with Exit or Disposal Activities(Statement 146). Statement 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3.
Statement 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred and is effective for exit or disposal activities initiated after December 31, 2002. The Company adopted this
Statement to be effective during the quarter ended March 31, 2003. The adoption of this Statement did not have any impact on our financial statements.



In December 2002 the FASB issued Statement No. 148, Accounting for Stock-Based CompensationTransition and Disclosurean amendment of
Statement No. 123 (Statement 148). Statement 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. This statement also amends the disclosure
requirements of FASB Statement



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No. 123, Accounting for Stock-Based Compensation (Statement 123) and Accounting Principles Board (APB) Opinion No. 28, Interim Financial
Reporting, to require prominent disclosure in both annual and interim financial statements about our method of accounting for stock-based employee compensation and the effect of the method used on reported results. We previously adopted the
disclosure only provisions of Statement 123 and continue to measure compensation costs for stock options issued to employees using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees (APB 25). Under APB 25, Compensation expense is not recognized when the exercise price is the same as the market price. A stock option is considered compensatory if the exercise price of the option is less than the fair market value of
the stock on the measurement date, which is the date all terms of the grant are finalized (normally the grant date). The intrinsic value of an option is the excess of the fair market value of the underlying stock over the exercise price of the
options. We have not yet determined whether we will voluntarily change to the fair value based method of accounting for the costs of stock-based compensation as provided under Statement 123 as amended by Statement 148.



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



|                                                                                      |  |                                |             |   |      |   |             |      |  |   |             |  
|------------------------------------------------------------------------------------- |  | ------------------------------ | ----------- | - | ---- | - | ----------- | ---- |  | - | ----------- | -
|                                                                                      |  | For the year ended December 31 |            
|                                                                                      |  | 2003                           |             |   | 2002 |   |             | 2001 | 
|Net loss attributable to common stock, as reported                                    |  | $                              | (32,328,397 | ) |      | $ | (24,342,918 | )    |  | $ | (60,147,667 | )
|Add: Stock based employee compensation expense included in reported net loss          |  |                                | 3,676,372   |   |      |   | 248,496     |      |  |   | 158,858     |  
|Deduct: Pro forma fair value stock compensation expense                               |  |                                | (3,625,372  | ) |      |   | (1,558,554  | )    |  |   | (1,688,885  | )
|                                                                                      |  |                                |             |   |      |   |             |      |  |   |             |  
|Pro forma net loss attributable to common stock                                       |  | $                              | (32,277,397 | ) |      | $ | (25,652,976 | )    |  | $ | (61,677,694 | )
|                                                                                      |  |                                |             |   |      |   |             |      |  |   |             |  
|Net loss per share attributable to common shareholdersbasic and diluted, as reported |  | $                              | (0.97       | ) |      | $ | (1.02       | )    |  | $ | (2.53       | )
|                                                                                      |  |                                |             |   |      |   |             |      |  |   |             |  
|Net loss per share attributable to common shareholdersbasic and diluted, pro forma   |  | $                              | (0.97       | ) |      | $ | (1.08       | )    |  | $ | (2.59       | )
|                                                                                      |  |                                |             |   |      |   |             |      |  |   |             |  



On April 30, 2002, the
FASB issued Statement No. 145,Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections(Statement 145) which updates, clarifies and simplifies existing accounting pronouncements. The
rescission of FASB Statement No. 4 eliminates the requirement to report all gains and losses resulting from the early extinguishments of debt as extraordinary items. Statement 145 is effective for all transactions occurring after May 15, 2002, with
earlier application encouraged. The Company adopted this Statement to be effective during the quarter ended June 30, 2002. As a result, the Company has reclassified an extraordinary gain on vendor settlements of $1,921,605 to operating expenses in
the accompanying 2001 statement of operations.



In November
2002 the FASB issued FASB Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Direct Guarantees of Indebtedness of Others(FIN 45). This interpretation requires the Company to record, at
the inception of a guarantee, the fair value of the guarantee as a liability, with the offsetting entry being recorded based on the circumstances in which the guarantee was issued. Fundings under the guarantee are to be recorded as a reduction of
the liability. After funding has ceased, the remaining liability is recognized in the income statement on a straight-line basis over the remaining term of the guarantee. We adopted the disclosure provisions of FIN 45 in the fourth quarter of 2002
and the initial recognition and initial measurement provisions on a prospective basis for all guarantees issued after December 31, 2002. This interpretation did not have a material impact on our financial conditions, results of operations, or cash
flows.



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In May 2003 the FASB issued Statement No. 150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity(Statement 150). This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an
issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). This statement is effective for interim periods beginning after June 15, 2003. We adopted the disclosure provisions of Statement 150
in the third quarter of 2003. This interpretation did not have a material impact on our financial condition, results of operations, or cash flows.



STATUS OF OUR COMMON STOCK LISTING ON NASDAQ NATIONAL MARKET



Under continued listing standard one (Nasdaq rule 4450(a)), companies listed on the Nasdaq National Market are required to have net tangible assets of $4
million, total stockholders equity of $10 million, and a minimum bid price of at least $1.00 per share (or a minimum bid price of at least $5.00 per share with no net tangible asset requirement). If a stock fails to trade at the minimum bid
price level for thirty consecutive business days, Nasdaq will notify the company of its deficiency in writing. The company then has ninety days to cure the deficiency and return its stock to compliance for at least ten consecutive business days (but
possibly longer at the discretion of Nasdaq). We received notice from Nasdaq of our noncompliance with the $1.00 minimum bid price per share continued listing requirement in 2002. Nasdaq sent a delisting notice in April 2003 and we filed an appeal.
Nasdaq granted us additional time and after our shares traded at or above the minimum bid price of $1.00 for at least ten consecutive trading days, on July 22, 2003 Nasdaq sent us a notice of compliance. Accordingly, our stock will continue to be
listed on the Nasdaq National Market, subject to compliance with the applicable listing requirements. During the months of November and December 2003 our share price traded at and below the required minimum of $1.00 per share, however subsequent to
the end of 2003 our stock has traded above the required minimum of $1.00 per share. We cannot give investors in our common stock any assurance that we will be able to maintain compliance with the $1.00 per share minimum bid price standard for
continued listing on Nasdaq and that the liquidity that Nasdaq provides will be available to investors in the future. On August 8, 2003 our shareholders approved a resolution allowing our Board of Directors the flexibility to implement a reverse
stock split if necessary to remain Nasdaq compliant. This authorization expires one year from the approval date.



In the absence of conversion of the secured convertible notes or if we are unable to secure additional equity financing, we expect our stockholders
equity to drop below the $10 million requirement under continued listing standard one (rule 4450(a)) when we report financial results for the first quarter of fiscal year 2004. There can be no assurance that the Nasdaq will permit the Company to
continue its listing on the Nasdaq National market or transfer to the Nasdaq SmallCap if it can not show a definitive plan for maintaining the stockholders equity requirement. Alternatively, continued listing standard two (rule 4450(b))
requires a market value of $50 million, the market value of listed shares of $15 million and a minimum bid price of $1.00 with no stockholders equity requirement. During portions of the first quarter of 2004, the Company satisfied listing
standard two. We cannot give investors in our common stock any assurance that we will be able to maintain compliance with either minimum standard for continued listing on Nasdaq National Market or the Nasdaq SmallCap Market and that the liquidity
that Nasdaq provides will be available to investors in the future.



FORWARD-LOOKING STATEMENTS; RISKS AND UNCERTAINTIES



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



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



RISK FACTORS



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



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



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



We have incurred significant losses since we began doing business. We
anticipate continuing losses and may never achieve or sustain profitability. We have accumulated losses of $242.9 million since we began doing business in 1994 through December 31, 2003, and we may never achieve or sustain profitability. We will
need to generate significantly higher revenues to achieve and sustain profitability. Since we began doing business in 1994, we have generated $114.0 million in net revenues through December 31, 2003. We have been marketing our GSM base stations
since 1996. We have never reported a profit. We will continue to incur significant research and product development, sales and marketing, materials and general administrative expenses, and we expect our expenses to increase as compared to prior
periods, as we expand our sales force and our international operations. We anticipate a net loss for the year 2004 and we may continue to incur losses beyond 2004. We cannot be certain that we will realize sufficient revenues or margins to sustain
our business.



We may not be able to obtain additional
capital to fund our operations on reasonable terms and this could hurt our business and negatively impact our stockholders. If adequate funds in the form of equity or debt are not available on reasonable terms or terms acceptable to us, we may
be unable to continue as a going concern. If we raise additional funds through the issuance of convertible debt or additional equity securities, the percentage ownership of our existing stockholders would be reduced, the securities issued may have
rights, preferences and privileges senior to those of holders of our common stock, and the terms of the securities may impose restrictions on our operations. Our secured convertible note holders have a senior security interest in all of our assets,
and until these investors are paid in full or until they have converted the notes and accrued interest into common stock, we may not be able to obtain additional investment or working capital.



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If the installments due under the $16 million financing by SCP II and TECORE are not made on a timely
basis, we may be forced to seek protection under the federal bankruptcy laws. If TECORE defaults on an installment payment due to us as payment of the purchase price of its convertible note and if we are unable to raise capital from another
source we are likely to cease operations or file for protection from claims of our creditors under the federal bankruptcy laws.



If we are unable to pay principal and interest on the $16 million financing when due, we may be forced to seek protection under the federal bankruptcy
laws. The convertible notes we sold in August 2003 in connection with our debt financing are convertible into our common stock at the election of the holders. If not converted, the principal and accrued interest on the notes become payable in
August 2007, subject to acceleration in certain circumstances. If the notes are not converted and we are unable to pay the principal amount and accrued interest on the notes when due, whether at maturity or by acceleration, the Investors could
foreclose on the notes and force a sale of our assets, including our intellectual property. Under such circumstances, we may need to cease operations or file for protection from claims of our creditors under the federal bankruptcy laws.



Conversion of the secured convertible notes will significantly dilute
the percentage ownership of our existing stockholders.If shares of our common stock are issued to the investors upon conversion of the secured convertible notes together with accrued interest, existing stockholders will have their ownership
percentage substantially diluted. The number of shares of common stock issuable under the terms of the proposed financing will also affect our earnings per share on a going-forward basis. The larger the number of shares deemed outstanding, the lower
the earnings per share will be. The actual effect of any conversion on our earnings per share will depend on the level of our earnings in future periods, the actual amount converted pursuant to the notes and the impact of the accounting treatment of
the secured convertible notes.



We have a limited operating
history.You should not rely on our recent results as an indication of our future results. Our base stations are being used in twenty-five commercially deployed systems. We had net revenues of $14.5 million, $23.0 million and $15.8 million in
2001, 2002 and 2003, respectively. Unless we can achieve significant increases in market acceptance of our products, we may never advance beyond our market penetration phase. Due to our limited operating history, it is difficult or impossible for us
to predict future results and you should not expect future revenue growth based on our recent results. You should consider our business and prospects in light of the risks and problems faced by technology companies in the early stages of
development.



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



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



| |  | Changes in the growth rate of the wireless communications industry;
| | - | -------------------------------------------------------------------



| |  | Consolidation in the wireless communications industry;
| | - | ------------------------------------------------------



| |  | Our ability to compete successfully against similar and larger sized GSM communications equipment providers;
| | - | ------------------------------------------------------------------------------------------------------------



| |  | Continued control of costs and reducing expenses;
| | - | -------------------------------------------------



| |  | Efficiently manufacturing our products ourselves and through outsourcing arrangements;
| | - | --------------------------------------------------------------------------------------



| |  | Absorbing overhead costs through higher manufacturing volume;
| | - | -------------------------------------------------------------



| |  | Generating cash flow from operations;
| | - | -------------------------------------



| |  | The mix of our revenue;
| | - | -----------------------



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| |  | The collectibility of our trade receivables;
| | - | --------------------------------------------



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



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



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



| |  | Our ability to reduce product costs to be cost competitive;
| | - | -----------------------------------------------------------



| |  | Foreign currency fluctuations, inflation and deflation;
| | - | -------------------------------------------------------



| |  | Decreases in average selling prices or demand for our products;
| | - | ---------------------------------------------------------------



| |  | Intellectual property disputes and litigation;
| | - | ----------------------------------------------



| |  | Government regulations;
| | - | -----------------------



| |  | Product defects;
| | - | ----------------



| |  | The availability of capital to fund operations;
| | - | -----------------------------------------------



| |  | Management of inventory in response to shifts in market demand; and
| | - | -------------------------------------------------------------------



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



The foregoing factors are difficult to forecast and these, as well as other factors, could harm our quarterly or annual operating results. If our
operating results fail to meet the expectations of investment analysts or investors in any period, the market price of our common stock may decline. If we are unable to achieve or maintain profitability, or if we are unable to achieve cash-flow
breakeven, we will be unable to build a sustainable business. In this event, the market price of our common stock may decline as well.



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



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



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



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



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



Investment in our stock is speculative.In light of the current market conditions for wireless communications and our precarious financial condition, we believe that an investment in our stock is highly speculative. Any investment in our common stock should only be made with
discretionary capital, all of which an investor can afford to lose.



Our stock price is volatile.The stock markets in general, and the stock prices of technology-based companies in particular, have experienced extreme volatility that often has been unrelated to the operating



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performance of any specific public company. The market price of our common stock has fluctuated in the past and is likely to fluctuate in the future as well.
Factors that may have a significant impact on the market price of our stock include:



| |  | Announcements concerning us, or our competitors;
| | - | ------------------------------------------------



| |  | Receipt of substantial orders for base stations;
| | - | ------------------------------------------------



| |  | Quality deficiencies in services or products;
| | - | ---------------------------------------------



| |  | Announcements regarding financial developments or technological innovations;
| | - | ----------------------------------------------------------------------------



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



| |  | New commercial products;
| | - | ------------------------



| |  | Changes in recommendations of securities analysts;
| | - | --------------------------------------------------



| |  | Government regulations;
| | - | -----------------------



| |  | Acts of terrorism or war;
| | - | -------------------------



| |  | Proprietary rights or product or patent litigation.
| | - | ---------------------------------------------------



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



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



In the absence of either conversion of the secured convertible notes or
additional equity financing, we expect our stockholders equity to drop below the $10 million requirement under continued listing standard one (Nasdaq rule 4450(a)) when we report financial results for the first quarter of fiscal year 2004.
There can be no assurance that the Nasdaq will permit us to continue our listing on the Nasdaq National Market or transfer to the Nasdaq SmallCap Market if it can not show a definitive plan for maintaining the stockholders equity requirement.
Alternatively, continued listing standard two (Nasdaq rule 4450(b)) requires a market value of $50 million, a market value of listed shares of $15 million and a minimum bid price of $1.00 with no stockholders equity requirement. During
portions of the first quarter of 2004, we satisfied listing standard two. We cannot give investors in our common stock any assurance that we will be able to maintain compliance with either minimum standard for continued listing on Nasdaq National
Market or the Nasdaq SmallCap Market and that the liquidity that Nasdaq provides will be available to investors in the future. Further information pertaining to the continued listing standards for the Nasdaq National Market and the Nasdaq SmallCap
market can be found on the Nasdaq web-site.



Intense
competition in the market for wireless telecommunications equipment from many larger, more established companies with greater resources could prevent us from increasing our revenue and achieving profitability. The wireless telecommunications
infrastructure market is highly competitive. We compete with large infrastructure manufacturers, systems integrators, and base station subsystem suppliers, as well as new



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market entrants. Most of our current and potential competitors have longer operating histories and presence in key markets, larger installed customer bases,
substantially greater name recognition, and more financial, technical, manufacturing, marketing, sales, distribution and other resources than we do. We may not be able to compete successfully against current and future competitors, including
companies that develop and market new wireless telecommunications products and services. These competitive pressures may result in price reductions, reduced gross margins, longer sales cycles and loss of customers. In addition roaming considerations
and bundled Mobile Switch Centers (MSCs) price/performance competition has impeded our sales in the North American market.



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



| |  | Comprehensiveness of product and technology solutions;
| | - | ------------------------------------------------------



| |  | Manufacturing capability;
| | - | -------------------------



| |  | Scalability and the ability of the system solution to meet customers immediate and future network requirements;
| | - | ----------------------------------------------------------------------------------------------------------------



| |  | Product performance and quality;
| | - | --------------------------------



| |  | Design and engineering capabilities;
| | - | ------------------------------------



| |  | Compliance with industry standards;
| | - | -----------------------------------



| |  | Time to market;
| | - | ---------------



| |  | System cost; and
| | - | ----------------



| |  | Customer support.
| | - | -----------------



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



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



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



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



A small number of customers account for substantially all of our revenues and the loss of any of these customers could hurt our results and cause our
stock price to decline. Our customer base has been and may continue to be concentrated with a small number of customers. The loss of any of these customers or the delay,



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reduction or cancellation of orders by or shipments to any of these customers could hurt our results and cause a decline in our stock price. The effect of
these risks on our operating results is compounded by our lengthy sales cycle. In 2003, sales to three customers accounted for 85.3% of our total revenue. In 2002 sales to five customers accounted for 81.8% and in 2001 sales to four customers
accounted for 57.8% of total revenue.



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



|                        |  |                         |   |  |      |   |  |      |  
|----------------------- |  | ----------------------- | - |  | ---- | - |  | ---- | -
|                        |  | YEARS ENDEDDECEMBER 31, |  
|                        |  | 2003                    |   |  | 2002 |   |  | 2001 |  
|TECORE Wireless Systems |  | 42.7                    | % |  | 49.0 | % |  | 14.1 | %
|U.S. Government         |  | 28.5                    | % |  |     |   |  |     |  
|Hafatel/Guam Wireless   |  | 14.1                    | % |  | 4.7  | % |  |     |  
|Big Five OEM            |  | 3.3                     | % |  |     |   |  |     |  
|MBO Cross               |  | 3.1                     | % |  | 4.7  | % |  | 16.6 | %
|COMTEL                  |  | 1.8                     | % |  | 0.4  | % |  | 14.0 | %
|Telsom Mobile           |  | 1.5                     | % |  | 21.2 | % |  | 2.5  | %
|Pioneer                 |  | 1.2                     | % |  | 0.8  | % |  | 2.7  | %
|Pinpoint                |  | 0.8                     | % |  | 0.5  | % |  | 4.4  | %
|ADAMS                   |  | 0.7                     | % |  | 1.0  | % |  | 13.1 | %



We have a
concentrated customer base and the failure of any of our customers to pay us or to pay us on time could cause significant cash flow problems, hurt our results and cause our stock price to decline. Our concentrated customer base significantly
increases the credit risks associated with slow payments or non-payments by our customers. These risks are also higher for us since many of our customers are start-up and small companies. Two customers accounted for 61% of our outstanding accounts
and notes receivable as of December 31, 2003, with one customer, TECORE, representing 39%. We are also dependent upon TECORE for additional Senior Debt funding. Two customers accounted for 71% of our combined outstanding accounts and notes
receivable as of December 31, 2002. Two customers represented 73% of our combined outstanding accounts and notes receivable as of December 31, 2001. In the past we have incurred bad debt charges and we may be required to do so in the future. The
failure of any of our customers to pay us, or to pay us on time, causes significant cash flow problems, hurts our results and could cause our stock price to decline.



Intense price performance competition for mobile switch centers will reduce sales opportunities in North American
markets. As a result of the reduction in global demand, our competitors have been bundling Mobile Switch Centers (MSCs) together with base stations at deeply discounted pricing levels targeting our traditional customer base resulting in intense
price performance competition. This competition has substantially reduced opportunities for us to expand or to continue sales of our coverage solution products to small/medium sized PCS operators in North America. We are executing a
significant cost reduction program for our products and we have programs in place to enhance the MSC price performance to address these competitive pressures but there can be no assurances that these efforts will be successful. If we are unable to
overcome the current competitive pressures facing us in connection with our traditional target market of small to medium operators for cost effective coverage solutions, we may be unable to compete against our larger competitors for future sales to
small and medium sized PCS operators in North America.



If
we continue to expand into international markets, we will become subject to additional business risks. We began marketing and selling our products internationally in Africa, the Middle East, Asia and Latin America both through OEM resellers and
our direct sales staff. Our business plan contemplates that a majority of our sales over the next several years will be in international markets. Our revenues from direct sales to international customers as a percentage of total revenues were 1.7%
in fiscal 2003, 29.1% in fiscal 2002 and 19.2% in fiscal 2001. Our revenues from OEM international sales were 14.1%, 49.0%, and 39.8% for the years ended December 31, 2001, 2002 and 2003, respectively. In many international markets, barriers to
entry are created by long-standing



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relationships between our potential customers and their local providers and protective regulations, including local content and service requirements. In
addition, our pursuit of international growth opportunities may require significant investments for an extended period before we realize returns, if any, on our investments.



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



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



| |  | Unexpected changes in regulatory requirements;
| | - | ----------------------------------------------



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



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



| |  | Inadequate protection of intellectual property in foreign countries;
| | - | --------------------------------------------------------------------



| |  | Increased difficulty in collecting delinquent or unpaid accounts;
| | - | -----------------------------------------------------------------



| |  | Lack of suitable export financing;
| | - | ----------------------------------



| |  | Adverse tax consequences;
| | - | -------------------------



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



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



| |  | Political and economic instability; and
| | - | ---------------------------------------



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



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



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



We sell products to companies in emerging markets in the Middle East and Africa. Future sales in these markets will be subject to economic, health and political risks. For the year ended December 31,
2003, our customers in the Middle East and Africa accounted for approximately 1.7% of our revenue. Sales in these regions have accounted for a greater proportion of our revenue in prior years, and may account for an increased portion of revenues
again in the future. Sales in these markets pose significant additional risks, which include:



| |  | Potential inability to enforce contracts or take other legal action, including actions to protect intellectual property rights;
| | - | -------------------------------------------------------------------------------------------------------------------------------



| |  | Difficulty in collecting revenues, obtaining letters of credit, and risks related to fluctuations in currency exchange rates, particularly if sales are denominated in the local
currency rather than in U.S. dollars;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Changes in United States foreign trade policy towards countries in the Middle East and Africa which may restrict our ability to export products to, or make sales in, those markets
and similar changes in those markets policy regarding the United States; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Changes in government regulation affecting companies doing business in the Middle East and Africa, either through export sales or local manufacturing operations.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



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In the event our revenue levels from sales to the Middle East and Africa increase, we will become
increasingly subject to these risks. The occurrence of any of these risks would harm our revenues or cash collections from our customers and could in turn cause our revenue, cash flow or growth to decline and harm our business and results of
operations.



Sales in certain foreign countries pose unique
and significant risks. A substantial portion of our product sales in 2003 were directly or indirectly made to operators in foreign countries, including countries experiencing armed conflict, civil unrest and instability, reports of terrorist
activities, and anti-American sentiment and activities. Conditions in these countries present unique and significant risks. Actions by foreign governments or hostile forces could result in harm to our personnel or our customers personnel, or
the loss of customers and prospective customers and could materially adversely affect our business.



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



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



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



Our market opportunity could be significantly diminished in the event that GSM or any subsequent GSM-based standards do
not continue to be or are not widely adopted.Our current products are designed to utilize only GSM, an international standard for voice and data communications. There are other competing standards including code division multiple access,
or CDMA, and time division multiple access, or TDMA. In the event that GSM or any GSM-based standards do not continue to be or are not broadly adopted, our market opportunity could be significantly limited, which would seriously harm our business.



Because some of our key components come from a single source,
or require long lead times, we could experience unexpected interruptions, which could cause our operating results to suffer. A number of our suppliers are sole sources for key components for our products. These key components are complex, difficult
to manufacture and require long lead times. In the event of a reduction or interruption of supply, or a degradation in quality, as many as six months could be required before we would begin receiving adequate supplies from other suppliers. Supply
interruptions could delay product shipments, causing our revenues and operating results to decline.



If we fail to accurately estimate product demand, we may incur expenses for excess inventory or be unable to meet customer requirements. Our
customers typically give us firm purchase orders with short lead times before requested shipment. However, our contract manufacturer requires commitments from us so that it can



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allocate capacity and be assured of having adequate components and supplies from third parties. Failure to accurately estimate product demand could cause us
to incur expenses related to excess inventory or prevent us from meeting customer requirements. In addition, our products are constantly evolving requiring new assemblies and components. If we fail to accurately estimate product demand, some
inventory could be designed out resulting in excess inventory.



Our reliance on a limited number of suppliers could lead to delays, additional costs, problems with our customers and loss of revenue. A reduction or interruption in component supply or a significant increase in component prices could
have a material adverse effect on our business or profitability.Our ability to meet customer demands depends, in part, on our ability to obtain timely and adequate delivery of parts and components from our suppliers and internal manufacturing
capacity. We plan to continue utilizing only one or a small number of suppliers for each of the components of our base station systems. We have no long-term contracts or arrangements with any of our suppliers that guarantee product availability or
the continuation of particular payment or credit terms. If, for any reason, a supplier fails to meet our quality and quantity requirements or stops selling products to us at commercially reasonable prices, we could experience significant production
delays and cost increases, as well as higher warranty expenses and product image problems. We have experienced component shortages in the past, including components for our integrated circuit products, that have adversely affected our operations.
Although we work closely with our suppliers to avoid these types of shortages, we may continue to encounter these problems in the future. Any of these problems could damage relationships with current or prospective customers, which could seriously
harm our operating results in a given period and impair our ability to generate future sales



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



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



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



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A significant decrease in the cost of digital T-1/E-1 phone lines or microwave will diminish one of
our competitive advantages. Existing base stations require an expensive physical communications link, usually through a digital T-1/E-1 phone line or microwave, to the wireline network.



Any significant decrease in the cost of digital T-1/E-1 phone lines or
microwave used to connect base stations to the wireline network, especially in less populated areas, will diminish a cost advantage that we currently use to market our products. The cost of T-1/E-1 or microwave facilities has recently declined
significantly in urban areas because of increased competition.



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



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



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



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



| |  | Install new management information systems; and
| | - | -----------------------------------------------



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



The Sarbanes/Oxley Act of 2002 requires companies such as AirNet that are not
expedited filers, to comply with more stringent internal control system and monitoring requirements beginning in 2005. This will require that we have a complete internal control system in place by the start of fiscal year 2005. Compliance with this
new requirement may place an expensive burden and significant time constraint on these companies with limited resources.



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



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



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



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



| |  | Incur debt, or
| | - | --------------



| |  | Assume liabilities.
| | - | -------------------



| |  | These purchases also involve numerous risks, including:
| | - | -------------------------------------------------------



| |  | Problems combining the purchased operations, technologies or products;
| | - | ----------------------------------------------------------------------



| |  | Unanticipated costs;
| | - | --------------------



| |  | Diversion of managements attention from our core business;
| | - | -----------------------------------------------------------



| |  | Adverse effects on existing business relationships with suppliers and customers;
| | - | --------------------------------------------------------------------------------



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



| |  | Potential loss of key employees of purchased organizations.
| | - | -----------------------------------------------------------



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



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



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



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Directors and officers insurance may be difficult or cost prohibitive to obtain. Our
current directors and officers insurance policy was difficult and expensive to obtain. The policy will expire on December 6, 2004. It may be difficult and/or expensive to secure a replacement policy. If we are unable to renew or secure a
replacement policy, we could lose our officers and directors and it will be extremely difficult to recruit qualified replacements for our management team and board of directors, which would have a material adverse affect on our business.



Control by our existing stockholders could discourage the potential
acquisition of our business. As of February 3, 2004, 5% or greater stockholders and their affiliates owned 32.4 million shares of our common stock or approximately 66.6% of our outstanding shares of common stock. In addition, two of these
stockholders, TECORE and SCP Private Equity Partners II, L.P. (SCP II), hold the rights to acquire another 97.9 million shares of common stock upon conversion or exercise of other securities. Acting together, these stockholders would be
able to control all matters requiring approval by stockholders, including the election of directors. Moreover, since the sale of the secured convertible notes with TECORE and SCP II, the combined interests of these two investors constitute a
controlling interest in the Company, with TECORE holding a majority of the outstanding shares on a fully diluted basis (assuming conversion of TECOREs Note). This concentration of ownership could have the effect of delaying or preventing a
change in control of our business or otherwise discouraging a potential acquirer from attempting to obtain control of us, which could prevent our stockholders from realizing a premium over the market price for their shares of common stock.



Some of our larger investors may attempt to sell their
common stock, which may depress the market price of our securities. Mellon Ventures, SCP Private Equity Partners, LP, its affiliate SCP II, TECORE and Harris Corporation each beneficially hold more than 5% of the Companys common stock. SCP
Private Equity Partners, which at February 20, 2004 held 4,672,176 shares of common stock, has indicated that it would like to sell its common stock due to the winding down of its fund. Other large investors may elect to sell at the same or
proximate times. If any one of these investors sells their common shares, the number of buyers in the market may not support the shares being sold and the market price of our shares could drop. The effect of these sales could be further accelerated
in the event the Company is not able to maintain its Nasdaq National Market listing.



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



We have no derivative financial instruments or derivative commodity instruments in our cash and cash equivalents. We invest the proceeds from our
financing activities in interest bearing, investment grade securities that mature within 24 months. Our transactions are generally conducted, and our accounts are denominated, in United States dollars. Accordingly, these funds were not exposed to
significant foreign currency risk at December 31, 2003.



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



FINANCIAL STATEMENTS



Our balance sheet as of
December 31, 2003 and 2002 and the related statements of operations, stockholders equity and cash flows for each of the three years in the period ended December 31, 2003 and the report of Deloitte & Touche LLP, Independent Auditors (which
report expresses an unqualified opinion and includes an explanatory paragraph) related to substantial doubt as to the Companys ability to continue as a going concern is included in this Annual Report on Form 10-K beginning on page F-1.



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SELECTED QUARTERLY RESULTS OF OPERATIONS



The following table sets forth unaudited quarterly financial data for the
four quarters in 2002 and 2003 and such information expressed as a percentage of our net revenues. This unaudited quarterly information has been prepared on the same basis as the audited financial information presented elsewhere in this report and,
in managements opinion, includes all adjustments, consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of the information for the quarters presented.



|                                                                            |  |               |        |   |              |   |        |              |  |   |              |   |  |              |         |   |              |   |        |              |  |   |              |      |  |   |         |   |  |   |        |  
|--------------------------------------------------------------------------- |  | ------------- | ------ | - | ------------ | - | ------ | ------------ |  | - | ------------ | - |  | ------------ | ------- | - | ------------ | - | ------ | ------------ |  | - | ------------ | ---- |  | - | ------- | - |  | - | ------ | -
|                                                                            |  | QUARTER ENDED |       
|(IN THOUSANDS)                                                              |  | MAR. 31 2002  |        |   | JUN. 30 2002 |   |        | SEP. 30 2002 |  |   | DEC. 31 2002 |   |  | MAR. 31 2003 |         |   | JUN. 30 2003 |   |        | SEP. 30 2003 |  |   | DEC. 31 2003 |     
|Net revenues                                                                |  | $             | 6,510  |   |              | $ | 7,210  |              |  | $ | 7,305        |   |  | $            | 2,001   |   |              | $ | 1,795  |              |  | $ | 4,440        |      |  | $ | 4,461   |   |  | $ | 5,089  |  
|Cost of revenues                                                            |  |               | 4,564  |   |              |   | 5,419  |              |  |   | 5,457        |   |  |              | 1,975   |   |              |   | 1,429  |              |  |   | 3,311        |      |  |   | 3,072   |   |  |   | 3,332  |  
|Write down of obsolete and excess inventory                                 |  |               |       |   |              |   |       |              |  |   |             |   |  |              | 145     |   |              |   |       |              |  |   | 196          |      |  |   | 11      |   |  |   | 177    |  
|                                                                            |  |               |        |   |              |   |        |              |  |   |              |   |  |              |         |   |              |   |        |              |  |   |              |      |  |   |         |   |  |   |        |  
|Gross Profit (loss)                                                         |  |               | 1,946  |   |              |   | 1,791  |              |  |   | 1,848        |   |  |              | (119    | ) |              |   | 366    |              |  |   | 933          |      |  |   | 1,378   |   |  |   | 1,580  |  
|OPERATING EXPENSES (GAINS):                                                 |  |               |        |   |              |   |        |              |  |   |              |   |  |              |         |   |              |   |        |              |  |   |              |      |  |   |         |   |  |   |        |  
|Research and development                                                    |  |               | 3,432  |   |              |   | 3,210  |              |  |   | 3,046        |   |  |              | 2,856   |   |              |   | 2,527  |              |  |   | 2,062        |      |  |   | 2,170   |   |  |   | 2,449  |  
|Sales and marketing                                                         |  |               | 1,512  |   |              |   | 1,450  |              |  |   | 1,391        |   |  |              | 1,079   |   |              |   | 819    |              |  |   | 536          |      |  |   | 514     |   |  |   | 715    |  
|General and administrative                                                  |  |               | 1,280  |   |              |   | 1,308  |              |  |   | 912          |   |  |              | (461    | ) |              |   | 993    |              |  |   | 815          |      |  |   | 1,862   |   |  |   | 2,735  |  
|Gain on vendor settlements                                                  |  |               |       |   |              |   | (30    | )            |  |   | (674         | ) |  |              |        |   |              |   |       |              |  |   |             |      |  |   |        |   |  |   |       |  
|                                                                            |  |               |        |   |              |   |        |              |  |   |              |   |  |              |         |   |              |   |        |              |  |   |              |      |  |   |         |   |  |   |        |  
|Total operating expenses                                                    |  |               | 6,224  |   |              |   | 5,938  |              |  |   | 4,675        |   |  |              | 3,474   |   |              |   | 4,339  |              |  |   | 3,413        |      |  |   | 4,546   |   |  |   | 5,899  |  
|Other income (expense), net                                                 |  |               | 128    |   |              |   | 66     |              |  |   | 159          |   |  |              | 44      |   |              |   | (23    | )            |  |   | (46          | )    |  |   | (9,141  | ) |  |   | (1,283 | )
|                                                                            |  |               |        |   |              |   |        |              |  |   |              |   |  |              |         |   |              |   |        |              |  |   |              |      |  |   |         |   |  |   |        |  
|Net loss                                                                    |  |               | (4,150 | ) |              |   | (4,081 | )            |  |   | (2,668       | ) |  |              | (3,549  | ) |              |   | (3,996 | )            |  |   | (2,526       | )    |  |   | (12,309 | ) |  |   | (5,602 | )
|Accretion of discountredeemable preferred stock                            |  |               | (456   | ) |              |   | (483   | )            |  |   | (511         | ) |  |              | (6,045  | ) |              |   |       |              |  |   |             |      |  |   |        |   |  |   |       |  
|Accretion of cumulative dividends on preferred stock                        |  |               | (600   | ) |              |   | (600   | )            |  |   | (600         | ) |  |              | (600    | ) |              |   | (600   | )            |  |   | (600         | )    |  |   |        |   |  |   |       |  
|Conversion charge                                                           |  |               |       |   |              |   |       |              |  |   |             |   |  |              |        |   |              |   |       |              |  |   |             |      |  |   | (7,895  | ) |  |   |       |  
|                                                                            |  |               |        |   |              |   |        |              |  |   |              |   |  |              |         |   |              |   |        |              |  |   |              |      |  |   |         |   |  |   |        |  
|Net loss attributable to common stock                                       |  | $             | (5,206 | ) |              | $ | (5,164 | )            |  | $ | (3,779       | ) |  | $            | (10,194 | ) |              | $ | (4,596 | )            |  | $ | (3,126       | )    |  | $ | (20,204 | ) |  | $ | (5,602 | )
|                                                                            |  |               |        |   |              |   |        |              |  |   |              |   |  |              |         |   |              |   |        |              |  |   |              |      |  |   |         |   |  |   |        |  
|Net loss attributable to common stock (as adjusted for waiver of dividends) |  | $             | (5,206 | ) |              | $ | (5,164 | )            |  | $ | (3,779       | ) |  | $            | (10,194 | ) |              | $ | (3,996 | )(1)         |  | $ | (2,526       | )(1) |  | $ | (20,204 | ) |  | $ | (5,602 | )
|                                                                            |  |               |        |   |              |   |        |              |  |   |              |   |  |              |         |   |              |   |        |              |  |   |              |      |  |   |         |   |  |   |        |  

---

|(1) | Pursuant to the issuance of the Senior Secured Convertible notes in the Securities Purchase Agreement signed on August 13, 2003 the dividends accrued for the Series B Redeemable
Convertible Preferred Stock were waived.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|                                                                            |  |                                 |    |  |              |    |  |              |    |  |              |    |  |              |    |  |              |    |  |              |    |  |              |   
|--------------------------------------------------------------------------- |  | ------------------------------- | -- |  | ------------ | -- |  | ------------ | -- |  | ------------ | -- |  | ------------ | -- |  | ------------ | -- |  | ------------ | -- |  | ------------ | --
|                                                                            |  | QUARTER ENDED                   |   
|                                                                            |  | MAR. 31 2002                    |    |  | JUN. 30 2002 |    |  | SEP. 30 2002 |    |  | DEC. 31 2002 |    |  | MAR. 31 2003 |    |  | JUN. 30 2003 |    |  | SEP. 30 2003 |    |  | DEC. 31 2003 |   
|                                                                            |  | (AS PERCENTAGE OF NET REVENUES) |   
|Net revenues                                                                |  | 100.0                           | %  |  | 100.0        | %  |  | 100.0        | %  |  | 100.0        | %  |  | 100.0        | %  |  | 100.0        | %  |  | 100.0        | %  |  | 100.0        | % 
|Cost of revenues                                                            |  | 70.1                            | %  |  | 75.2         | %  |  | 74.7         | %  |  | 98.7         | %  |  | 79.6         | %  |  | 74.6         | %  |  | 68.9         | %  |  | 65.5         | % 
|Write down of obsolete and excess inventory                                 |  |                                |    |  |             |    |  |             |    |  | 7.2          | %  |  |             |    |  | 4.4          | %  |  | 0.3          | %  |  | 3.5          | % 
|                                                                            |  |                                 |    |  |              |    |  |              |    |  |              |    |  |              |    |  |              |    |  |              |    |  |              |   
|Gross Profit (loss)                                                         |  | 29.9                            | %  |  | 24.8         | %  |  | 25.3         | %  |  | (5.9         | )% |  | 20.4         | %  |  | 21.0         | %  |  | 30.8         | %  |  | 31.0         | % 
|Operating expenses                                                          |  |                                 |    |  |              |    |  |              |    |  |              |    |  |              |    |  |              |    |  |              |    |  |              |   
|Research and development                                                    |  | 52.7                            | %  |  | 44.4         | %  |  | 41.7         | %  |  | 142.7        | %  |  | 140.8        | %  |  | 46.4         | %  |  | 48.6         | %  |  | 48.1         | % 
|Sales and marketing                                                         |  | 23.3                            | %  |  | 20.2         | %  |  | 19.0         | %  |  | 53.9         | %  |  | 45.7         | %  |  | 12.1         | %  |  | 11.5         | %  |  | 14.0         | % 
|General and administrative                                                  |  | 19.7                            | %  |  | 18.1         | %  |  | 12.5         | %  |  | (23.0        | )% |  | 55.3         | %  |  | 18.4         | %  |  | 41.7         | %  |  | 53.7         | % 
|Gain on vendor settlements                                                  |  |                                |    |  | (0.4         | )% |  | (9.2         | )% |  |             |    |  |             |    |  |             |    |  |             |    |  |             |   
|                                                                            |  |                                 |    |  |              |    |  |              |    |  |              |    |  |              |    |  |              |    |  |              |    |  |              |   
|Total operating expenses.                                                   |  | 95.7                            | %  |  | 82.3         | %  |  | 64.0         | %  |  | 173.6        | %  |  | 241.8        | %  |  | 76.9         | %  |  | 101.8        | %  |  | 115.8        | % 
|Other income (expense), net                                                 |  | 2.0                             | %  |  | 0.9          | %  |  | 2.2          | %  |  | 2.2          | %  |  | (1.3         | )% |  | (1.0         | )% |  | (204.9       | )% |  | (25.2        | )%
|                                                                            |  |                                 |    |  |              |    |  |              |    |  |              |    |  |              |    |  |              |    |  |              |    |  |              |   
|Net loss                                                                    |  | (63.8                           | )% |  | (56.6        | )% |  | (36.5        | )% |  | (177.3       | )% |  | (222.7       | )% |  | (56.9        | )% |  | (275.9       | )% |  | (110.0       | )%
|Accretion of discountredeemable preferred stock                            |  | (7.0                            | )% |  | (6.7         | )% |  | (7.0         | )% |  | (302.1       | )% |  |             |    |  |             |    |  |             |    |  |             |   
|Dividends on preferred stock                                                |  | (9.2                            | )% |  | (8.3         | )% |  | (8.2         | )% |  | (30.0        | )% |  | (33.4        | )% |  | (13.5        | )% |  |             |    |  |             |   
|Conversion charge                                                           |  |                                |    |  |             |    |  |             |    |  |             |    |  |             |    |  |             |    |  | (177.0       | )% |  |             |   
|                                                                            |  |                                 |    |  |              |    |  |              |    |  |              |    |  |              |    |  |              |    |  |              |    |  |              |   
|Net loss attributable to common stock                                       |  | (80.0                           | )% |  | (71.6        | )% |  | (51.7        | )% |  | (509.4       | )% |  | (256.1       | )% |  | (70.4        | )% |  | (452.9       | )% |  | (110.0       | )%
|                                                                            |  |                                 |    |  |              |    |  |              |    |  |              |    |  |              |    |  |              |    |  |              |    |  |              |   
|Net loss attributable to common stock (as adjusted for waiver of dividends) |  | (80.0                           | )% |  | (71.6        | )% |  | (51.7        | )% |  | (509.4       | )% |  | (222.7       | )% |  | (56.9        | )% |  | (452.9       | )% |  | (110.0       | )%
|                                                                            |  |                                 |    |  |              |    |  |              |    |  |              |    |  |              |    |  |              |    |  |              |    |  |              |   



There were no material
fourth quarter adjustments to cost of revenue or expenses.



We
have experienced and expect to continue to experience significant fluctuations in quarterly operating results as a result of many factors. We believe that period-to-period comparisons of our operating results are not meaningful and should not be
relied upon as any indication of future performance. It is likely that future quarterly operating results from time to time will not meet the expectations of market analysts or investors, which may have an adverse effect on the price of our common
stock.



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE



None.



ITEM 9A. CONTROLS AND PROCEDURES



Our Chief Executive Officer and Chief Financial Officer (collectively, the Certifying Officers) are responsible for establishing and maintaining disclosure controls and procedures for us. Such officers have concluded (based upon
their evaluation of these controls and procedures as of the end of the period covered by this report) that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in this report is accumulated
and communicated to management, including our principal executive officers as appropriate, to allow timely decisions regarding required disclosure.



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The Certifying Officers also have indicated that there were no significant changes in our internal
controls or other factors that could significantly affect such controls subsequent to the date of their evaluation, and there were no corrective actions with regard to significant deficiencies and material weaknesses.



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



PART III



ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT



The directors and executive officers of the Company are:



|                       |  |     |  |                                                                          
|---------------------- |  | --- |  | -------------------------------------------------------------------------
|NAME                   |  | AGE |  | POSITION                                                                 
|Glenn A. Ehley         |  | 41  |  | President, Chief Executive Officer and Director                          
|James W. Brown         |  | 52  |  | Chairman                                                                 
|Darrell Lance Maynard  |  | 50  |  | Director                                                                 
|George M. Calhoun      |  | 51  |  | Director                                                                 
|Gerald Y. Hattori      |  | 52  |  | Director                                                                 
|Jay J. Salkini         |  | 40  |  | Director                                                                 
|Christopher J. Doherty |  | 47  |  | Director                                                                 
|Shiblie O. Shiblie     |  | 42  |  | Director                                                                 
|Hans F. Morris         |  | 30  |  | Director                                                                 
|Munzer Kayyem          |  | 40  |  | Director                                                                 
|Joseph F. Gerrity      |  | 51  |  | Vice President of Finance, Chief Financial Officer and Treasurer         
|Stuart P. Dawley       |  | 40  |  | Vice President, General Counsel, Investor Relations Officer and Secretary
|Timothy J. Mahar.      |  | 56  |  | Vice President of Worldwide Sales                                        
|Thomas R. Schmutz      |  | 41  |  | Vice President of Engineering                                            
|Bennet Wong            |  | 43  |  | Vice President, Technical Sales and Business Development                 
|Patricio X. Muirragui  |  | 54  |  | Vice President, Customer Care                                            
|Terry L. Williams      |  | 42  |  | Chief Technical Officer                                                  



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The composition of the Board of Directors and the Committees of the Board are listed in the chart below.



|                       |  |             |  |                                              |       |            |              |                 |            |                       |            |            |  |   |  |   |  |  
|---------------------- |  | ----------- |  | -------------------------------------------- | ----- | ---------- | ------------ | --------------- | ---------- | --------------------- | ---------- | ---------- |  | - |  | - |  | -
|                       |  |             |  | Independent per Audit Committee Requirements |       | Committees |              | FinancialExpert |            | SeniorDebtholdersReps |            | CompanyRep
|Name                   |  | Independent |  |                                              | Audit |            | Compensation |                 | Nominating |                       | Litigation |            |  |  
|Glenn A. Ehley         |  |             |  |                                              |       |            |              |                 |            |                       |            |            |  |   |  |   |  | X
|James W. Brown         |  | X           |  |                                              |       |            |              | X               |            |                       |            |            |  |   |  | X |  |  
|Darrell Lance Maynard  |  | X           |  | X                                            |       | X          |              | X               |            | X                     |            | X          |  |   |  |   |  |  
|George M. Calhoun      |  | X           |  | X                                            |       | X          |              |                 |            | X                     |            | X          |  |   |  |   |  |  
|Gerald Y. Hattori      |  | X           |  | X                                            |       | X          |              | X               |            | X                     |            | X          |  | X |  |   |  |  
|Jay J. Salkini         |  |             |  |                                              |       |            |              |                 |            |                       |            |            |  |   |  | X |  |  
|Christopher J. Doherty |  | X           |  |                                              |       |            |              |                 |            |                       |            |            |  |   |  | X |  |  
|Shiblie O. Shiblie     |  |             |  |                                              |       |            |              |                 |            |                       |            |            |  |   |  | X |  |  
|Hans F. Morris         |  |             |  |                                              |       |            |              |                 |            |                       |            |            |  |   |  | X |  |  
|Munzer Kayyem          |  |             |  |                                              |       |            |              |                 |            |                       |            |            |  |   |  | X |  |  



The Board of Directors
and management believe that we meet the current requirements of the Sarbanes-Oxley Act and the Nasdaq Stock Market for both the required independent directors and the requirement for a financial expert. Effective with our 2004 Annual Meeting, Nasdaq
requires that the majority of our Board members must be independent. Currently we do not meet this requirement. The Board of Directors has determined that Mr. Hattori qualifies as an audit committee financial expert within the meaning of
the applicable SEC rules, and that he meets the applicable independence standards relating to audit committee members.



Mr. Gerald Hattori is the President and Founder of Evolution Management, Inc., a business advisory and strategic planning consulting firm that provides
operational expertise to startup and high emerging growth companies. Prior to starting Evolution Management, Inc. Mr. Hattori held the position of Vice President of Finance, Chief Financial Officer, Treasurer & Secretary at AirNet Communications
from March 1999 through July 2000, which included the time of the Companys initial public offering in December 1999. Prior to joining AirNet, Mr. Hattori held the position of Vice President of Finance & Chief Financial Officer &
Treasurer at Nexar Technologies, Inc. where he successfully brought this high technology startup to its Initial Public Offering (IPO) in April 1997, two years from its beginning. Nexar was a manufacturer of fully upgradeable personal computers
utilizing an unconventional patented technology with industry standard components. In addition, to Mr. Hattoris primary responsibilities for the companys finance and administration, he was heavily involved with the companys
manufacturing operations located in the Silicon Valley. He was involved in establishing the appropriate internal control procedures and planning techniques. Prior to Nexar, Mr. Hattori was the Corporate Controller of Sipex Corporation, an analog
semiconductor manufacturer. He was a very key individual in taking Sipex Corporation through its IPO in April 1996 and subsequent follow-on offering in November 1996. He was also involved in the acquisitions of several businesses which gave the
company the ability to change its customer direction from being a predominantly government military contractor to a viable supplier of semiconductors for commercial applications. As the Corporate Controller, he was responsible for the worldwide
financial and accounting operations of the company. Mr. Hattori started his career with Sanders, a Lockheed Martin Company in 1974. Mr. Hattori holds a Masters in Business Administration (MBA) from New Hampshire College and a Bachelors of Science
degree in Business Administration/Accounting from Merrimack College.



We have not yet completed adoption of a code of ethics, as such term is used in applicable SEC regulations, for our senior executive, financial and accounting executives as of December 31, 2003. Nasdaq listing rules will require
us to adopt a code of conduct applicable to all directors, officers and employees by May 4, 2004, and to make the code, together with any amendments and waivers, available to the public. We are in the process of preparing a code of conduct that
addresses these requirements, and we will make it available to the public when it is completed.



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Officer and Board of Director Biographies



Glenn A. Ehley has served as President and Chief Executive Officer since
August 2001 and as a director of the Company since January 2002. Prior to August 2001, he served as Senior Vice President of Worldwide Sales and Marketing beginning February 2000 and from August 1997 until February 2000 as Vice President of Sales
and Marketing. Mr. Ehley joined the Company in July 1995 as Director of Marketing. Prior to joining the Company, Mr. Ehley served in several positions at Siemens and Lucent Bell Laboratories in the Marketing and Engineering organizations. Mr. Ehley
received an M.B.A. and M.S. in Computer Engineering from Florida Atlantic University and received a B.S. in Computer Science from Illinois Benedictine College.



James W. Brown has served as a director since November 1997 and as Chairman of the Board since October 1999. He serves as the designee of SCP Private
Equity Partners II, LP, one of the Companys stockholders. Mr. Brown has been a Partner, since 1996, of SCP Private Equity Management, LP and its successors, which manage private equity investment funds. Mr. Brown has also been a Managing
Director of CIP Capital Management, Inc. since 1994. From 1989 until 1994, Mr. Brown was Chief of Staff to the Governor of Pennsylvania. Prior to his public service, he was a partner in a major Philadelphia law firm. Mr. Brown received a J.D. from
the University of Virginia and a B.A. from Villanova Universitys Honors Program.



Darrell Lance Maynard has served as a director of the Company since January 2002. Since 1996, he has been the President and Chairman of Southeast Telephone (SET), of which he was a founder, in Pikeville, Kentucky. SET
is a telecommunications provider of long distance, local service, Internet service and paging. Mr. Maynard was selected as the SBA 2002 Small Business Person of the Year for the Commonwealth of Kentucky. Mr. Maynard attended Michigan Technological
University in Houghton, Michigan.



George M. Calhoun has served
as a director of the Company since March 2002. He was Chairman and CEO of Illinois Superconductor Corporation (Nasdaq: ISCO) from 1999 until 2002. He has more than 23 years of experience in high-tech wireless systems development, beginning in 1980
as the co-founder of InterDigital Communications Corporation (Nasdaq: IDCC), where he participated in the development of the first commercial application of digital TDMA radio technology, and introduced the first wireless local loop system to the
North American telecommunications industry. Dr. Calhoun was a Director and Vice-Chairman of Geotek (which filed for reorganization under Chapter 11 of the Federal Bankruptcy Code in 1998), and served as the Chairman of the companys engineering
joint venture in Israel, PowerSpectrum Technologies, Ltd. until 1998. In 1998, Dr. Calhoun founded Davinci Solutions, LLC, a consulting firm focused on wireless and Internet technology companies. Dr. Calhoun holds a Ph.D. in Systems Science from the
Wharton School at the University of Pennsylvania, as well as a B.A. from the same university.



Gerald Y. Hattori has served as a director of the Company since April 2003. Since July 2000, Mr. Hattori has served as President of Evolution Management Inc., a business advisory and strategic planning consulting
firm. Mr. Hattori served as Vice President of Finance and Chief Financial Officer of the Company from March 1999 until July 2000 and as Treasurer and Secretary from September 1999 until July 2000. Prior to joining the Company, from October 1996
until March 1999 Mr. Hattori was Vice President of Finance, Chief Financial Officer and Treasurer of Nexar Technologies, Inc., a manufacturer of personal computers, which filed for reorganization under Chapter 11 of the Federal Bankruptcy Code in
December 1998. Mr. Hattori holds an M.B.A. from New Hampshire College and a B.S. degree in Business Administration/Accounting from Merrimack College. Mr. Hattori serves on the Audit Committee of the Board as an audit committee financial
expert.



Jay J. Salkini has served as a director of the
Company since August 2003. Mr. Salkini is the founder of TECORE and has served as its President and Chief Executive Officer since December 1991. Prior to founding TECORE, Mr. Salkini was with Nortel/BNR and Siemens in the engineering organizations
involved in the development of wireless and switching systems. Mr. Salkini earned his BSEE and Masters in Computer Engineering from Florida Atlantic University.



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Christopher J. Doherty has served as a director of the Company since August 2003. Mr. Doherty is a
principal of SCP Private Equity Partners II, L.P. From 1994 to 1997, Mr. Doherty was a partner with the Washington, D.C. law firm of Fox, Bennett & Turner. Mr. Doherty has also served as Trustee of the $2 billion Montgomery County Employee
Retirement System (1996-2002), Deputy Treasurer of the Commonwealth of Massachusetts (1991-1994), Special Assistant Attorney General of Massachusetts (1991-1993), Counsel to the United State Senate Committee on Labor and Human Resources (1986-1989)
and Deputy Staff Director to Senator Edward M. Kennedy (1981-1986). Mr. Doherty currently serves on the Board of Directors and Investment Committee of the Suburban Hospital Healthcare System. He also sits on the Board of Directors of the Potomac
Asset Management Company. Mr. Doherty received his B.A. in Government from Harvard College and his J.D. from Georgetown University Law Center.



Shiblie O. Shiblie has served as a director for the Company since August 2003. Mr. Shiblie has served as the Chief Operating Officer of TECORE since July
2002 and from June 2000 until July 2002 served as Vice President of Business Development. Prior to joining TECORE, Mr. Shiblie served as Director of Marketing for Ericsson, Vice President of Systems and Products at LCC International and served in
several positions at DAI and Comsys in the engineering organizations. Mr. Shiblie earned his BSEE from the University of Maryland.



Hans F. Morris has served as a director for the Company since August 2003. Mr. Morris has served as Controller of TECORE since joining the company in
September 2002. Prior to joining TECORE, Mr. Morris served as a financial analyst and consultant to Corvis Corporation, Assistant Controller at PPGs Stone Industrial Division and as controller of MSI, Inc. Mr. Morris earned his B.S. in Finance
from Towson University.



Munzer Kayyem has served as a director
for the Company since January 2004. Mr. Kayyem has served as General Manager of TECORE Wireless Systems MEA, FZ LLC in Dubai, United Arab Emirates since July 2002. From February 2001 until July 2002, Mr. Kayyem served as the Business Development
Manager and a trainer for American Life Insurance Company in the Gulf region, the United Arab Emirates, Qatar and Bahrain, where he was responsible for development and training. From January 1996 until January 2000, Mr. Kayyem served as the Business
Development Manager for National (Aldwalya) Glass and Mirror Company in Syria. Mr. Kayyem earned his bachelors degree in Business Administration from the University of Nebraska.



Joseph F. Gerrity has served as Vice President of Finance and Chief Financial Officer since June 2001. Prior to June 2001,
he served as Director of Strategic Planning beginning 1999. Prior to 1999, Mr. Gerrity served with Harris Corporation, most recently as Controller of the Military and Space Division of Harris Semiconductor. Mr. Gerrity also served as CFO of
COREdata. Mr. Gerrity holds an M.S. in Management from the University of Wisconsin and a B.S. in Management from Marquette.



Stuart P. Dawley has served as Vice President, General Counsel, Investor Relations Officer and Secretary since September 2001. Prior to that, he was
General Counsel to the Company between July 2000 and September 2001. Prior to that, he served as Executive Vice President and General Counsel at Exigent International, Inc. from July 1997 until April 2000. Before joining Exigent, Mr. Dawley was
General Counsel of AirNet from November 1996 until July 1997 and served as Director of Marketing and Strategic Alliances from June 1995 until November 1996. Mr. Dawley received his Juris Doctor Degree from the University of Iowa.



Timothy J. Mahar has served as Vice President of Worldwide Sales since August
2001. Prior to that, he served as Vice President of Marketing and Business Development from February 2000 to August 2001. Prior to joining the Company, Mr. Mahar served in several sales and marketing management positions at Siemens Information and
Communications Networks since 1992. From October 1998 to February 2000 he served as Vice President of Sales and Business Development and from October 1997 to October 1998 as Vice President of Business Solutions. Mr. Mahar holds an M.S. in Electrical
Engineering and a B.S. in Computer Engineering from the University of WisconsinMilwaukee.



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Thomas R. Schmutz has served as Vice President of Engineering since August 2001. Prior to being elected
as Vice President of Engineering, he served as the Companys Director of Engineering beginning in 1995. Mr. Schmutz holds a MS in Engineering from the Georgia Institute of Technology and a BS from the United States Military Academy. He holds
thirteen U.S. patents in the wireless technology field.



Patricio X. Muirragui has served as Vice President of Customer Care since June 2003 and prior to that as Vice President of Quality since January 2001. Prior to January 2001, for more than 24 years Mr. Muirragui held several positions with
Siemens Information and Communications Networks, most recently as Director of Quality. Prior to joining Siemens in 1976, Mr. Muirragui held various positions, as a Member of the Technical Staff, at Bell Telephone Laboratories. Mr. Muirragui holds a
BSEE from Purdue University and a MSEE from the University of California, Berkeley.



Bennet Wong has served as Vice President of Technical Sales & Business Development since August 2001. Prior to August 2001, Mr. Wong held several positions in marketing and technical sales for the Company
beginning in September 1998. Prior to September 1998, Mr. Wong was employed by Ericsson Communications of Canada where he was a Product Manager for approximately four years. He holds an MSEE and BSEE from Ohio State University.



Terry L. Williams has served the Chief Technical Officer since August 2001
having joined the Company as its co-founder in 1994. Prior to that, he served at Harris Corporation and GE Aerospace on numerous government/commercial projects focusing on communications, signal processing and advanced radar technology. Mr. Williams
is the architect of the Companys broadband SDR radio and holds eleven U.S. patents in the wireless field. Mr. Williams holds an MSEE from the Georgia Institute of Technology and a B.S. from Mississippi State University.



SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE



Based solely on our review of copies of reports filed by persons
(reporting persons) required to file such reports pursuant to Section 16(a) of the Exchange Act, we believe that all filings required to be made by reporting persons with respect to the year ended December 31, 2003 were timely made in
accordance with the requirements of the Exchange Act.



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ITEM 11. EXECUTIVE COMPENSATION



The following summary compensation table sets forth information concerning compensation awarded to, earned by, or paid to (i) our Chief Executive Officer, and (ii) the four other highest compensated executive officers who were serving as
executive officers at December 31, 2003, (collectively, the named executive officers) for services rendered in all capacities with respect to the fiscal years ended December 31, 2001, 2002 and 2003:



|                                                                |  |                     |  |                       |                              |                  |     |  |                             |           |  |                                    |  |                            
|--------------------------------------------------------------- |  | ------------------- |  | --------------------- | ---------------------------- | ---------------- | --- |  | --------------------------- | --------- |  | ---------------------------------- |  | ---------------------------
|                                                                |  | ANNUAL COMPENSATION |  |                       | LONG-TERMCOMPENSATION AWARDS
|NAME AND PRINCIPAL POSITION                                     |  | FISCALYEAR          |  | SALARY($)             |                              | BONUS($) (5)     |     |  | OTHER ANNUALCOMPENSATION($) |           |  | SECURITIESUNDERLYINGOPTIONS(#) (1) |  | ALL OTHERCOMPENSATION($)(4)
|Glenn A. Ehley President, Chief Executive Officer and Director  |  | 200320022001        |  | 250,000250,000187,090 |                              | 150,000132,500  | (6) |  | 53,940103,03351,767         | (2)(2)(3) |  | 10,883,106250,000                 |  | 8655,5005,100              
|                                                                |  |                     |  |                       |                              |                 
|Thomas R. Schmutz Vice President of Engineering                 |  | 200320022001        |  | 182,246182,246156,641 |                              | 29,90941,051    |     |  |                          |           |  | 550,00050,000                     |  | 6315,5005,100              
|                                                                |  |                     |  |                       |                              |                 
|Joseph F. Gerrity Chief Financial Officer                       |  | 200320022001        |  | 178,750178,750140,395 |                              | 26,462         |     |  |                          |           |  | 550,00042,933                     |  | 1,4195,3635,006            
|                                                                |  |                     |  |                       |                              |                 
|Stuart P. Dawley Vice President, General Counsel, and Secretary |  | 200320022001        |  | 174,000174,000153,923 |                              | 23,237         |     |  |                          |           |  | 550,00050,000                     |  | 6025,2205,100              
|                                                                |  |                     |  |                       |                              |                 
|Terry L. Williams Chief Technical Officer                       |  | 200320022001        |  | 164,814164,814141,657 |                              | 2,2103,06045,875 |     |  |                          |           |  | 550,00050,000                     |  | 5715,0365,100              

---

|(1) | Figures in this column show the number of options to purchase shares of our common stock that were granted during the respective fiscal year, notwithstanding the fact that the
options may have been granted for services performed in a prior fiscal year. We did not grant any restricted stock awards or stock appreciation rights to any of the named executive officers during the years shown.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Represents performance-based sales bonuses, premiums paid for life insurance policy, and legal fees paid for personal representation.
|--- | -------------------------------------------------------------------------------------------------------------------------------------

|(3) | Represents performance-based sales bonuses.
|--- | -------------------------------------------

|(4) | Represents a matching contribution to a defined contribution plan.
|--- | ------------------------------------------------------------------

|(5) | Includes patent awards.
|--- | -----------------------

|(6) | This bonus payment is detailed in Note 10 to the financial statements.
|--- | ----------------------------------------------------------------------



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OPTION GRANTS IN LAST FISCAL YEAR



The following table sets forth information concerning individual grants of stock options to the named executive officers
during the fiscal year ended December 31, 2003:



|                  |  |                                            |  |                                                         |   |           |                             |           |                                    |            |                |  |                                                                                                |  |   |           |  |   |            |  |   |           
|----------------- |  | ------------------------------------------ |  | ------------------------------------------------------- | - | --------- | --------------------------- | --------- | ---------------------------------- | ---------- | -------------- |  | ---------------------------------------------------------------------------------------------- |  | - | --------- |  | - | ---------- |  | - | ----------
|NAME              |  | SECURITIESUNDERLYINGOPTION/SARSGRANTED (#) |  | % OF TOTALOPTIONSGRANTEDTOEMPLOYEES IN FISCAL YEAR 2003 |   |           | EXERCISEOR BASEPRICE ($/SH) |           | MARKET PRICEON DAY OF GRANT ($/SH) |            | EXPIRATIONDATE |  | POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUALRATES OF STOCKPRICE
APPRECIATIONFOR OPTION TERM(1)
|                  |  |                                            |  |                                                         |   | 0% ($)(2) |                             | 5% ($)(2) |                                    | 10% ($)(2)
|Glenn A. Ehley    |  | 10,883,106                                 |  | 53.40                                                   | % |           | $                           | 0.01      |                                    | $          | 0.91           |  | 08/13/2013                                                                                     |  | $ | 9,794,795 |  | $ | 12,639,816 |  | $ | 16,131,964
|Thomas R. Schmutz |  | 550,000                                    |  | 2.70                                                    | % |           | $                           | 0.01      |                                    | $          | 1.02           |  | 09/05/2013                                                                                     |  | $ | 555,500   |  | $ | 708,974    |  | $ | 904,851   
|Joseph F. Gerrity |  | 550,000                                    |  | 2.70                                                    | % |           | $                           | 0.01      |                                    | $          | 1.02           |  | 09/05/2013                                                                                     |  | $ | 555,500   |  | $ | 708,974    |  | $ | 904,851   
|Stuart P. Dawley  |  | 550,000                                    |  | 2.70                                                    | % |           | $                           | 0.01      |                                    | $          | 1.02           |  | 09/05/2013                                                                                     |  | $ | 555,500   |  | $ | 708,974    |  | $ | 904,851   
|Terry L. Williams |  | 550,000                                    |  | 2.70                                                    | % |           | $                           | 0.01      |                                    | $          | 1.02           |  | 09/05/2013                                                                                     |  | $ | 555,500   |  | $ | 708,974    |  | $ | 904,851   

---

|(1) | Options vest in two installments over a two-year period. The options in this table expire ten years after grant.
|--- | ----------------------------------------------------------------------------------------------------------------

|(2) | These columns show the hypothetical value of the options granted at the end of the option terms if the price of our common stock were to appreciate annually by 0%, 5%, and 10%,
respectively, based on the grant date value of our common stock.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES



The following table sets forth certain information regarding stock option exercises by the named executive officers during the fiscal year ended December
31, 2003, and stock options held by the named executive officers at December 31, 2003:



|                  |  |                                 |  |                    |   |                                                                          |         |                                                                  |            |                   |   |         |  |   |          
|----------------- |  | ------------------------------- |  | ------------------ | - | ------------------------------------------------------------------------ | ------- | ---------------------------------------------------------------- | ---------- | ----------------- | - | ------- |  | - | ---------
|                  |  | SHARES ACQUIRED ON EXERCISE (#) |  | VALUE REALIZED ($) |   | NO. OF SECURITIES UNDERLYING UNEXERCISED OPTIONS HELD AT FISCAL YEAR-END |         | VALUE OF UNEXERCISED, IN-THE-MONEY OPTIONS AT FISCAL YEAR-END(1)
|NAME              |  |                                 |  | EXERCISABLE (#)    |   | UNEXERCISABLE (#)                                                        |         | EXERCISABLE ($)                                                  |            | UNEXERCISABLE ($)
|Glenn A. Ehley    |  |                                |  | $                  |  |                                                                          | 300,324 |                                                                  | 10,908,106 |                   | $ | 120,130 |  | $ | 9,162,809
|Thomas R. Schmutz |  |                                |  | $                  |  |                                                                          | 75,136  |                                                                  | 557,500    |                   | $ | 30,054  |  | $ | 468,300  
|Joseph F. Gerrity |  |                                |  | $                  |  |                                                                          | 54,859  |                                                                  | 552,716    |                   | $ | 21,944  |  | $ | 464,281  
|Stuart P. Dawley  |  |                                |  | $                  |  |                                                                          | 51,000  |                                                                  | 557,500    |                   | $ | 20,400  |  | $ | 468,300  
|Terry L. Williams |  |                                |  | $                  |  |                                                                          | 56,300  |                                                                  | 555,000    |                   | $ | 22,520  |  | $ | 466,200  

---

|(1) | Calculated by determining the difference between the exercise price of the options and $0.85, the closing price of our common stock on December 31, 2003.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------



COMPENSATION OF DIRECTORS



We modified our policy on the compensation of directors retroactive to
January 1, 2002. We compensate all outside, independent directors (those not affiliated with a significant investor, currently Mr. Maynard, Mr. Calhoun, and Mr. Hattori) $1,000.00 for attendance at each meeting of our Board of Directors and any
committee meetings. In addition, non-employee, non-affiliated directors are entitled to receive option grants and awards under our 1999 Equity Incentive Plan. All directors will be reimbursed for expenses incurred in attending meetings of the Board
of Directors and its committees.



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##### Table of Contents

EMPLOYMENT AND OTHER COMPENSATORY ARRANGEMENTS



During August 2003, we entered into an amended and restated employment agreement with Glenn A. Ehley, President and Chief
Executive Officer, that contains change of control and severance provisions. Should Mr. Ehley be terminated without cause (as defined in the employment agreement), the agreement provides for special severance (twelve months of pay) plus
benefits payable in a lump sum within three days after termination and accelerated vesting of all stock options. In addition, Mr. Ehley has the right to participate in the amended and restated Acquisition Bonus Program adopted by the Board of
Directors on August 13, 2003 to compensate employees in the event of a change in control of the Company. This program gives the CEO the authority to set aside a certain percentage of the net proceeds associated with an acquisition or merger
constituting a change in control of the Company. The percentage varies depending on the amount of the proceeds. The CEO would then allocate this pool to employees designated by him, with the approval of the Board (which pool may include the other
named executive officers above).



COMPENSATION COMMITTEE INTERLOCKS AND
INSIDER PARTICIPATION



Our Compensation Committee consists
of Messrs. Brown, Maynard and Hattori. No interlocking relationship exists between the Board of Directors or the Compensation Committee and the board of directors or compensation committee of any other company, nor has any such interlocking
relationship existed in the past. Until July 2000, Mr. Hattori was the chief financial officer of the Company. Because he has not served in such capacity during the past three years, such service does not disqualify Mr. Hattori from being considered
independent under the applicable Nasdaq rules. Mr. Brown is affiliated with SCP Private Equity Partners, L.P. and SCP Private Equity Partners II, L.P., each of which holds more than 5% of the outstanding and issued shares of our common stock
acquired in certain financings, including the senior convertible note financing described below.



In connection with a private placement consummated on August 13, 2003 (the Private Placement), we issued $16,000,000 of our senior secured convertible
notes to two investors, SCP Private Equity Partners II, L.P. (SCP II) and TECORE, Inc. (TECORE). The Private Placement was conducted under the terms of a Securities Purchase Agreement among the Company, SCP II and TECORE dated June 5, 2003. On
August 13, 2003, we issued Senior Secured Convertible Notes of $4 million and $12 million to SCP II and TECORE, respectively, in exchange for payments of $4 million from each investor. The balance of $8 million for the issuance of TECOREs Note
is payable in eight quarterly installments of $1 million each. The first installment payment originally scheduled for June 2003 was paid at closing. The Notes were initially convertible at any time into shares of our common stock at an initial
conversion price of $0.1081, subject to adjustment for certain future dilutive issuances of securities. The Notes also have voting rights equivalent to the number of shares into which they could be converted, at a deemed conversion price of $0.57
per share. Interest on the Notes accrues at an annual rate of 12%. Principal and accrued interest on the Notes are payable on the fourth anniversary of the closing date. In the fourth quarter of 2003 and the first quarter of 2004, the conversion
price of the notes was adjusted pursuant to their terms to $0.10469347 as a result of the cashless exercise of certain warrants between August 2003 and February 2004.



In connection with the same private placement transaction, (a) the holders of our Series B Preferred Stock, including SCP
II, converted all outstanding shares of such preferred stock into 19,108,281 shares of our common stock, (b) we issued to SCP 4,625,347 shares of our common stock as an inducement to convert its Series B Preferred Stock into common stock, (c) the
holders of the Series B Preferred Stock waived their right to receive accumulated but unpaid dividends on the preferred stock, and (d) to cancel their warrants to purchase shares of our common stock in exchange for $500,000. SCP II committed to
taking additional shares of our common stock, as discussed in (b) above, in lieu of receiving $500,000 in cash.



45



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##### Table of Contents

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT



The following table sets forth certain information with respect to the ownership of our common stock, of which 49,966,935 shares were outstanding as of
February 20, 2004, by (i) persons known by us to be beneficial owners of more than 5% of its common stock, (ii) our directors, (iii) the named executive officers, and (iv) all executive officers and directors as of February 20, 2004 as a group:



|                                                                                                                        |  |                                              |      |  |         |  
|----------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------- | ---- |  | ------- | -
|                                                                                                                        |  | SHARES OF COMMON STOCK BENEFICIALLY OWNED(1) |     
|                                                                                                                        |  | SHARES                                       |      |  | PERCENT |  
|TECORE, Inc. 7165 Columbia Gateway Drive Columbia, Maryland 21046                                                       |  | 70,353,471                                   | (2)  |  | 58.5    | %
|                                                                                                                        |  |                                             
|SCP Private Equity Partners, LP 800 The Safeguard Building 435 Devon Park Drive Wayne, PA 19087                         |  | 56,398,486                                   | (3)  |  | 53.1    | %
|                                                                                                                        |  |                                             
|Mellon Ventures, L.P. One Mellon Center, Room 5300 Pittsburgh, PA 15258                                                 |  | 15,362,634                                   | (4)  |  | 24.0    | %
|                                                                                                                        |  |                                             
|VFC Capital, Inc. c/o Harris Corporation 1025 West NASA Boulevard Melbourne, FL 32919                                   |  | 2,467,593                                    | (5)  |  | 5.1     | %
|                                                                                                                        |  |                                             
|Tandem PCS Investments, L.P c/o Capital Communications CDPQ 1981 McGill College Avenue Montreal, Quebec H3A 3C7, Canada |  | 645,616                                      | (6)  |  | 1.3     | %
|                                                                                                                        |  |                                             
|James W. Brown.                                                                                                         |  | 56,406,019                                   | (7)  |  | 53.1    | %
|                                                                                                                        |  |                                             
|Darrell Lance Maynard                                                                                                   |  | 20,954                                       |      |  | *       |  
|                                                                                                                        |  |                                             
|George M. Calhoun                                                                                                       |  | 21,438                                       |      |  | *       |  
|                                                                                                                        |  |                                             
|Gerald Y. Hattori                                                                                                       |  | 14,890                                       |      |  | *       |  
|                                                                                                                        |  |                                             
|Jay J. Salkini                                                                                                          |  | 70,445,971                                   | (8)  |  | 58.5    | %
|                                                                                                                        |  |                                             
|Christopher J. Doherty                                                                                                  |  |                                             |      |  |        |  
|                                                                                                                        |  |                                             
|Shiblie O. Shiblie                                                                                                      |  | 6,500                                        |      |  | *       |  
|                                                                                                                        |  |                                             
|Hans F. Morris                                                                                                          |  |                                             |      |  |        |  
|                                                                                                                        |  |                                             
|Munzer Kayyem                                                                                                           |  |                                             |      |  |        |  
|                                                                                                                        |  |                                             
|Glenn A. Ehley.                                                                                                         |  | 377,494                                      | (9)  |  | *       |  
|                                                                                                                        |  |                                             
|Thomas R. Schmutz.                                                                                                      |  | 97,198                                       | (10) |  | *       |  
|                                                                                                                        |  |                                             
|Joseph F. Gerrity.                                                                                                      |  | 58,575                                       | (11) |  | *       |  
|                                                                                                                        |  |                                             
|Stuart P. Dawley                                                                                                        |  | 60,156                                       | (12) |  | *       |  
|                                                                                                                        |  |                                             
|Terry L. Williams                                                                                                       |  | 116,968                                      | (13) |  | *       |  
|                                                                                                                        |  |                                             
|All executive officers and directors as a group (17 persons)                                                            |  | 127,839,642                                  | (14) |  | 71.9    | %

---

|* | Indicates less than 1%
|- | ----------------------

|(1) | Unless otherwise indicated, each beneficial owner has sole voting and investment power with respect to the shares listed in the table.
|--- | --------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

|(2) | As reported in the Schedule 13D (the TECORE Schedule 13D) filed on August 21, 2003 on behalf of TECORE, Inc. TECORE had a total of 111,008,326 of underlying shares
should the entire loan of $12,000,000 be advanced to AirNet. This amount reflects the shares underlying the $7,000,000 actually loaned to AirNet as of February 20, 2004 and the accrued interest on this amount, both convertible at a conversion rate
of $0.10469347 (See Note 8 to the financial statements for complete discussion of conversion rate). This results in 66,861,859 shares underlying the $7,000,000 of convertible debt outstanding and 3,491,612 of shares underlying the accrued interest
as of February 20, 2004.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | As reported in the Schedule 13D (the SCP Schedule 13D) filed August 18, 2003 on behalf of SCP Private Equity Partners II, L.P. (SCP II), or otherwise, of
this amount 4,672,176 shares of Common Stock are held by SCP Private Equity Partners, L.P. (SCP) and 169,799 shares of Common Stock are held by CIP Capital L.P. (CIP). The shares held by SCP include 1,234,489 shares of Common
Stock received upon the cashless exercise of warrants in January 2004. 10,994,774 shares of Common Stock are held directly by SCP II. In addition, at February 20, 2004, SCP II had the right to acquire 40,561,737 shares underlying the $4,000,000
loaned to AirNet in the convertible debt financing at a conversion rate of $0.10469347. This amount includes 38,206,776 shares underlying the principal outstanding and 2,354,961 shares underlying the accrued interest as of February 20, 2004.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | As reported in the Schedule 13D/A filed September 4, 2003 on behalf of Mellon Ventures, L.P., (Mellon), or otherwise, of this amount 15,362,634 shares of Common Stock
are beneficially held by Mellon.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | As reported in the Schedule 13G/A filed February 10, 2004 on behalf of Harris Corporation (Harris), and VFC Capital (VFC), a wholly-owned subsidiary of Harris, of this amount
2,467,593 shares of Common Stock are beneficially held by VFC.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | As reported in the Schedule 13D/A filed August 22, 2003 on behalf of Tandem PCS Investments, L.P. (Tandem), or otherwise, of this amount 645,616 shares of Common Stock
are beneficially held by Tandem.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | As reported in the Schedule 13D (the SCP Schedule 13D) filed August 18, 2003 on behalf of SCP Private Equity Partners II, L.P. (SCP II), or otherwise, of
this amount 4,672,176 shares of Common Stock are held by SCP Private Equity Partners, L.P. (SCP) and 169,799 shares of Common Stock are held by CIP Capital L.P. (CIP). The shares held by SCP include 1,234,489 shares of Common
Stock received upon the cashless exercise of warrants in January 2004. 10,994,774 shares of Common Stock are held directly by SCP II. In addition, at February 20, 2004, SCP II had the right to acquire 40,561,737 shares underlying the $4,000,000
loaned to AirNet in the convertible debt financing at a conversion rate of $0.10469347. This amount includes 38,206,776 shares underlying the principal outstanding and 2,354,961 shares underlying the accrued interest as of February 20, 2004. Mr.
Brown is affiliated with each of SCP, SCP II and CIP. Includes an option to purchase Common Stock held by Mr. Brown exercisable immediately for 7,533 shares.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) | As reported on the Form 3 filed by Mr. Salkini on August 15, 2003 Mr. Salkini beneficially owned a total of 111,008,326 shares should the remaining installment payments on the
convertible note financing of $12,000,000 be advanced to AirNet by TECORE. This amount reflects the shares underlying the $7,000,000 actually loaned to AirNet as of February 20, 2004 and the accrued interest on this amount, both convertible at a
conversion rate of $0.10469347. This results in 66,861,859 shares underlying the $7,000,000 of convertible debt outstanding and 3,491,612 of shares underlying the accrued interest as of February 20, 2004. Mr. Salkini is affiliated with TECORE, Inc.
Includes 92,500 shares of common stock beneficially held by Mr. Salkini.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(9) | Includes 52,170 shares held by Mr. Ehley and options exercisable immediately for 325,324 shares.
|--- | ------------------------------------------------------------------------------------------------

|(10) | Includes 14,562 shares held by Mr. Schmutz and options exercisable immediately for 82,636 shares.
|---- | -------------------------------------------------------------------------------------------------

|(11) | Includes 1,000 shares held by Mr. Gerrity and options exercisable immediately for 57,575 shares.
|---- | ------------------------------------------------------------------------------------------------

|(12) | Includes 1,656 shares held by Mr. Dawley and options exercisable immediately for 58,500 shares.
|---- | -----------------------------------------------------------------------------------------------

|(13) | Includes 55,668 shares held by Mr. Williams and options exercisable immediately for 61,500 shares.
|---- | --------------------------------------------------------------------------------------------------

|(14) | The executive officers and directors of the Company as a group consist of Glenn A. Ehley, Stuart P. Dawley, Joseph F. Gerrity, Timothy J. Mahar, Patricio X. Muirragui, Thomas R.
Schmutz, Terry L. Williams, Bennett Wong, James W. Brown, Darrell Lance Maynard, Dr. George M. Calhoun, Gerald Y. Hattori, Jay J. Salkini, Christopher J. Doherty, Shiblie O. Shiblie, Hans F. Morris, and Munzer Kayyem.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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EQUITY COMPENSATION PLAN INFORMATION



The following table outlines the number of securities underlying options
granted, and the number of securities remaining for grant, under our equity compensation plans.



|                                                           |  |                                                                                                 |  |                                                                                |      |                                                                                                                                                |          
|---------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------ | ---- | ---------------------------------------------------------------------------------------------------------------------------------------------- | ---------
|Plan category                                              |  | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) |  | Weighted-averageexercise price of outstanding options, warrants and rights (b) |      | Number of securitiesremaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)
|Equity compensation plans approved by security holders     |  | 22,082,182                                                                                      |  | $                                                                              | 0.41 |                                                                                                                                                | 7,421,018
|Equity compensation plans not approved by security holders |  |                                                                                                |  | $                                                                              |     |                                                                                                                                                |         
|                                                           |  |                                                                                                 |  |                                                                                |      |                                                                                                                                                |          
|Total                                                      |  | 22,082,182                                                                                      |  | $                                                                              | 0.41 |                                                                                                                                                | 7,421,018
|                                                           |  |                                                                                                 |  |                                                                                |      |                                                                                                                                                |          



ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



On November 9, 2000, the Company loaned a former officer of the Company, Dr. R. Lee Hamilton, Jr., $112,660, payable in full on November 9, 2005 at 6.01% interest, payable semiannually. The loan was made to reimburse
Dr. Hamilton, when he was an officer, for an amount paid by him to exercise an option to purchase 113,274 shares of the Companys common stock in February 2000 and is accordingly classified in stockholders equity. The note is
collateralized by the underlying value of the stock and the Company has full recourse against Dr. Hamilton in the event of a default. The unpaid principal amount of the note, which is classified as a deduction from stockholders equity together
with all accrued and unpaid interest and any other sums owing under the note, are payable on November 9, 2005, the fifth anniversary of the date of the note. Interest was payable on November 9, 2001 and semi-annually thereafter. As of December 31,
2001 this note was in default and therefore the payment of principal and interest was due in full. A portion of the collateral stock was sold in the first quarter of 2002 and the proceeds of $41,503, including interest income of $6,534 and prepaid
interest of $27,339 were transmitted to the Company on April 15, 2002 bringing payments on the note current. The Company continues to pursue collection of the note. The Company feels, given the full recourse on the note, that the funds held in a
brokerage account, subject to an account control agreement, and the prepaid interest on the note provide adequate protection against default.



On March 14, 2001, the Company loaned Dr. Hamilton, $995,133 at an interest rate of 5.07% per annum secured by his pledge of stock under an Account
Control Agreement dated as of March 14, 2001 among Dr. Hamilton, Salomon Smith Barney, Inc. and the Company. The principal represents the amount that the Company loaned to Dr. Hamilton to satisfy the alternative minimum tax liability incurred in
connection with his exercise of options in February 2000. The unpaid principal amount of the note, together with all accrued and unpaid interest and any other sums owing under the note, is payable on March 14, 2006, the fifth anniversary of the date
of the note. As of the date of this report, the entire principal amount of the note is outstanding. An allowance of $995,133 was recorded during 2001 for the estimated loss on this loan. The Company is not accruing any interest associated with this
note.



On March 16, 2001, the Company loaned Mr. Ehley $221,997
at an interest rate of 5.07% per annum secured by the pledge of the officers stock under an Account Control Agreement dated as of March 16, 2001 among the officer, Salomon Smith Barney Inc. and the Company. The principal represents the amount
the Company loaned to the officer to satisfy the alternative minimum tax liability incurred in connection with the exercise of options to purchase 25,261 shares of common stock in March 2000. The unpaid principal amount of the note, together with
all accrued and unpaid interest and any other sums owing under the note, was payable on March 16, 2006, the fifth anniversary of the date of the note. The note was valued at a market rate of interest



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(9%) and accordingly a discount of $43,040 was recorded against the note. On September 5, 2003 Mr. Ehley repaid the full amount of the loan of $221,997 along
with accrued interest of $16,590. The note, including interest was paid by Mr. Ehley in cash in the amount of $144,762 with the remainder paid from the 2002 bonus for Mr. Ehley of $93,825 net of taxes. The interest income was recognized in full
during the quarter ended September 30, 2003. Consequently as of December 31, 2003 the entire principal amount and accrued interest of the note was paid in full.



In connection with a private placement consummated on August 13, 2003 (the Private Placement), we issued $16,000,000 of our senior secured convertible
notes to two investors, SCP Private Equity Partners II, L.P. (SCP II) and TECORE, Inc. (TECORE). The Private Placement was conducted under the terms of a Securities Purchase Agreement among the Company, SCP II and TECORE dated June 5, 2003. On
August 13, 2003, we issued Senior Secured Convertible Notes of $4 million and $12 million to SCP II and TECORE, respectively, in exchange for payments of $4 million from each investor. The balance of $8 million for the issuance of TECOREs Note
is payable in eight quarterly installments of $1 million each. The first installment payment originally scheduled for June 2003 was paid at closing. The Notes were initially convertible at any time into shares of our common stock at an initial
conversion price of $0.1081, subject to adjustment for certain future dilutive issuances of securities. In the fourth quarter of 2003 and the first quarter of 2004, the conversion price of the Notes was adjusted pursuant to their terms to
$0.10469347 as a result of the cashless exercise of certain warrants between August 2003 and February 2004. The Notes also have voting rights equivalent to the number of shares into which they could be converted, at a deemed conversion price of
$0.57 per share. Interest on the Notes accrues at an annual rate of 12%. Principal and accrued interest on the Notes are payable on the fourth anniversary of the closing date. Mr. Brown is affiliated with SCP II and served on our Board prior to the
financing. Mr. Doherty is also affiliated with SCP II and was elected to the Board in connection with the debt financing. Messrs. Salkini, Shiblie, Morris and Kayyem are affiliated with TECORE and were elected to the Board in connection with the
debt financing.



In connection with the same private placement
transaction, (a) the holders of our Series B Preferred Stock, including SCP II, converted all outstanding shares of such preferred stock into 19,108,281 shares of our common stock, (b) we paid $500,000 to each of Mellon and Tandem, and issued to SCP
II 4,625,347 shares of our common stock, in each case as an inducement to convert its Series B Preferred Stock into common stock, (c) the holders of the Series B Preferred Stock waived their right to receive accumulated but unpaid dividends on the
preferred stock, and (d) the holders of the Series B Preferred Stock agreed to cancel certain warrants to purchase shares of our common stock. SCP II committed to taking additional shares of our common stock, as discussed in (b) above, in lieu of
receiving $500,000 in cash. Also in connection with the same transaction, we adjusted the exercise price of certain warrants which we had originally issued in connection with financings in June and August 1999, as required by the anti-dilution terms
of those warrants. These warrants are described in more detail in Note 6 to our financial statements. As of December 31, 2003 the warrants represented the right to purchase a total of 1,904,509 shares of our common stock at $0.43 per share. SCP
Private Equity Partners, L.P. was one of the holders of these warrants, and held at December 31, 2003 warrants representing the right to purchase 1,744,903 shares. In January 2004, SCP Private Equity Partners exercised these warrants in cashless
exercise transaction, receiving 1,234,489 shares and surrendering the balance in payment of the exercise price based on the market price of the shares at the time. Mr. Brown is affiliated with SCP Private Equity Partners.



As noted above, Messrs. Salkini, Shiblie, Morris and Kayyem are affiliated
with TECORE. During fiscal year 2003, TECORE accounted for payments to the Company that represented approximately 42.7% of our gross revenue. We anticipate that TECORE will continue to account for a significant portion of our revenue in fiscal year
2004 and possibly beyond.



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##### Table of Contents

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES



The following table presents fees for professional audit services rendered by our independent auditors, Deloitte & Touche LLP, for the audit of our annual financial statements for the years ended December 31, 2002
and December 31, 2003, and fees billed for other services rendered by Deloitte & Touche LLP during those periods:



|                           |  |      |         |      |   |        
|-------------------------- |  | ---- | ------- | ---- | - | -------
|                           |  | 2002 |         | 2003
|Audit fees                 |  | $    | 248,355 |      | $ | 200,000
|Non-audit fees:            |  |      |         |      |   |        
|Audit-related fees         |  |      | 34,609  |      |   | 90,603 
|Tax fees                   |  |      | 20,870  |      |   | 30,670 
|                           |  |      |         |      |   |        
|Total fees paid to auditor |  | $    | 303,834 |      | $ | 321,273
|                           |  |      |         |      |   |        



Pre-Approval of Services by the
Independent Auditor



The Audit Committee has adopted a
policy regarding the pre-approval of audit and permitted non-audit services to be performed by our independent auditors, Deloitte & Touche LLP. The Audit Committee will, on an annual basis, consider and, if appropriate, approve the provision of
audit and non-audit services by Deloitte & Touche. Thereafter, the Audit Committee will, as necessary, consider and, if appropriate, approve the provision of additional audit and non-audit services by Deloitte & Touche which are not
encompassed by the Audit Committees annual pre-approval and are not prohibited by law.



PART IV



ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K



|a. | We have filed the following documents as part of this report, except as otherwise noted:
|-- | ----------------------------------------------------------------------------------------



1. Financial Statements



See Index to Financial Statements on page F-1 of this report.



2. Financial Statement Schedules Financial Statement Schedules have been omitted because of the absence of conditions under which they would be required
or because the required information has been included in the financial statements.



3. Exhibits



|               |  |                                                                                                                               
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT NUMBER |  | DESCRIPTION OF DOCUMENT                                                                                                       
|3.1.1(11)      |  | Eighth Amended and Restated Certificate of Incorporation                                                                      
|               | 
|3.1.2(12)      |  | Certificate of Amendment to Eighth Amended and Restated Certificate of Incorporation                                          
|               | 
|3.2(11)        |  | Third Amended and Restated Bylaws                                                                                             
|               | 
|4.1(1)         |  | Specimen Certificate evidencing shares of Common Stock.                                                                       
|               | 
|4.2(1)         |  | Second Amended and Restated Shareholders and Registration Rights Agreement dated as of April 16, 1997.                       
|               | 
|4.3(1)         |  | First Amendment to Second Amended and Restated Shareholders and Registration Rights Agreement dated as of September 20, 1999.



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##### Table of Contents

|               |  |                                                                                                                                                                                                       
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT NUMBER |  | DESCRIPTION OF DOCUMENT                                                                                                                                                                               
|               | 
|4.4(1)         |  | Second Amended and Restated Agreement Among Series E, Series F and Series G Second Amended and Restated Preferred Stockholders and Senior Registration Rights Agreement dated as of September
7, 1999.
|               | 
|4.5(1)         |  | First Amendment to Second Amended and Restated Agreement Among Series E, Series F and Series G Preferred Stockholders and Senior Registration Rights Agreement dated as of September 20,
1999.        
|               | 
|4.6(5)         |  | Rights Agreement dated January 9, 2001 between AirNet Communications Corporation and Continental Stock Transfer & Trust Company.                                                                      
|               | 
|4.6.1(11)      |  | Amendment No. 1, dated August 13, 2003, to Rights Agreement dated January 9, 2001, between the Company and Continental Stock Transfer & Trust Company, as rights agent                                
|               | 
|4.7(11)        |  | Senior Secured Convertible Note dated August 13, 2003 in the principal amount of $12 million, issued to TECORE                                                                                        
|               | 
|4.8(11)        |  | Senior Secured Convertible Note dated August 13, 2003 in the principal amount of $4 million, issued to SCP                                                                                            
|               | 
|4.9(11)        |  | Allonge dated August 13, 2003 between the Company and TECORE                                                                                                                                          
|               | 
|4.10(11)       |  | Allonge dated August 13, 2003 between the Company and SCP                                                                                                                                             
|               | 
|10.1(11)       |  | Amended and Restated AirNet Communications Corporation 1999 Equity Incentive Plan effective August 13, 2003                                                                                           
|               | 
|10.2(1)        |  | OEM and Patent License Option Agreement dated January 27, 1995 between Motorola, Inc. and AirNet Communications Corporation.                                                                          
|               | 
|10.3(1)        |  | Employee Noncompete and Post-Termination Benefits Agreement dated October 26, 1999 between AirNet Communications Corporation and R. Lee Hamilton, Jr.                                                 
|               | 
|10.4(3)        |  | Amendment to Incentive Stock Option Agreements dated February 11, 2000 between AirNet Communications Corporation and Glenn A. Ehley.                                                                  
|               | 
|10.5(3)        |  | Amendment to Incentive Stock Option Agreements dated February 11, 2000 between AirNet Communications Corporation and Timothy Mahar.                                                                   
|               | 
|10.6(6)        |  | Account Control Agreement among R. Lee Hamilton, Jr., Salomon Smith Barney Inc. and AirNet Communications Corporation dated as of October 2, 2000.                                                    
|               | 
|10.7(6)        |  | Promissory Note dated November 9, 2000 in the amount of $112,600.00 made by R. Lee Hamilton, Jr. in favor of AirNet Communications Corporation.                                                       
|               | 
|10.8(6)        |  | Agreement to Loan Funds dated as of December 22, 2000 by and between AirNet Communications Corporation and R. Lee Hamilton, Jr.                                                                       
|               | 
|10.9(6)        |  | Non-Recourse Promissory Note dated March 14, 2001 in the amount of $995,133.00 made by R. Lee Hamilton, Jr. in favor of AirNet Communications Corporation.                                            
|               | 
|10.10(6)       |  | Security Agreement dated as of November 15, 2001 between AirNet Communications Corporation and Force Computers, Inc., Sanmina Corporation and Brooktrout, Inc.                                        
|               | 
|10.11(7)       |  | Form of Indemnity Agreement between AirNet Communications Corporation and each of its directors and officers.                                                                                         
|               | 
|10.12(7)       |  | Employment, Severance, and Bonus Agreement dated August 13, 2002 between AirNet Communications Corporation and Glenn A. Ehley.                                                                        



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|               |  |                                                                                                                                                                                                                        
|-------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT NUMBER |  | DESCRIPTION OF DOCUMENT                                                                                                                                                                                                
|               | 
|10.13(9)       |  | Bridge Loan Agreement dated January 24, 2003 by and among AirNet Communications Corporation, TECORE, Inc. and SCP Private Equity Partners II, L.P.                                                                     
|               | 
|10.14(9)       |  | Bridge Loan Promissory Note in favor of SCP Private Equity Partners II, L.P. for $3,000,000 dated January 24, 2003.                                                                                                    
|               | 
|10.15(9)       |  | Bridge Loan Promissory Note in favor of TECORE, Inc. for $3,000,000 dated January 24, 2003.                                                                                                                            
|               | 
|10.16(9)       |  | Security Agreement dated January 24, 2003 by and among AirNet Communications Corporation, TECORE, Inc. and SCP Private Equity Partners II, L.P.                                                                        
|               | 
|10.17(9)       |  | Notice of Election to Convert from SCP Private Equity Partners II, L.P. to AirNet Communications Corporation dated January 20, 2003 (with letter to escrow agent attached).                                            
|               | 
|10.18(9)       |  | Notice of Election to Convert from Mellon Ventures, LP to AirNet Communications Corporation dated January 20, 2003 (with letter to escrow agent attached).                                                             
|               | 
|10.19(9)       |  | Notice of Election to Convert from Tandem PCS Investments, LP to AirNet Communications Corporation dated January 20, 2003 (with letter to escrow agent attached).                                                      
|               | 
|10.20(9)       |  | Escrow Agreement dated January 20, 2003 by and among AirNet Communications Corporation, Tandem PCs Investments, LP, SCP Private Equity Partners II, LP, Mellon Ventures, LP and Edwards &
Angell, LLP, as escrow agent.
|               | 
|10.21(9)       |  | Technology Collateral Escrow Agreement effective January 24, 2003 among DSI Technology Escrow Services, Inc., AirNet Communications Corporation, TECORE, Inc. and SCP Private Equity Partners
II, LP                   
|               | 
|10.22(9)       |  | Collateral Assignment of Patents, Trademarks & Copyrights dated January 24, 2003 by and among AirNet Communications Corporation, SCP Private Equity Partners II, LP and TECORE,
Inc.                                   
|               | 
|10.23(10)      |  | Terms sheet dated March 25, 2003 among AirNet Communications Corporation, SCP Private Equity Partners II, LP and TECORE, Inc.                                                                                          
|               | 
|10.24(11)      |  | First Amendment to Security Agreement dated August 13, 2003 among the Company, TECORE and SCP, amending the Security Agreement dated January 24, 2003                                                                  
|               | 
|10.25(11)      |  | Amended and Restated Employment Agreement, Severance and Bonus Agreement, dated August 13, 2003, between the Company and Glenn A. Ehley                                                                                
|               | 
|10.26(11)      |  | Non-Qualified Stock Option Agreement dated August 13, 2003 between the Company and Glenn Ehley                                                                                                                         
|               | 
|10.27(11)      |  | Intercreditor and Subordination Agreement dated August 13, 2003 among the Company, Force Computers, Inc. Sanmina Corporation and Brooktrout, Inc.                                                                      
|               | 
|10.28(11)      |  | Amended and Restated AirNet Bonus Program dated and effective August 13, 2003                                                                                                                                          
|               | 
|10.29(11)      |  | Tag-Along Allocation Agreement dated August 13, 2003                                                                                                                                                                   
|               | 
|23.1           |  | Consent of Deloitte & Touche LLP.                                                                                                                                                                                      
|               | 
|31.1           |  | Rule 13a-14(a)/15d-14(a) Certification of Glenn A. Ehley, Chief Executive Officer of the Company                                                                                                                       



52



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##### Table of Contents

|               |  |                                                                                                                                                                           
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT NUMBER |  | DESCRIPTION OF DOCUMENT                                                                                                                                                   
|31.2           |  | Rule 13a-14(a)/15d-14(a) Certification of Joseph F. Gerrity, Chief Financial Officer of the Company                                                                       
|               | 
|32.1           |  | Certification by the Chief Executive Officer, Glenn A. Ehley, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.   
|               | 
|32.2           |  | Certification by the Chief Financial Officer, Joseph F. Gerrity, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

---

|(1) | Incorporated by reference to Registration Statement No. 333-87693 on Form S-1 as filed with the Securities and Exchange Commission on September 24, 1999, as amended.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Incorporated by reference to Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 29, 2000.
|--- | -------------------------------------------------------------------------------------------------------------------------------

|(3) | Incorporated by reference to Quarterly Report on Form 10-Q as filed with the Securities and Exchange Commission on May 15, 2000.
|--- | --------------------------------------------------------------------------------------------------------------------------------

|(4) | Incorporated by reference to Schedule 14A as filed with the Securities and Exchange Commission on December 7, 2000.
|--- | -------------------------------------------------------------------------------------------------------------------

|(5) | Incorporated by reference to Exhibit 4.1 of the Companys Current Report on Form 8-K filed with the Securities and Exchange Commission on January 17, 2001.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Incorporated by reference to the Annual Report on Form 10-K as filed with the Securities and Exchange Commission on April 3, 2001.
|--- | ----------------------------------------------------------------------------------------------------------------------------------

|(7) | Incorporated by reference to Quarterly Report on Form 10-Q as filed with the Securities and Exchange Commission on August 14, 2001.
|--- | -----------------------------------------------------------------------------------------------------------------------------------

|(8) | Incorporated by reference to Quarterly Report on Form 10-Q as filed with the Securities and Exchange Commission on November 14, 2002.
|--- | -------------------------------------------------------------------------------------------------------------------------------------

|(9) | Incorporated by reference to Current Report on Form 8-K as filed with the Securities and Exchange Commission on January 28, 2003.
|--- | ---------------------------------------------------------------------------------------------------------------------------------

|(10) | Incorporated by reference to Current Report on Form 8-K as filed with the Securities and Exchange Commission on March 26, 2003.
|---- | -------------------------------------------------------------------------------------------------------------------------------

|(11) | Incorporated by reference to Current Report on Form 8-K as filed with the Securities and Exchange Commission on August 14, 2003.
|---- | --------------------------------------------------------------------------------------------------------------------------------

|(12) | Incorporated by reference to Current Report on Form 8-K as filed with the Securities and Exchange Commission on August 25, 2003.
|---- | --------------------------------------------------------------------------------------------------------------------------------



|b. | Reports on Form 8-K
|-- | -------------------



The Company filed a Current Reports on Form 8-K with the Securities and Exchange Commission on November 12, 2003 reporting one event under
Item 5, Other Events, and filing one exhibit under Item 7, Exhibits.



53



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##### Table of Contents

SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized.



AIRNET COMMUNICATIONS CORPORATIONBy:

/s/    GLENN A.
EHLEYGlenn A. Ehley President and Chief Executive Officer




Date: March 8, 2004



Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed by the following persons on behalf of the Registrant and in the capacities indicated on March 8, 2004.



|                                                                                       |  |                                                                              
|-------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------
|                                                                                       | 
|/s/    GLENN A.
EHLEYGlenn A.
Ehley                                                    |  | Director, President and Chief Executive Officer (Principal Executive Officer)
|                                                                                       | 
|/s/    JOSEPH F.
GERRITYJoseph F.
Gerrity (Principal Financial and Accounting Officer) |  | Vice President of Finance, Chief Financial Officer, and Treasurer            
|                                                                                       | 
|/s/    JAMES W.
BROWNJames W.
Brown                                                    |  | Director                                                                     
|                                                                                       | 
|/s/    JAY J.
SALKINIJay J.
Salkini                                                    |  | Director                                                                     
|                                                                                       | 
|/s/    GEORGE M.
CALHOUNGeorge M.
Calhoun                                              |  | Director                                                                     
|                                                                                       | 
|/s/    DARRELL LANCE
MAYNARDDarrell Lance
Maynard                                      |  | Director                                                                     
|                                                                                       | 
|/s/    GERALD Y.
HATTORIGerald Y.
Hattori                                              |  | Director                                                                     
|                                                                                       | 
|/s/    CHRISTOPHER J.
DOHERTYChristopher J.
Doherty                                    |  | Director                                                                     
|                                                                                       | 
|/s/    SHIBLIE O.
SHIBLIEShiblie O.
Shiblie                                            |  | Director                                                                     
|                                                                                       | 
|/s/    HANS F.
MORRISHans F.
Morris                                                    |  | Director                                                                     
|                                                                                       | 
|/s/    MUNZER
KAYYEMMunzer
Kayyem                                                      |  | Director                                                                     



54



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##### Table of Contents

AIRNET COMMUNICATIONS CORPORATION



INDEX TO FINANCIAL STATEMENTS



|                                                                                         |  |     
|---------------------------------------------------------------------------------------- |  | ----
|                                                                                         |  | PAGE
|Independent Auditors Report                                                             |  | F-2 
|                                                                                         | 
|Balance Sheets at December 31, 2003 and 2002                                             |  | F-3 
|                                                                                         | 
|Statements of Operations for the Years Ended December 31, 2003, 2002, and 2001.          |  | F-4 
|                                                                                         | 
|Statements of Stockholders Equity for the Years Ended December 31, 2003, 2002, and 2001 |  | F-5 
|                                                                                         | 
|Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and 2001.           |  | F-6 
|                                                                                         | 
|Notes to Financial Statements                                                            |  | F-7 



F-1



---

##### Table of Contents

INDEPENDENT AUDITORS REPORT



Board of Directors

AirNet Communications Corporation



We have audited the accompanying balance sheets of AirNet Communications Corporation (the
Company) as of December 31, 2003 and 2002, and the related statements of operations, stockholders equity, and cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of
the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.



We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards 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. An audit also
includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of the Company at December 31, 2003 and 2002, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally
accepted in the United States of America.



The accompanying financial
statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Companys recurring losses from operations, negative cash flows, and accumulated deficit raise
substantial doubt about its ability to continue as a going concern. Managements plans concerning these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this
uncertainty.



/s/ DELOITTE & TOUCHE LLP

Certified Public Accountants



Orlando, Florida

March 5, 2004



F-2



---

##### Table of Contents

AIRNET COMMUNICATIONS CORPORATION

BALANCE SHEETS



|                                                                                                                                                                          |  |                    |              |   |      |   |              |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------ | ------------ | - | ---- | - | ------------ | -
|                                                                                                                                                                          |  | As of December 31, |             
|                                                                                                                                                                          |  | 2003               |              |   | 2002 |  
|ASSETS                                                                                                                                                                    |  |                    |              |   |      |   |              |  
|CURRENT ASSETS                                                                                                                                                            |  |                    |              |   |      |   |              |  
|Cash and cash equivalents                                                                                                                                                 |  | $                  | 5,060,471    |   |      | $ | 3,205,478    |  
|Accounts receivablenet of allowance for doubtful accounts of $275,000 and $1,200,000 in 2003 and 2002, respectively                                                      |  |                    | 3,849,016    |   |      |   | 569,348      |  
|Inventories                                                                                                                                                               |  |                    | 11,687,150   |   |      |   | 14,459,025   |  
|Notes receivable                                                                                                                                                          |  |                    | 256,564      |   |      |   | 923,266      |  
|Other                                                                                                                                                                     |  |                    | 1,261,537    |   |      |   | 1,062,553    |  
|                                                                                                                                                                          |  |                    |              |   |      |   |              |  
|TOTAL CURRENT ASSETS                                                                                                                                                      |  |                    | 22,114,738   |   |      |   | 20,219,670   |  
|                                                                                                                                                                          |  |                    |              |   |      |   |              |  
|PROPERTY AND EQUIPMENT                                                                                                                                                    |  |                    |              |   |      |   |              |  
|Test equipment and other                                                                                                                                                  |  |                    | 13,230,872   |   |      |   | 12,951,197   |  
|Computer equipment                                                                                                                                                        |  |                    | 5,874,474    |   |      |   | 5,864,391    |  
|Software                                                                                                                                                                  |  |                    | 3,459,335    |   |      |   | 3,425,461    |  
|Office equipment, furniture, and fixtures                                                                                                                                 |  |                    | 654,802      |   |      |   | 644,320      |  
|Leasehold improvements                                                                                                                                                    |  |                    | 918,700      |   |      |   | 937,398      |  
|                                                                                                                                                                          |  |                    |              |   |      |   |              |  
|                                                                                                                                                                          |  |                    | 24,138,183   |   |      |   | 23,822,767   |  
|Accumulated depreciation                                                                                                                                                  |  |                    | (18,584,993  | ) |      |   | (15,663,247  | )
|                                                                                                                                                                          |  |                    |              |   |      |   |              |  
|PROPERTY AND EQUIPMENT, NET                                                                                                                                               |  |                    | 5,553,190    |   |      |   | 8,159,520    |  
|                                                                                                                                                                          |  |                    |              |   |      |   |              |  
|OTHER ASSETS                                                                                                                                                              |  |                    |              |   |      |   |              |  
|Long-term notes receivable, less current portion                                                                                                                          |  |                    |             |   |      |   | 277,856      |  
|Other long-term assets                                                                                                                                                    |  |                    | 2,388,781    |   |      |   | 2,172,998    |  
|                                                                                                                                                                          |  |                    |              |   |      |   |              |  
|TOTAL OTHER ASSETS                                                                                                                                                        |  |                    | 2,388,781    |   |      |   | 2,450,854    |  
|                                                                                                                                                                          |  |                    |              |   |      |   |              |  
|TOTAL ASSETS                                                                                                                                                              |  | $                  | 30,056,709   |   |      | $ | 30,830,044   |  
|                                                                                                                                                                          |  |                    |              |   |      |   |              |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                      |  |                    |              |   |      |   |              |  
|CURRENT LIABILITIES                                                                                                                                                       |  |                    |              |   |      |   |              |  
|Accounts payable                                                                                                                                                          |  | $                  | 2,622,159    |   |      | $ | 2,801,144    |  
|Accrued payroll and other expenses                                                                                                                                        |  |                    | 3,459,068    |   |      |   | 3,597,109    |  
|Current portion of capital lease obligations                                                                                                                              |  |                    | 65,255       |   |      |   | 53,291       |  
|Customer deposits                                                                                                                                                         |  |                    | 2,080,767    |   |      |   | 101,296      |  
|Deferred revenues                                                                                                                                                         |  |                    | 574,374      |   |      |   | 1,402,851    |  
|                                                                                                                                                                          |  |                    |              |   |      |   |              |  
|TOTAL CURRENT LIABILITIES                                                                                                                                                 |  |                    | 8,801,623    |   |      |   | 7,955,691    |  
|                                                                                                                                                                          |  |                   
|LONG-TERM LIABILITIES                                                                                                                                                     |  |                    |              |   |      |   |              |  
|Long-term debt                                                                                                                                                            |  |                    | 10,000,000   |   |      |   |             |  
|Long-term accounts payable                                                                                                                                                |  |                    | 69,327       |   |      |   | 800,496      |  
|Capital lease obligations less current portion                                                                                                                            |  |                    | 4,540        |   |      |   | 15,998       |  
|Other long-term liabilities                                                                                                                                               |  |                    | 617,253      |   |      |   | 20,569       |  
|                                                                                                                                                                          |  |                    |              |   |      |   |              |  
|TOTAL LONG-TERM LIABILITIES                                                                                                                                               |  |                    | 10,691,120   |   |      |   | 837,063      |  
|                                                                                                                                                                          |  |                    |              |   |      |   |              |  
|TOTAL LIABILITIES                                                                                                                                                         |  |                    | 19,492,743   |   |      |   | 8,792,754    |  
|                                                                                                                                                                          |  |                    |              |   |      |   |              |  
|COMMITMENTS AND CONTINGENCIES                                                                                                                                             |  |                    |             |   |      |   |             |  
|STOCKHOLDERS EQUITY                                                                                                                                                      |  |                    |              |   |      |   |              |  
|Convertible preferred stock (liquidation value of $60,000,000 plus accrued dividends)                                                                                     |  |                    |             |   |      |   | 27,338,319   |  
|Common Shares, $.001 par value, 400,000,000 shares authorized, 48,680,789 and 23,851,177 issued and outstanding at December 31, 2003 and
December 31, 2002, respectively, |  |                    | 48,681       |   |      |   | 23,851       |  
|Additional paid in capital                                                                                                                                                |  |                    | 269,183,960  |   |      |   | 213,519,692  |  
|Accumulated deficit                                                                                                                                                       |  |                    | (242,919,809 | ) |      |   | (218,486,666 | )
|Deferred stock-based compensation                                                                                                                                         |  |                    | (15,643,836  | ) |      |   | (73,919      | )
|Notes receivableformer officer                                                                                                                                           |  |                    | (105,030     | ) |      |   | (283,987     | )
|                                                                                                                                                                          |  |                    |              |   |      |   |              |  
|TOTAL STOCKHOLDERS EQUITY                                                                                                                                                |  |                    | 10,563,996   |   |      |   | 22,037,290   |  
|                                                                                                                                                                          |  |                    |              |   |      |   |              |  
|TOTAL LIABILITIES & STOCKHOLDERS EQUITY                                                                                                                                  |  | $                  | 30,056,709   |   |      | $ | 30,830,044   |  
|                                                                                                                                                                          |  |                    |              |   |      |   |              |  



See notes to financial
statements.



F-3



---

##### Table of Contents

AIRNET COMMUNICATIONS CORPORATION

STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001



|                                                                                         |  |                                 |             |   |      |   |             |      |  |   |             |  
|---------------------------------------------------------------------------------------- |  | ------------------------------- | ----------- | - | ---- | - | ----------- | ---- |  | - | ----------- | -
|                                                                                         |  | For the year ended December 31, |            
|                                                                                         |  | 2003                            |             |   | 2002 |   |             | 2001 | 
|NET REVENUES                                                                             |  | $                               | 15,784,906  |   |      | $ | 23,026,082  |      |  | $ | 14,544,223  |  
|COST OF REVENUES                                                                         |  |                                 | 11,144,359  |   |      |   | 17,415,422  |      |  |   | 16,717,053  |  
|WRITE-DOWN OF EXCESS AND OBSOLETE INVENTORY                                              |  |                                 | 384,444     |   |      |   | 144,700     |      |  |   | 8,758,659   |  
|                                                                                         |  |                                 |             |   |      |   |             |      |  |   |             |  
|Gross profit (loss)                                                                      |  |                                 | 4,256,103   |   |      |   | 5,465,960   |      |  |   | (10,931,489 | )
|                                                                                         |  |                                 |             |   |      |   |             |      |  |   |             |  
|                                                                                         |  |                                 |            
|OPERATING EXPENSES *                                                                     |  |                                 |             |   |      |   |             |      |  |   |             |  
|Research and development                                                                 |  |                                 | 9,207,621   |   |      |   | 12,543,815  |      |  |   | 25,563,216  |  
|Sales and marketing                                                                      |  |                                 | 2,583,523   |   |      |   | 5,432,134   |      |  |   | 11,935,772  |  
|General and administrative                                                               |  |                                 | 6,405,539   |   |      |   | 3,039,470   |      |  |   | 11,645,649  |  
|Gain on vendor settlement                                                                |  |                                 |            |   |      |   | (703,618    | )    |  |   | (1,921,605  | )
|                                                                                         |  |                                 |             |   |      |   |             |      |  |   |             |  
|Total costs and expenses                                                                 |  |                                 | 18,196,683  |   |      |   | 20,311,801  |      |  |   | 47,223,032  |  
|                                                                                         |  |                                 |             |   |      |   |             |      |  |   |             |  
|LOSS FROM OPERATIONS                                                                     |  |                                 | (13,940,580 | ) |      |   | (14,845,841 | )    |  |   | (58,154,521 | )
|                                                                                         |  |                                 |             |   |      |   |             |      |  |   |             |  
|OTHER (EXPENSE) INCOME                                                                   |  |                                 |             |   |      |   |             |      |  |   |             |  
|Interest income                                                                          |  |                                 | 119,836     |   |      |   | 443,079     |      |  |   | 848,873     |  
|Non-cash debt conversion interest charge                                                 |  |                                 | (10,000,000 | ) |      |   |            |      |  |   |            |  
|Interest charged on convertible debt                                                     |  |                                 | (576,718    | ) |      |   |            |      |  |   |            |  
|Other interest expense                                                                   |  |                                 | (39,792     | ) |      |   | (11,162     | )    |  |   | (81,721     | )
|Loss on disposal of fixed assets                                                         |  |                                 | (205        | ) |      |   | (1,660      | )    |  |   | (199,565    | )
|Other, net                                                                               |  |                                 | 4,316       |   |      |   | (32,546     | )    |  |   | (24,708     | )
|                                                                                         |  |                                 |             |   |      |   |             |      |  |   |             |  
|TOTAL OTHER (EXPENSE) INCOME                                                             |  |                                 | (10,492,563 | ) |      |   | 397,711     |      |  |   | 542,879     |  
|                                                                                         |  |                                 |             |   |      |   |             |      |  |   |             |  
|NET LOSS                                                                                 |  |                                 | (24,433,143 | ) |      |   | (14,448,130 | )    |  |   | (57,611,642 | )
|                                                                                         |  |                                 |            
|ACCRETION OF DISCOUNTSERIES B REDEEMABLEPREFERRED STOCK                                 |  |                                 |            |   |      |   | (7,494,788  | )    |  |   | (1,036,025  | )
|CUMULATIVE PREFERRED DIVIDENDS                                                           |  |                                 |            |   |      |   | (2,400,000  | )    |  |   | (1,500,000  | )
|CONVERSION INDUCEMENT (NON-CASH)                                                         |  |                                 | (7,895,254  | ) |      |   |            |      |  |   |            |  
|                                                                                         |  |                                 |             |   |      |   |             |      |  |   |             |  
|NET LOSS ATTRIBUTABLE TO COMMON STOCK                                                    |  | $                               | (32,328,397 | ) |      | $ | (24,342,918 | )    |  | $ | (60,147,667 | )
|                                                                                         |  |                                 |             |   |      |   |             |      |  |   |             |  
|WEIGHTED AVERAGE SHARES OUTSTANDINGUSED IN CALCULATING BASIC AND DILUTED LOSS PER SHARE |  |                                 | 33,304,579  |   |      |   | 23,822,913  |      |  |   | 23,783,637  |  
|                                                                                         |  |                                 |             |   |      |   |             |      |  |   |             |  
|NET LOSS PER SHARE ATTRIBUTABLE TO COMMON SHAREHOLDERSBASIC AND DILUTED                 |  | $                               | (0.97       | ) |      | $ | (1.02       | )    |  | $ | (2.53       | )
|                                                                                         |  |                                 |             |   |      |   |             |      |  |   |             |  

---

|* | Operating expenses include non-cash stock compensation expenses of $3,628,081, $248,496, and $158,858 for the years ended December 31, 2003, 2002, and 2001, respectively.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



See notes to financial statements.



F-4



---

##### Table of Contents

AIRNET COMMUNICATIONS CORPORATION

STATEMENTS OF STOCKHOLDERS EQUITY

YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001



|                                                        |  |                  |   |  |              |             |                            |        |            |                     |   |        |                                   |   |             |                                            |  |   |              |   |  |   |             |   |  |   |          |   |  |   |             |  
|------------------------------------------------------- |  | ---------------- | - |  | ------------ | ----------- | -------------------------- | ------ | ---------- | ------------------- | - | ------ | --------------------------------- | - | ----------- | ------------------------------------------ |  | - | ------------ | - |  | - | ----------- | - |  | - | -------- | - |  | - | ----------- | -
|                                                        |  | Preferred Stocks |   |  | Common Stock |             | Additional Paid in Capital |        |            | Accumulated Deficit |   |        | Deferred Stock-Based Compensation |   |             | Note Receivable- Officer andFormer Officer |  |   | Total        |  
|                                                        |  | Shares           |   |  | Amount       |             |                            | Shares |            | Amount              |   |        |                                   |   |            
|BALANCE DECEMBER 31, 2000                               |  |                 |   |  | $            |            |                            |        | 23,764,845 |                     | $ | 23,765 |                                   | $ | 211,739,682 |                                            |  | $ | (146,426,894 | ) |  | $ | (1,000,719  | ) |  | $ | (112,660 | ) |  | $ | 64,223,174  |  
|Warrants / conversion features series B preferred stock |  |                 |   |  |              |             |                            |        |           |                     |   |       |                                   |   | 14,273,884  |                                            |  |   |             |   |  |   |            |   |  |   |         |   |  |   | 14,273,884  |  
|Exercise of common stock options                        |  |                 |   |  |              |            |                            |        | 25,020     |                     |   | 25     |                                   |   | 39,171      |                                            |  |   |             |   |  |   |            |   |  |   |         |   |  |   | 39,196      |  
|Forfeiture of common stock options                      |  |                 |   |  |              |            |                            |        |           |                     |   |       |                                   |   | (487,107    | )                                          |  |   |             |   |  |   | 487,107     |   |  |   |         |   |  |   |            |  
|Amortization of deferred stock-based compensation       |  |                 |   |  |              |            |                            |        |           |                     |   |       |                                   |   |            |                                            |  |   |             |   |  |   | 158,858     |   |  |   |         |   |  |   | 158,858     |  
|Amortization of issuance costs and discounts            |  |                 |   |  |              |            |                            |        |           |                     |   |       |                                   |   | (1,036,025  | )                                          |  |   |             |   |  |   |            |   |  |   |         |   |  |   | (1,036,025  | )
|Note Receivable from officer                            |  |                 |   |  |              |            |                            |        |           |                     |   |       |                                   |   |            |                                            |  |   |             |   |  |   |            |   |  |   | (178,957 | ) |  |   | (178,957    | )
|Preferred dividends                                     |  |                  |   |  |              |             |                            |        |            |                     |   |        |                                   |   | (1,500,000  | )                                          |  |   |             |   |  |   |             |   |  |   |          |   |  |   | (1,500,000  | )
|Net loss                                                |  |                 |   |  |              |            |                            |        |           |                     |   |       |                                   |   |            |                                            |  |   | (57,611,642  | ) |  |   |             |   |  |   |          |   |  |   | (57,611,642 | )
|                                                        |  |                  |   |  |              |             |                            |        |            |                     |   |        |                                   |   |             |                                            |  |   |              |   |  |   |             |   |  |   |          |   |  |   |             |  
|BALANCE DECEMBER 31, 2001                               |  |                 |   |  |              |            |                            |        | 23,789,865 |                     |   | 23,790 |                                   |   | 223,029,605 |                                            |  |   | (204,038,536 | ) |  |   | (354,754    | ) |  |   | (291,617 | ) |  |   | 18,368,488  |  
|Exercise of common stock options                        |  |                 |   |  |              |            |                            |        | 61,312     |                     |   | 61     |                                   |   | 17,214      |                                            |  |   |             |   |  |   |            |   |  |   |         |   |  |   | 17,275      |  
|Forfeiture of common stock options                      |  |                 |   |  |              |            |                            |        |           |                     |   |       |                                   |   | (32,339     | )                                          |  |   |             |   |  |   | 32,339      |   |  |   |         |   |  |   |            |  
|Amortization of deferred stock-based compensation       |  |                 |   |  |              |            |                            |        |           |                     |   |       |                                   |   |            |                                            |  |   |             |   |  |   | 248,496     |   |  |   |         |   |  |   | 248,496     |  
|Accretion of issuance costs and discounts               |  |                 |   |  |              |            |                            |        |           |                     |   |       |                                   |   | (1,630,938  | )                                          |  |   |             |   |  |   |            |   |  |   |         |   |  |   | (1,630,938  | )
|Accretion of remaining beneficial discount              |  |                 |   |  |              |            |                            |        |           |                     |   |       |                                   |   | (5,863,850  | )                                          |  |   |             |   |  |   |            |   |  |   |         |   |  |   | (5,863,850  | )
|Note Receivable from officer                            |  |                 |   |  |              |            |                            |        |           |                     |   |       |                                   |   |            |                                            |  |   |             |   |  |   |            |   |  |   | 7,630    |   |  |   | 7,630       |  
|Recharacterization of redeemablepreferred stock         |  | 955,414          |   |  |              | 25,338,319  |                            |        |            |                     |   |        |                                   |   |             |                                            |  |   |              |   |  |   |             |   |  |   |          |   |  |   | 25,338,319  |  
|Accretion of preferred dividends                        |  |                  |   |  |              | 2,000,000   |                            |        |            |                     |   |        |                                   |   | (2,000,000  | )                                          |  |   |             |   |  |   |             |   |  |   |          |   |  |   |            |  
|Net loss                                                |  |                 |   |  |              |            |                            |        |           |                     |   |       |                                   |   |            |                                            |  |   | (14,448,130  | ) |  |   |             |   |  |   |          |   |  |   | (14,448,130 | )
|                                                        |  |                  |   |  |              |             |                            |        |            |                     |   |        |                                   |   |             |                                            |  |   |              |   |  |   |             |   |  |   |          |   |  |   |             |  
|BALANCE DECEMBER 31, 2002                               |  | 955,414          |   |  |              | 27,338,319  |                            |        | 23,851,177 |                     |   | 23,851 |                                   |   | 213,519,692 |                                            |  |   | (218,486,666 | ) |  |   | (73,919     | ) |  |   | (283,987 | ) |  |   | 22,037,290  |  
|Conversion of Series B Preferred                        |  | (955,414         | ) |  |              | (27,338,319 | )                          |        | 19,108,281 |                     |   | 19,108 |                                   |   | 27,319,211  |                                            |  |   |              |   |  |   |             |   |  |   |          |   |  |   |            |  
|Inducement to convert Series B                          |  |                  |   |  |              |             |                            |        | 4,625,347  |                     |   | 4,625  |                                   |   | (1,004,625  | )                                          |  |   |              |   |  |   |             |   |  |   |          |   |  |   | (1,000,000  | )
|Conversion interest charge                              |  |                  |   |  |              |             |                            |        |            |                     |   |        |                                   |   | 10,000,000  |                                            |  |   |              |   |  |   |             |   |  |   |          |   |  |   | 10,000,000  |  
|Exercise of common stock options                        |  |                 |   |  |              |            |                            |        | 232,197    |                     |   | 233    |                                   |   | 104,257     |                                            |  |   |             |   |  |   |            |   |  |   |         |   |  |   | 104,490     |  
|Exercise of warrants                                    |  |                 |   |  |              |            |                            |        | 863,787    |                     |   | 864    |                                   |   | (864        | )                                          |  |   |             |   |  |   |            |   |  |   |         |   |  |   |            |  
|Deferred stock based compensation                       |  |                 |   |  |              |            |                            |        |           |                     |   |       |                                   |   | 19,246,289  |                                            |  |   |             |   |  |   | (19,246,289 | ) |  |   |         |   |  |   |            |  
|Amortization of deferred stock-based compensation       |  |                 |   |  |              |            |                            |        |           |                     |   |       |                                   |   |            |                                            |  |   |             |   |  |   | 3,676,372   |   |  |   |         |   |  |   | 3,676,372   |  
|Note receivable from officer                            |  |                 |   |  |              |            |                            |        |           |                     |   |       |                                   |   |            |                                            |  |   |             |   |  |   |            |   |  |   | 178,957  |   |  |   | 178,957     |  
|Net loss                                                |  |                 |   |  |              |            |                            |        |           |                     |   |       |                                   |   |            |                                            |  |   | (24,433,143  | ) |  |   |            |   |  |   |         |   |  |   | (24,433,143 | )
|                                                        |  |                  |   |  |              |             |                            |        |            |                     |   |        |                                   |   |             |                                            |  |   |              |   |  |   |             |   |  |   |          |   |  |   |             |  
|BALANCE DECEMBER 31, 2003                               |  |                 |   |  | $            |            |                            |        | 48,680,789 |                     | $ | 48,681 |                                   | $ | 269,183,960 |                                            |  | $ | (242,919,809 | ) |  | $ | (15,643,836 | ) |  | $ | (105,030 | ) |  | $ | 10,563,966  |  
|                                                        |  |                  |   |  |              |             |                            |        |            |                     |   |        |                                   |   |             |                                            |  |   |              |   |  |   |             |   |  |   |          |   |  |   |             |  



See notes to financial
statements



F-5



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##### Table of Contents

AIRNET COMMUNICATIONS CORPORATION

STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001



|                                                                               |  |                                 |             |   |      |   |             |      |  |   |             |  
|------------------------------------------------------------------------------ |  | ------------------------------- | ----------- | - | ---- | - | ----------- | ---- |  | - | ----------- | -
|                                                                               |  | For the year ended December 31, |            
|                                                                               |  | 2003                            |             |   | 2002 |   |             | 2001 | 
|OPERATING ACTIVITIES                                                           |  |                                 |             |   |      |   |             |      |  |   |             |  
|Net loss                                                                       |  | $                               | (24,433,143 | ) |      | $ | (14,448,130 | )    |  | $ | (57,611,642 | )
|                                                                               |  |                                 |             |   |      |   |             |      |  |   |             |  
|Adjustments to reconcile net loss to net cash used in operating activities:    |  |                                 |             |   |      |   |             |      |  |   |             |  
|Depreciation and amortization of assets                                        |  |                                 | 2,955,499   |   |      |   | 3,374,563   |      |  |   | 3,798,285   |  
|Amortization of deferred stock-based compensation                              |  |                                 | 3,676,372   |   |      |   | 248,496     |      |  |   | 158,858     |  
|(Recovery of) provision for losses on accounts and notes receivable            |  |                                 | (325,000    | ) |      |   | (1,545,416  | )    |  |   | 5,677,249   |  
|Loss on disposal of fixed assets                                               |  |                                 | 205         |   |      |   | 1,660       |      |  |   | 199,565     |  
|Write down for inventory obsolescence                                          |  |                                 | 384,444     |   |      |   | 144,700     |      |  |   | 8,758,659   |  
|Gain on vendor settlements                                                     |  |                                 |            |   |      |   | (703,618    | )    |  |   | (1,921,605  | )
|Debt conversion interest charge                                                |  |                                 | 10,000,000  |   |      |   |            |      |  |   |            |  
|Changes in operating assets and liabilities:                                   |  |                                 |             |   |      |   |             |      |  |   |             |  
|Accounts and notes receivable                                                  |  |                                 | (2,010,110  | ) |      |   | 7,562,625   |      |  |   | 4,739,951   |  
|Inventories                                                                    |  |                                 | 2,339,833   |   |      |   | 7,267,369   |      |  |   | 2,139,251   |  
|Other current assets                                                           |  |                                 | (506,304    | ) |      |   | 817,092     |      |  |   | (851,309    | )
|Other long-term assets                                                         |  |                                 | 91,535      |   |      |   | (35,621     | )    |  |   | (1,541,246  | )
|Accounts payable                                                               |  |                                 | (910,154    | ) |      |   | (2,940,635  | )    |  |   | (4,030,086  | )
|Accrued payroll, other expenses, and other liabilities                         |  |                                 | (181,081    | ) |      |   | 801,061     |      |  |   | (2,159,044  | )
|Customer deposits                                                              |  |                                 | 1,979,471   |   |      |   | (446,649    | )    |  |   | (1,010,312  | )
|Deferred revenue                                                               |  |                                 | (828,477    | ) |      |   | (1,234,852  | )    |  |   | (4,523,643  | )
|Other liabilities                                                              |  |                                 | 596,685     |   |      |   |            |      |  |   |            |  
|                                                                               |  |                                 |             |   |      |   |             |      |  |   |             |  
|Total adjustments                                                              |  |                                 | 17,262,918  |   |      |   | 13,310,775  |      |  |   | 9,434,573   |  
|                                                                               |  |                                 |             |   |      |   |             |      |  |   |             |  
|NET CASH USED IN OPERATING ACTIVITIES                                          |  |                                 | (7,170,225  | ) |      |   | (1,137,355  | )    |  |   | (48,177,069 | )
|                                                                               |  |                                 |             |   |      |   |             |      |  |   |             |  
|INVESTING ACTIVITIES                                                           |  |                                 |             |   |      |   |             |      |  |   |             |  
|Cash paid for acquisition of capital assets                                    |  |                                 | (217,803    | ) |      |   | (217,137    | )    |  |   | (3,311,810  | )
|Proceeds from the disposal of fixed assets                                     |  |                                 |            |   |      |   | 179,262     |      |  |   | 162,641     |  
|                                                                               |  |                                 |             |   |      |   |             |      |  |   |             |  
|NET CASH USED IN INVESTING ACTIVITIES                                          |  |                                 | (217,803    | ) |      |   | (37,875     | )    |  |   | (3,149,169  | )
|                                                                               |  |                                 |             |   |      |   |             |      |  |   |             |  
|FINANCING ACTIVITIES                                                           |  |                                 |             |   |      |   |             |      |  |   |             |  
|Net proceeds from issuance of notes payable                                    |  |                                 | 10,000,000  |   |      |   |            |      |  |   |            |  
|Net proceeds from issuance of preferred and common stocks                      |  |                                 | 104,490     |   |      |   | 17,275      |      |  |   | 29,663,627  |  
|Payment to Series B investors                                                  |  |                                 | (1,000,000  | ) |      |   |            |      |  |   |            |  
|Notes receivable issued to officers                                            |  |                                 |            |   |      |   |            |      |  |   | (1,217,130  | )
|Payments on notes receivable issued to officers                                |  |                                 | 221,997     |   |      |   | 7,630       |      |  |   |            |  
|Principal payments on capital lease obligations                                |  |                                 | (83,466     | ) |      |   | (345,843    | )    |  |   | (1,286,096  | )
|                                                                               |  |                                 |             |   |      |   |             |      |  |   |             |  
|NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                            |  |                                 | 9,243,021   |   |      |   | (320,938    | )    |  |   | 27,160,401  |  
|                                                                               |  |                                 |             |   |      |   |             |      |  |   |             |  
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                           |  |                                 | 1,854,993   |   |      |   | (1,496,168  | )    |  |   | (24,165,837 | )
|CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                   |  |                                 | 3,205,478   |   |      |   | 4,701,646   |      |  |   | 28,867,483  |  
|                                                                               |  |                                 |             |   |      |   |             |      |  |   |             |  
|CASH AND CASH EQUIVALENTS, END OF YEAR                                         |  | $                               | 5,060,471   |   |      | $ | 3,205,478   |      |  | $ | 4,701,646   |  
|                                                                               |  |                                 |             |   |      |   |             |      |  |   |             |  
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION                               |  |                                 |             |   |      |   |             |      |  |   |             |  
|Cash paid during the period for interest                                       |  | $                               | 39,792      |   |      | $ | 11,162      |      |  | $ | 81,721      |  
|SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES            |  |                                 |             |   |      |   |             |      |  |   |             |  
|Property and equipment acquired under capital lease obligations                |  | $                               | 83,630      |   |      | $ | 37,034      |      |  | $ | 682,785     |  
|Issuance of warrants in connection with redeemable convertible preferred stock |  | $                               |            |   |      | $ |            |      |  | $ | 14,273,884  |  
|Reclass of accounts payable to long-term accounts payable                      |  | $                               | 69,327      |   |      | $ | 800,496     |      |  | $ | 2,021,561   |  



See notes to financial
statements.



F-6



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##### Table of Contents

AIRNET COMMUNICATIONS CORPORATION



NOTES TO FINANCIAL STATEMENTS

YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001



1. NATURE OF OPERATIONS, BUSINESS OPERATIONS AND GOING CONCERN



Nature of OperationsAirNet Communications Corporation (the Company or
AirNet) is engaged in the design, development, manufacture, and installation of broadband, software-defined base stations, base station controllers, and related wireless infrastructure components for wireless telecommunications in the Global Systems
for Mobile Communications (GSM) market. This product and service line represents the Companys one reportable segment as defined by FASB Statement of Financial Accounting Standards Statement 131, Disclosures about Segments of an Enterprise
and Related Information. The Company was founded in 1994 and is incorporated in the State of Delaware.



Business Operations and Going ConcernThe accompanying financial statements have been prepared on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course of business; and, as a consequence, the financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or
the amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company has experienced net operating losses and negative cash flows since inception and, as of December 31,
2003, had an accumulated deficit of $242.9 million. Cash used in operating activities and to fund capital expenditures for the years ended December 31, 2003 and 2002 was $7.4 million and $1.4 million, respectively. The Company expects to have a net
operating loss in 2004. At December 31, 2003, the Companys principal source of liquidity was $5.1 million of cash and cash equivalents and six additional $1.0 million quarterly installment payments associated with the Securities Purchase
Agreement (Purchase Agreement) described in Note 8. Such conditions raise substantial doubt that the Company will be able to continue as a going concern. As of March 5, 2004 the Companys cash balance was $3.2 million, which includes advances
of $11.0 million of funding received pursuant to the Purchase Agreement (see Note 8 to the financial statements) entered into in August 2003. The Companys current 2004 operating plan projects that cash available from planned revenue combined
with the $3.2 million on hand at March 5, 2004 and the additional $1.0 million quarterly funding payments may be adequate to defer the requirement for new funding until 2005. There can be no assurances that the installments will be received as
planned, if at all, or that this financing combined with revenue will be adequate to sustain operations through 2004.



The Companys future results of operations involve a number of significant risks and uncertainties. The worldwide market for telecommunications
products such as those sold by the Company has seen dramatic reductions in demand as compared to the late 1990s and 2000. It is uncertain as to when or whether market conditions will improve. The Company has been negatively impacted by this
reduction in global demand and by the resulting inability to generate sufficient revenues to cover expenses and reach profitability. Other factors that could affect the Companys future operating results and cause actual results to vary from
expectations include, but are not limited to, ability to raise capital, dependence on key personnel, dependence on a limited number of customers (with three customers accounting for 85% of the revenue for 2003), ability to design new products, the
erosion of product prices, the ability to overcome deployment and installation challenges in developing countries which may include political and civil risks and risks relating to environmental conditions, product obsolescence, ability to generate
consistent sales, ability to finance research and development, government regulation, technological innovations and acceptance, competition, reliance on certain vendors and credit risks. The Companys ultimate ability to continue as a going
concern for a reasonable period of time will depend on the Companys increasing its revenues and/or reducing its expenses and securing enough additional funding to enable the Company to reach profitability. The Companys historical sales
results and its current backlog do not give the Company sufficient visibility or predictability to indicate when the required higher sales levels might be achieved, if at all.



F-7



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##### Table of Contents

AIRNET COMMUNICATIONS CORPORATION



NOTES TO FINANCIAL STATEMENTS(Continued)

YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001



If the Company does not receive the outstanding installment payments from the August 2003 Purchase
Agreement, it will have to seek additional funding or dramatically reduce its expenditures and it is possible that the Company will be required to discontinue operations. It is unlikely that the Company will achieve profitable operations in the near
term and therefore it is likely that its operations will continue to consume cash in the foreseeable future. The Company has limited cash resources and therefore it must reduce its negative cash flows in the near term or secure additional funding to
continue operations. On February 9, 2004 the Company signed a non-exclusive agreement with an investment advisory firm to assist the Company in exploring the possibility of placing shares of the Company stock with one or more accredited investors
(see Note 17, Subsequent Events, to these financial statements). There can be no assurances that the Company will succeed in achieving its goals and failure to do so in the near term will have a material adverse effect on the business, prospects,
financial condition and operating results of the Company and its ability to continue as a going concern. As a consequence, the Company may be forced to seek protection under the bankruptcy laws. In that event, it is unclear whether the Company could
successfully reorganize its capital structure and operations, or whether it could realize sufficient value for its assets to satisfy fully the Companys debts. Accordingly, should the Company file for bankruptcy, there is no assurance that its
stockholders would receive any value.



SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES



Use of EstimatesThe preparation of
financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.



Vulnerability Due to Certain Concentrations and Other RisksThe
Company performs ongoing credit evaluations of its customers financial condition and generally does not require collateral on accounts receivable; hence, the accounts receivable are unsecured and the Company is at risk to the extent such
amounts become uncollectible. Customers are billed as contractual milestones are met, including deposits of up to 50% of the contracted amount at the inception of the contract. However, collection of the entire amounts due under the Companys
contracts to date have lagged behind shipment of products due to the substantial time period between shipment and the fulfillment of post-shipment contractual obligations. As of December 31, 2003 and 2002, the total due from two customers
represented 61% and 71%, respectively, of accounts and notes receivable, with one customer representing 39% and 63%, respectively, of accounts and notes receivable.



The Companys customers include cellular service providers and companies providing products to cellular service
providers. The Companys sales to customers in the United States are subject to the regulations imposed by the U.S. Federal Communications Commission. Sales outside the US commenced in 2000 and its revenue from direct sales to international
customers totaled approximately $0.3 million, $6.7 million, and $2.8 million in 2003, 2002, and 2001, respectively. In addition revenues from OEM sales for international deployments were $6.3 million, $11.3 million, and $2.0 million for the years
ended December 31, 2003, 2002, and 2001, respectively.



Long-Lived AssetsThe Company periodically reviews long-lived assets and certain identifiable intangibles to be held and used for impairment whenever events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. If the estimated future cash flows (undiscounted and without interest) attributable to the assets, less estimated future cash outflows, are less than the carrying amount, an impairment loss is required to be recognized.
The amount of the loss is measured by the difference between the asset carrying value and its fair value. No impairment losses were recorded in 2003, 2002, or 2001.



F-8



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##### Table of Contents

AIRNET COMMUNICATIONS CORPORATION



NOTES TO FINANCIAL STATEMENTS(Continued)

YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001



Comprehensive Income (Loss)Comprehensive income (loss) includes all changes in equity
during a period except those resulting from investments by owners and distributions to owners. There were no changes in equity during the years presented herein exclusive of investments by owners and losses from operations. As such, the
comprehensive loss for all periods presented is equal to the amount shown on the statement of operations as net loss.



Stock-Based CompensationIn December 2002 the FASB issued Statement No. 148, Accounting for Stock-Based CompensationTransition and
Disclosurean amendment of Statement No. 123 (Statement 148). Statement 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. This statement
also amends the disclosure requirements of FASB Statement No. 123, Accounting for Stock-Based Compensation (Statement 123) to require prominent disclosure in annual financial statements about the Companys method of accounting for
stock-based employee compensation and the effect of the method used on reported results. The Company previously adopted the disclosure only provisions of Statement 123 and continues to measure compensation costs for stock options issued to employees
using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25). Under APB 25, compensation expense is not recognized when the exercise price is the same as the
market price. A stock option is considered compensatory if the exercise price of the option is less than the fair market value of the stock on the measurement date, which is the date all terms of the grant are finalized (normally the grant date).
The intrinsic value of an option is the excess of the fair market value of the underlying stock over the exercise price of the options. The Company has not yet determined whether it will voluntarily change to the fair value based method of
accounting for the costs of stock-based compensation as provided under Statement 123 as amended by Statement 148. The Company has adoped the disclosure only provisions of FAS 123 and continues to record stock-based compensation under APB25.



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



|                                                                                      |  |                                |             |   |      |   |             |      |  |   |             |  
|------------------------------------------------------------------------------------- |  | ------------------------------ | ----------- | - | ---- | - | ----------- | ---- |  | - | ----------- | -
|                                                                                      |  | For the year ended December 31 |            
|                                                                                      |  | 2003                           |             |   | 2002 |   |             | 2001 | 
|Net loss attributable to common stock, as reported                                    |  | $                              | (32,328,397 | ) |      | $ | (24,342,918 | )    |  | $ | (60,147,667 | )
|Add: Stock based employee compensation expense included in reported net loss          |  |                                | 3,676,372   |   |      |   | 248,496     |      |  |   | 158,858     |  
|Deduct: Pro forma fair value stock compensation expense                               |  |                                | (3,625,372  | ) |      |   | (1,558,554  | )    |  |   | (1,688,885  | )
|                                                                                      |  |                                |             |   |      |   |             |      |  |   |             |  
|Pro forma net loss attributable to common stock                                       |  | $                              | (32,277,397 | ) |      | $ | (25,652,976 | )    |  | $ | (61,677,694 | )
|                                                                                      |  |                                |             |   |      |   |             |      |  |   |             |  
|Net loss per share attributable to common shareholdersbasic and diluted, as reported |  | $                              | (0.97       | ) |      | $ | (1.02       | )    |  | $ | (2.53       | )
|                                                                                      |  |                                |             |   |      |   |             |      |  |   |             |  
|Net loss per share attributable to common shareholdersbasic and diluted, pro forma   |  | $                              | (0.97       | ) |      | $ | (1.08       | )    |  | $ | (2.59       | )
|                                                                                      |  |                                |             |   |      |   |             |      |  |   |             |  



Financial
InstrumentsThe carrying amounts reported in the balance sheet under cash and cash equivalents, accounts receivable, accounts payable and capital lease obligations approximate fair value due to the immediate or short-term maturity of these
financial instruments.



Fair value estimates are made at a
specific point in time and are based on relevant market information and information about the financial instrument; they are subjective in nature and involve uncertainties and matters of



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AIRNET COMMUNICATIONS CORPORATION



NOTES TO FINANCIAL STATEMENTS(Continued)

YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001



judgment and, therefore, cannot be determined with precision. These estimates do not reflect any premium or discount that could result from offering for sale
at one time the Companys entire holdings of a particular instrument. Changes in assumptions could significantly affect these estimates.



Cash EquivalentsThe Company considers all highly liquid investments with maturity of three months or less when purchased to be cash
equivalents. The Companys policy is to invest excess funds with only well-capitalized financial institutions.



InventoriesInventories are valued at the lower of cost (determined by the first-in, first-out basis) or market. Inventories are reviewed
periodically and items considered to be slow moving or obsolete are written down to their estimated net realizable value. Finished goods delivered to customers are recorded in inventories until the related revenue is recognized.



Property and EquipmentProperty and equipment is stated at cost.
Depreciation is computed by the straight-line method over the estimated useful lives of the related assets, which range from two to five years. Assets held under capital leases and leasehold improvements are amortized over the life of the related
leases.



Capitalized Software Development CostsIn
accordance with Statement of Financial Accounting Standards No. 86, Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed, (Statement 86), the Company capitalizes the costs associated with internally developed
software products. Initial costs are charged to operations as research and development prior to the development of a detailed program design or a working model. Costs incurred subsequent to the products release, and research and development
performed as contractual requirements are charged to operations. The costs of this capitalized software development are amortized over the estimated useful lives of the product.



Revenue RecognitionRevenue from product sales is recognized after delivery and determination that the fee is
fixed and determinable, collectibilty is probable, and after the resolution of uncertainties regarding satisfaction of significant terms and conditions of the customer contract. Revenue for sales to Original Equipment Manufacturers (OEMs) is
recognized when title to the product passes to the OEM customer. Typically, for these product sales, title passes to the customer at the point of shipment.



The Company recognizes revenue from service agreements on a straight-line basis unless its obligation is fulfilled in a different pattern, over the
contractual term of the arrangement. Revenue on certain long-term projects is recognized on a percentage of completion basis. The cost incurred to date is taken as a percentage of the estimated cost at completion and this percentage is used to
compute revenue on an inception-to-date basis.



Warranty and
Customer SupportThe Company typically warrants its products against defects in materials and workmanship for a period of one year from the date of revenue recognition. A provision for estimated future warranty and customer support is
recorded when revenue is recognized.



Research and
Development ExpensesExpenditures relating to the development of new products and processes, including significant improvements to existing products, are expensed as incurred. These expenses include continued product development and
engineering support costs for test development and technical services.



Income TaxesThe Company accounts for income taxes under the asset and liability method. Under this method, deferred income taxes are recognized for the tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases and to



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AIRNET COMMUNICATIONS CORPORATION



NOTES TO FINANCIAL STATEMENTS(Continued)

YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001



operating loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that the change in the rate is enacted.



Recent PronouncementsIn June 2002 the FASB issued Statement No.
146, Accounting for Costs Associated with Exit or Disposal Activities(Statement 146). Statement 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3.
Statement 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred and is effective for exit or disposal activities initiated after December 31, 2002. The Company adopted this
Statement to be effective during the quarter ended March 31, 2003. The adoption of this Statement did not have any impact on the Company.



On April 30, 2002, the FASB issued Statement No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections (Statement 145) which updates, clarifies and simplifies existing accounting pronouncements. The rescission of FASB Statement No. 4 eliminates the requirement to report all gains and losses resulting from the early
extinguishments of debt as extraordinary items. Statement 145 is effective for all transactions occurring after May 15, 2002, with earlier application encouraged. The Company adopted this Statement to be effective during the quarter ended June 30,
2002. As a result, the Company reclassified an extraordinary gain on vendor settlements of $1,921,605 to operating expenses in the accompanying 2001 statement of operations.



In November 2002 the FASB issued FASB Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Direct Guarantees of Indebtedness of Others(FIN 45). This interpretation requires the Company to record, at the inception of a guarantee, the fair value of the guarantee as a liability, with the offsetting entry being
recorded based on the circumstances in which the guarantee was issued. Fundings under the guarantee are to be recorded as a reduction of the liability. After funding has ceased, the remaining liability is recognized in the income statement on a
straight-line basis over the remaining term of the guarantee. The Company adopted the disclosure provisions of FIN 45 in the fourth quarter of 2002 and the initial recognition and initial measurement provisions on a prospective basis for all
guarantees issued after December 31, 2002. This interpretation did not have a material impact on the financial conditions, results of operations, or cash flows of the Company.



In May 2003 the FASB issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity(Statement 150). This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a
financial instrument that is within its scope as a liability (or an asset in some circumstances). This statement is effective for interim periods beginning after June 15, 2003. The Company adopted the disclosure provisions of Statement 150 in the
third quarter of 2003. This interpretation did not have a material impact on the financial condition, results of operations, or cash flows of the Company.



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##### Table of Contents

AIRNET COMMUNICATIONS CORPORATION



NOTES TO FINANCIAL STATEMENTS(Continued)

YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001



Loss Per ShareBasic loss per share is computed by dividing the net loss attributable to
common stockholders by the weighted average number of common shares outstanding. Net loss attributable to common stockholders is computed by adding dividends accrued but unpaid and accretion of discounts on cumulative preferred stocks to the net
loss reported. Diluted net loss per share equals basic net loss per share for all periods reported since potential common shares are anti-dilutive. A reconciliation of the components used in computing basic and diluted net loss per share follows:



|                                                                                       |  |                          |            |   |      |   |            |      |  |   |            |  
|-------------------------------------------------------------------------------------- |  | ------------------------ | ---------- | - | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                                                       |  | YEARS ENDED DECEMBER 31, |           
|                                                                                       |  | 2003                     |            |   | 2002 |   |            | 2001 | 
|Net loss, as reported                                                                  |  | $                        | 24,433,143 |   |      | $ | 14,448,130 |      |  | $ | 57,611,642 |  
|                                                                                       |  |                          |            |   |      |   |            |      |  |   |            |  
|Plus Series B cumulative preferred dividends                                           |  |                          |           |   |      |   | 2,400,000  |      |  |   | 1,500,000  |  
|Plus accretion of discounts on redeemable preferred stock                              |  |                          |           |   |      |   | 7,494,788  |      |  |   | 1,036,025  |  
|Plus Series B conversion expense                                                       |  |                          | 7,895,254  |   |      |   |           |      |  |   |           |  
|                                                                                       |  |                          |            |   |      |   |            |      |  |   |            |  
|Net loss attributable to common stockholders                                           |  | $                        | 32,328,397 |   |      | $ | 24,342,918 |      |  | $ | 60,147,667 |  
|                                                                                       |  |                          |            |   |      |   |            |      |  |   |            |  
|Weighted average common shares outstanding                                             |  |                          | 33,304,579 |   |      |   | 23,822,913 |      |  |   | 23,783,637 |  
|Net loss per share attributable to common stockholders, basic and diluted, as reported |  | $                        | (0.97      | ) |      | $ | (1.02      | )    |  | $ | (2.53      | )



For the
above-mentioned periods, the Company had securities outstanding that may have increased the loss per share but were excluded from the computation of diluted net loss per share in the periods presented since their inclusion would have been
anti-dilutive. The potential number of common shares into which these outstanding securities were convertible is as follows:



|                                              |  |                          |            |      |   |           |  |   |          
|--------------------------------------------- |  | ------------------------ | ---------- | ---- | - | --------- |  | - | ---------
|                                              |  | YEARS ENDED DECEMBER 31,
|                                              |  | 2003                     |            | 2002 |   | 2001     
|Convertible preferred stock                   |  |                          | 5,879,471  |      |   | 9,554,140 |  |   | 6,020,417
|Convertible debt (including accrued interest) |  |                          | 35,333,275 |      |   |          |  |   |         
|Outstanding options                           |  |                          | 236,456    |      |   | 399,979   |  |   | 50,965   
|Warrants                                      |  |                          | 853,285    |      |   |          |  |   |         
|                                              |  |                          |            |      |   |           |  |   |          
|Total                                         |  |                          | 42,302,487 |      |   | 9,954,119 |  |   | 6,071,382
|                                              |  |                          |            |      |   |           |  |   |          
|Weighted average conversion price of debt     |  | $                        | 0.1071     |      |   |          |  |   |         
|Weighted average exercise price of options    |  | $                        | 0.45       |      | $ | 0.45      |  | $ | 4.97     
|Weighted average exercise price of warrant    |  | $                        | 0.43       |      | $ | 3.31      |  | $ | 3.31     



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##### Table of Contents

AIRNET COMMUNICATIONS CORPORATION



NOTES TO FINANCIAL STATEMENTS(Continued)

YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001



The number of convertible securities listed above represent an average for the fiscal years. As of
December 31, 2003 the number of shares issued and outstanding and potentially dilutive convertible securities outstanding were:



|                                            |  |                      
|------------------------------------------- |  | ---------------------
|                                            |  | As ofDecember 31,2003
|Issued and outstanding                      |  | 48,680,789           
|Convertible securities:                     |  |                      
|Convertible debt including accrued interest |  | 97,852,576           
|Outstanding exercisable options             |  | 786,580              
|Warrants                                    |  | 1,904,509            
|                                            |  |                      
|Total outstanding and convertibles          |  | 149,224,454          
|                                            |  |                      



The numbers listed
above exclude an additional 56,294,504 shares underlying the convertible financing (principal only), had the full value of the financing ($16 million) been advanced and an additional 20,359,424 options outstanding that have not yet vested. The
shares underlying any additional accrued interest beyond December 31, 2003 are not included in this calculation and would be an additional impact.



ReclassificationsCertain amounts in the 2001 financial statements have been reclassified to conform to the 2002 classifications.



2. INVENTORIES



|                                      |  |                    |            |      |   |           
|------------------------------------- |  | ------------------ | ---------- | ---- | - | ----------
|                                      |  | AS OF DECEMBER 31,
|                                      |  | 2003               |            | 2002
|Raw Materials                         |  | $                  | 8,808,527  |      | $ | 10,986,216
|Work in Process                       |  |                    | 1,780,434  |      |   | 1,850,265 
|Finished Goods.                       |  |                    | 25,610     |      |   | 155,062   
|Finished Goods Delivered to Customers |  |                    | 1,072,578  |      |   | 1,467,482 
|                                      |  |                    |            |      |   |           
|                                      |  | $                  | 11,687,150 |      | $ | 14,459,025
|                                      |  |                    |            |      |   |           



3. ACCOUNTS AND NOTES RECEIVABLE



At December 31, 2003, two customers on open accounts
receivable represented 66% of the net carrying amount of accounts receivable, a significant concentration of credit risk. As of December 31, 2003 $0.4 million of the balance carried by these two customers was past due. The Company believes that this
past due balance is collectible.



Provision for doubtful
accounts and notes receivable amounted to $275,000, $1,054,584, and $5,677,249 for the years ended December 31, 2003, 2002, and 2001, respectively. Notes and accounts receivable recoveries totaled $500,000, $1,200,000 and $0 in 2003, 2002 and 2001,
respectively. In addition there was a charge off of receivables balance of $625,027 during the year ended December 31, 2003 and a reversal of the allowance for notes receivable of $1,400,000 in 2002. The allowance for doubtful accounts and notes
receivable of $275,000 at December 31, 2003 is considered adequate by management, based on current knowledge of customer status and market conditions, to absorb estimated losses in the accounts receivable portfolio.



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##### Table of Contents

AIRNET COMMUNICATIONS CORPORATION



NOTES TO FINANCIAL STATEMENTS(Continued)

YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001



The chart below (in $ millions) details the change in the allowance for doubtful accounts for the
following periods:



|                        |  |                     |      |   |                  |   |      |  
|----------------------- |  | ------------------- | ---- | - | ---------------- | - | ---- | -
|                        |  | Accounts Receivable |      |   | Notes Receivable |  
|Balance 12/31/00        |  | $                   | 4.1  |   |                  | $ | 3.7  |  
|Provision for bad debts |  |                     | 1.3  |   |                  |   | 4.4  |  
|Recoveries              |  |                     |     |   |                  |   |     |  
|Chargeoffs              |  |                     | (2.0 | ) |                  |   | (6.7 | )
|                        |  |                     |      |   |                  |   |      |  
|Balance 12/31/01        |  |                     | 3.4  |   |                  |   | 1.4  |  
|Provision for bad debts |  |                     | 1.1  |   |                  |   |     |  
|Reversal                |  |                     |     |   |                  |   | (1.4 | )
|Recoveries **           |  |                     | (1.2 | ) |                  |   |     |  
|Chargeoffs              |  |                     | (2.1 | ) |                  |   |     |  
|                        |  |                     |      |   |                  |   |      |  
|Balance 12/31/02        |  |                     | 1.2  |   |                  |   |     |  
|Provision for bad debts |  |                     | 0.2  |   |                  |   |     |  
|Recoveries **           |  |                     | (0.5 | ) |                  |   |     |  
|Chargeoffs              |  |                     | (0.6 | ) |                  |   |     |  
|                        |  |                     |      |   |                  |   |      |  
|Balance 12/31/03        |  | $                   | 0.3  |   |                  | $ |     |  
|                        |  |                     |      |   |                  |   |      |  

---

|** | Recoveries due to payment of account.
|-- | -------------------------------------



In mid-2000, the Company provided vendor financing in select situations, including one customer whose open account of $9,015,051 was converted to a note
receivable in June 2000, due on December 31, 2000. The customer defaulted on the note and the Company provided an allowance for the estimated loss exposure of $3.7 million under the note at December 31, 2000. The Company entered into a mediated
settlement agreement with the customer on March 29, 2001. The settlement agreement provided for the recovery of inventory, application of customer deposits and a cash payment of $3 million to be paid on or before July 29, 2001, which in the
aggregate was sufficient to settle the customers account, assuming the amounts owed were collected in full, without further loss to the Company. This amount was collected in full on July 25, 2001.



4. OTHER LONG TERM ASSETS



Other long-term assets consist of the following at December 31, 2003 and
2002 respectively:



|                                                                         |  |                    |           |      |   |          
|------------------------------------------------------------------------ |  | ------------------ | --------- | ---- | - | ---------
|                                                                         |  | AS OF DECEMBER 31,
|                                                                         |  | 2003               |           | 2002
|Licensing and software development costs, net of cumulative amortization |  | $                  | 2,195,775 |      | $ | 2,048,525
|Other long-term assets                                                   |  |                    | 193,006   |      |   | 124,473  
|                                                                         |  |                    |           |      |   |          
|                                                                         |  | $                  | 2,388,781 |      | $ | 2,172,998
|                                                                         |  |                    |           |      |   |          



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



The first license agreement is for EDGE software to be integrated into the base station product line for applications
involving high-speed data. The license term for this agreement is perpetual with payments made as



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AIRNET COMMUNICATIONS CORPORATION



NOTES TO FINANCIAL STATEMENTS(Continued)

YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001



certain Company development milestones are reached. The total amount paid under this agreement was approximately $0.9 million at December 31, 2003 with the
remaining balance of approximately $0.6 million in licensing fees to be made as certain, specified milestones are reached. Payments are expected to be made in 2004, and 2005. In addition to the licensing fees and non-recurring engineering fees paid,
there will be royalties payable on a per unit basis.



The
second agreement for development pertains to licensing of adaptive array technology. The license term for this agreement is perpetual. The Company has capitalized approximately $1.3 million of software costs under this agreement and achieved
commercial availability of the product in December 2003 at which point amortization of the capitalized software costs were started. This software will be amortized evenly over a five-year period. Amortization expense at December 31, 2003 was
$21,619. In addition to the $1.3 million that has previously been paid there is an additional licensing fee of $1.2 payable, if and only if, 100 SuperCapacity base stations have been shipped; and royalties payable on a per unit basis with a minimum
of $1.0 million due within two years of the anniversary of shipment of 100 SuperCapacity base stations, if ever.



5. CONVERTIBLE NOTE AND WARRANT



On September 12, 1997, the Company entered into a Convertible Note and Warrant purchase agreement with Harris Corporation (Harris), pursuant to which
Harris purchased a secured convertible promissory note and a warrant for $4,000,000. The Harris note was secured by all assets of the Company and bore interest at an annual rate of 8%. The Harris note was convertible into 112,296,970 shares of the
Companys Series E voting cumulative preferred stock, and the Harris warrant was exercisable for the purchase of an additional 11,229,697 shares of Series E voting cumulative preferred stock at a warrant exercise price of $0.0356 per share. The
fair value of the Harris warrant was calculated at $112,297 at the date of grant. This fair value was accounted for as a discount on the note, and was being amortized over the life of the note.



Harris exercised its right of conversion of the note with a carrying value of
$3,965,687 in September 1998 and received 112,296,970 shares of the Companys Series E voting convertible preferred stock and the note was canceled. Harris transferred ownership of the warrant to its wholly owned subsidiary, VFC Capital, Inc.
The warrant expired unexercised on September 12, 2002.



6. SERIES G BRIDGE
FINANCING



Through a private placement in June and July
1999, the Company issued $6,338,187 of securities comprised of convertible promissory notes (1999 Bridge Notes) with attached warrants (the Bridge Warrants). The investors in these securities were also preferred stockholders. The 1999 Bridge Notes,
which were to mature on December 11, 2000, bore interest at a rate of prime plus 2% and were payable upon maturity. The 1999 Bridge Notes were collateralized by a security interest in all assets of the Company, but subordinate to a first lien for
any debt incurred to finance receivables and inventory. The 1999 Bridge Notes were automatically convertible in the event that the Company closed on a private financing of at least $10 million or closed on an initial public offering of the
Companys common stock. As of September 16, 1999, the carrying value and accrued interest on the 1999 Bridge Notes totaling $6,485,985 was converted into Series G senior voting convertible preferred stock, which was subsequently converted into
Company common stock.



The Bridge Warrants vested immediately,
have a ten-year term, and contain a cashless exercise option. Warrants to purchase 518,335 shares of common stock were issued in June and August 1999 at an exercise price of $3.67 per share. In August 2003, the number of shares that can be purchased
upon exercise of the warrants and



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AIRNET COMMUNICATIONS CORPORATION



NOTES TO FINANCIAL STATEMENTS(Continued)

YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001



the exercise price per share were adjusted pursuant to the anti-dilution rights of the warrants as a result of the Companys consummation of the
Securities Purchase Agreement with convertible debt at an effective conversion price of $0.1081 per share. As a result of this adjustment, there were warrants to purchase 3,708,695 shares at a purchase price of $0.43 per share. (See Note 8). During
2003 there were cashless exercises of 1,804,186 warrants resulting in the issuance of 853,285 shares of the Companys common stock. As of December 31, 2003, warrants to purchase 1,904,509 shares of common stock were still outstanding at an
exercise price of $0.43 per share. The Bridge Warrants issued in June 1999 expire on June 10, 2009. The Bridge Warrants issued on August 2, 1999 expire on August 1, 2009. The fair value of the Bridge Warrants was calculated at $1,032,180. The fair
value was determined using the Black-Scholes model based on the following assumptions:



|                         |  |   |          |  
|------------------------ |  | - | -------- | -
|Volatility               |  |   | 40.7     | %
|Expected life.           |  |   | 10 years |  
|Fair value of stock.     |  | $ | 3.67     |  
|Dividend rate.           |  |   | 0        | %
|Risk-free interest rate. |  |   | 6.11     | %



7. REDEEMABLE CONVERTIBLE PREFERRED
STOCK (SERIES B PREFERRED)



On May 16, 2001, the Company
issued 955,414 shares of Series B redeemable convertible preferred stock to three existing stockholders at $31.40 per share for a total face value of $30 million. The Series B redeemable convertible preferred stock was recorded in the initial amount
of $15,307,506 (face value of $30 million less issuance costs of $418,610 and the fair value totaling $14,273,884 of detachable warrants and of the beneficial non-detachable conversion feature discussed below.) The stock was redeemable at the option
of the holder, at any time after May 31, 2006 by the Company out of funds legally available for such purposes and initially each preferred share was convertible, at any time, into ten shares of common stock. Holders of preferred stock were entitled
to votes equal to the number of shares of common stock into which each preferred stockholding converts and collectively to elect two members of the Board of Directors. Upon liquidation of the Company, or if a majority of the preferred stockholders
agreed to treat a change in control or a sale of all or substantially all of the Companys assets (with certain exceptions) as a liquidation, the preferred stockholders were entitled to 200% of their initial purchase price plus accrued but
unpaid dividends before any payments to any other stockholders.



In association with this preferred stock offering, the Company issued detachable warrants to purchase 2,866,242 shares of common stock for $3.14 per share. The warrants expire on May 14, 2011 and are recorded in additional paid in capital
at their estimated fair value of $7,136,942, resulting in a like amount of discount on the preferred stock. The discount was being amortized using the effective interest method over the preferred stock redemption period.



An additional discount for $7,136,942, related to the intrinsic value of the
beneficial conversion feature embedded in the preferred stock was also recorded as additional paid capital, after valuation of the warrants issued. The discount was recorded as an offset to the preferred stock and was being amortized over the
preferred stock redemption period.



Effective October 31, 2002,
the holders of all of the Companys Series B redeemable convertible preferred stock irrevocably and permanently waived the right of optional redemption applicable to the Series B Preferred Stock as well as the right to treat a specific proposed
Sale of the Corporation as a Liquidation Event, as defined, to the extent that such treatment would entitle the Series B Holders to receive their liquidation amount per share in a form different from the consideration to be paid to holders of the
Companys common stock in connection with such sale of the Corporation. As a result of the irrevocable removal of the redemption feature associated



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##### Table of Contents

AIRNET COMMUNICATIONS CORPORATION



NOTES TO FINANCIAL STATEMENTS(Continued)

YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001



with the Series B preferred stock, the Company reclassified the Series B preferred stock to stockholders equity in the 2002 balance sheet. Also as a
result of the waiver on the redemption right, dividends accrued but not declared of $400,000 after October 31, 2002 for the Series B Preferred Shares were not included in the carrying value of the Preferred Stock.



On June 19, 2003, as a condition to the Investment under the Securities
Purchase Agreement (Purchase Agreement) (see Note 8) and contingent upon its closing, the holders of the Companys Series B Convertible Preferred Stock (Series B Preferred Stock), SCP II, Tandem PCS Investments, L.P. (Tandem) and Mellon
Ventures, L.P. (the Series B Holders), agreed to irrevocably elect to convert the aggregate number of 955,414 shares of Series B Preferred Stock currently outstanding into 19,108,281 shares of common stock at the closing of the Purchase Agreement in
consideration for the Companys payment (return of capital) of $500,000 to each of Mellon and Tandem and the Companys issuance of 4,625,347 shares of common stock to SCP II. The Series B Holders each signed a written notice (collectively,
the Notices) electing to convert their shares of Series B Preferred Stock upon closing of the Purchase Agreement. In addition, Mellon and Tandem entered into a separate agreement, pursuant to which Mellon purchased all the shares of the
Companys common stock held by Tandem (including the shares received upon conversion of its shares of Series B Preferred Stock into common stock but excluding the Series G Bridge Warrants) at the closing of the Purchase Agreement, for an
aggregate purchase price of $500,000. As a result of the conversion of the Series B Preferred Stock, the $60 million liquidation preference and other rights and privileges of the Series B Preferred Stock expired. In addition, the holders of the
Series B Preferred Stock agreed to irrevocably waive their rights to all accrued but unpaid dividends totaling approximately $5.4 million as of August 13, 2003 on the Series B Preferred Stock upon closing of the Purchase Agreement. Accordingly, at
the closing of the Purchase Agreement on August 13, 2003 and the conversion of the Series B Preferred Stock, all such accrued dividends were cancelled and no further dividends have been or will be recorded by the Company related to the Series B
Preferred Stock. As of August 14, 2003 the Series B preferred convertible stock was converted into 19,108,281 shares of common stock at a conversion price of $1.57 per share.



8. SECURITIES PURCHASE AGREEMENT TRANSACTION



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



On June 5, 2003, the
Company, and the lenders entered into a Securities Purchase Agreement (Purchase Agreement) for the issuance and sale to the lenders of senior secured convertible notes (the Notes) in the principal amount of $16.0 million (the Investment). The Notes
are collateralized by a security interest in all of the Companys assets, including without limitation its intellectual property, in favor of the lenders under the terms and conditions of the Purchase Agreement. The Purchase Agreement was
disclosed in an attachment to the Companys Form 8-K filed on June 9, 2003.



The Companys stockholders approved the closing of the Investment under the Purchase Agreement on August 8, 2003 and the Purchase Agreement closed on August 13, 2003. On that date, the Company issued Notes of
$4 million and $12 million to SCP II and TECORE, respectively, and immediately received $8 million in



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##### Table of Contents

AIRNET COMMUNICATIONS CORPORATION



NOTES TO FINANCIAL STATEMENTS(Continued)

YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001



proceeds ($4 million each from SCP and TECORE). Upon the closing of the Purchase Agreement, the principal balance of the Bridge Loans ($6 million) was due
and paid from the proceeds of the Investment. The interest accrued on these Bridge Loans was deferred by the Lenders and will be due and payable four years from the closing date under the Purchase Agreement. The interest rate at 12% per annum will
compound on the amount of interest deferred under the Bridge Loans. As of December 31, 2003, the deferred accrued interest from the Bridge Loans was $160,741 and accrued interest on this amount was $7,190. The interest on the bridge note and any
accrued interest on this amount is not convertible into shares of common stock.



The remaining proceeds from the Investment still to be paid by TECORE is payable in eight quarterly installments of $1 million each. The first installment payment originally scheduled for June 30, 2003 was received by
the Company at the closing of the Purchase Agreement on August 13, 2003; as a result, TECOREs Note at closing totaled $5 million.



The Notes are convertible, at any time, into shares of the Companys common stock at an initial conversion price of $0.1081, subject to adjustment
for certain future dilutive issuances of securities. The Notes also have voting rights equivalent to the number of shares into which the Notes could be converted at a deemed conversion price of $0.57. Interest on the Notes accrues at an annual rate
of 12%. Both interest and the Notes are due and payable on August 13, 2007. Any portion of the accrued interest may be converted at any time to shares of common stock at the applicable conversion price (initial conversion price of $0.1081 per
share). Although this security is not registered, the holders have demand registration rights.



In the event that the holder shall fail to pay any installment of the purchase price of this Note when due pursuant to any of Sections 1.1(b)(ii)-(ix) of the Purchase Agreement, and such failure shall not be cured on
or before the 20th calendar day following such due date, this Note shall immediately be converted automatically into the number of shares of Common Stock into which the Note is then convertible pursuant to Section 5.1 as of close of business of such
20th day, without action by the holder of the Note and whether or not the Note is surrendered to the Company or its transfer agent.



The conversion price of the Notes was adjusted on a preliminary basis, to be finalized in the in the first quarter of 2004, from $0.1081 per share of
common stock to approximately $0.1066 per share of common stock at December 31, 2003 as a result of the cashless exercise of 853,285 Bridge Warrants described in Note 6 in these financial statements (see chart below for conversion rate adjustments
made between the closing of the Securities Purchase agreement and December 31, 2003 and then the adjustment made on February 20, 2004 and the associated underlying shares.)



Conversion of Senior Secured Debt



|                       |  |                      |           |                         |            |                         |   |                   |  |            |  |                   |            |  |            
|---------------------- |  | -------------------- | --------- | ----------------------- | ---------- | ----------------------- | - | ----------------- |  | ---------- |  | ----------------- | ---------- |  | -----------
|                       |  | As of August 13 2003 |           | As of December 31, 2003 |            | As of February 20, 2004
|                       |  | Dollars              |           | Underlying Shares       |            | Dollars                 |   | Underlying Shares |  | Dollars    |  | Underlying Shares
|Conversion Rate        |  | $                    | 0.108100  |                         |            |                         | $ | 0.10658234        |  |            |  | $                 | 0.10469347 |  |            
|                       |  |                      |           |                         |            |                         |   |                   |  |            |  |                   |            |  |            
|TECORE                 |  |                      |           |                         |            |                         |   |                   |  |            |  |                   |            |  |            
|Principal              |  | $                    | 5,000,000 |                         | 46,253,469 |                         | $ | 6,000,000         |  | 56,294,504 |  | $                 | 7,000,000  |  | 66,861,859 
|Accrued Interest       |  | $                    |          |                         |           |                         | $ | 250,441           |  | 2,349,740  |  | $                 | 365,549    |  | 3,491,612  
|                       |  |                      |           |                         |            |                         |   |                   |  |            |  |                   |            |  |            
|SCP Equity Partners II |  |                      |           |                         |            |                         |   |                   |  |            |  |                   |            |  |            
|Principal              |  | $                    | 4,000,000 |                         | 37,002,775 |                         | $ | 4,000,000         |  | 37,529,670 |  | $                 | 4,000,000  |  | 38,206,776 
|Accrued Interest       |  | $                    |          |                         |           |                         | $ | 178,916           |  | 1,678,662  |  | $                 | 246,549    |  | 2,354,961  
|                       |  |                      |           |                         |            |                         |   |                   |  |            |  |                   |            |  |            
|Total                  |  |                      |           |                         |            |                         |   |                   |  |            |  |                   |            |  |            
|Principal              |  | $                    | 9,000,000 |                         | 83,256,244 |                         | $ | 10,000,000        |  | 93,824,174 |  | $                 | 11,000,000 |  | 105,068,635
|Accrued Interest       |  | $                    |          |                         |           |                         | $ | 429,357           |  | 4,028,402  |  | $                 | 612,098    |  | 5,846,573  
|Grand Total            |  | $                    | 9,000,000 |                         | 83,256,244 |                         | $ | 10,429,357        |  | 97,852,576 |  | $                 | 11,612,098 |  | 110,915,208



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##### Table of Contents

AIRNET COMMUNICATIONS CORPORATION



NOTES TO FINANCIAL STATEMENTS(Continued)

YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001



Effective upon the closing of the Investment under the Purchase Agreement, the Company has amended
its stock option plan. Under the amended plan the number of options available for grant was increased to 30,742,986. After the closing of the Purchase Agreement, 20,081,926 options at a strike price of $0.01 per share were issued to employees. This
includes options granted to the Chief Executive Officer of the Company provided under a separate agreement, concurrent with the closing of the Purchase Agreement, as disclosed in the Definitive Proxy (Schedule 14A) filed with the Securities and
Exchange Commission on July 9, 2003. The granting of the non-qualified stock options to employees will cause a non-cash charge to the earnings of the Company of $19.1 million amortized ratably over the two-year vesting period ending in September
2005. The impact of these grants during the year ended December 31, 2003 was approximately $3.7 million. (See Note 9 to these financial statements.)



On June 19, 2003, as a condition to the Investment under the Purchase Agreement and contingent upon the closing of the Investment under the Purchase
Agreement, the holders of the Companys Series B Preferred Stock, agreed to irrevocably elect to convert the aggregate number of 955,414 shares of Series B Preferred Stock currently outstanding into 19,108,281 shares of common stock (see Note
7) at the closing of the Purchase Agreement in consideration for the Companys payment (return of capital) of $500,000 to each of Mellon and Tandem and the Companys issuance of 4,625,347 shares of common stock to SCP II. The Series B
Holders each signed a written notice (collectively, the Notices) electing to convert their shares of Series B Preferred Stock upon closing of the Purchase Agreement. In addition, Mellon and Tandem entered into a separate agreement, pursuant to which
Mellon purchased all the shares of the Companys common stock held by Tandem (including the shares received upon conversion of its shares of Series B Preferred Stock into common stock but excluding the Series G Bridge Warrants) at the closing
of the Purchase Agreement, for an aggregate purchase price of $500,000. As a result of the conversion of the Series B Preferred Stock, the $60 million liquidation preference and other rights and privileges of the Series B Preferred Stock expired. In
addition, the Series B Holders agreed to irrevocably waive their rights to all accrued but unpaid dividends totaling approximately $5.4 million as of August 13, 2003 on the Series B Preferred Stock upon closing of the Purchase Agreement.
Accordingly, at the closing of the Investment under the Purchase Agreement on August 13, 2003 and the conversion of the Series B Preferred Stock, all such accrued dividends were cancelled and no further dividends have been or will be recorded by the
Company related to the Series B Preferred Stock. As of August 14, 2003 the Series B Preferred Stock was converted into 19,108,281 shares of common stock at a conversion price of $1.57 per share.



The events surrounding the closing of the Investment under the Purchase
Agreement (and the payments of additional installments under the TECORE Note) discussed above will have non-cash impacts on the financial statements of the Company in 2003, 2004 and 2005 as follows:



| |  | As a result of the conversion feature embedded in the Notes, which provide for conversion of the Notes into AirNets common stock at any time, the Company
recorded a charge to interest expense representing the intrinsic value of the conversion feature, limited to the total cash proceeds received from the funding. The offset to this charge was credited to Additional Paid in Capital. Accordingly, a
charge of $9 million was recorded to interest expense on the closing date of the Purchase Agreement. An additional payment of $1.0 million, due by September 30, 2003, was received by the Company on October 8, 2003 and accordingly, an additional
charge related to the beneficial conversion feature embedded in the Notes was recorded as a charge to interest expense in the fourth quarter. In January 2004 an additional TECORE installment of $1.0 million was received by the Company and therefore
an additional charge to interest expense of $1.0 million will be made in the first quarter of 2004. Assuming TECORE makes the five remaining $1 million installment payments for its purchase of the TECORE Note, the Company will record additional
non-cash charges to interest
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

AIRNET COMMUNICATIONS CORPORATION



NOTES TO FINANCIAL STATEMENTS(Continued)

YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001



| | expense, with respect to each installment paid, up to an additional $1.0 million in each quarter thereafter through March 2005. The actual charge to earnings
was determined based on the intrinsic value of the conversion feature on the date of the closing of the Investment under the Purchase Agreement. The chart below details the amounts planned, dates due and the dates received for this funding:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                   |  |                   |           |          |          |               |            
|---------------------------------- |  | ----------------- | --------- | -------- | -------- | ------------- | -----------
|Source                             |  | Amount of Funding |           | Date Due |          | Date Received
|SCP Private Equity Partners II, LP |  | $                 | 4,000,000 |          | 8/13/03  |               | 8/13/03    
|TECORE, Inc.                       |  | $                 | 4,000,000 |          | 8/13/03  |               | 8/13/03    
|TECORE, Inc.                       |  | $                 | 1,000,000 |          | 8/13/03  |               | 8/13/03    
|TECORE, Inc.                       |  | $                 | 1,000,000 |          | 9/30/03  |               | 10/8/03    
|TECORE, Inc.                       |  | $                 | 1,000,000 |          | 12/31/03 |               | 1/7/04     
|TECORE, Inc.                       |  | $                 | 1,000,000 |          | 3/31/04  |               | Not yet due
|TECORE, Inc.                       |  | $                 | 1,000,000 |          | 6/30/04  |               | Not yet due
|TECORE, Inc.                       |  | $                 | 1,000,000 |          | 9/30/04  |               | Not yet due
|TECORE, Inc.                       |  | $                 | 1,000,000 |          | 12/31/04 |               | Not yet due
|TECORE, Inc.                       |  | $                 | 1,000,000 |          | 3/31/05  |               | Not yet due



| |  | As a result of the payment of stock and cash to the Series B Preferred Holders in the negotiated conversion of the Series B Preferred Stock into shares of common stock, the Company
recorded a non-cash inducement charge of approximately $7.9 million to net loss attributable to common stockholders during the third quarter of 2003.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Interest expense on the Notes will be recorded monthly at the rate of 12% per annum and interest on the outstanding interest under the Bridge Loans will be recorded monthly on a
compounded basis at an annual interest rate of 12%. The payment date for this interest will be four years from the closing date of the Investment.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | In addition, cash payments of $500,000 each were made to Tandem and Mellon as an inducement for them to convert their shares of Series B Preferred Stock into common stock as
described above. These payments were paid on August 13, 2003 and were charges to additional paid in capital.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Legal fees of $200,000 were paid on behalf of and split between the two noteholders to reimburse legal expenses incurred in the transaction.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------



As of December 31, 2003, there is a total of 48,680,789 shares outstanding
with 97,852,576 shares issuable upon conversion of the principal amount of the Notes and related accrued interest, after taking into account the preliminary anti-dilution adjustment of the conversion price of the Notes from $0.1081 per share to
approximately $0.1066 per share (as described and detailed in the chart shown previously in this note) and the installments paid by TECORE on its Note through December 31, 2003. Additional shares of common stock will be issuable upon conversion of
the Notes as TECORE pays the remaining installments of the Investment and upon conversion of interest accrued on the Notes. The 97,852,576 shares and other shares issuable upon conversion of such additional principal and accrued interest will be
excluded from the fully diluted loss per share calculation, as their inclusion would be anti-dilutive.



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



TECORE is a supplier of switching equipment to the Company. At December 31, 2003, the TECORE Note could be converted (inclusive of accrued interest, and
assuming no conversion of the SCP Note and any other



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##### Table of Contents

AIRNET COMMUNICATIONS CORPORATION



NOTES TO FINANCIAL STATEMENTS(Continued)

YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001



convertible securities held by other investors) into approximately 54.6% of the Companys outstanding common stock, and represents approximately 16.5%
of the voting power of the Company. TECORE was the Companys largest customer, based on revenues (42.7%), during the year ended December 31, 2003 and at December 31, 2003 owed the Company 46% of the Companys accounts receivable balance.
At December 31, 2003, affiliates of SCP II, including SCP Private Equity Partners, L.P. (SCP) and CIP Capital LP, held approximately 23.1% of the outstanding shares of the Companys common stock (or 53.3% assuming conversion of the SCP II Note
and warrants held by SCP, and assuming no conversion of the TECORE Note or any other convertible securities held by other investors) and beneficially owned approximately 32.7% of the voting power of the Company, which represented the Companys
largest single voting block. The Chairman of the Companys board of directors is an affiliate of SCP and SCP II, and one other member of the Companys board of directors is a representative of SCP and SCP II. Three of the Companys
directors (and a fourth, effective upon payment of the installment on TECOREs Note that was paid on January 7, 2004) are affiliates of TECORE. TECORE or one of its affiliates is negotiating an ownership interest in a customer of the Company
who represent approximately 2% of the Companys revenue for the year ended December 31, 2003.



9. STOCK-BASED COMPENSATION PLANS



Officers and employees of the Company are awarded options periodically for the purchase of common stock of the Company under the Companys 1994 Stock Option Plan, as amended. The options, which expire five to ten
years from the date of grant, are exercisable equally over a vesting period up to four years.



Effective April 1998, under the Companys 1996 Independent Director Stock Option Plan, as amended, each independent director of the Company was eligible to receive a grant of options.



Effective September 1, 1999, the Company adopted the 1999 Equity Incentive
Plan (1999 Plan), which amended and restated the 1994 Stock Option and the 1996 Independent Director Stock Option Plan. The 1999 Plan provides for the issuance of a maximum of 3,206,841 shares of common stock pursuant to the grant of incentive stock
options, nonqualified stock options, restricted stock, stock appreciation rights, performance awards and other stock-based awards to employees, directors, and independent contractors. In the event of a change in control, as defined, two years of
pending vesting, as to all stock options issued and outstanding, will be accelerated for all option holders.



Effective upon the closing of the Investment under the Purchase Agreement, the Company amended its stock option plan. Under the amended plan the number of
options available for grant was increased to 30,742,986. After the closing of the Investment, 20,081,926 options at a strike price of $0.01 per share were issued to employees. This includes options granted to the Chief Executive Officer of the
Company provided under a separate agreement, concurrent with the closing of the Purchase Agreement, as disclosed in the Definitive Proxy (Schedule 14A) filed with the Securities and Exchange Commission on July 9, 2003. The granting of the
non-qualified stock options to employees will have a non-cash impact to the earnings of the Company of $19.1 million amortized ratably over the two-year vesting period ending in September 2005. The impact of these grants during the year ended
December 31, 2003 was approximately $3.7 million.



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##### Table of Contents

AIRNET COMMUNICATIONS CORPORATION



NOTES TO FINANCIAL STATEMENTS(Continued)

YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001



The following table summarizes option activity for the years ended December 31, 2003, 2002, and 2001:



|                                 |  |            |   |  |                      |       |                                 |   |        |  |   |       
|-------------------------------- |  | ---------- | - |  | -------------------- | ----- | ------------------------------- | - | ------ |  | - | ------
|                                 |  | SHARES     |   |  | EXERCISE PRICE RANGE |       | WEIGHTED AVERAGE EXERCISE PRICE
|Outstanding at December 31, 2000 |  | 1,950,009  |   |  |                      | 0.066 |                                 |   | 58.500 |  |   | 10.130
|Granted                          |  | 2,142,815  |   |  |                      | 0.450 |                                 |   | 7.81   |  |   | 3.930 
|Terminated                       |  | (1,600,603 | ) |  |                      | 0.066 |                                 |   | 58.500 |  |   | 10.020
|Exercised                        |  | (25,020    | ) |  |                      | 0.066 |                                 |   | 3.320  |  |   | 1.650 
|                                 |  |            |   |  |                      |       |                                 |   |        |  |   |       
|Outstanding at December 31, 2001 |  | 2,467,201  |   |  |                      | 0.066 |                                 |   | 57.875 |  |   | 4.970 
|Granted                          |  | 130,742    |   |  |                      | 0.500 |                                 |   | 4.000  |  |   | 1.444 
|Terminated                       |  | (142,045   | ) |  |                      | 0.450 |                                 |   | 56.500 |  |   | 5.252 
|Exercised                        |  | (61,312    | ) |  |                      | 0.066 |                                 |   | 3.319  |  |   | 0.282 
|                                 |  |            |   |  |                      |       |                                 |   |        |  |   |       
|Outstanding at December 31, 2002 |  | 2,394,586  |   |  |                      | 0.500 |                                 |   | 55.625 |  |   | 4.846 
|Granted                          |  | 20,381,926 |   |  |                      | 0.010 |                                 |   | 0.010  |  |   | 0.010 
|Terminated                       |  | (462,133   | ) |  |                      | 0.010 |                                 |   | 55.625 |  |   | 5.624 
|Exercised                        |  | (232,197   | ) |  |                      | 0.045 |                                 |   | 0.045  |  |   | 0.045 
|                                 |  |            |   |  |                      |       |                                 |   |        |  |   |       
|Outstanding at December 31, 2003 |  | 22,082,182 |   |  | $                    | 0.010 |                                 | $ | 39.750 |  | $ | 0.411 
|                                 |  |            |   |  |                      |       |                                 |   |        |  |   |       



For options
outstanding and exercisable at December 31, 2003, the exercise price ranges and weighted average exercise prices and remaining lives are as follows:



|                   |  |                     |  |                    |  |                                 |       |        |           |                                 |   |      
|------------------ |  | ------------------- |  | ------------------ |  | ------------------------------- | ----- | ------ | --------- | ------------------------------- | - | -----
|                   |  | OPTIONS OUTSTANDING |  | OPTIONSEXERCISABLE
|PRICE RANGE        |  | NUMBER              |  | REMAINING LIFE     |  | WEIGHTED AVERAGE EXERCISE PRICE |       | NUMBER |           | WEIGHTED AVERAGE EXERCISE PRICE
|$0.00 - $0.01      |  | 20,361,926          |  | 9.5 years          |  | $                               | 0.01  |        | 25,002    |                                 | $ | 0.01 
|0.02 - 0.50        |  | 749,078             |  | 7.8 years          |  |                                 | 0.45  |        | 745,328   |                                 |   | 0.45 
|0.51 - 3.00        |  | 281,192             |  | 6.2 years          |  |                                 | 1.90  |        | 228,724   |                                 |   | 2.14 
|3.01 - 10.00       |  | 446,266             |  | 6.9 years          |  |                                 | 5.24  |        | 265,919   |                                 |   | 5.52 
|Greater than 10.00 |  | 243,720             |  | 6.1 years          |  |                                 | 23.25 |        | 196,376   |                                 |   | 22.39
|                   |  |                     |  |                    |  |                                 |       |        |           |                                 |   |      
|                   |  | 22,082,182          |  | 9.3 years          |  | $                               | 0.41  |        | 1,461,349 |                                 | $ | 4.58 
|                   |  |                     |  |                    |  |                                 |       |        |           |                                 |   |      



The outstanding
options expire at various dates through September 2013. At December 31, 2003, 2002, and 2001 a total of 1,461,349, 1,455,915, and 389,382 shares were exercisable respectively, with a weighted average exercise price of $4.58, $4.11, and $7.90 per
share respectively. The weighted average remaining contractual life of options at December 31, 2003 with exercise prices ranging from $0.01 to $39.75 is 9.3 years. The weighted average fair value of the options issued for the years ended December
31, 2003, 2002 and 2001 is $0.94, $0.76, and $3.10, respectively.



In January 2004, as a result of the change of control that occurred when the additional $1.0 million payment on the Securities Purchase agreement was made, the vesting on all options outstanding prior to August 13, 2003 accelerated and
therefore all options with the exception of the $0.01 options have vested. The 300,000 $0.01 independent director options vest monthly over a thirty-six month period with the remaining 20,061,926 vesting annually over a two-year period.



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AIRNET COMMUNICATIONS CORPORATION



NOTES TO FINANCIAL STATEMENTS(Continued)

YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001



The weighted average exercise prices and fair values of options whose exercise price equal, or are
less than, the market price on the grant date are as follows for the years ended December 31:



|                          |  |                |      |            |   |                |  |            |      |                |   |            |  |   |      |  |   |     
|------------------------- |  | -------------- | ---- | ---------- | - | -------------- |  | ---------- | ---- | -------------- | - | ---------- |  | - | ---- |  | - | ----
|                          |  | 2003           |      | 2002       |   | 2001          
|                          |  | EXERCISE PRICE |      | FAIR VALUE |   | EXERCISE PRICE |  | FAIR VALUE |      | EXERCISE PRICE |   | FAIR VALUE
|OPTIONS ISSUED:           |  |                |      |            |   |                |  |            |      |                |   |            |  |   |      |  |   |     
|Less than market price    |  | $              | 0.01 |            | $ | 0.95           |  |            |     |                |   |           |  |   |     |  |   |    
|Equal market price        |  |                |     |            |   |               |  | $          | 0.85 |                | $ | 0.76       |  | $ | 3.93 |  | $ | 3.10
|Greater than market price |  |                |     |            |   |               |  | $          | 4.00 |                | $ | 1.08       |  |   |     |  |   |    



At December 31, 2003,
a total of 7,421,018 shares of the Companys common stock were available for future grants of stock options.



Total compensation expense for options issued at an exercise price below fair value at the date of grant was $3,676,372, $248,496, and $158,858 for the
years ended December 31, 2003, 2002 and 2001, respectively. Stock-based compensation expense is recognized on a straight-line method over the vesting period of the options.



Pro forma information regarding net loss is required by Statement 123 and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using the following assumptions:



|                        |  |                          |   |  |         |   |  |         |  
|----------------------- |  | ------------------------ | - |  | ------- | - |  | ------- | -
|                        |  | YEARS ENDED DECEMBER 31, |  
|                        |  | 2003                     |   |  | 2002    |   |  | 2001    |  
|Risk-free interest rate |  | 2.81                     | % |  | 3.61    | % |  | 5.03    | %
|Expected life           |  | 4 years                  |   |  | 4 years |   |  | 4 years |  
|Divided yield           |  | 0.00                     | % |  | 0.00    | % |  | 0.00    | %
|Volatility              |  | 131.56                   | % |  | 160.90  | % |  | 171.00  | %



For purposes of pro
forma disclosures, the estimated fair value of the options is amortized to expense over the options vesting periods. The effect of applying Statement 123s fair value method to the Companys stock options granted in 2003, 2002 and
2001 results in the following pro forma amounts. (See Note 1 for details of ProForma calculations):



|                                                                            |  |                          |             |   |      |   |             |      |  |   |             |  
|--------------------------------------------------------------------------- |  | ------------------------ | ----------- | - | ---- | - | ----------- | ---- |  | - | ----------- | -
|                                                                            |  | YEARS ENDED DECEMBER 31, |            
|                                                                            |  | 2003                     |             |   | 2002 |   |             | 2001 | 
|Proforma net loss attributable to common stock                              |  | $                        | (32,277,397 | ) |      | $ | (25,652,976 | )    |  | $ | (61,677,694 | )
|Proforma net loss per share attributable to common stockbasic and diluted. |  | $                        | (0.97       | ) |      | $ | (1.08       | )    |  | $ | (2.59       | )



10. NOTES RECEIVABLE FROM OFFICER
AND FORMER OFFICER



On November 9, 2000, the Company
loaned a former officer of the Company $112,660, payable in full on November 9, 2005 at 6.01% interest, payable semiannually. The loan was made to reimburse the officer for an amount paid by him to exercise an option to purchase 113,274 shares of
the Companys common stock in February 2000 and is accordingly classified in stockholders equity. The note is collateralized by the underlying value of the stock and the Company has full recourse against the officer in the event of a
default. The unpaid principal amount of the note, which is classified as a deduction from stockholders equity together with all accrued and unpaid interest and any other sums owing under the note, is payable on November 9, 2005, the fifth



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##### Table of Contents

AIRNET COMMUNICATIONS CORPORATION



NOTES TO FINANCIAL STATEMENTS(Continued)

YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001



anniversary of the date of the note. Interest was payable on November 9, 2001 and semi-annually thereafter. A portion of the collateral stock was sold in the
first quarter of 2002 and the proceeds of $41,503, including interest income of $6,534 and prepaid interest of $27,339 were transmitted to the Company on April 15, 2002 bringing payments on the note current. The Company continues to pursue
collection of the note. The Company believes, given the full recourse provisions of the note, that the funds held in a brokerage account, subject to an account control agreement, and the prepaid interest on the note provide adequate protection
against default on the note.



On March 14, 2001, the Company
loaned a former officer of the Company $995,133 at an interest rate of 5.07% per annum secured by his pledge of stock under an Account Control Agreement dated as of March 14, 2001 among the officer, Salomon Smith Barney, Inc. and the Company. The
principal represents the amount that the Company loaned to the officer to satisfy the alternative minimum tax liability incurred in connection with his exercise of Company options in February 2000. The unpaid principal amount of the note, together
with all accrued and unpaid interest and any other sums owing under the note, is payable on March 14, 2006, the fifth anniversary of the date of the note. As of December 31, 2002, the entire principal amount of the note was outstanding but is not in
default; however, a net balance of $0 is recorded in equity since an allowance of $995,133 was recorded during 2001 for the estimated loss on this loan, given that there is no recourse on the note and that the former officer is no longer associated
with the Company. The Company is not recognizing any interest associated with this note.



On March 16, 2001, the Company loaned an officer of the Company $221,997 at an interest rate of 5.07% per annum secured by the pledge of the officers stock under an Account Control Agreement dated as of March
16, 2001 among the officer, Salomon Smith Barney Inc. and the Company. The principal represents the amount the Company loaned to the officer to satisfy the alternative minimum tax liability incurred in connection with the exercise of options to
purchase 25,261 shares of common stock in March 2000. The unpaid principal amount of the note, together with all accrued and unpaid interest and any other sums owing under the note, was payable on March 16, 2006, the fifth anniversary of the date of
the note. The note was valued at a market rate of interest (9%) and accordingly a discount of $43,040 was recorded against the note. On September 5, 2003 the officer repaid the full amount of the loan of $221,997 along with accrued interest of
$16,590. The note, including interest was paid by the officer in cash in the amount of $144,762 with the remainder paid from the 2002 bonus for the officer of $93,825 net of taxes. The interest income was recognized in full during the quarter ended
September 30, 2003.



11. EMPLOYEE RETIREMENT PLAN



The Company sponsors a retirement plan for all employees through a salary
deduction 401-K savings plan. Employees are permitted to contribute to the plan up to 15% of eligible wages, not to exceed the maximum amount allowable by law. Commencing on January 1, 2000, the Company began a matching contribution of $0.50 for
each $1.00 contributed by the employee, up to 3% of the employees annual base salary. The Companys contribution vests ratably over a four-year period. Effective January 27, 2003 the Company stopped matching contributions. Total
contributions made by the Company in 2003, 2002 and 2001 were $33,105, $287,173, and $454,074, respectively.



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##### Table of Contents

AIRNET COMMUNICATIONS CORPORATION



NOTES TO FINANCIAL STATEMENTS(Continued)

YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001



12. INCOME TAXES



At December 31, 2003, the Company has approximately $174,090,580, of net operating loss carryforwards remaining to offset future taxable income. These net
operating losses will expire at various dates through 2023. In addition, the Company has available approximately $3,277,001 of research and development tax credit carryforwards, expiring at various dates through 2023, which may be used to offset
future regular tax liabilities. The benefit of all of these carryforwards has been fully offset by a valuation allowance at December 31, 2003 and 2002 because it is considered more likely than not that the benefits of the carryforwards will not be
realized. U.S tax rules impose limitations on the use of net operating losses and tax credits following certain defined changes in ownership. The Company last performed the complex analysis to determine if net operating losses and tax credits are
limited by Section 382 of the Internal Revenue Code (IRC) through December 7, 1999, the date of the Companys initial public offering. The study was finalized in 2000. Through December 7, 1999, the Company had incurred two changes of ownership
as defined by Section 382. As a result of the two changes of ownership, approximately $37,191,000 of net operating losses are no longer available to offset future taxable income. A corresponding reduction of approximately $13,995,000 was made to the
deferred tax asset related to net operating losses and the related valuation allowance. These adjustments to the deferred tax asset and the related valuation allowance were reflected in the financial statements of the Company for the year ended
December 31, 2000.



Since December 8, 1999, the Company has not
updated the Section 382 analysis to determine if another ownership change has occurred. If another change were deemed to have occurred, the new Section 382 limitation could reduce or eliminate the amount of net operating loss benefits that would be
available to offset future taxable income each year, starting with the year of the ownership change.



A reconciliation of the statutory income tax rate to the Companys effective tax rate is as follows:



|                                           |  |                          |            |   |   |       |   |      |   |            |   |  |       |      |  |   |             |   |  |       |  
|------------------------------------------ |  | ------------------------ | ---------- | - | - | ----- | - | ---- | - | ---------- | - |  | ----- | ---- |  | - | ----------- | - |  | ----- | -
|                                           |  | YEARS ENDED DECEMBER 31, |           
|                                           |  | 2003                     |            |   | % |       |   | 2002 |   |            | % |  |       | 2001 |  |   | %           |  
|Tax benefit at federal income tax rate     |  | $                        | (8,314,221 | ) |   | (34.0 | ) |      | $ | (4,912,365 | ) |  | (34.0 | )    |  | $ | (19,587,958 | ) |  | (34.0 | )
|State income taxes, net of federal benefit |  |                          | (744,651   | ) |   | (3.0  | ) |      |   | (524,467   | ) |  | (3.6  | )    |  |   | (2,079,404  | ) |  | (3.6  | )
|Research and development credits           |  |                          | (210,489   | ) |   | (0.9  | ) |      |   | (239,895   | ) |  | (1.7  | )    |  |   | (462,597    | ) |  | (0.8  | )
|Other                                      |  |                          | 6,419      |   |   | 0     |   |      |   | 119,934    |   |  | 0.8   |      |  |   | 111,449     |   |  | 0.2   |  
|Sec. 382 limitation                        |  |                          |           |   |   |      |   |      |   |           |   |  |      |      |  |   |            |   |  |      |  
|Non-deductible interest                    |  |                          | 3,596,084  |   |   | 14.7  |   |      |   |           |   |  |      |      |  |   |            |   |  |      |  
|Increase in valuation allowance            |  |                          | 5,666,858  |   |   | 23.2  |   |      |   | 5,556,793  |   |  | 38.5  |      |  |   | 22,018,510  |   |  | 38.2  |  
|                                           |  |                          |            |   |   |       |   |      |   |            |   |  |       |      |  |   |             |   |  |       |  
|Effective tax rate                         |  | $                        |           |   |   |      |   |      | $ |           |   |  |      |      |  | $ |            |   |  |      |  
|                                           |  |                          |            |   |   |       |   |      |   |            |   |  |       |      |  |   |             |   |  |       |  



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##### Table of Contents

AIRNET COMMUNICATIONS CORPORATION



NOTES TO FINANCIAL STATEMENTS(Continued)

YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001



Significant components of the net deferred tax balances are as follows:



|                                      |  |                    |             |   |      |   |             |  
|------------------------------------- |  | ------------------ | ----------- | - | ---- | - | ----------- | -
|                                      |  | AS OF DECEMBER 31, |            
|                                      |  | 2003               |             |   | 2002 |  
|CURRENT                               |  |                    |             |   |      |   |             |  
|Deferred tax assets:                  |  |                    |             |   |      |   |             |  
|Inventories                           |  | $                  | 4,695,165   |   |      | $ | 5,581,794   |  
|Bad debts                             |  |                    | 108,531     |   |      |   | 526,820     |  
|Stock compensationcurrent            |  |                    | 700,873     |   |      |   |            |  
|Other                                 |  |                    | 946,028     |   |      |   | 1,018,113   |  
|                                      |  |                    |             |   |      |   |             |  
|Total deferred tax assets             |  |                    | 6,450,597   |   |      |   | 7,126,727   |  
|Deferred tax liabilities              |  |                    | (331,283    | ) |      |   | (295,563    | )
|                                      |  |                    |             |   |      |   |             |  
|Net deferred tax assets               |  |                    | 6,119,314   |   |      |   | 6,831,164   |  
|Valuation allowance                   |  |                    | (6,119,314  | ) |      |   | (6,831,164  | )
|                                      |  |                    |             |   |      |   |             |  
|                                      |  | $                  |            |   |      | $ |            |  
|                                      |  |                    |             |   |      |   |             |  
|                                      |  |                   
|NONCURRENT                            |  |                    |             |   |      |   |             |  
|Deferred tax assets:                  |  |                    |             |   |      |   |             |  
|Net operating loss carryforwards      |  | $                  | 66,354,853  |   |      | $ | 60,997,118  |  
|Research and development credits      |  |                    | 3,277,001   |   |      |   | 2,958,078   |  
|Stock compensationnon-current        |  |                    | 700,873     |   |      |   |            |  
|Other                                 |  |                    | 22,429      |   |      |   | 21,387      |  
|                                      |  |                    |             |   |      |   |             |  
|                                      |  |                    | 70,355,156  |   |      |   | 63,976,583  |  
|Deferred tax liabilitiesaccruals     |  |                    | (262,169    | ) |      |   | (262,169    | )
|Deferred tax liabilitiesfixed assets |  |                    | (806,362    | ) |      |   | (806,497    | )
|                                      |  |                    |             |   |      |   |             |  
|Net deferred tax assets               |  |                    | 69,286,625  |   |      |   | 62,907,917  |  
|Valuation allowance                   |  |                    | (69,286,625 | ) |      |   | (62,907,917 | )
|                                      |  |                    |             |   |      |   |             |  
|                                      |  | $                  |            |   |      | $ |            |  
|                                      |  |                    |             |   |      |   |             |  

No amounts were paid for income taxes during any of the periods presented.



13. COMMITMENTS AND CONTINGENCIES



Operating LeasesThe Company leases its primary manufacturing and
office facilities under long-term noncancelable operating leases. The Company also has operating leases for certain other furniture, equipment and computers. Future minimum lease payments for long-term noncancelable operating leases as of December
31, 2003 are as follows:



|     |  |   |        
|---- |  | - | -------
|2004 |  | $ | 451,744
|2005 |  |   | 216,913
|2006 |  |   | 30,770 
|2007 |  |   | 12,373 
|     |  |   |        
|     |  | $ | 711,800
|     |  |   |        



Rental expense charged
to operations was $605,260, $617,908, and $1,425,831 for the years ended December 31, 2003, 2002 and 2001, respectively.



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AIRNET COMMUNICATIONS CORPORATION



NOTES TO FINANCIAL STATEMENTS(Continued)

YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001



Capital Lease ObligationsThe Company also leases certain computer and test equipment under
capital lease agreements, which are reported as computer equipment in the accompanying financial statements. The net carrying value of such equipment is as follows:



|                         |  |              |         |   |      |   |         |  
|------------------------ |  | ------------ | ------- | - | ---- | - | ------- | -
|                         |  | DECEMBER 31, |        
|                         |  | 2003         |         |   | 2002 |  
|Cost                     |  | $            | 162,079 |   |      | $ | 262,130 |  
|Accumulated depreciation |  |              | (38,973 | ) |      |   | (78,788 | )
|                         |  |              |         |   |      |   |         |  
|                         |  | $            | 123,106 |   |      | $ | 183,342 |  
|                         |  |              |         |   |      |   |         |  



A schedule of future
minimum lease payments under capital leases for the Company and the related present value of the net minimum lease payments as of December 31, 2003 follows:



|                                                |  |   |         |  
|----------------------------------------------- |  | - | ------- | -
|2004                                            |  | $ | 67,076  |  
|2005                                            |  |   | 4,823   |  
|                                                |  |   |         |  
|Total minimum lease payments                    |  |   | 71,899  |  
|Less amount representing interest               |  |   | (2,104  | )
|                                                |  |   |         |  
|Present value of lease payments                 |  |   | 69,795  |  
|Less capital lease obligationscurrent portion  |  |   | (65,255 | )
|                                                |  |   |         |  
|Capital lease obligations, less current portion |  | $ | 4,540   |  
|                                                |  |   |         |  



AgreementsSimultaneously with its equity investment in January 1995, Motorola, Inc. (Motorola) entered into an agreement with the Company whereby Motorola was granted the right to obtain non-exclusive, royalty-free licenses
under any two of AirNets patents of Motorolas choice. In return, the Company and Motorola have agreed not to enjoin the other and to negotiate license agreements in good faith with respect to possible patent infringement. In the event of
a merger, consolidation or sale of AirNet, the Company has the option to require Motorola to either exercise its rights to obtain such licenses or to cancel such right in exchange for a payment by AirNet of $1 million per patent.



LitigationThe Company, the members of the underwriting syndicate
involved in our initial public offering and two of our former officers have been named as defendants in a class action lawsuit filed on November 16, 2001 in the United States District Court for the Southern District of New York. The action, number
21 MC 92 (SAS), alleges that the defendants violated federal securities laws and seeks unspecified monetary damages and certification of a plaintiff class consisting of all persons and entities who purchased, converted, exchanged or otherwise
acquired shares of our common stock between December 6, 1999 and December 6, 2000, inclusive. Specifically, the complaint charges the defendants with violations of Sections 11 and 15 of the Securities Act of 1933 and Section 10(b) of the Securities
Exchange Act of 1934. In substance, the allegations are that the underwriters of the Companys initial public offering charged commissions in excess of those disclosed in the initial public offering materials and that these actions were not
properly disclosed. The Company does not know whether the claims of misconduct by the underwriters have merit but at this time it believes the claims against the Company are without merit and intend to defend this matter when appropriate. Under the
terms of the Underwriting Agreement, the Company has claims against the underwriters of the initial public offering for indemnification and reimbursement of all of the costs and any damages incurred in connection with this lawsuit and it intends to
pursue those claims vigorously. On July 15, 2002 the Issuers Committee filed a Motion to



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AIRNET COMMUNICATIONS CORPORATION



NOTES TO FINANCIAL STATEMENTS(Continued)

YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001



Dismiss on behalf of all issuers and individual defendants in similar lawsuits. In February 2003, the Motion to Dismiss was granted in part (with respect to
the Company) and denied in part (with respect to all issuer defendants). Discovery in this litigation is commencing while settlement talks between the plaintiffs and the issuers continue. The claims against the Companys two former officers
named in the class action lawsuit have been dismissed without prejudice. The issuer defendants and the plaintiffs have since drafted and agreed upon a settlement, which is pending approval by the court. Pending approval, the individual tolling
agreements dismissing the named individual defendants have been extended, so that the individual defendants will be covered by the settlement as well. While awaiting court approval of the settlement, the issuers, including the Company, have complied
with discovery obligations specified in the Settlement, by providing a limited number of documents.



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



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



Purchase CommitmentsOn December 15, 2000 the Company entered
into an agreement to purchase from a vendor (TECORE, Inc.) ten integrated switch products through December 31, 2002, which was extended. Alternatively, the Company may buy-out the commitment by purchasing $3.0 million of TECORE common stock at
mutually agreed to terms. Additionally, TECORE has an agreement dated December 13, 2001 with the Company to purchase products from AirNet under a reseller agreement dated October 31, 2001. As of December 31, 2003 the Company has purchased eight of
the original ten products from TECORE. See Note 8 for further discussion of the relationship that the Company has with TECORE. Each agreement was negotiated separately and no terms in either agreement are dependent upon terms in the other agreement.
Pursuant to the pending financing agreement, TECORE is a related party.



Bonus AccrualFor the year ended December 31, 2002 the Company provided an accrual for employee bonuses of $1.2 million. These bonuses, which were recorded as earned in accordance with a Board approved bonus program, were
scheduled to be paid in January 2003. During 2003 the Company negotiated a Securities Purchase Agreement with SCP and TECORE (the Lenders) (see Note 8) and payment of the bonuses were deferred until the Lenders approve the payment. During the year
ended December 31, 2003 payment of the 2002 bonus to the Companys CEO, Mr. Glenn A. Ehley was approved by the lenders. Subsequently in September 2003 the 2002 bonus of $150,000 was paid to Mr. Ehley. The proceeds of the bonus were then used by
Mr. Ehley to pay the outstanding non-recourse loan that he had from the Company (see Note 10 to the Financial Statements.) As of December 31, 2003 the remaining bonuses continue to be deferred until the Lenders approve the payment.



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##### Table of Contents

AIRNET COMMUNICATIONS CORPORATION



NOTES TO FINANCIAL STATEMENTS(Continued)

YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001



14. MAJOR CUSTOMERS



Revenue generated from major customers representing more than 10% of net revenues during at least one of the years ended December 31, 2003, 2002, and
2001 is summarized below:



|           |  |                          |           |      |   |            |  |   |          
|---------- |  | ------------------------ | --------- | ---- | - | ---------- |  | - | ---------
|           |  | YEARS ENDED DECEMBER 31,
|           |  | 2003                     |           | 2002 |   | 2001      
|Customer A |  | $                        | 6,738,367 |      | $ | 11,278,863 |  | $ | 2,049,902
|Customer B |  | $                        | 4,499,188 |      | $ |           |  | $ |         
|Customer C |  | $                        | 2,223,204 |      | $ | 1,093,230  |  | $ | 6,808    
|Customer D |  | $                        | 523,590   |      | $ |           |  | $ |         
|Customer E |  | $                        | 486,033   |      | $ | 1,093,230  |  | $ | 2,417,084
|Customer F |  | $                        | 291,951   |      | $ | 83,091     |  | $ | 2,033,606
|Customer G |  | $                        | 240,917   |      | $ | 4,871,823  |  | $ | 362,651  
|Customer H |  | $                        | 195,181   |      | $ | 178,900    |  | $ | 390,714  
|Customer I |  | $                        | 121,754   |      | $ | 106,156    |  | $ | 646,468  
|Customer J |  | $                        | 109,651   |      | $ | 231,256    |  | $ | 1,899,442



15. VENDOR SETTLEMENT PROGRAM AND
LONG TERM ACCOUNTS PAYABLE



During 2002, the Company
entered into agreements with certain vendors to settle outstanding accounts payable totaling approximately $1,010,934 at discounts from the recorded liabilities, resulting in a gain, net of expenses, of $703,618 which was recorded as a gain from
vendor settlements in the 2002 statement of operations. The vendors agreed, in exchange for the settlement, to release the Company from future liabilities related to these settled balances.



During the third and fourth quarters of 2001, the Company entered into
agreements with certain vendors to settle outstanding payables totaling $11,280,221 at varying discounts from the recorded liability. The vendors agreed, in exchange for the settlement, to release the Company from future liability related to the
settled balances. The total gain recorded as a result of these settlements was $1,921,605, net of expenses which is recorded in the accompanying 2001 statement of operations.



In addition, during 2001, the Company negotiated extended payment terms relating to accounts payable totaling approximately
$2,323,886 with certain other vendors. These restructured terms included a partial payment by the Company of approximately $648,236 with remaining payments to be paid, as additional product is purchased from these vendors. The timing of these
additional payments cannot be estimated since it is contingent upon the Companys demand for each vendors product and accordingly the unpaid balances of $1,127,131 are included in accounts payable at December 31, 2003. Under agreements
with these vendors, the Company pledged general inventory as security for any unpaid balances, payable upon the sale of the Company.



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##### Table of Contents

AIRNET COMMUNICATIONS CORPORATION



NOTES TO FINANCIAL STATEMENTS(Continued)

YEARS ENDED DECEMBER 31, 2003, 2002, AND 2001



During the fourth quarter 2001 the Company entered into long-term agreements with certain vendors to
settle outstanding payables over a period in excess of one year. The long-term agreements require monthly or quarterly payments as well as certain milestone and final settlement payments. Amounts due under these agreements in excess of one year are
recorded as long-term accounts payable in the accompanying financial statements. In addition to the liability recorded in the accompanying financial statements there are open purchase commitments with two of these vendors totaling approximately
$41,300 as of December 31, 2003. The schedule of payments remaining is as follows:



|      |  |   |        
|----- |  | - | -------
|2004  |  |   | 691,655
|2005  |  |   | 64,902 
|      |  |   |        
|Total |  | $ | 756,557
|      |  |   |        



Included in the
long-term agreements with three of these vendors is a Security Agreement granting these vendors a security interest in the Companys tangible property. These rights do not include the Companys intellectual property and the rights were
subordinated as part of the Purchase Agreement closed in August 2003. In addition in February 2004 one of these vendors released its lien in recognition of full payment of the account.



16. RELATED PARTY TRANSACTIONS



Pursuant to a consulting agreement with a relative of an officer, consulting services are provided to the Company with respect to evolving
telecommunications standards and business development opportunities in the military, public safety, law enforcement and government sectors. The agreement provides for a payment not to exceed $5,000 per month and is terminable at will by either party
with thirty days notice. For the fiscal years ended December 31, 2003, 2002, and 2001 the payments made under this agreement were $0, $14,500, and $71,074, respectively.



TECORE is a supplier of switching equipment to the Company. TECORE was the Companys largest customer, based on
revenues of approximately $6.7 million and $11.3 million during the years ended December 31, 2003 and 2002, respectively, and a significant customer based on revenue of approximately $2 million during the year ended December 31, 2001. As of December
31, 2003 the Company has approximately $1.6 million in accounts receivable from TECORE while no amounts were due from TECORE as of December 31, 2002. During fiscal years December 31, 2003, 2002 and 2001, the Company purchased inventory shipped to
customer in the amount of approximately $0.6 million, $1.0 million and $1.6 million, respectively. All amounts due to TECORE were paid as of December 31, 2003 and 2002, respectively. (See note 8 and 13 for additional information on TECORE).



17. SUBSEQUENT EVENT



On February 9, 2004 the Company entered into a Letter Agreement (Agreement)
with an investment advisory firm. The purpose of the Agreement is to engage such firm to act as a non-exclusive placement agent for the Company in connection with a potential transaction. For purposes of the Agreement a transaction shall mean all or
part of a private placement of the Companys securities, on terms satisfactory to the Companys Board of Directors and the lenders, which such firm places with one or more accredited investors who are introduced to and accepted by the
Company and identified in an attachment to the Agreement.



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##### Table of Contents

EXHIBIT INDEX



|               |  |                                                                                                                                                                                                       
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT NUMBER |  | DESCRIPTION OF DOCUMENT                                                                                                                                                                               
|3.1.1(11)      |  | Eighth Amended and Restated Certificate of Incorporation                                                                                                                                              
|               | 
|3.1.2(12)      |  | Certificate of Amendment to Eighth Amended and Restated Certificate of Incorporation                                                                                                                  
|               | 
|3.2(11)        |  | Third Amended and Restated Bylaws                                                                                                                                                                     
|               | 
|4.1(1)         |  | Specimen Certificate evidencing shares of Common Stock.                                                                                                                                               
|               | 
|4.2(1)         |  | Second Amended and Restated Shareholders and Registration Rights Agreement dated as of April 16, 1997.                                                                                               
|               | 
|4.3(1)         |  | First Amendment to Second Amended and Restated Shareholders and Registration Rights Agreement dated as of September 20, 1999.                                                                        
|               | 
|4.4(1)         |  | Second Amended and Restated Agreement Among Series E, Series F and Series G Second Amended and Restated Preferred Stockholders and Senior Registration Rights Agreement dated as of September
7, 1999.
|               | 
|4.5(1)         |  | First Amendment to Second Amended and Restated Agreement Among Series E, Series F and Series G Preferred Stockholders and Senior Registration Rights Agreement dated as of September 20,
1999.        
|               | 
|4.6(5)         |  | Rights Agreement dated January 9, 2001 between AirNet Communications Corporation and Continental Stock Transfer & Trust Company.                                                                      
|               | 
|4.6.1(11)      |  | Amendment No. 1, dated August 13, 2003, to Rights Agreement dated January 9, 2001, between the Company and Continental Stock Transfer & Trust Company, as rights agent                                
|               | 
|4.7(11)        |  | Senior Secured Convertible Note dated August 13, 2003 in the principal amount of $12 million, issued to TECORE                                                                                        
|               | 
|4.8(11)        |  | Senior Secured Convertible Note dated August 13, 2003 in the principal amount of $4 million, issued to SCP                                                                                            
|               | 
|4.9(11)        |  | Allonge dated August 13, 2003 between the Company and TECORE                                                                                                                                          
|               | 
|4.10(11)       |  | Allonge dated August 13, 2003 between the Company and SCP                                                                                                                                             
|               | 
|10.1(11)       |  | Amended and Restated AirNet Communications Corporation 1999 Equity Incentive Plan effective August 13, 2003                                                                                           
|               | 
|10.2(1)        |  | OEM and Patent License Option Agreement dated January 27, 1995 between Motorola, Inc. and AirNet Communications Corporation.                                                                          
|               | 
|10.3(1)        |  | Employee Noncompete and Post-Termination Benefits Agreement dated October 26, 1999 between AirNet Communications Corporation and R. Lee Hamilton, Jr.                                                 
|               | 
|10.4(3)        |  | Amendment to Incentive Stock Option Agreements dated February 11, 2000 between AirNet Communications Corporation and Glenn A. Ehley.                                                                  
|               | 
|10.5(3)        |  | Amendment to Incentive Stock Option Agreements dated February 11, 2000 between AirNet Communications Corporation and Timothy Mahar.                                                                   
|               | 
|10.6(6)        |  | Account Control Agreement among R. Lee Hamilton, Jr., Salomon Smith Barney Inc. and AirNet Communications Corporation dated as of October 2, 2000.                                                    
|               | 
|10.7(6)        |  | Promissory Note dated November 9, 2000 in the amount of $112,600.00 made by R. Lee Hamilton, Jr. in favor of AirNet Communications Corporation.                                                       



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##### Table of Contents

|               |  |                                                                                                                                                                                                                        
|-------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT NUMBER |  | DESCRIPTION OF DOCUMENT                                                                                                                                                                                                
|10.8(6)        |  | Agreement to Loan Funds dated as of December 22, 2000 by and between AirNet Communications Corporation and R. Lee Hamilton, Jr.                                                                                        
|               | 
|10.9(6)        |  | Non-Recourse Promissory Note dated March 14, 2001 in the amount of $995,133.00 made by R. Lee Hamilton, Jr. in favor of AirNet Communications Corporation.                                                             
|               | 
|10.10(6)       |  | Security Agreement dated as of November 15, 2001 between AirNet Communications Corporation and Force Computers, Inc., Sanmina Corporation and Brooktrout, Inc.                                                         
|               | 
|10.11(7)       |  | Form of Indemnity Agreement between AirNet Communications Corporation and each of its directors and officers.                                                                                                          
|               | 
|10.12(7)       |  | Employment, Severance, and Bonus Agreement dated August 13, 2002 between AirNet Communications Corporation and Glenn A. Ehley.                                                                                         
|               | 
|10.13(9)       |  | Bridge Loan Agreement dated January 24, 2003 by and among AirNet Communications Corporation, TECORE, Inc. and SCP Private Equity Partners II, L.P.                                                                     
|               | 
|10.14(9)       |  | Bridge Loan Promissory Note in favor of SCP Private Equity Partners II, L.P. for $3,000,000 dated January 24, 2003.                                                                                                    
|               | 
|10.15(9)       |  | Bridge Loan Promissory Note in favor of TECORE, Inc. for $3,000,000 dated January 24, 2003.                                                                                                                            
|               | 
|10.16(9)       |  | Security Agreement dated January 24, 2003 by and among AirNet Communications Corporation, TECORE, Inc. and SCP Private Equity Partners II, L.P.                                                                        
|               | 
|10.17(9)       |  | Notice of Election to Convert from SCP Private Equity Partners II, L.P. to AirNet Communications Corporation dated January 20, 2003 (with letter to escrow agent attached).                                            
|               | 
|10.18(9)       |  | Notice of Election to Convert from Mellon Ventures, LP to AirNet Communications Corporation dated January 20, 2003 (with letter to escrow agent attached).                                                             
|               | 
|10.19(9)       |  | Notice of Election to Convert from Tandem PCS Investments, LP to AirNet Communications Corporation dated January 20, 2003 (with letter to escrow agent attached).                                                      
|               | 
|10.20(9)       |  | Escrow Agreement dated January 20, 2003 by and among AirNet Communications Corporation, Tandem PCs Investments, LP, SCP Private Equity Partners II, LP, Mellon Ventures, LP and
Edwards & Angell, LLP, as escrow agent.
|               | 
|10.21(9)       |  | Technology Collateral Escrow Agreement effective January 24, 2003 among DSI Technology Escrow Services, Inc., AirNet Communications Corporation, TECORE, Inc. and SCP Private Equity Partners
II, LP                   
|               | 
|10.22(9)       |  | Collateral Assignment of Patents, Trademarks & Copyrights dated January 24, 2003 by and among AirNet Communications Corporation, SCP Private Equity Partners II, LP and TECORE,
Inc.                                   
|               | 
|10.23(10)      |  | Terms sheet dated March 25, 2003 among AirNet Communications Corporation, SCP Private Equity Partners II, LP and TECORE, Inc.                                                                                          
|               | 
|10.24(11)      |  | First Amendment to Security Agreement dated August 13, 2003 among the Company, TECORE and SCP, amending the Security Agreement dated January 24, 2003                                                                  
|               | 
|10.25(11)      |  | Amended and Restated Employment Agreement, Severance and Bonus Agreement, dated August 13, 2003, between the Company and Glenn A. Ehley                                                                                
|               | 
|10.26(11)      |  | Non-Qualified Stock Option Agreement dated August 13, 2003 between the Company and Glenn Ehley                                                                                                                         



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##### Table of Contents

|               |  |                                                                                                                                                                           
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT NUMBER |  | DESCRIPTION OF DOCUMENT                                                                                                                                                   
|               | 
|10.27(11)      |  | Intercreditor and Subordination Agreement dated August 13, 2003 among the Company, Force Computers, Inc. Sanmina Corporation and Brooktrout, Inc.                         
|               | 
|10.28(11)      |  | Amended and Restated AirNet Bonus Program dated and effective August 13, 2003                                                                                             
|               | 
|10.29(11)      |  | Tag-Along Allocation Agreement dated August 13, 2003                                                                                                                      
|               | 
|23.1           |  | Consent of Deloitte & Touche LLP.                                                                                                                                         
|               | 
|31.1           |  | Rule 13a-14(a)/15d-14(a) Certification of Glenn A. Ehley, Chief Executive Officer of the Company                                                                          
|               | 
|31.2           |  | Rule 13a-14(a)/15d-14(a) Certification of Joseph F. Gerrity, Chief Financial Officer of the Company                                                                       
|               | 
|32.1           |  | Certification by the Chief Executive Officer, Glenn A. Ehley, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.   
|               | 
|32.2           |  | Certification by the Chief Financial Officer, Joseph F. Gerrity, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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|(1) | Incorporated by reference to Registration Statement No. 333-87693 on Form S-1 as filed with the Securities and Exchange Commission on September 24, 1999, as amended.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Incorporated by reference to Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 29, 2000.
|--- | -------------------------------------------------------------------------------------------------------------------------------

|(3) | Incorporated by reference to Quarterly Report on Form 10-Q as filed with the Securities and Exchange Commission on May 15, 2000.
|--- | --------------------------------------------------------------------------------------------------------------------------------

|(4) | Incorporated by reference to Schedule 14A as filed with the Securities and Exchange Commission on December 7, 2000.
|--- | -------------------------------------------------------------------------------------------------------------------

|(5) | Incorporated by reference to Exhibit 4.1 of the Companys Current Report on Form 8-K filed with the Securities and Exchange Commission on January 17, 2001.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Incorporated by reference to the Annual Report on Form 10-K as filed with the Securities and Exchange Commission on April 3, 2001.
|--- | ----------------------------------------------------------------------------------------------------------------------------------

|(7) | Incorporated by reference to Quarterly Report on Form 10-Q as filed with the Securities and Exchange Commission on August 14, 2001.
|--- | -----------------------------------------------------------------------------------------------------------------------------------

|(8) | Incorporated by reference to Quarterly Report on Form 10-Q as filed with the Securities and Exchange Commission on November 14, 2002.
|--- | -------------------------------------------------------------------------------------------------------------------------------------

|(9) | Incorporated by reference to Current Report on Form 8-K as filed with the Securities and Exchange Commission on January 28, 2003.
|--- | ---------------------------------------------------------------------------------------------------------------------------------

|(10) | Incorporated by reference to Current Report on Form 8-K as filed with the Securities and Exchange Commission on March 26, 2003.
|---- | -------------------------------------------------------------------------------------------------------------------------------

|(11) | Incorporated by reference to Current Report on Form 8-K as filed with the Securities and Exchange Commission on August 14, 2003.
|---- | --------------------------------------------------------------------------------------------------------------------------------

|(12) | Incorporated by reference to Current Report on Form 8-K as filed with the Securities and Exchange Commission on August 25, 2003.
|---- | --------------------------------------------------------------------------------------------------------------------------------