##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549


Form 10-K

|           |  |                                                                                              
|---------- |  | ---------------------------------------------------------------------------------------------
|(Mark One) |  |                                                                                              
|þ          |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.    
|          
|           |  | For the fiscal year ended December 31,
    2002                                              
|          
|or        
|          
|o          |  | 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 000-26963

Netro Corporation

(Exact name of registrant as specified in its
charter)


|                         |  |                                  
|------------------------ |  | ---------------------------------
|Delaware                 |  | 77-0395029                       
|(State of incorporation) |  | (IRS Employer Identification No.)

3860 North First Street, San Jose, CA
95134

(408) 216-1500


(Address, including zip code, and telephone
number, including area code,


of Registrants principal executive
offices)


Securities registered pursuant to
Section 12(b) of the Act:

None


Securities registered pursuant to
Section 12(g) of the Act:

Common Stock, $.001 per share par
value




---

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 þ     No o.

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 the registrants knowledge, in
the definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any
amendment to this
Form 10-K.     o

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

The aggregate market value of the
registrants common stock held by non-affiliates of the
registrant was approximately $58,630,594, computed by reference
to the last sales price reported on The Nasdaq Stock Market on
June 28, 2002.

There were 38,687,729 shares of the
registrants common stock issued and outstanding as of
March 1, 2003.

DOCUMENTS INCORPORATED BY REFERENCE

None.



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TABLE OF CONTENTS



|               |                                                                                                         |  |  |  |  |  |  | 
|-------------- | ------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I        
|               | Item 1. Business                                                                                       
|               | Item 2. Properties                                                                                     
|               | Item 3. Legal Proceedings                                                                              
|               | Item 4. Submission of Matters to a Vote of Security Holders                                            
|PART II       
|               | Item 5. Market for the Registrants Common Stock and Related Stockholder Matters                       
|               | Item 6. Selected Consolidated Financial Data                                                           
|               | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations          
|               | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                                    
|               | Item 8. Financial Statements and Supplementary Data                                                    
|               | Item 9. Changes in and Disagreements with Accountants and Financial Disclosure                         
|PART III      
|               | Item 10. Directors and Executive Officers of the Registrant                                            
|               | Item 11. Executive Compensation                                                                        
|               | Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|               | Item 13. Certain Relationships and Related Transactions                                                
|               | Item 14. Controls and Procedures                                                                       
|PART IV       
|               | Item 15. Exhibits, Financial Statement Schedules and Reports On Form 8-K                               
|SIGNATURES    
|CERTIFICATIONS
|EXHIBIT INDEX 
|EXHIBIT 10.16 
|EXHIBIT 10.17 
|EXHIBIT 10.18 
|EXHIBIT 21.1  
|EXHIBIT 23.1  
|EXHIBIT 99.1  



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TABLE OF CONTENTS

|               |           |  |    |                                                                                                    |  |  |    | 
|-------------- | --------- |  | -- | -------------------------------------------------------------------------------------------------- |  |  | -- | 
|               |           |  |    | Page                                                                                              
|               |           |  |    |                                                                                                   
|PART I        
|               | Item  1.  |  |    | Business                                                                                           |  |  | 2  | 
|               | Item  2.  |  |    | Properties                                                                                         |  |  | 10 | 
|               | Item  3.  |  |    | Legal Proceedings                                                                                  |  |  | 10 | 
|               | Item  4.  |  |    | Submission of Matters to a Vote of Security
    Holders                                            |  |  | 12 | 
|PART II       
|               | Item  5.  |  |    | Market for Registrants Common Stock and
    Related Stockholder Matters                           |  |  | 13 | 
|               | Item  6.  |  |    | Selected Consolidated Financial Data                                                               |  |  | 14 | 
|               | Item  7.  |  |    | Managements Discussion and Analysis of
    Financial Condition and Results of Operations          |  |  | 16 | 
|               | Item  7A. |  |    | Quantitative and Qualitative Disclosures about
    Market Risk                                     |  |  | 35 | 
|               | Item  8.  |  |    | Financial Statements and Supplementary Data                                                        |  |  | 36 | 
|               | Item  9.  |  |    | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure           |  |  | 64 | 
|PART III      
|               | Item  10. |  |    | Directors and Executive Officers of the Registrant                                                 |  |  | 64 | 
|               | Item  11. |  |    | Executive Compensation                                                                             |  |  | 67 | 
|               | Item  12. |  |    | Security Ownership of Certain Beneficial Owners
    and Management and Related Stockholder Matters |  |  | 73 | 
|               | Item  13. |  |    | Certain Relationships and Related Transactions                                                     |  |  | 75 | 
|               | Item  14. |  |    | Controls and Procedures                                                                            |  |  | 75 | 
|PART IV       
|               | Item  15. |  |    | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K                                |  |  | 75 | 
|Signatures     |           |  | 80 |                                                                                                   
|Certifications |           |  | 81 |                                                                                                   

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PART I






|        |         
|------- | --------
|Item 1. | Business

Certain matters discussed in this Annual
Report on Form 10-K contain certain forward-looking
statements within the meaning of the Private Securities
Litigation Reform Act of 1995, including statements regarding
our business strategy, product capability, financial condition,
results of operation and business. The words
anticipate, believe,
estimate, expect, plan,
intend and similar expressions, as they relate to
Netro, are intended to identify forward-looking statements. Such
statements reflect our current views with respect to future
events and involve known and unknown risks, uncertainties and
other factors including, but not limited to, economic, key
employee, competitive, regulatory, governmental and
technological factors affecting our growth, operations, markets,
products, services, licenses and other factors discussed under
the heading Risk Factors in the section entitled
Managements Discussion and Analysis of Financial
Condition and Results of Operations. We cannot be sure
that any of our expectations will be realized.

Overview

We design, market and sell broadband,
point-to-multipoint, fixed wireless equipment.
Telecommunications service providers use our equipment as an
alternative to using wired connectivity or point-to-point fixed
wireless equipment. The three principal applications for our
products are:



| |   |                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------
| |  | Providing voice and high speed data access
    connections to residences, which we do principally through our
    Angel product line,        
|
| |  | Providing voice and high speed data access
    connections for businesses, which we do principally through our
    AirStar® product line, and
|
| |  | Connecting mobile phone base stations to the core
    telecommunications network, which we do through our AirStar
    product line.          

We began commercially shipping our first
point-to-multipoint product, AirStar, in 1998 and have a
significant installed base for this product. AirStar operates at
the higher end of the licensed frequency spectrum (10 -
39 GHz) with support for an additional frequency at the
lower range (3.5 GHz).

In February of 2002 we acquired from AT&T
Wireless Services, Inc. their fixed wireless development team, a
license to intellectual property, equipment and proprietary
software assets. This product, called Angel, was commercially
deployed in the United States by AT&T Wireless, however
since acquiring it, we have modified the Angel platform to
conform to international standards and we are marketing this
product line principally in international locations. Angel
operates at the lower end of the licensed frequency spectrum
(1.9 - 3.5 GHz). To date, we have not had material
sales of Angel.

Both the AirStar and Angel platforms have been
designed to minimize the costs of deployment and operation and
to permit operators to offer a broad range of voice, Internet
Protocol, or IP, and data services. We offer
complete solutions that operate at point-to-multipoint
frequencies licensed in every major geography in the world,
including Europe, Asia, Australia, North America and South
America, which we believe is a significant competitive advantage.

We were incorporated in California on
November 14, 1994 and were reincorporated in Delaware on
June 19, 2001. Our principal corporate offices are located
at 3860 North First Street, San Jose, California 95134.

The Netro Solution

The global telecommunications industry has
experienced substantial deregulation during the past several
years. Simultaneously, the emergence of the Internet and other
telecommunications services has increased the demand for
bandwidth. In addition, we believe that there is a growing
demand for public telecommunications voice services in some less
developed countries where the number of telephone lines per 100
inhabitants, known as teledensity, is below 10.0, but there is
significant per capita income growth. This is driving local

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access service providers to upgrade their
networks and increase their service offerings. However, the
public telecommunications infrastructure does not currently meet
all the public access demand and therefore fixed wireless access
systems have emerged as an alternative to copper wired
infrastructure for telephony and access to the Internet. Fixed
wireless technology is an attractive solution for network access
needs, since it offers quick deployment, independence from the
limitations of an existing wired network, lower infrastructure
costs and lower operating costs.


At the same time that deregulation and the
emergence of the Internet have influenced telecommunications
networks around the world, governments are also licensing mobile
service providers to use new spectrum for advanced mobile phone
services that include both voice calls and data functionality,
such as Internet browsing. This next generation of cellular
phone service, typically referred to as 3G, is expected to
require significantly more hub sites than existing cellular
topologies. In addition, these hub sites will be transmitting
not only voice, but also high speed data traffic. We believe
that point-to-multipoint technology such as AirStar can be a
more efficient and cost-effective alternative for connecting
these 3G cellular hubs to the core mobile network than alternate
methods, such as leased lines and point-to-point radios.

Our AirStar system operates at the higher
licensed frequencies (10 - 39 GHz, with a low
frequency version for 3.5 GHz) and is designed to allow
service providers to offer a wide range of high speed data and
voice services to small and mid-sized enterprises and to enable
mobile service providers to deploy cost effective transmission
infrastructure for their 3G cellular networks. AirStar has an
impressive track record of performance and stability across a
worldwide installed base. AirStar can handle a wide range of
services providing on-demand bandwidth and allowing for
oversubscription of available spectrum, thereby allowing service
providers to maximize revenues from their broadband wireless
installation.

Our Angel system operates at the lower licensed
frequencies (1.9 - 3.5 GHz) and is designed to offer
residences and small businesses primary voice and high speed
data services with speeds similar to those offered by DSL. Angel
uses orthogonal frequency division multiplexing, or
OFDM, to allow service providers non-line-of-sight
coverage within a cell, to ensure that up to 95 percent of
the population within a given cell will be covered by the base
station. This non-line-of-sight capability, along with the
quality of the services offered by Angel, make it a leading edge
solution. Angel was deployed in the United States to 47,000
subscribers and was the first solution of its kind to be mass
deployed and field proven.

Both AirStar and Angel are designed to provide
the following benefits to service providers:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Carrier Class Voice and High Speed Data
    Services.Many existing high speed
    access technologies are optimized for either voice or data
    traffic. However, offering both voice and data services can
    increase the average revenue per user a service provider can
    realize. Voice traffic requires fixed-speed, low-capacity
    transmissions, while data traffic requires variable-speed,
    high-capacity transmissions. Consequently, network operators
    wishing to carry both types of traffic, whether because they
    offer access solutions or are aggregating mobile phone traffic,
    often must choose among setting aside capacity to service peak
    transmission data traffic requirements, which typically requires
    installing more base stations, allowing degradation of service
    during heavy usage, or servicing a smaller number of
    subscribers. In contrast, service providers using the Angel or
    AirStar systems can support voice and high speed data from the
    same system without having to make these performance compromises.                                                                                                                                  
|
| |  | Cost-Effective Deployment and Operation.Both AirStar and Angel use
    point-to-multipoint deployment architectures. By employing a
    point-to-multipoint architecture, one hub radio can serve
    multiple subscriber radios. This results in lower total radio
    costs than point-to-point architectures in which each radio can
    communicate with only one other radio. In addition, a
    significant portion of the cost to build an AirStar or Angel
    network is directly related to subscriber growth. To add
    subscribers in a sector, a provider simply installs equipment at
    the subscribers premises and activates the service
    remotely, allowing the service provider to incur costs
    concurrently with the subscriber growth. The Angel system also
    uses OFDM and therefore allows non-line-of-sight deployment,
    meaning that there is up to a 95 percent chance in a given
    cell that a subscriber can indeed be connected to the network
    even if the path between the subscriber and the hub is
    obstructed. This reduces capital expenditures in terms of the
    number of hubs that need to be deployed and reduces service
    provider operating costs since there

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | are fewer cases where, due to unanticipated
    coverage gaps, a service technician will fail to connect a
    subscriber who has requested service.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | Quality of Service and Reliability.Service providers using Netros
    products can deploy bundles of voice and high speed data
    services at different price points to different market segments
    with high levels of service availability. In addition, AirStar
    permits differentiated service levels among subscribers. AirStar
    can prioritize transmissions depending on their source and type,
    and fill available transmission capacity with lower priority
    transmissions. Furthermore, Netros products are engineered
    to enable service providers to offer the same high reliability
    and availability for services that traditional service providers
    have historically offered for voice services. Reliability is
    accomplished through an error correction algorithm, redundancy
    and comprehensive network management software.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | Global Market Coverage.We currently offer products to address
    point-to-multipoint licensed frequencies in Europe, Asia,
    Australia, North America, and South America. We are also in the
    process of adapting our products to additional frequencies to
    address new markets and new spectrum auctions ongoing in our
    existing markets. We believe our experience around the world
    makes our products more attractive to service providers with
    multi- country strategies and enhances our ability to apply
    learning from established markets to developing markets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | Rapid Time to Market.Service providers using Netros
    products can achieve rapid time to market for integrated voice
    and high speed data connections through efficient installation,
    network management software and the ability to dynamically
    allocate capacity among subscribers. Service providers that we
    target have typically committed a high level of capital
    investment to enter the high speed wireless telecommunications
    services market, and thus are focused on quickly realizing a
    return on their investment. Our systems are scalable and allow
    service providers to rapidly offer new services to existing or
    incremental subscribers within a coverage area by a simple
    software command and a radio installation that is automatically
    configured by the base station with little technician
    intervention. By installing one base station, the service
    provider can attain coverage of many potential subscribers. For
    example, an AirStar cell operating at the 26 GHz frequency
    band can cover ranges from 5 to 15 square miles, depending
    on local conditions, and has a transmission capacity of over
    600 Mbps. Compared to other high speed, wire-based
    technologies that often require lengthy and expensive upgrades
    before offering service or do not support integrated voice and
    data services, our products allow a service provider to rapidly
    deploy integrated voice and high speed data services as demand
    warrants.

Strategy

Our objective is to be the leading worldwide
supplier of broadband wireless, point-to-multipoint equipment
used by telecommunications service providers. Key elements of
our strategy include the following:

Reduce Product Costs.We believe that a key element to
enabling the market for fixed broadband wireless is to reduce
the cost per customer served and improve the business case for
the service provider. We have reduced the cost of our
26 GHz AirStar customer premise equipment by more than
50 percent in the past twelve months. We are in the process
of applying this platform to other AirStar frequencies. In
addition, we have recently embarked on a similar process for our
Angel products, which we expect to be complete during the first
half of 2003.

Focus on Large Influential Service
Providers.We believe the best way to
increase product sales and overall market acceptance of our
products is by establishing our products in the networks of the
largest and most influential service providers, particularly
those who have networks in multiple countries. Given the limited
sales and marketing resources that we possess, we are focusing
our direct sales and customer support efforts on these service
providers while utilizing distributors and value added resellers
for other customers.

Capitalize on Technology
Expertise.We have dedicated ourselves
to bringing technologically advanced, innovative and cost
effective solutions to the broadband fixed wireless market. We
believe that our expertise in relevant core technologies and our
customer oriented approach to product definition and development
have enabled us to achieve technological leadership in the
broadband fixed wireless market.

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Leverage our Leadership Position.We believe that AirStar is one of the
most mature point-to-multipoint broadband wireless systems and
has one of the largest worldwide installed bases. We have
deployed the AirStar in several commercial networks worldwide
including in Europe, South America and Asia. Similarly, Angel
was the first solution of its kind to be mass deployed and field
proven, and was deployed to over 47,000 residences in the United
States. We intend to leverage our successful commercial
deployments at our existing AirStar service providers by
extending our sales into the networks that those same service
providers are establishing in other countries and by using these
customers as reference accounts for new service providers. We
intend to capitalize on Angels maturity and capabilities
in the low frequency market segment to enter into international
markets we are targeting for Angel.

Products and Technology

We currently develop, market and sell the AirStar
product for access offerings to small and mid-sized businesses
and mobile infrastructure, and the Angel platform for access
offerings to residences and small businesses. Each of our
product lines is comprised of three principal components:



| |   |                                                                                                                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Customer Premise
    Equipment,which includes a radio
    element which sends and receives signals to and from the hub
    equipment, and a digital signal processing unit, which connects
    and provides interfaces to the end-users
    telecommunications and/or data network;               
|
| |  | Hubs,which include
    several radio elements that each send and receive signals from
    multiple customer premise equipment units and an aggregation
    unit, which aggregates data from the outdoor units and
    interfaces to the telecommunications service providers
    core network; and
|
| |  | Network Management
    Software,which controls and monitors
    the operation of hubs and customer premise equipment.                                                                                                                                                                              

We believe our AirStar and Angel products have
industry-leading technologies including air interface
technology, software and hardware implementations, advanced
networking architecture, radio transmission technology and
networking software capabilities. Key technology elements of
Netro products include the following:

Air Interface
Protocol.We believe our
products proprietary air interface protocols maximize the
benefit of our point-to-multipoint architecture, and advanced
peak traffic management techniques. Our air interface technology
for AirStar, CellMACTM, schedules transmissions from
each subscriber in very small increments. It allows subscribers
to request additional capacity from the base station for peak
demand data services through a capacity reservation mechanism
that requires little wasted radio frequency. The base station
can prioritize the requests according to service level
agreements and allocates just enough capacity or time slots to
enable the transfer of each transmission. Our air interface
technology for Angel uses OFDM, which allows deployment in
non-line-of-sight mode. In addition, Angels air interface
technology supports adaptive modulation, thereby increasing
bandwidth to some subscribers and doing the opposite for others,
all based on a dynamic analysis of the link characteristics for
each subscriber. This results in a larger effective transmission
capacity and better bandwidth utilization. Angels air
interface technology also supports circuit-switched voice
services and packet data services, with data capacity allocated
on demand.

Effective Combination of Voice and
Data.In AirStar, the CellMAC air
interface utilizes asynchronous transfer mode, or ATM, to
efficiently combine voice and data onto a single stream. This
transports voice and data traffic simultaneously and maintains a
guaranteed quality of service for each traffic type. Using this
architecture, capacity for services can be provided based on
average throughput requirements rather than peak throughput
requirements. As a result, the capacity of the transmission is
increased, resulting in better use of radio frequency and thus
lower equipment expenditures. Our Angel technology carries
circuit switched voice over narrow channels, without any
degradation in voice quality. This leaves more bandwidth for
dynamic sharing of data services.

Radio Technology.Since our inception, we have worked extensively on radio designs
and volume manufacturing processes to create robust yet
cost-effective radios that support advanced radio technology and
peak demand transmission capabilities. The current AirStar
radios are fourth generation designs. Current

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Angel radios are third generation designs and we
are in the process of developing fourth generation designs which
will reduce cost and enhance performance.


Carrier Class Management
Software.We believe that the network
management systems we offer provide a significant competitive
advantage. Our software architecture and use of object-oriented
design principles for both real-time and network management
software are key to making our software modular and adjustable
to additional communications protocols. Our software extends the
ability of our systems to enable the inter-working of voice
protocols and support the concentration of voice traffic.

Sales and Marketing

We have sales representatives in Mexico, China,
France, Germany, Singapore and Spain, as well as in Florida,
Redmond, Washington and in our corporate headquarters in
San Jose, California. We sell our products indirectly
through original equipment manufacturers, or OEMs,
and local resellers in addition to through our direct sales
force. In addition, we offer installation and maintenance
services through our system integration partners and third-party
installation and support organizations.

During 2002, most of our sales were direct or
through local resellers who rely heavily on Netro sales
personnel and we expect this to continue in the future. In
determining which accounts are appropriate for direct sales, we
try to identify those that are key early adopters that can help
drive our product feature sets in a manner that will better
address the needs of the marketplace as a whole. These customers
usually have the ability to install, integrate, service and
maintain their systems themselves. For customers requiring
significant installations integration and maintenance services,
we typically sell our product through OEMs.

Revenues by geography based on to the location of
our original customers were as follows:

|              |  |          |        |                     |  |      |        |      |  |      |        |      |  |  |     |   |  |  |     |   |  |  |     |  
|------------- |  | -------- | ------ | ------------------- |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  |  | --- | - |  |  | --- | - |  |  | --- | -
|              |  |          |        |                     |  |      |        |     
|              |  |          |        | Percentage of Total
|              |  | Revenues |        | Revenues           
|              |  |          |        |                    
|              |  | 2002     |        | 2001                |  | 2000 |        | 2002 |  | 2001 |        | 2000
|              |  |          |        |                     |  |      |        |      |  |      |        |     
|Latin America |  | $        | 1,815  |                     |  | $    | 9,872  |      |  | $    | 6,661  |      |  |  | 11  | % |  |  | 42  | % |  |  | 10  | %
|Europe        |  |          | 12,998 |                     |  |      | 6,028  |      |  |      | 1,447  |      |  |  | 76  |   |  |  | 25  |   |  |  | 2   |  
|Middle East   |  |          | 471    |                     |  |      | 482    |      |  |      | 40     |      |  |  | 3   |   |  |  | 2   |   |  |  |    |  
|Asia          |  |          | 910    |                     |  |      | 468    |      |  |      | 192    |      |  |  | 5   |   |  |  | 2   |   |  |  |    |  
|              |  |          |        |                     |  |      |        |      |  |      |        |      |  |  |     |   |  |  |     |   |  |  |     |  
|International |  |          | 16,194 |                     |  |      | 16,850 |      |  |      | 8,340  |      |  |  | 95  |   |  |  | 71  |   |  |  | 12  |  
|United States |  |          | 913    |                     |  |      | 6,809  |      |  |      | 60,187 |      |  |  | 5   |   |  |  | 29  |   |  |  | 88  |  
|              |  |          |        |                     |  |      |        |      |  |      |        |      |  |  |     |   |  |  |     |   |  |  |     |  
|              |  | $        | 17,107 |                     |  | $    | 23,659 |      |  | $    | 68,527 |      |  |  | 100 | % |  |  | 100 | % |  |  | 100 | %
|              |  |          |        |                     |  |      |        |      |  |      |        |      |  |  |     |   |  |  |     |   |  |  |     |  

Substantially all of our United States revenues
are related to products sold to OEMs and local resellers. In
both 2001 and 2000, almost all of their end customers were
located outside of the United States. In 2002, $0.4 million
of the United States revenues were for an end user located in
the United States.

We derive the substantial majority of our
revenues from an international customer base. International
sales are subject to a number of risks and uncertainties,
including those described under Risk Factors 
If we are unable to manage our international operations
effectively, our business would be adversely affected.
Regardless of the distribution channel that services the
account, our direct sales force maintains contact with the
service provider and the system integrator account team. This
contact keeps us close to the evolving needs of the service
providers and helps ensure that we are well positioned within
each account.

Our marketing group provides marketing support
services for our executive staff, our direct sales force and for
our OEMs and resellers. Through our marketing activities, we
provide technical and strategic sales support to our direct
sales personnel and system integrators or resellers including
in-depth product presentations, technical manuals, sales tools,
pricing, marketing communications, marketing research, trademark
administration and other support functions. Our marketing group
is also responsible for product management activities throughout
each products lifecycle. These include the definition of
product features, approval of product releases and specification
of enhancements to our future product and service offerings.

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Customers

Historically, the predominant portion of our
revenues have come from sales to OEMs who have in turn resold
Netro products to competitive phone service providers in Europe.
We have implemented a strategy centered around changing our
customer base to incumbent phone service providers and mobile
service providers. Although the majority of our revenues in 2002
were ultimately related to installations by competitive phone
service providers, our strategy for future growth is dependent
on the acceptance of our products by these new target customers.

Revenues from customers that comprised more that
10 percent of revenue were as follows:

|                 |  |          |       |                     |  |      |        |      |  |      |        |      |  |  |    |   |  |  |    |   |  |  |    |  
|---------------- |  | -------- | ----- | ------------------- |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  |  | -- | - |  |  | -- | - |  |  | -- | -
|                 |  |          |       |                     |  |      |        |     
|                 |  |          |       | Percentage of Total
|                 |  | Revenues |       | Revenues           
|                 |  |          |       |                    
|                 |  | 2002     |       | 2001                |  | 2000 |        | 2002 |  | 2001 |        | 2000
|                 |  |          |       |                     |  |      |        |      |  |      |        |     
|Lucent           |  | $        | 6,891 |                     |  | $    | 7,110  |      |  | $    | 59,220 |      |  |  | 40 | % |  |  | 30 | % |  |  | 86 | %
|Techtel          |  |          | *     |                     |  |      | 7,007  |      |  |      | *      |      |  |  | *  |   |  |  | 30 |   |  |  | *  |  
|Condumex         |  |          | *     |                     |  |      | 2,390  |      |  |      | *      |      |  |  | *  |   |  |  | 10 |   |  |  | *  |  
|                 |  |          |       |                     |  |      |        |      |  |      |        |      |  |  |    |   |  |  |    |   |  |  |    |  
|Aggregate amount |  | $        | 6,891 |                     |  | $    | 16,507 |      |  | $    | 59,220 |      |  |  | 40 | % |  |  | 70 | % |  |  | 86 | %
|                 |  |          |       |                     |  |      |        |      |  |      |        |      |  |  |    |   |  |  |    |   |  |  |    |  



---



|  |                                         
|- | ----------------------------------------
|* | Revenues less than 10 percent for period

See Managements Discussion and
Analysis of Financial Condition and Results of Operations.

Operations and Manufacturing

Our manufacturing activities, based in our
San Jose and Redmond facilities, consist primarily of
prototype manufacturing, final testing and system staging. Our
strategy is to outsource manufacturing to contract
manufacturers, which have the expertise and ability to achieve
cost reductions associated with volume manufacturing and to
respond quickly to customer orders while maintaining high
quality standards. This also serves to turn some of our fixed
costs into variable costs and enables us to share in the
purchasing efficiencies enjoyed by these larger manufacturers.

Our operations and manufacturing groups
facilitate technology transfer between our research and
development group and the contract manufacturers. We may also
use our own manufacturing operation in situations where we need
product before the full product is released to external
manufacturers.

Research and Development

We believe that our extensive experience
designing and implementing high-quality network and radio
components and system software has enabled us to develop
high-value integrated systems solutions. As a result of these
development efforts, we believe we have created an
industry-leading platform for cost-effective high speed wireless
voice and data delivery with dynamic allocation of capacity.

We believe that our future success depends on our
continued investment in research and development in core radio,
networking and software technologies, particularly in an effort
to reduce product cost, and we expect to continue to invest
significant resources in this area. Our research and development
expenses were $28.0 million in 2002, $25.8 million in
2001 and $24.3 million in 2000. We are committed to an
ongoing research and development program that is focused around
reducing the manufacturing cost of our products and a continuous
assessment of service providers needs and technological
changes in the communications market.

Customer Advocacy

A high level of continuing service and support is
critical to our objective of developing long-term customer
relationships. We consolidate all aspects of our customer
service, satisfaction and quality assurance initiatives into a
customer advocacy group. Our customer advocacy organization is
based in our San Jose

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headquarters. Our customer advocacy organization
in San Jose serves as the interface to our research and
development group to highlight certain problems and also
provides information about customers needs to our
marketing and research and development organizations. Our
customer support model consists of three tiers of support:




| |   |                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------
| |  | local problem isolation, which provides for
    on-site problem identification and resolution of relatively
    simple issues;               
|
| |  | fault isolation and repair, which provides for
    consultation and instruction by technicians trained by product
    experts; and           
|
| |  | expert level support from product engineering
    experts for the resolution of problems not remedied by the first
    two levels of support.

Our main focus is to provide system integrators
and first-tier support partners with the ability to provide
local support worldwide to service providers, including
training, spare parts, maintenance and installation. As most of
the hands-on support is provided through system integrators,
local resellers, service and installation partners, or the
service providers themselves, we focus on offering various
training courses to enable system integrators, service and
installation partners and service providers to perform both
local problem isolation and fault isolation and repair.
Currently, the majority of our service and support activities
are related to training and installation support for service
providers. These services are provided directly at customer
installations by our customer advocacy group or remotely by our
San Jose headquarters team.

We have a number of flexible hardware and
software maintenance and customer support programs available for
products beyond the applicable warranty period, depending on our
customer preferences.

Competition

The market for high speed, wireless,
point-to-multipoint telecommunications equipment is rapidly
evolving and highly competitive. Increased competition is likely
to result in price reductions, shorter product life cycles,
longer sales cycles and loss of market share, any of which would
adversely affect our business.

Depending on the market we are addressing, we
face different types of competition:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Enterprise Access.As an enterprise access technology,
    point-to-multipoint fixed wireless solutions compete with
    wire-based solutions, such as fiber optic cable and leased T1
    and E1 lines and wireless solutions, such as point-to-point
    radios. As a company within the point-to-multipoint fixed
    wireless industry addressing small and medium enterprise access,
    we compete through our AirStar product with large OEMs, such as
    Alcatel, Ericsson and Marconi, as well as with smaller
    wireless-only companies, such as Alvarion.                                                                                                                         
|
| |  | Residential and Small Business Access.As a residential and small business
    access technology, point-to-multipoint fixed wireless solutions
    compete with wire-based solutions, such as DSL and cable modems.
    As a company within the point-to-multipoint fixed wireless
    industry addressing residential and small business access, we
    compete through our Angel product with established wireless
    local loop vendors, such as Innowave (a division of ECI
    Telecommunications which has executed an agreement to be
    acquired by Alvarion), AirSpan and Alvarion, as well as with
    numerous startup companies that are developing products for our
    industry.
|
| |  | Mobile Infrastructure.As a technology for connecting
    cellular base stations to the core telecommunications network,
    point-to-multipoint fixed wireless solutions compete with
    wire-based solutions such as leased T1 and E1 lines and wireless
    solutions such as point-to-point radios. As a company within the
    point-to-multipoint fixed wireless industry addressing cellular
    infrastructure, we compete through our AirStar product
    principally with large systems integrators, such as Alcatel,
    Ericsson and Marconi.                                                                                                                                      

We expect competition to persist and intensify in
the future. Many of our competitors are substantially larger
than we are and have significantly greater financial, sales,
marketing, technical, manufacturing and other resources and more
established distribution channels. These competitors may be able
to respond more

8



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##### Table of Contents



rapidly to new or emerging technologies and
changes in customer requirements. They may also be able to
devote greater resources to the development, promotion, sale and
financing of their products than we can. Our competitors may
also attempt to influence the adoption of standards that are not
compatible with our current architecture. Our larger, more
established competitors may have more influence with
standards-setting bodies than we do. If standards other than
ours are adopted, this may require us to incur additional
development and integration costs and may delay our sales
efforts.


Some of our competitors may make strategic
acquisitions or establish cooperative relationships to increase
their ability to gain customer market share rapidly. These
competitors may enter our existing or future markets with
solutions that may be less expensive, provide higher performance
or additional features or be introduced earlier than our
solutions. We also expect that other companies may enter our
market with better products and technologies. If any technology
that is competing with ours is more reliable, faster or less
expensive or has other advantages over our technology, then the
demand for our products and services would decrease, which would
seriously harm our business.

We expect our competitors to continue to improve
the performance of their current products and to introduce new
products or new technologies that may supplant or provide lower
cost alternatives to our products. To be competitive, we must
continue to invest significant resources in research and
development, sales and marketing and customer support. We cannot
be sure that we will have sufficient resources to make these
investments or that we will be able to make the technological
advances necessary to be competitive. As a result, we may not be
able to compete effectively against our competitors.

Intellectual Property

We rely on a combination of patent, copyright,
trademark and trade secret laws, as well as confidentiality
agreements and licensing arrangements, to establish and protect
our proprietary rights. We presently have five issued United
States patents, with additional applications in process. We have
also acquired from AT&T Wireless Services, Inc. a license to
several patents and numerous patent applications associated with
the Angel platform. Although AT&T Wireless has agreed not to
license these patents to our competitors for a period of five
years from the date of acquisition, we cannot assure that they
will enforce their rights against potential infringors. Despite
our efforts to protect our proprietary rights, existing
copyright, trademark and trade secret laws afford only limited
protection. In addition, the laws of some foreign countries do
not protect our proprietary rights to the same extent as do the
laws of the United States. Attempts may be made to copy or
reverse engineer aspects of our products or to obtain and use
information that we regard as proprietary. Accordingly, we may
not be able to protect our proprietary rights against
unauthorized third-party copying or use. Furthermore, policing
the unauthorized use of our products is difficult. Litigation
may be necessary in the future to enforce our intellectual
property rights, to protect our trade secrets or to determine
the validity and scope of the proprietary rights of others. This
litigation could result in substantial costs and diversion of
resources and could have a material adverse effect on our future
operating results.

From time to time, third parties may assert
patent, copyright, trademark and other intellectual property
rights to technologies in various jurisdictions that are
important to our business. Any claims could be time-consuming to
deal with, result in costly litigation, divert the efforts of
our technical and management personnel, cause product shipment
delays or require us to enter into royalty or licensing
agreements, any of which could have an adverse effect on our
operating results. Royalty or licensing agreements, if required,
may not be available on terms acceptable to us, if at all. In
addition, in our sales agreements, we agree to indemnify our
customers for any expenses or liabilities resulting from claimed
infringements of patents, trademarks or copyrights of third
parties. As part of our acquisition of assets from AT&T
Wireless, we were assigned by AT&T Wireless, and we assumed,
several contracts with third party software vendors. We are
required to indemnify AT&T Wireless against claims that
arise out of or in connection with the assumed contracts after
the date of assignment and against claims that the assigned
software infringes the intellectual or proprietary rights of
others.

9



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Employees

As of December 31, 2002, we employed
approximately 134 full-time employees. Our full-time
employees include 87 people in research and development, 23 in
sales and marketing, and 24 in general and administrative. None
of our employees is represented by collective bargaining
agreements, and we consider relations with our employees to be
good. However, employee retention may be particularly
challenging in light of the recent restructurings and the
announcement of our decision to pursue strategic opportunities.

Available Information

Our website is http://www.netro-corp.com.
We make our annual reports on Form 10-K, our quarterly
reports on Form 10-Q, our current reports on Form 8-K
and any amendments to those reports available free of charge on
the website.






|        |           
|------- | ----------
|Item 2. | Properties

We lease an approximately 100,000 square
foot facility in San Jose, California, which we use for
executive offices and for administrative, AirStar engineering
and product development, AirStar prototype manufacturing and
sales and marketing purposes. The lease for this facility
expires in September 2006. We lease an approximately
175,000 square foot facility in Redmond, Washington, which
we use for Angel related engineering, product development and
prototype manufacturing purposes. The lease for this facility
expires in February 2006. We also maintain leases for executive
office space in China, France and Mexico, which do not represent
material financial obligations.






|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

Coates Litigation.On or around October 5, 2001, C.
Robert Coates, a holder of shares of our common stock, commenced
an action in the Delaware Chancery Court against the Company,
the former Netro Corporation, which was incorporated in
California (Netro California), and the members of
our board of directors, styled Coates v. Netro Corp.,
et al., C.A. No. 19154
(Coates I). The complaint in Coates I made
a number of allegations relating to the approval by the
shareholders of Netro California of the merger transaction by
which our state of incorporation was changed from California to
Delaware and also claimed that the adoption by our board of
directors of a stockholder rights plan sometime after that
merger transaction was in violation of Delaware law. On
November 30, 2001, defendants filed a motion to dismiss the
complaint in Coates I for failure to state a claim. In a
decision issued on September 11, 2002, the Delaware Court
of Chancery granted defendants motion to dismiss.
Mr. Coates did not appeal from that decision.

Separately, on or about December 10, 2001,
Mr. Coates filed a complaint in a second action that names
as defendants us and certain members of our board of directors,
styled Coates v. Netro Corp., et al., C.A.
No. 19309 (Coates II). Mr. Coates
filed an amended complaint in that action in October 2002. In
the amended complaint, Mr. Coates challenges a stock option
cancellation and regrant program for employees that was adopted
by our board of directors in 2001. He also challenges an award
of options to our outside directors in July 2001. The complaint
seeks an order declaring the options at issue to be invalid and
void, rescinding those options, preliminarily and permanently
enjoining the exercise of those options, imposing a constructive
trust on any such options that were granted to defendants, and
awarding monetary damages in an unspecified amount as well as
plaintiffs attorneys fees and expenses. Defendants filed a
motion to dismiss the amended complaint on October 18,
2002. During the period for briefing of that motion, the parties
reached an agreement in principle to settle the action. Under
the proposed settlement: (i) Each of our outside directors
(other than Ms. Young, who is not named as a defendant)
would agree to forego any award of our options in calendar year
2003; (ii) our governing documents will be amended to
reflect that any future option awards to directors must be made
by the Compensation Committee of our board of directors; and
(iii) the Company and our directors will agree that any
future grant of options made to our directors will be publicly
disclosed within 30 days after such a grant. The proposed
settlement is subject to approval by the Delaware Court of
Chancery. In connection with such court approval,
plaintiffs counsel intends to make an application for an
award of fees and expenses, which the Company and other
defendants have agreed not to oppose up to $40,000.

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##### Table of Contents



IPO Allocation Litigation.On or around August 23, 2001,
Ramiro Soto-Gonzalez, who alleges that he is a former
shareholder of our common stock, commenced a purported class
action lawsuit in the U.S. District Court for the Southern
District of New York against the Company, Richard Moley, Gideon
Ben-Efraim and Michael T. Everett (Individual
Defendants), as well as against Dain Rauscher, Inc.,
FleetBoston Robertson Stephens, Inc., and Merrill Lynch, Pierce,
Fenner and Smith, Inc. (Underwriter Defendants). The
action is styled Soto-Gonzalez v. Netro Corporation,
Inc., et al., No. 01 Civ. 7993 (S.D.N.Y.). On
or around December 6, 2001, Zion Badichi, who alleges that
he is a former shareholder of our common stock, commenced a
purported class action lawsuit in the U.S. District Court
for the Southern District of New York against us, the Individual
Defendants (except Mr. Moley) and the Underwriter
Defendants. The action is styled Badichi v. Netro
Corporation, Inc., et al., No. 01 Civ. 8348
(S.D.N.Y.).

The Soto-Gonzalez and Badichi
actions are two of more than 1,000 lawsuits filed in the
U.S. District Court for the Southern District of New York
against more than 300 different issuers, certain officers and
directors of these issuers and more than 45 different
underwriters arising out of initial public offerings occurring
between December 1997 and December 2000 (collectively IPO
Allocation Litigation). By Order dated August 9,
2001, Chief Judge Michael B. Mukasey assigned the IPO Allocation
Litigation, including the Soto-Gonzalez and
Badichi actions, to the Honorable Shira A. Scheindlin for
all pre-trial purposes. On September 7, 2001, Judge
Scheindlin adjourned the time for all defendants in the IPO
Allocation Litigation, including us and the Individual
Defendants, to answer, move or otherwise respond to current and
future complaints indefinitely pending further instruction from
the court. On or about March 2002, the Soto-Gonzalez and
Badichi actions were consolidated into a single action
styled In re Netro Corp. Initial Public Offering Securities
Litigation, No. 01 Civ. 7035, 21 MC 92
(SAS) (Netro Litigation). Other lawsuits alleging
similar claims arising out of our August 1999 initial public
offering against the Underwriter Defendants  but not
against us or the Individual Defendants  were also
consolidated into the Netro Litigation. Those actions are styled
Gutner v. Merrill Lynch, Pierce, Fenner & Smith
Incorporated et al., No. 01 Civ. 7035
(S.D.N.Y.) and Bryant v. Merrill Lynch, Pierce,
Fenner & Smith Incorporated et al.,
No. 01 Civ. 9184 (S.D.N.Y.).

On April 19, 2002, plaintiffs filed a
consolidated amended class action complaint in the Netro
Litigation (Complaint). The Complaint alleges claims
against the Company arising under Section 11 of the
Securities Act of 1933 (33 Act) and
Section 10(b) of the Securities Exchange Act of 1934
(Exchange Act), and Rule 10b-5 promulgated
thereunder, and against the Individual Defendants under
Section 10(b), Rule 10b-5 and Section 20(a) of
the Exchange Act, and Section 15 of the 33 Act.
The claims allege various misconduct arising from our August
1999 initial public offering and March 2000 follow-on offering
of our common stock, including, among other things, that the
disclosures made in connection with the offerings were
incomplete or misleading in various respects. The allegations
include, among other things, that we and the Individual
Defendants failed to disclose that the Underwriter Defendants:
(1) charged us excessive commissions and inflated
transaction fees in violation of the securities laws and
regulations; and (2) allowed certain investors to take part
in our initial public offering in exchange for promises that
these investors would purchase additional shares in the
after-market for the purpose of inflating and maintaining the
market price of our common stock. The Complaint seeks to certify
a class of shareholders who purchased our common stock between
August 18, 1999 and December 6, 2000, and to recover
monetary damages from defendants in an unspecified amount, as
well as plaintiffs attorneys fees and expenses in
bringing the action.

On October 9, 2002, the claims against the
Individual Defendants were dismissed without prejudice on
consent of the parties. In addition, counsel for the plaintiffs,
liaison counsel for the issuer defendants and counsel for
insurers of the issuer defendants have taken part in continuing
discussions mediated by a former federal district court judge to
explore a possible settlement of the claims against all of the
issuer defendants in the IPO Allocation Litigation, including us.

The IPO Allocation Litigation in general, and the
Netro Litigation in particular, are in an early phase, and no
date has yet been set by the court for completion of pre-trial
discovery or trial. We believe the claims asserted against us in
the Netro Litigation are without merit, and we intend to
vigorously defend ourselves against those claims.

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FCC Kuwait
Litigation.This matter involves a
dispute regarding the alleged improper draw down by the Company
of a letter of credit opened by Future Communications Company
(FCC) with the Bank of Kuwait and the Middle East in
Kuwait, and the alleged refusal by the Company to accept return
by FCC of certain equipment provided to FCC by the Company. At
the January 15, 2003, hearing, the Court ruled that Netro
Corporation had not yet been properly served. The case has been
adjourned until May 2, 2003, at which time FCC will be
required to prove completed service of process or risk
dismissal. The amount in dispute is approximately $1,013,000
plus interest from December 31, 1999.

Solectron
Arbitration.On or around
December 19, 2002, Solectron California Corporation
(Solectron) demanded arbitration to resolve disputes
arising under its May 31, 1998 Manufacturing
Agreement with Netro. Solectrons principal claim is
that during the third quarter of 2000, it purchased materials on
the basis of Netros forecasts which were not followed by
corresponding orders. Solectron claims that as a result it now
has an excess inventory of materials which it cannot sell. Netro
vigorously disputes the claims on the ground that the
acquisition of material had not been approved by Netro as
required by the agreement. The total claim, including the cost
of materials and asserted carrying charges, is approximately
$14.5 million. The matter is set for mediation which is
scheduled to commence in the second quarter of 2003. Unless the
matter is resolved, arbitration will proceed thereafter before
the American Arbitration Association.

From time to time, we are involved in various
legal proceedings in the ordinary course of business. We are not
currently involved in any additional litigation that, in
managements opinion, would have a material adverse effect
on our business, operating results or financial condition;
however, there can be no assurance that any such proceeding will
not escalate or otherwise become material to our business in the
future.






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

None.

12



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##### Table of Contents






PART II






|        |                                                                             
|------- | ----------------------------------------------------------------------------
|Item 5. | Market for the Registrants Common
    Stock and Related Stockholder Matters

Price Range of Common Stock

Our common stock trades on The Nasdaq National
Market under the symbol NTRO. As of March 1,
2003, the Company had approximately 368 stockholders of record
and the closing price of our common stock was $2.60 per
share as reported by The Nasdaq National Market. The following
table shows the high and low bid prices of our Common Stock for
the periods presented as reported on The Nasdaq National Market:

|                                |  |      |       |     |  |   |      | 
|------------------------------- |  | ---- | ----- | --- |  | - | ---- | 
|                                |  | High |       | Low
|                                |  |      |       |    
|2001                            |  |      |       |     |  |   |      | 
|First Quarter (ended 3/31/01)   |  | $    | 11.63 |     |  | $ | 4.88 | 
|Second Quarter (ended 6/30/01)  |  |      | 6.25  |     |  |   | 3.31 | 
|Third Quarter (ended 9/30/01)   |  |      | 4.00  |     |  |   | 2.21 | 
|Fourth Quarter (ended 12/31/01) |  |      | 4.10  |     |  |   | 2.36 | 
|2002                            |  |      |       |     |  |   |      | 
|First Quarter (ended 3/31/02)   |  | $    | 3.94  |     |  | $ | 2.60 | 
|Second Quarter (ended 6/30/02)  |  |      | 3.01  |     |  |   | 2.06 | 
|Third Quarter (ended 9/30/02)   |  |      | 3.70  |     |  |   | 2.03 | 
|Fourth Quarter (ended 12/31/02) |  |      | 3.22  |     |  |   | 1.56 | 

We have not paid dividends on our Common Stock at
any time and have no present plans to do so in the future.

Future stock prices may be subject to volatility,
particularly on a quarterly basis. Any shortfall in revenues or
operating results from amounts expected by securities analysts
or investors could have an immediate and significant adverse
effect on the trading price of our stock.

Recent Sales of Unregistered
Securities

None

13



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|        |                                         
|------- | ----------------------------------------
|Item 6. | Selected Consolidated Financial
    Data

You should read the following selected
consolidated financial data in conjunction with our consolidated
financial statements and the related notes and with
Managements Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere in
this Form 10-K. The consolidated statements of operations
data for the years ended December 31, 2002, 2001 and 2000,
and the consolidated balance sheet data as of December 31,
2002 and 2001, are derived from our audited consolidated
financial statements included elsewhere in this Form 10-K.
The consolidated statements of operations data for the years
ended December 31, 1999 and 1998 and the consolidated
balance sheet data as of December 31, 2000, 1999 and 1998
are derived from our audited consolidated financial statements
not included in this Form 10-K. The unaudited selected
quarterly data for the years ended December 31, 2002 and
2001 are derived from our unaudited consolidated quarterly
financial statements not included in this Form 10-K. The
historical results presented below are not necessarily
indicative of the results to be expected for any future fiscal
year. See Managements Discussion and Analysis of
Financial Condition and Results of Operations.

Consolidated Statements of Operations
Data:

|                                                                                 |                                                             |                                          |         |         |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |        |        | 
|-------------------------------------------------------------------------------- | ----------------------------------------------------------- | ---------------------------------------- | ------- | ------- | ------ | ---- | ------- | ------ | ------ | ---- | ------- | ------ | ------ | - | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                                                                                 |                                                             |                                         
|                                                                                 |                                                             | Year Ended December 31,                 
|                                                                                 |                                                             |                                         
|                                                                                 |                                                             | 2002(1)                                  |         | 2001(2) |        | 2000 |         | 1999   |        | 1998
|                                                                                 |                                                             |                                          |         |         |        |      |         |        |        |     
|                                                                                 |                                                             |                                         
|                                                                                 |                                                             | (In thousands, except per share amounts)
|Revenues                                                                         |                                                             | $                                        | 17,107  |         |        | $    | 23,659  |        |        | $    | 68,527  |        |        | $ | 18,185  |        |        | $ | 5,438   |       
|Cost of revenues                                                                 |                                                             |                                          | 17,167  |         |        |      | 62,512  |        |        |      | 52,096  |        |        |   | 14,874  |        |        |   | 9,640   |       
|                                                                                 |                                                             |                                          |         |         |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |       
|Gross profit (loss)                                                              |                                                             |                                          | (60     | )       |        |      | (38,853 | )      |        |      | 16,431  |        |        |   | 3,311   |        |        |   | (4,202  | )     
|                                                                                 |                                                             |                                          |         |         |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |       
|Operating expenses:                                                              |                                                             |                                          |         |         |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |       
|                                                                                 | Research and development                                    |                                          |         | 27,973  |        |      |         | 25,782 |        |      |         | 24,265 |        |   |         | 19,307 |        |   |         | 16,143 |       
|                                                                                 | Sales and marketing                                         |                                          |         | 13,877  |        |      |         | 13,281 |        |      |         | 10,455 |        |   |         | 5,794  |        |   |         | 4,819  |       
|                                                                                 | General and administrative                                  |                                          |         | 21,210  |        |      |         | 16,996 |        |      |         | 9,812  |        |   |         | 6,259  |        |   |         | 3,968  |       
|                                                                                 | Amortization of deferred stock compensation                 |                                          |         | 612     |        |      |         | 857    |        |      |         | 1,064  |        |   |         | 1,104  |        |   |         |       |       
|                                                                                 | Amortization of acquired intangible assets                  |                                          |         | 7,820   |        |      |         |       |        |      |         |       |        |   |         |       |        |   |         |       |       
|                                                                                 | Acquired in-process research and development                |                                          |         | 17,600  |        |      |         |       |        |      |         |       |        |   |         |       |        |   |         |       |       
|                                                                                 | Restructuring and asset impairment charges
    compensation |                                          |         | 8,079   |        |      |         |       |        |      |         |       |        |   |         |       |        |   |         |       |       
|                                                                                 |                                                             |                                          |         |         |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |       
|                                                                                 |                                                             | Total operating expenses                 |         |         | 97,171 |      |         |        | 56,916 |      |         |        | 45,596 |   |         |        | 32,464 |   |         |        | 24,930 | 
|                                                                                 |                                                             |                                          |         |         |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |       
|Loss from operations                                                             |                                                             |                                          | (97,231 | )       |        |      | (95,769 | )      |        |      | (29,165 | )      |        |   | (29,153 | )      |        |   | (29,132 | )     
|Other income, net                                                                |                                                             |                                          | 6,624   |         |        |      | 16,541  |        |        |      | 18,987  |        |        |   | 353     |        |        |   | 304     |       
|                                                                                 |                                                             |                                          |         |         |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |       
|Net loss before provision for income taxes                                       |                                                             |                                          | (90,607 | )       |        |      | (79,228 | )      |        |      | (10,178 | )      |        |   | (28,800 | )      |        |   | (28,828 | )     
|Provision for income taxes                                                       |                                                             |                                          | 103     |         |        |      | 76      |        |        |      |        |        |        |   |        |        |        |   |        |       
|                                                                                 |                                                             |                                          |         |         |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |       
|Net loss                                                                         |                                                             | $                                        | (90,710 | )       |        | $    | (79,304 | )      |        | $    | (10,178 | )      |        | $ | (28,800 | )      |        | $ | (28,828 | )     
|                                                                                 |                                                             |                                          |         |         |        |      |         |        |        |      |         |        |        |   |         |        |        |   |         |       
|Basic and diluted net loss per share                                             |                                                             | $                                        | (1.76   | )       |        | $    | (1.52   | )      |        | $    | (0.21   | )      |        | $ | (1.31   | )      |        | $ | (4.07   | )     
|Weighted-average shares used to compute basic and
    diluted net loss per share |                                                             |                                          | 51,521  |         |        |      | 52,196  |        |        |      | 49,639  |        |        |   | 21,988  |        |        |   | 7,087   |       

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Consolidated Balance Sheet Data:

|                                                                |  |                         |         |         |  |      |         |      |  |      |         |  |  |  |        |  |  |  |        | 
|--------------------------------------------------------------- |  | ----------------------- | ------- | ------- |  | ---- | ------- | ---- |  | ---- | ------- |  |  |  | ------ |  |  |  | ------ | 
|                                                                |  |                        
|                                                                |  | As of December 31,     
|                                                                |  |                        
|                                                                |  | 2002(1)                 |         | 2001(2) |  | 2000 |         | 1999 |  | 1998
|                                                                |  |                         |         |         |  |      |         |      |  |     
|                                                                |  |                        
|                                                                |  | (Dollars, in thousands)
|Cash, cash equivalents and short-term marketable
    securities |  |                         | 101,058 |         |  |      | 206,444 |      |  |      | 277,564 |  |  |  | 45,337 |  |  |  | 15,128 | 
|Working capital                                                 |  |                         | 89,325  |         |  |      | 191,123 |      |  |      | 300,159 |  |  |  | 44,417 |  |  |  | 12,523 | 
|Total assets                                                    |  |                         | 203,253 |         |  |      | 349,721 |      |  |      | 421,753 |  |  |  | 65,814 |  |  |  | 26,788 | 
|Long-term debt and capital leases, net of current
    portion   |  |                         |        |         |  |      | 64      |      |  |      | 1,280   |  |  |  | 3,633  |  |  |  | 4,547  | 
|Total stockholders equity                                      |  |                         | 178,521 |         |  |      | 320,876 |      |  |      | 395,975 |  |  |  | 45,556 |  |  |  | 13,893 | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | For 2002, the results include the effect of the
    acquisition of the assets related to Angel from AT&T
    Wireless and the effect of the 2002 restructuring and asset
    impairment charges. Please see Managements
    Discussion of Financial Condition and Results of
    Operations  Overview and
     Results of Operations 
    Restructuring and Asset Impairment for additional
    information.
|   
|(2) | For 2001, the results include approximately
    $42.4 million of charges to cost of revenues related to
    obsolete inventory and other material-related commitments.                                                                                                                                                                                                                                              

Selected Quarterly Data

|                  |  |                                                       |       |              |  |          |         |                     |  |  |         |   |  |  |       |  
|----------------- |  | ----------------------------------------------------- | ----- | ------------ |  | -------- | ------- | ------------------- |  |  | ------- | - |  |  | ----- | -
|                  |  |                                                       |       | Gross Profit |  |          |         | Basic & Diluted Net
|                  |  | Revenue                                               |       | (Loss)       |  | Net Loss |         | Loss per Share     
|                  |  |                                                       |       |              |  |          |         |                    
|                  |  |                                                      
|                  |  | (Unaudited, in dollars, in thousands except per share
|                  |  | amounts)                                             
|2001              |  |                                                       |       |              |  |          |         |                     |  |  |         |   |  |  |       |  
|First Quarter(3)  |  |                                                       | 9,131 |              |  |          | (21,572 | )                   |  |  | (32,972 | ) |  |  | (0.64 | )
|Second Quarter(4) |  |                                                       | 2,051 |              |  |          | (19,131 | )                   |  |  | (29,838 | ) |  |  | (0.57 | )
|Third Quarter     |  |                                                       | 6,043 |              |  |          | 969     |                     |  |  | (7,039  | ) |  |  | (0.13 | )
|Fourth Quarter    |  |                                                       | 6,434 |              |  |          | 881     |                     |  |  | (9,455  | ) |  |  | (0.18 | )
|2002              |  |                                                       |       |              |  |          |         |                     |  |  |         |   |  |  |       |  
|First Quarter(5)  |  |                                                       | 5,008 |              |  |          | 613     |                     |  |  | (32,431 | ) |  |  | (0.57 | )
|Second Quarter    |  |                                                       | 5,681 |              |  |          | 1,027   |                     |  |  | (18,489 | ) |  |  | (0.30 | )
|Third Quarter(6)  |  |                                                       | 3,516 |              |  |          | (4,584  | )                   |  |  | (25,606 | ) |  |  | (0.51 | )
|Fourth Quarter(7) |  |                                                       | 2,902 |              |  |          | 2,884   |                     |  |  | (14,184 | ) |  |  | (0.37 | )



---



|    |                                                                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(3) | Results for the first quarter of 2001 include
    $23.2 million of charges to cost of revenues related to
    obsolete inventory and other material-related commitments.                                                            
|   
|(4) | Results for the second quarter of 2001 include
    $18.5 million of charges to cost of revenues related to
    obsolete inventory and other material-related commitments.                                                           
|   
|(5) | Results for the first quarter of 2002 include
    $17.6 million in charges related to the write-off of
    acquired in-process research and development expenses and
    $1.8 million of restructuring and asset impairment charges.
|   
|(6) | Results for the third quarter of 2002 include
    $5.2 million of charges to cost of revenues related to
    obsolete inventory and other material-related commitments and
    $2.0 million of restructuring charges.               
|   
|(7) | Results for the fourth quarter of 2002 include
    $4.3 million of restructuring and asset impairment charges.                                                                                                                      

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|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

You should read the following
managements discussion and analysis of financial condition
and results of operations in conjunction with our consolidated
financial statements and the related notes contained elsewhere
in this report.

This managements discussion and analysis of
financial condition and results of operations contains
forward-looking statements which include, but are not limited
to, statements concerning projected revenues, gross profit
(loss), and expenses, the need for additional capital and market
acceptance of our products. The forward-looking statements are
based on our current expectations, estimates and projections
about our industry, managements beliefs and certain
assumptions made by us. Words such as anticipates,
expects, intends, plans,
believes, or similar expressions are intended to
identify forward-looking statements. These statements are not
guarantees of future performance and are subject to certain
risks, uncertainties and assumptions that are difficult to
predict. Therefore, our actual results could differ
substantially from those anticipated in these forward-looking
statements as a result of many factors. Please read the section
of this 10-K entitled Risk Factors and our other
Securities and Exchange Commission filings that discuss some of
the important risk factors that may affect our business, results
of operations and financial condition. We undertake no
obligation to revise or update publicly any forward-looking
statements for any reason.

Overview

We design, market and sell broadband,
point-to-multipoint, fixed wireless equipment.
Telecommunications service providers use our equipment as an
alternative to using wired connectivity or point-to-point fixed
wireless equipment. The three principal applications for our
products are:



| |   |                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------
| |  | Providing voice and high speed data access
    connections to residences, which we do principally through our
    Angel product line,       
|
| |  | Providing voice and high speed data access
    connections for businesses, which we do principally through our
    AirStar product line, and
|
| |  | Connecting mobile phone base stations to the core
    telecommunications network, which we do through our AirStar
    product line.         

We began commercially shipping our first
point-to-multipoint product, AirStar, in 1998 and have a
significant installed base for this product. AirStar operates at
the higher end of the licensed frequency spectrum (10 -
39 GHz) with support for an additional frequency, at the
lower range (3.5 GHz).

On February 12, 2002, we acquired from
AT&T Wireless Services, Inc. their fixed wireless
development team, a license to intellectual property, inventory,
equipment and proprietary software assets. The technology was
originally developed under the code name Project
Angel. The acquisition was accounted for as a purchase of
assets. The purchase price was allocated based on the estimated
fair values of the assets acquired. The purchase consideration
was approximately $48.8 million, consisting of
8.2 million shares of our common stock, valued at
approximately $29.5 million, approximately
$16.0 million in cash and transaction costs of
approximately $3.3 million.

A total of $45.7 million of the purchase
consideration was allocated to intangible assets, including
$24.9 million of developed and core technology,
$17.6 million of in-process research and development costs,
and $3.2 million of other intangibles, which include the
acquired workforce. The remaining $3.1 million of purchase
consideration was allocated to fixed assets ($2.5 million)
and inventory ($0.6 million). Acquired in-process research
and development costs represent research and development
projects relating to expanding product capacity. These projects
had not yet reached technological feasibility and, accordingly,
this amount was expensed in the first quarter of 2002. The
intangible assets are being amortized over an estimated useful
life of three years based on the product life cycle of the
acquired technology.

The Angel product was commercially deployed in
the United States by AT&T Wireless, however since acquiring
it, we have modified the Angel platform to conform to
international standards and we are marketing

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##### Table of Contents



this product line principally in international
locations. Angel operates at the lower end of the licensed
frequency spectrum (1.9 - 3.5 GHz). To date, we have
not had material sales of the Angel product.


Both the AirStar and Angel platforms have been
designed to minimize the costs of deployment and operation and
to permit operators to offer a broad range of voice, Internet
Protocol, or IP, and data services. We offer
complete solutions that operate at point-to-multipoint
frequencies licensed in every major geography in the world,
including Europe, Asia, Australia, North America and South
America, which we believe is a significant competitive advantage.

We currently develop, manufacture and sell the
AirStar product for access offerings to small and mid-sized
businesses and mobile infrastructure, and are developing the
Angel platform for access offerings to residences and small
businesses. Each of our product lines is comprised of three
principal components:



| |   |                                                                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Customer Premise
    Equipment,which includes a radio
    element which sends and receives signals to and from the hub
    equipment, and a digital signal processing unit, which connects
    and provides interfaces to the end-users
    telecommunications and/or data network;                
|
| |  | Hubs,which include
    several radio elements that each send and receive signals from
    multiple customer premise equipment units, and an aggregation
    unit, which aggregates data from the outdoor units and
    interfaces to the telecommunications service providers
    core network; and
|
| |  | Network Management
    Software,which controls and monitors
    the operation of hubs and customer premise equipment.                                                                                                                                                                               

We sell our products indirectly through systems
integrators and local resellers in addition to through a direct
sales force. Our revenue from systems integrators comprised
approximately 40 percent of revenues in 2002,
31 percent of revenues in 2001, and 89 percent of
revenues in 2000. Due to past realignments of our relationships
with certain of our systems integrator partners and our current
low visibility regarding potential future revenues, we are
uncertain what portion of revenues system integrators will
represent in future periods. However, in the event of
significant declines in indirect sales, we will be required to
improve and expand our internal sales, customer advocacy and
sales administration functions. Furthermore, as a result of
these realignments we could experience order delays and order
cancellations and, therefore, revenues could be adversely
affected. Overall, our visibility regarding potential future
revenues is unclear.

International revenues represented approximately
95 percent of revenues in 2002, 71 percent of revenues
in 2001, and 12 percent of revenues in 2000. In 2000,
86 percent of our sales were to Lucent in the United
States. Substantially all of our domestic revenues in 2001 and
2000 were related to products sold to systems integrators and
local resellers (predominantly Lucent) who resold the products
to end customers located outside of the U.S. In 2001,
Lucent altered their purchasing pattern and had its
international subsidiaries order directly from us for resale to
end users in the countries those subsidiaries supported. Our
domestic revenues in 2002 included approximately
$0.4 million of sales to a domestic end user. With
international revenues comprising such a large proportion of our
total revenues, our revenues can be significantly impacted by
changes in the economy of a geography or particular country. For
example, revenues from Argentina constituted approximately
30 percent of our revenues for the year ended
December 31, 2001. However, as a result of economic
instability in Argentina, we recognized less than $100,000 of
revenue from Argentina in the year ended December 31, 2002.

We outsource substantially all of our volume
product manufacturing and assembly to contract manufacturers. We
maintain small facilities for prototype production in support of
our research and development efforts in both our San Jose,
California and Redmond, Washington locations. We expect to
continue to outsource our product manufacturing for both AirStar
and Angel product lines to contract manufacturers.

During the year ended December 31, 2002, we
have undertaken efforts to reduce our cost structure and cash
usage. In February 2002, we closed our Israel based engineering
organization and reduced our San Jose based Airstar
research and development organization, reducing headcount by 54
employees. In August 2002, we made further headcount reductions
in our Angel and Airstar research and development and general
and administrative organizations, reducing headcount by 68
employees. Finally in November 2002, we did a

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further restructuring of our global operations
reducing our headcount by 110 employees and closing two of our
international sales offices. At December 31, 2001, our
headcount was 225, we added 141 people with the acquisition of
Angel in February 2002 and ended 2002 with 134 people in the
Company.


In November 2002, we announced plans to evaluate
strategic alternatives which could include a possible sale,
merger or liquidation. The consolidated financial statements
included in Item 8 of this 10-K have been prepared on the
basis that we will continue to pursue our ongoing operating
objectives and do not reflect the impact of any of these
potential courses of action.

Critical Accounting Policies

Revenue Recognition.Revenues consist of sales made directly to end users and
indirectly through systems integrators and local resellers.
Revenues from product sales are recognized when all of the
following conditions are met: delivery has occurred, an
arrangement exists with the customer and we have the right to
invoice the customer, collection of the receivable is reasonably
assured and we have fulfilled all of our material contractual
obligations to the customer. Provisions are made at the time of
revenue recognition for estimated warranty costs. If we believe
that we have not fulfilled all of our material contractual
obligations to the customer (such as when we have primary
responsibility for installation or if there are acceptance
criteria,) or if the collectability of a receivable is not
assured, we defer revenue recognition from such shipment until
such time as the amounts due have been collected. Some of the
factors that we use in evaluating whether or not to defer
revenue from a particular customer include:



| |   |                                                                                          
| | - | -----------------------------------------------------------------------------------------
| |  | any material contract obligations not fulfilled,                                         
|
| |  | acceptance criteria not yet met,                                                         
|
| |  | the customers liquid assets,                                                            
|
| |  | actual and projected cash flows for the
    customer, and                                
|
| |  | the political and economic environment in the
    country in which the customer operates.

Allowance for Doubtful Accounts.We perform ongoing credit evaluations
of our customers financial condition and establish an
allowance for doubtful accounts based upon factors surrounding
the credit risk of specific customers, historical trends and
other available information. Although the Company does not
require collateral on certain accounts receivable on sales to
large, well-established companies, it does require standby
letters of credit or prepayments on certain sales to smaller
companies. We believe that we have sufficient allowances for
doubtful accounts to address the risk associated with our
outstanding accounts receivable.

Assessment of Impairment of Long-lived Assets.We periodically evaluate whether
events and circumstances have occurred which indicate that the
carrying value of our long-lived assets may not be recoverable.
In the recent past, many telecommunications equipment companies
with significant long-lived intangible assets resulting from
acquisition activity have recorded significant charges
associated with write-off of those long-lived assets. If we
determine an asset has been impaired, the impairment charge is
recorded based on the excess of the carrying value over the fair
value of the impaired asset, with the reduction in value charged
to expense.

Provision for Excess and Obsolete Inventory.Inventory, which includes material and
labor costs, is valued at standard cost, which approximates
actual cost computed on a first-in, first-out basis, not in
excess of market value. We maintain a reserve for estimated
obsolescence or unmarketable inventory based upon assumptions
about future demand for our products, changes or revisions of
our products, and the conditions of the markets in which our
products are sold. This provision to reduce inventory to net
realizable value is reflected as a reduction to inventory in the
accompanying consolidated balance sheets. Significant management
judgments and estimates must be made and used in connection with
establishing these reserves. If actual market conditions are
less favorable than our assumptions, additional reserves may be
required.

Warranty
Obligations.The Company evaluates its
obligations related to product warranties on a quarterly basis.
Netro offers a standard one-year warranty on all products
shipped. The Company also

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##### Table of Contents



indemnifies its customers against any actions
from third parties whose technologies Netro licenses. The
Company monitors historical warranty rates and tracks costs
incurred to repair units under warranty. These costs include
labor, replacement parts and certain freight costs. This
information is then used to calculate the accrual needed based
on actual sales and remaining warranty periods. For new product
introductions, estimates are made based on test and
manufacturing data as well as the Companys historical
experience on similar products. If circumstances change, or if
the Company experiences a significant change in its failure
rates, the Companys warranty accrual estimate could change
significantly.


Results of Operations

|                                           |                                                                          |                          |      |      |     |      |      |     |     |  |     |    |    | 
|------------------------------------------ | ------------------------------------------------------------------------ | ------------------------ | ---- | ---- | --- | ---- | ---- | --- | --- |  | --- | -- | -- | 
|                                           |                                                                          |                         
|                                           |                                                                          | Percent of Revenue      
|                                           |                                                                          |                         
|                                           |                                                                          | 2002                     |      | 2001 |     | 2000
|                                           |                                                                          |                          |      |      |     |     
|Revenues                                   |                                                                          |                          | 100  | %    |     |      | 100  | %   |     |  | 100 | % 
|Cost of revenues                           |                                                                          |                          | 100  |      |     |      | 264  |     |     |  | 76  |   
|                                           |                                                                          |                          |      |      |     |      |      |     |     |  |     |   
|Gross profit (loss)                        |                                                                          |                          | (0   | )    |     |      | (164 | )   |     |  | 24  |   
|                                           |                                                                          |                          |      |      |     |      |      |     |     |  |     |   
|Operating expenses:                        |                                                                          |                          |      |      |     |      |      |     |     |  |     |   
|                                           | Research and development                                                 |                          |      | 164  |     |      |      | 109 |     |  |     | 36 |   
|                                           | Sales and marketing                                                      |                          |      | 81   |     |      |      | 56  |     |  |     | 15 |   
|                                           | General and administrative                                               |                          |      | 124  |     |      |      | 72  |     |  |     | 14 |   
|                                           | Amortization of deferred stock compensation                              |                          |      | 4    |     |      |      | 4   |     |  |     | 2  |   
|                                           | Amortization of acquired intangible assets                               |                          |      | 46   |     |      |      | 0   |     |  |     | 0  |   
|                                           | Write-off of in-process technology                                       |                          |      | 103  |     |      |      | 0   |     |  |     | 0  |   
|                                           | Restructuring and asset impairment charges                               |                          |      | 47   |     |      |      | 0   |     |  |     | 0  |   
|                                           |                                                                          |                          |      |      |     |      |      |     |     |  |     |   
|                                           |                                                                          | Total operating expenses |      |      | 569 |      |      |     | 241 |  |     |    | 67 | 
|                                           |                                                                          |                          |      |      |     |      |      |     |     |  |     |   
|Loss from operations                       |                                                                          |                          | (569 | )    |     |      | (405 | )   |     |  | (43 | ) 
|Other income, net                          |                                                                          |                          |      |      |     |      |      |     |     |  |     |   
|                                           | Interest income and realized gains on sales of
    marketable securities |                          |      | 42   |     |      |      | 73  |     |  |     | 29 |   
|                                           | Interest expense                                                         |                          |      | (3   | )   |      |      | (3  | )   |  |     | (1 | ) 
|                                           |                                                                          |                          |      |      |     |      |      |     |     |  |     |   
|                                           |                                                                          | Total other income, net  |      |      | 39  |      |      |     | 70  |  |     |    | 28 | 
|                                           |                                                                          |                          |      |      |     |      |      |     |     |  |     |   
|Net loss before provision for income taxes |                                                                          |                          | (530 | )    |     |      | (335 | )   |     |  | (15 | ) 
|Provision for income taxes                 |                                                                          |                          | 0    |      |     |      | 0    |     |     |  | 0   |   
|                                           |                                                                          |                          |      |      |     |      |      |     |     |  |     |   
|Net loss                                   |                                                                          |                          | (530 | )%   |     |      | (335 | )%  |     |  | (15 | )%
|                                           |                                                                          |                          |      |      |     |      |      |     |     |  |     |   

Revenues.Revenues
by geography based on the location of our original customers
were as follows:

|              |  |          |        |                     |  |      |        |      |  |      |        |      |  |  |     |   |  |  |     |   |  |  |     |  
|------------- |  | -------- | ------ | ------------------- |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  |  | --- | - |  |  | --- | - |  |  | --- | -
|              |  |          |        |                    
|              |  | Revenues |        | % of Total Revenues
|              |  |          |        |                    
|              |  | 2002     |        | 2001                |  | 2000 |        | 2002 |  | 2001 |        | 2000
|              |  |          |        |                     |  |      |        |      |  |      |        |     
|Latin America |  | $        | 1,815  |                     |  | $    | 9,872  |      |  | $    | 6,661  |      |  |  | 11  | % |  |  | 42  | % |  |  | 10  | %
|Europe        |  |          | 12,998 |                     |  |      | 6,028  |      |  |      | 1,447  |      |  |  | 76  |   |  |  | 25  |   |  |  | 2   |  
|Middle East   |  |          | 471    |                     |  |      | 482    |      |  |      | 40     |      |  |  | 3   |   |  |  | 2   |   |  |  |    |  
|Asia          |  |          | 910    |                     |  |      | 468    |      |  |      | 192    |      |  |  | 5   |   |  |  | 2   |   |  |  |    |  
|              |  |          |        |                     |  |      |        |      |  |      |        |      |  |  |     |   |  |  |     |   |  |  |     |  
|International |  |          | 16,914 |                     |  |      | 16,850 |      |  |      | 8,340  |      |  |  | 95  |   |  |  | 71  |   |  |  | 12  |  
|United States |  |          | 913    |                     |  |      | 6,809  |      |  |      | 60,187 |      |  |  | 5   |   |  |  | 29  |   |  |  | 88  |  
|              |  |          |        |                     |  |      |        |      |  |      |        |      |  |  |     |   |  |  |     |   |  |  |     |  
|              |  | $        | 17,107 |                     |  | $    | 23,659 |      |  | $    | 68,527 |      |  |  | 100 | % |  |  | 100 | % |  |  | 100 | %
|              |  |          |        |                     |  |      |        |      |  |      |        |      |  |  |     |   |  |  |     |   |  |  |     |  

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Substantially all of our United States revenues
are related to products sold to OEMs and direct resellers in
both 2001 and 2000. Almost all of their end customers are
located outside of the United States. In 2002, $0.4 million
of the United States revenues were for an end user in the
United States.

Revenues from customers that comprised more than
10 percent of consolidated revenues were as follows:

|                 |  |          |       |                     |  |      |        |      |  |      |        |      |  |  |    |   |  |  |    |   |  |  |    |  
|---------------- |  | -------- | ----- | ------------------- |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  |  | -- | - |  |  | -- | - |  |  | -- | -
|                 |  |          |       |                    
|                 |  | Revenues |       | % of Total Revenues
|                 |  |          |       |                    
|                 |  | 2002     |       | 2001                |  | 2000 |        | 2002 |  | 2001 |        | 2000
|                 |  |          |       |                     |  |      |        |      |  |      |        |     
|Lucent           |  | $        | 6,891 |                     |  | $    | 7,110  |      |  | $    | 59,220 |      |  |  | 40 | % |  |  | 30 | % |  |  | 86 | %
|Techtel          |  |          | *     |                     |  |      | 7,007  |      |  |      | *      |      |  |  | *  |   |  |  | 30 |   |  |  | *  |  
|Condumex         |  |          | *     |                     |  |      | 2,390  |      |  |      | *      |      |  |  | *  |   |  |  | 10 |   |  |  | *  |  
|                 |  |          |       |                     |  |      |        |      |  |      |        |      |  |  |    |   |  |  |    |   |  |  |    |  
|Aggregate amount |  | $        | 6,891 |                     |  | $    | 16,507 |      |  | $    | 59,220 |      |  |  | 40 | % |  |  | 70 | % |  |  | 86 | %
|                 |  |          |       |                     |  |      |        |      |  |      |        |      |  |  |    |   |  |  |    |   |  |  |    |  



---



|  |                                         
|- | ----------------------------------------
|* | Revenues less than 10 percent for period

Revenues decreased to $17.1 million in 2002
from $23.7 million in 2001, due principally to reduced
demand for broadband wireless access equipment from competitive
local exchange carriers in Latin America, particularly Argentina
which has experienced dramatic currency exchange problems during
all of 2002. In addition, order activity slowed for several
weeks following our announcement in November 2002 that our board
of directors was exploring strategic alternatives. Revenues
decreased to $23.7 million in 2001 from $68.5 million
in 2000, due principally to reduced demand for broadband
wireless access equipment from competitive local exchange
carriers in Europe, which was reflected in delayed and cancelled
orders from some of our OEM partners. Overall, our visibility
regarding potential future revenue is unclear due to weakness in
the telecommunications equipment market and due to uncertainty
resulting from our November 2002 announcement.

Gross Profit (Loss).Gross profit(loss) represents total
revenues less the cost of revenues. Cost of revenues consists of
contract manufacturing costs, material costs, labor costs,
manufacturing overhead, warranty reserves and other direct
product costs. We have experienced substantial fluctuations in
gross profit(loss). The principal drivers of the fluctuations,
other than the inventory and material-related commitments in
2002 and 2001, are the level of revenues, the product sales mix
and the customer sales mix. In general, customer premise
equipment sales result in lower gross profit percentages than
hub sales. The ratio of customer premise equipment can vary
depending upon the stage of rollout of our systems by a
customer. Typically, early stages have a very low ratio of
customer premise equipment to base stations. In later stages of
rollout, the ratio of customer premise equipment to base
stations tends to increase substantially. The unit ratio of
customer premise equipment sales to hub sales was 36:1 for 2002
compared to 25:1 for 2001 and 8:1 for 2000. We expect the ratio
of unit sales of customer premise equipment to hub unit sales to
continue to be in excess of 25:1 in future periods. Sales to
OEMs generally generate lower gross profit percentages than
sales to local resellers or direct sales to customers. Sales to
OEMs represented 40 percent of revenues in 2002, compared
to 31 percent of revenues in 2001 and 89 percent of
revenues in 2000. In 2002, our gross loss was negatively
impacted by both a higher ratio of customer premise equipment
and the increase in the proportion of revenue coming from OEMs.

Gross profit (loss) improved to a gross loss of
($0.1) million in 2002 from a gross loss of
($38.9) million in 2001. The gross loss as a percent of
revenue improved to less than (1) percent in 2002 from
(164.2) percent in 2001. The decline in the gross loss in
2002 compared to 2001, reflects a $4.7 million charge
related to excess and obsolete inventory and other
material-related commitments in 2002 compared to a
$42.4 million charge related to excess and obsolete
inventory and other material-related commitments in 2001, offset
in part by lower average selling prices in 2002. Gross loss in
2002 was also benefited by a $2.0 million reduction in our
accrued warranty liability due to improved product quality
experience. Gross profit decreased to a loss of
($38.9) million in 2001 from a profit of $16.4 million
in 2000. As a percentage of revenues, gross profit decreased to
(164.2) percent in 2001 from 24.0 percent in 2000. The
decline in gross profit on a dollar basis as well as on a
percentage basis primarily reflects a $42.4 million charge
related to excess and obsolete inventory

20



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and other material-related commitments made in
anticipation of significantly higher revenue volumes than those
achieved.


We expect continued pressures on average selling
prices for our products during 2003. We have initiatives
underway to reduce direct manufacturing and indirect
manufacturing overhead costs. We completed cost reduction
initiatives on certain Airstar products in the third quarter of
2002 and expect cost reduction initiatives to be completed on
additional Airstar products in the first half of 2003. However,
to the extent that we are unable to reduce our product costs at
a rate faster than the rate at which average selling prices
and/or total revenues decline, gross profit as a percentage of
revenues will continue to decline during 2003. We expect that,
due to the introduction of the Angel product, the introduction
of new customers, channel mix, product mix, declining average
selling prices, and our efforts to reduce product costs, our
gross profit in future periods will continue to fluctuate.

Research and Development.Research and development expenses
consist of compensation costs, the cost of some software
development tools, consultant fees and prototype expenses
related to the design, development and testing of our products.
Research and development expenses increased to
$28.0 million in 2002 from $25.8 million in 2001. The
increase of $2.2 million was the result of the addition of
the Angel organization and its 110 people and engineering
projects in February 2002, offset in part by the closure of our
Israel based Airstar engineering operation and additional
restructuring activities we undertook in August and November
2002. As a result, we had 87 research and development people at
December 31, 2002 compared to 142 at December 31,
2001. In addition to the headcount reductions, we reduced
third-party engineering cost, prototype and other expenses
related to our Airstar engineering activities by
$4.0 million in 2002 compared to 2001 as we continued the
reduction in Airstar development activities. Research and
development expenses increased $1.5 million in 2001 from
$24.3 million in 2000, primarily due to an increase in
research and development personnel and related expenses,
partially offset by a $1.2 million decrease in prototype
material expenses related to the release of new product features
for the AirStar system. As a result of our November 2002
restructuring activities and forecasted engineering projects we
expect research and development expenses to be lower in the
quarter ending March 31, 2003 than in the quarter ended
December 31, 2002.

Sales and Marketing.Sales and marketing expenses consist
primarily of compensation costs, commissions, travel and related
expenses for marketing, sales, customer advocacy and field
service support personnel. We also incur expenses related to
product management, trade show and promotional expenses. Sales
and marketing expenses increased to $13.9 million in 2002
from $13.3 million in 2001. The increase was primarily due
to an increase in personnel and related compensation costs
related to the addition of 13 people supporting Angel and
reduced by the impact of the restructuring activities we
undertook in February 2002, August 2002 and November 2002. Sales
and marketing headcount at the beginning of 2002 was 56 people
and was 23 people at December 31, 2002. Sales and marketing
expenses increased to $13.3 million in 2001 from
$10.5 million in 2000. The increase was primarily due to
the significant expansion in our sales, technical assistance and
field support personnel necessary to support both the pre-sale
and post-sale activities associated with the AirStar system. We
expect sales and marketing expenses to be lower in the quarter
ending March 31, 2003 than in the quarter ended
December 31, 2002 as a result of the full quarter impact of
our November 2002 restructuring activities.

General and Administrative.General and administrative expenses
consist primarily of compensation costs and related expenses for
executive, finance, management information systems, human
resources and administrative personnel. These expenses also
include professional fees, facilities and other general
corporate expenses. General and administrative expenses
increased to $21.2 million in 2002 from $16.2 million
in 2001. The $5.0 million increase was primarily due to the
expenses 18 people added related to Angel, additional facilities
expenses of $2.0 million related to the Angel acquisition
and an increase of $2.4 million related to cost of
directors and officers insurance. These were offset by headcount
reductions in February, August and November 2002 and
$0.5 million reduction in our allowance for bad debt.
General and administrative headcount at December 31, 2001
was 27 people and 24 people at December 31, 2002. General
and administrative expenses increased $6.4 million in 2001
compared to 2000 due to increased personnel and related
compensation costs related to an increase in general and
administrative personnel, an increase of $1.3 million for
doubtful accounts reserves, fixed assets disposals of
$0.4 million, increased facilities expenses

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of $2.4 million associated with additional
leased building space and growth in our infrastructure, in
addition to increased director and officer insurance of
$0.4 million. We expect general and administrative expenses
to be higher in the quarter ended March 31, 2003 than in
the quarter ended December 31, 2002.


Amortization of Deferred Stock Compensation.Amortization of deferred stock
compensation results from the granting of stock options to
employees with exercise prices per share determined to be below
the estimated fair values per share of our common stock at dates
of grant. The deferred compensation that results is being
amortized to expense over the vesting periods of the individual
options, generally four years. We have recorded total deferred
stock compensation of $5.4 million through
December 31, 2002. Amortization of deferred stock
compensation was $0.6 in 2002, $0.9 million in 2001 and
$1.1 million in 2000.

Amortization of Acquired Intangible Assets.In February 2002, in connection with
the Angel acquisition, we acquired approximately
$24.9 million of developed and core technology and
$3.2 million of other intangibles, which include technical
synergies and the competitive advantage in providing a one-stop
fixed broadband wireless solution for its customers. These
intangible assets will be amortized over a three-year estimated
useful life based on the product life cycle of the acquired
technology. We expect future quarterly amortization to be
approximately $2.3 million.

Acquired In-process Research and Development.In February 2002, in connection with
the Angel acquisition, we acquired approximately
$17.6 million of in-process research and development costs.
These costs were valued by an independent appraisal firm based
on managements forecast of future revenues, cost of
revenues and operating expenses related to the purchased
technologies. The calculation gave consideration to relevant
market sizes and growth factors, expected industry trends, the
anticipated nature and timing of new product introductions by us
and our competitors, individual product cycles, and the
estimated lives of each of the products underlying the
technology. In-process research and development costs consist of
two research and development projects that had not yet reached
technological feasibility at the time of acquisition.
Accordingly, the costs were charged to operations in the first
quarter of 2002.

One project, begun in the second half of 2001,
was related to the development of a new 3.5 GHz front end
for existing platforms that will triple capacity. The other
project, begun in the last quarter of 2001, was related to
re-architecting the core Airlink technology that will result in
next generation base station and remote unit products. These
next generation Angel solutions were approximately
41 percent complete as to cost at the date of acquisition.
The value of acquired in-process technology was computed using a
discounted cash flow analysis on the anticipated income stream
of the related product revenues. The net cash flows from the
identified projects are based upon our estimates of revenues,
cost of revenues, research and development costs, selling and
marketing costs, general and administrative costs and income
taxes from the projects. The estimated revenues are based on our
projections for the projects and are expected to peak in 2008
and decline thereafter. The discount rate used was
35 percent, reflecting the added uncertainty of the
completion of the development, the relative success of the
development effort and its commercialization and the risk
premium for in-process projects versus existing technology.



| |                                        
| | ---------------------------------------
| | Restructuring and Asset
    Impairment.



| |                                                          
| | ---------------------------------------------------------
| | First Quarter 2002 Restructuring and Asset
    Impairment

In the first quarter of 2002, the Company
incurred $1.8 million in restructuring charges related to
various initiatives undertaken by the Company to reduce its cost
structure. The Company closed Bungee Communications, Inc., the
Companys Israeli engineering entity, and reduced its
workforce in its San Jose, California headquarters
location. The charges included the termination of approximately
54 employees (50 research and development employees, 3 sales and
marketing employees and 1 general and administrative employee),
the termination of the Bungee office lease and the write-down of
assets associated with the Bungee operations.

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##### Table of Contents



The following table summarizes the activity
related to the first quarter restructuring charges for the year
ended December 31, 2002 (in thousands):


|                        |  |               |       |               |  |                     |        |   |  |  |   | 
|----------------------- |  | ------------- | ----- | ------------- |  | ------------------- | ------ | - |  |  | - | 
|                        |  |               |       |               |  | Remaining Liability
|                        |  | Restructuring |       | Amounts Paid/ |  | at December 31,    
|                        |  | Charges       |       | Written-off   |  | 2002               
|                        |  |               |       |               |  |                    
|Impairment of assets    |  | $             | 797   |               |  | $                   | (797   | ) |  |  |  | 
|Severance               |  |               | 763   |               |  |                     | (763   | ) |  |  |  | 
|Lease and other expense |  |               | 265   |               |  |                     | (265   | ) |  |  |  | 
|                        |  |               |       |               |  |                     |        |   |  |  |   | 
|Total                   |  | $             | 1,825 |               |  | $                   | (1,825 | ) |  |  |  | 
|                        |  |               |       |               |  |                     |        |   |  |  |   | 



| |                                                          
| | ---------------------------------------------------------
| | Third Quarter 2002 Restructuring and Asset
    Impairment

In the third quarter of 2002, the Company
incurred $2.0 million in restructuring charges to further
reduce its cost structure. The Company reduced its worldwide
workforce by approximately 68 employees (43 research and
development employees, 13 sales and marketing employees and 12
general and administrative employees) and wrote-down certain
fixed assets. The following table summarizes the activity
related to the third quarter restructuring charges for the year
ended December 31, 2002 (in thousands):

|                     |  |               |       |               |  |                     |        |   |  |  |   | 
|-------------------- |  | ------------- | ----- | ------------- |  | ------------------- | ------ | - |  |  | - | 
|                     |  |               |       |               |  | Remaining Liability
|                     |  | Restructuring |       | Amounts Paid/ |  | at December 31,    
|                     |  | Charges       |       | Written-off   |  | 2002               
|                     |  |               |       |               |  |                    
|Impairment of assets |  | $             | 117   |               |  | $                   | (117   | ) |  |  |  | 
|Severance            |  |               | 1,883 |               |  |                     | (1,883 | ) |  |  |  | 
|                     |  |               |       |               |  |                     |        |   |  |  |   | 
|Total                |  | $             | 2,000 |               |  | $                   | (2,000 | ) |  |  |  | 
|                     |  |               |       |               |  |                     |        |   |  |  |   | 



| |                                  
| | ---------------------------------
| | Fourth Quarter 2002 Restructuring

In the fourth quarter of 2002, the Company
incurred $4.3 million in restructuring charges to further
reduce its cost structure. The Company reduced its worldwide
workforce by approximately 110 employees (80 research and
development employees, 21 sales and marketing employees and 9
general and administrative employees), closed two sales offices
and wrote-down certain fixed assets. The following table
summarizes the activity related to the fourth quarter
restructuring charges for the year ended December 31, 2002
(in thousands):

|                     |  |               |       |               |  |                     |        |   |  |   |     | 
|-------------------- |  | ------------- | ----- | ------------- |  | ------------------- | ------ | - |  | - | --- | 
|                     |  |               |       |               |  | Remaining Liability
|                     |  | Restructuring |       | Amounts Paid/ |  | at December 31,    
|                     |  | Charges       |       | Written-off   |  | 2002               
|                     |  |               |       |               |  |                    
|Impairment of assets |  | $             | 154   |               |  | $                   | (154   | ) |  |   |    | 
|Severance            |  |               | 4,100 |               |  |                     | (3,429 | ) |  | $ | 671 | 
|                     |  |               |       |               |  |                     |        |   |  |   |     | 
|Total                |  | $             | 4,254 |               |  | $                   | (3,583 | ) |  | $ | 671 | 
|                     |  |               |       |               |  |                     |        |   |  |   |     | 

The remaining liability relates to severance
charges and is expected to be paid in the first quarter of 2003.
As a result of these restructurings, we expect to realize a
savings of $12.5 million in 2003 as compared to 2002.

Other Income, net.Other income, net consists primarily
of interest income earned on low-risk, marketable securities and
interest paid on outstanding debt. Other income, net decreased
to $6.6 million in 2002 from $16.5 million in 2001 due
to decreased cash balances and declining interest rates. Other
income, net decreased to $16.5 million in 2001 from
$19.0 million in 2000 due to decreased cash balances and
declining interest rates.

Income Taxes.We
have incurred a net loss for each period since inception.
Recorded income taxes represent taxes paid by our foreign
subsidiaries. As of December 31, 2002, we had a Federal net
operating loss carry forward of approximately
$241.9 million and a State net tax loss carry forward
$95.8 million. These expire at various dates through 2023.
Due to the uncertainty of future profitability, a valuation
allowance equal

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to the deferred tax asset has been recorded. A
change in ownership could limit the future annual realization of
the tax net operating loss carry forwards.


Liquidity and Capital Resources

As of December 31, 2002, cash and cash
equivalents were $43.5 million, short-term marketable
securities were $57.6 million and long term marketable
securities were $57.3 million. We have a $10 million
bank line of credit that expires in March 2003. Under the
agreement, we must comply with certain financial and other
covenants. As of December 31, 2002, we were in compliance
with all covenants. As of December 31, 2002, there were no
borrowings outstanding and amounts utilized for outstanding
letters of credit were $6.1 million under this agreement.
When this line of credit expires, we do not intend to renew it.
We intend to purchase certificates of deposit to cover our
outstanding letters of credit. Any borrowings under the line
would accrue interest at the 30-day LIBOR plus 1.5 percent,
2.9 percent at December 31, 2002, or the banks
prime rate, 4.3 percent at December 31, 2002, at our
option. Capital lease obligations were $0.1 million at
December 31, 2002. Operating lease obligations through 2006
were $18.8 million at December 31, 2002.

Cash used in operating activities was
$61.9 million in 2002 due primarily to the net loss,
adjusted for non-cash charges of $35.4 million, including
acquired in process research and development, amortization of
acquired intangible assets related to the Angel acquisition and
provisions for inventory, doubtful accounts and material-related
commitments. Cash used in operating activities was
$28.3 million for the year ended December 31, 2001,
primarily due to the net loss adjusted for non cash charges of
$43.0 million, including provisions for inventory, doubtful
accounts and material-related commitments.

Cash provided by investing activities was
$97.1 million for the year ended December 31, 2002,
primarily due to net maturities of marketable securities of
$117.8 million, partially offset by $16.0 million of
assets acquired and $4.7 million in capital equipment
purchases. Cash used in investing activities was
$30.4 million for the year ended December 31, 2001,
primarily due to net purchases of marketable securities of
$37.8 million, partially offset by $5.8 million in
capital equipment purchases.

Cash used in financing activities was
$82.3 million for the year ended December 31, 2002,
primarily due to an $82.8 million repurchase of our common
stock. Cash used in financing activities was $3.2 million
for the year ended December 31, 2001, primarily due to
payments on the bank line of credit and capital leases of
$6.1 million, partially offset by proceeds from the
issuance of common stock of $2.9 million.

The capital required for volume manufacturing is
being committed by our contract manufacturers. We provide six or
twelve month forecasts to our contract manufacturers. We
generally make rolling 60-day purchase commitments, subject to
cancellation fees. In addition, in specific instances we may
agree to assume liability for limited quantities of specialized
components with lead times beyond this 60-day period. As of
December 31, 2002, amounts outstanding under forecasts and
long-lead time commitments were $2.7 million.

In addition, from time to time in the past, we
have committed to purchase minimum volumes of products from
certain of our contract manufacturers. As of December 31,
2002, we had no outstanding minimum purchase commitments for
which we had not yet placed purchase orders. We believe that our
currently forecasted demand for products, combined with our
reserves for inventory and material related commitments will be
sufficient to meet these commitments in the future.

We have no other material unaccrued commitments.
Our future capital requirements will depend upon many factors,
including the timing of research and product development efforts
and expansion of our marketing efforts for both our AirStar and
Angel products. We expect to continue to invest in property and
equipment related to laboratory and test equipment for research
and development.

We believe that our cash and cash equivalents
balances, short-term and long-term marketable securities and
funds available under our existing line of credit will be
sufficient to satisfy our cash requirements for at least the
next twelve months. We intend to invest our cash in excess of
current operating requirements in interest-bearing,
investment-grade marketable securities.

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##### Table of Contents



Accounting Pronouncements

In June 2001, the Financial Accounting Standards
Board (FASB) issued Statement of Financial
Accounting Standards (SFAS) No. 143,
Accounting for Asset Retirement Obligations, which
addresses the financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and
associated retirement costs. SFAS No. 143 requires
that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred
if a reasonable estimate of fair value can be made.
SFAS No. 143 is effective for fiscal years beginning
after June 15, 2002. We do not expect the adoption of
SFAS No. 143 to have a material effect on our results
of operations or consolidated financial statements.

In July 2002, FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities. SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an
exit or disposal plan. Examples of costs covered by the standard
include lease termination costs and certain employee severance
costs that are associated with a restructuring, discontinued
operation, plant closing, or other exit or disposal activity.
SFAS No. 146 replaces EITF Issue No. 94-3,
Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). SFAS No. 146
is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. We do not expect the
adoption of SFAS No. 146 to have a material impact on
our results of operations or consolidated financial statements,
although SFAS No. 146 may impact the timing of recognition
of costs associated with future restructuring, exit or disposal
activities.

In November 2002, the FASB issued FASB
Interpretation No. 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN 45).
FIN 45 requires that upon issuance of a guarantee, a
guarantor must recognize a liability for the fair value of an
obligation assumed under a guarantee. FIN 45 also requires
additional disclosures by a guarantor in its interim and annual
financial statements about the obligations associated with
guarantees issued. The recognition provisions of FIN 45 are
effective for any guarantees issued or modified after
December 31, 2002. These consolidated financial statements
comply with the disclosure requirements of this interpretation.

On December 31, 2002, the FASB issued
SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure that amends
SFAS No. 123, Accounting for Stock-Based Compensation,
to provide alternative methods of transition to
SFAS No. 123s fair value method of accounting
for stock-based employee compensation. SFAS No. 148
also amends the disclosure provisions of SFAS No. 123
and APB Opinion No. 28, Interim Financial Reporting, to
require disclosure in the summary of significant accounting
policies of the effects of an entitys accounting policy
with respect to stock-based employee compensation on reported
net income and earnings per share in annual and interim
financial statements. SFAS No. 148 does not amend
SFAS No. 123 to require companies to account for
employee stock options using the fair value method.
SFAS No. 148 is effective for fiscal years ending
after December 15, 2002. These consolidated financial
statements comply with the requirements of
SFAS No. 148.

In January 2003, the FASB issued FASB
Interpretation No. 46, Consolidation of Variable
Interest Entities (FIN 46). FIN 46
addresses consolidation by business enterprises of variable
interest entities. Under that interpretation, certain entities
known as Variable Interest Entities (VIEs) must be
consolidated by the primary beneficiary of the entity. The
primary beneficiary is generally defined as having the majority
of the risks and rewards arising from the VIE. For VIEs in which
a significant (but not majority) variable interest is held,
certain disclosures are required. It applies immediately to
variable interest entities created after January 31, 2003,
and applies in the first year or interim period beginning after
June 15, 2003 to variable interest entities in which an
enterprise holds a variable interest that it acquired before
February 1, 2003. We are currently assessing the impact the
adoption of this interpretation will have on our results of
operations and consolidated financial statements.

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Risk Factors

You should carefully consider the following
factors and other information in this prospectus before deciding
to purchase our common stock. Any of these risks could have a
material adverse effect on our business, financial condition,
results of operations and prospects, which could in turn have a
material adverse effect on the price of our common
stock.



| |                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We have undergone multiple, significant
    restructurings, which may hamper our ability to timely develop
    products, make significant product sales or provide appropriate
    customer service to existing customers.

At our peak during 2002 we had 355 employees. As
of December 31, 2002 we had 135 employees, a reduction of
more than 60 percent. These reductions in force have
affected all of the functional departments at Netro, including
research and development, sales and customer service. As a
result of our reduced resources, we may not be able to complete
certain activities which would have a material adverse effect on
our financial condition and results of operations. For example:



| |   |                                                                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | We cannot assure that we will be able to timely
    develop new products and features which are necessary for us to
    achieve market acceptance.                                                                                                      
|
| |  | We cannot assure that we will be able to reduce
    product costs sufficiently to ensure positive financial
    performance.                                                                                                                            
|
| |  | We may not be able to achieve satisfactory sales
    levels in light of our reduced sales and marketing resources.                                                                                                                                      
|
| |  | We may suffer reduced customer satisfaction as a
    result of reduced customer service personnel, which could result
    in reduced repeat sales or liabilities to customers resulting
    from our inability to adequately service our installed base.



| |                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We recently announced a decision to
    evaluate strategic alternatives. This announcement may have a
    negative effect on our ability to make significant product
    sales.

Many of our targeted customers are large
telecommunications service providers seeking to deploy large
networks over a period of several years. As a result of our
recent announcement of our decision to pursue strategic
alternatives, many of these customers may be reluctant to
purchase products and services from us due to concerns about our
long-term market presence. To the extent that we are unable to
overcome these reservations, we may be unable to achieve the
revenue levels necessary for us to achieve profitability.
Furthermore, we may be required to make financial concessions,
such as posting letters of credit, securing performance bonds or
entering into technology escrow agreements which could add costs
to our business model that delay our achieving profitability. To
the extent that we pursue other strategic alternatives, the
announcement of our decision may adversely affect future sales.



| |                                                                                           
| | ------------------------------------------------------------------------------------------
| | We have a history of losses, expect future
    losses and may never achieve profitability.

We have never recorded net income from operations
and as of December 31, 2002, we had an accumulated deficit
of $276.6 million. We expect to continue to incur net
losses. We incurred net losses of approximately
$90.1 million in 2002, $79.3 million in 2001 and
$10.2 million in 2000. We anticipate continuing to incur
significant sales and marketing, research and development and
general and administrative expenses and, as a result, we will
need to generate significantly higher revenues to achieve
profitability. To date, we have funded our operations primarily
through the sale of equity securities. We cannot be certain that
we will realize sufficient revenues to achieve profitability.
Even if we ultimately do achieve profitability, we may not be
able to sustain or increase profitability on a quarterly or
annual basis. If our revenues grow more slowly than we
anticipate, if we fail to reduce our product costs quickly
enough, or if our operating expenses exceed our expectations and
cannot be adjusted accordingly, our business will be harmed.

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| |                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we are not able to successfully market
    and sell our new angel product, anticipated benefits of our
    acquisition of assets from AT&T Wireless may never be
    achieved.

In February 2002, we acquired technologies and
other assets from AT&T Wireless Services, Inc.
(AT&T Wireless or AWS) associated
with its Angel product. We plan to sell the Angel product in
international markets and have modified the Angel platform to
conform to international standards. While we completed these
modifications in the second half of 2002, we have not achieved
our originally anticipated sales levels from the Angel product.
We have not achieved any material Angel product sales to date.
Although we believe that the Angel product continues to hold
significant promise, we cannot assure that the Angel product
will achieve market acceptance or generate revenues or high
enough revenues to recover the carrying value of the assets
associated with the Angel acquisition.



| |                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------
| | If we are unable to change our customer
    base, our revenues will continue to decline and our results of
    operations will suffer.

Historically, the majority of our revenues have
come from sales to original equipment manufacturers, or OEMs,
who in turn, resold our products to competitive local exchange
carriers in Europe. Over the past two years, there has been a
significant dislocation in the market for these service
providers, particularly in the United States and Europe, which
has included several prominent bankruptcies. We have begun the
process of modifying our AirStar product line to be more
suitable for incumbent local exchange carriers and mobile
service operators. Furthermore, we believe that the most
significant market for our Angel product will be incumbent local
exchange carriers. We have limited experience with sales to
these types of customers. We cannot assure you that these
customers will be willing to purchase products from a smaller
company such as Netro. Furthermore, sales cycles with these
customers can be even longer than with competitive local
exchange carrier customers. For example, in connection with
sales of our AirStar product to our first incumbent local
exchange carrier customer, we received a commitment from them to
qualify our product approximately six months prior to the
commencement of qualification testing, qualification testing
took more than three months, and our first order following the
completion of qualification testing took more than six months
from the date qualification testing was complete. We cannot
assure that we will ever sell enough of our AirStar or Angel
products to become profitable.



| |                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------
| | Due to our limited operating history, it is
    difficult to predict future operating results or our stock
    price.

We have generated only limited revenues to date.
Due to our limited operating history, disappointing sales of the
AirStar product in 2002 and 2001, and the uncertainties
associated with the time of launch and market acceptance of our
new Angel product line, it is difficult for us to predict future
results of operations. Investors in our common stock must
consider our operational and financial prospects in light of
these risks.



| |                                                                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our future operating results are dependent
    on the sales of two similar product lines serving an emerging
    market. If revenues from these products do not meet our
    expectations, we will not have other products to offset the
    negative impact on our operating results.

We currently derive substantially all of our
revenues from our AirStar product line and expect that this will
continue until our Angel product is accepted in the
international markets we serve. If there are unexpected changes
in revenues from our current product or if our Angel product is
not accepted by the market, we will not have other products to
offset the negative impact on our operating results. Many of the
risk factors listed in this section could negatively affect
sales of our product line. The market may not continue to demand
our current product and we may not be successful in developing
or marketing our Angel product or any new or enhanced products.
Any reduction in the demand for our current product or our
failure to successfully develop or market our Angel product and
introduce new or enhanced products could adversely affect our
operating results and cause the price of our common stock to
decline.

27



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| |                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We encounter continued competitive
    pressures to lower selling prices to retain our existing
    customers and win new customers. If we cannot reduce our product
    costs, our results of operations will suffer.

Average selling prices for broadband fixed
wireless equipment have declined substantially over the past few
years. We expect that the average selling price for broadband
fixed wireless equipment will continue to decline substantially
during 2003. In addition, market acceptance of our products will
depend in part on reductions in the unit price of our AirStar
and Angel products. If we cannot reduce the cost of our products
enough to keep pace with the required price reductions, our
product sales and/or our gross margins, and consequently our
results of operations, will suffer. We have experienced
significant delays in implementing cost reductions in the past
and may continue to experience delays in the future.

Our ability to implement cost reductions is also
dependent on factors outside of our control. For example,



| |   |                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | our cost for contract manufacturing is largely
    impacted by the level and volume of our orders which are driven
    by our customers demand.      
|
| |  | our contract manufacturers must correctly
    implement cost reductions that we design into the products.                                             
|
| |  | our cost projections are based upon assumptions
    regarding the ability of our contract manufacturers to achieve
    volume-related cost reductions.
|
| |  | many of our design cost reductions depend on the
    emergence of low-cost components which we expect to be developed
    by third parties.           

We do not control these third parties. To the
extent they are unable or unwilling to cooperate with us in
reducing product cost, or their efforts in this regard are not
timely, our product costs will exceed our internal projections.

In addition, we believe that the price for high
speed wireless telecommunications equipment is driven by the
prevailing price for other high speed connection technologies,
such as the cost of obtaining digital subscriber line service or
leasing a T1 connection from the traditional telecommunications
service provider in a given locale. The price of these
connections has declined significantly in many countries in the
recent past, and could decline significantly in the future. If
this trend continues, service providers might be more likely to
use these kinds of connections than to introduce new technology
such as our products, which would adversely affect our market
share and pricing.



| |                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If we do not succeed in developing
    relationships directly with telecommunications service providers
    and in strengthening our sales channels, our business will be
    harmed.

Our revenues have historically depended to a
significant extent on orders from third party systems
integrators. We have begun efforts to decrease our focus on
selling to OEMs and to develop a sales and customer advocacy
infrastructure that deals directly with the ultimate customer,
the telecommunications service provider. However, due to our
restructuring activities, we have reduced the total number of
personnel we have dedicated to these activities. If we do not
develop these direct contacts with and sales to the service
providers, we will not be able to diversify and expand our
customer base and will continue to depend on indirect sales
through OEMs. Furthermore, we believe that the most significant
markets for our Angel product will be incumbent local exchange
carriers. In addition, failure to develop these contacts would
prevent us from building and maintaining the long-term
relationships needed to sustain our installed customer base. Our
relationships with our current service provider customers must
also be maintained and strengthened so that we can provide
potential service provider customers with positive customer
references. Furthermore, if we are unable to expand our business
with current service provider customers as they extend their
networks into other countries, our business will be harmed.

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| |                                                                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Many projects that include our products
    require system integration expertise and third-party financing,
    which we are unable to provide. If sources for system
    integration or financing cannot be obtained as needed, service
    providers may not select our products.

Some service providers using our products
purchase them as a part of a larger network deployment program
that can require capital expenditures in the hundreds of
millions of dollars. In some circumstances, these service
providers require their equipment vendors to integrate equipment
into these larger networks and finance deployment. We will be
unable to provide this integration or financing and therefore
will have to rely on the ability of OEMs or third parties to
integrate or finance these transactions. In the event that we
are unable to identify distributors and OEMs that are able to
provide this integration or financing on our behalf, we would be
unable to compete for the business of some service provider
accounts and our business might be adversely affected.



| |                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The majority of service providers using our
    products are international and payments from them are dependent
    on the political and economical situation in those
    countries.

Our products are marketed almost exclusively to
an international customer base. The stability of these customers
and their service bases are directly related to the political
and economic situations in these various countries. In the past,
we have suffered significant collection losses as a result of
political and economic instability in countries in which we do
business. Political or economic instability in countries where
we are focusing our sales and marketing efforts could
significantly impact our ability to sell to and collect from
existing or potential customers.



| |                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Intense competition in the market for
    communications equipment could prevent us from increasing or
    sustaining revenues or achieving or sustaining
    profitability.

The market for high speed, wireless,
point-to-multipoint telecommunications equipment is rapidly
evolving and highly competitive. Increased competition is likely
to result in price reductions, shorter product life cycles,
longer sales cycles and loss of market share, any of which would
adversely affect our business.

Depending on the market we are addressing we face
different types of competition:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Enterprise Access.As an enterprise access technology,
    point-to-multipoint fixed wireless solutions compete with
    wire-based solutions, such as fiber optic cable and leased T1
    and E1 lines and wireless solutions, such as point-to-point
    radios. As a company within the point-to-multipoint fixed
    wireless industry addressing small and medium enterprise access,
    we compete through our AirStar product with large OEMs, such as
    Alcatel, Ericsson and Marconi, as well as with smaller wireless
    only companies, such as Alvarion.                                                                                                                            
|
| |  | Residential and Small Business
    Access.As a residential and small
    business access technology, point-to-multipoint fixed wireless
    solutions compete with wire-based solutions, such as DSL and
    cable modems. As a company within the point-to-multipoint fixed
    wireless industry addressing residential and small business
    access we compete through our Angel product with established
    wireless local loop vendors, such as Innowave (a division of ECI
    Telecommunications which has executed an agreement to be
    acquired by Alvarion), AirSpan and Alvarion, as well as with
    numerous startup companies that are developing products for our
    industry.
|
| |  | Mobile
    Infrastructure.As a technology for
    connecting cellular base stations to the core telecommunications
    network, point-to-multipoint fixed wireless solutions compete
    with wire-based solutions such as leased T1 and E1 lines and
    wireless solutions such as point-to-point radios. As a company
    within the point-to-multipoint fixed wireless industry
    addressing cellular infrastructure, we compete through our
    AirStar product principally with large OEMs, such as Alcatel,
    Ericsson and Marconi.                                                                                                                                                    

We expect competition to persist and intensify in
the future. Many of our competitors are substantially larger
than we are and have significantly greater financial, sales,
marketing, technical, manufacturing and other resources and more
established distribution channels. These competitors may be able
to respond more rapidly to new or emerging technologies and
changes in customer requirements or to devote greater resources

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to the development, promotion, sale and financing
of their products than we can. Our competitors may also attempt
to influence the adoption of standards that are not compatible
with our current architecture. Our larger, more established
competitors may have more influence with standards setting
bodies than we do. If standards other than ours are adopted,
this may require us to incur additional development and
integration costs and may delay our sales efforts.


Some of our competitors may make strategic
acquisitions or establish cooperative relationships to increase
their ability to gain customer market share rapidly. These
competitors may enter our existing or future markets with
solutions that may be less expensive, provide higher performance
or additional features or be introduced earlier than our
solutions. We also expect that other companies may enter our
market with better products and technologies. If any technology
that is competing with ours is more reliable, faster, less
expensive or has other advantages over our technology, then the
demand for our products and services would decrease, which would
seriously harm our business.

We expect our competitors to continue to improve
the performance of their current products and to introduce new
products or new technologies that may supplant or provide lower
cost alternatives to our products. To be competitive, we must
continue to invest significant resources in research and
development, sales and marketing and customer support. We cannot
be sure that we will have sufficient resources to make these
investments or that we will be able to make the technological
advances necessary to be competitive. As a result, we may not be
able to compete effectively against our competitors.



| |                                                                                                              
| | -------------------------------------------------------------------------------------------------------------
| | We have a long sales cycle, which could
    cause our results of operations and stock price to
    fluctuate.

Our sales cycles are long and unpredictable. As a
result, our revenues may fluctuate from quarter to quarter and
we may be unable to adjust our expenses accordingly. This would
cause our operating results and stock price to fluctuate. OEMs
and service providers typically perform numerous tests and
extensively evaluate products before incorporating them into
networks. The time required for testing, evaluation and design
of our products into the service providers network
typically ranges from six to twelve months. If a service
provider decides to supply commercial service with our products,
it can take an additional six to twelve months before a service
provider commences deployment of our products. Some additional
factors that affect the length of our sales cycle include:



| |   |                                                   
| | - | --------------------------------------------------
| |  | acquisition of roof rights;                       
|
| |  | deployment and planning of network infrastructure;
|
| |  | complexity of a given network;                    
|
| |  | scope of a given project;                         
|
| |  | availability of radio frequency; and              
|
| |  | regulatory issues.                                

In addition, the delays inherent in our sales
cycle raise additional risks of service provider decisions to
cancel or change their product plans. Our business is adversely
affected when a significant customer reduces or delays orders
during our sales cycle or chooses not to deploy networks
incorporating our products. For example, delays in the licensing
process for 26GHz spectrum in China have limited our ability to
sell a product we developed specifically for this market.



| |                                                                                      
| | -------------------------------------------------------------------------------------
| | We may purchase significant inventory for
    planned sales which do not materialize.

We generally anticipate significant increases in
our working capital needs to the extent we believe we will
achieve future revenue increases. In anticipation of increased
revenues in future periods, we may purchase significant amounts
of inventory and incur significant payment obligations. Due to
the long and unpredictable nature of our sales cycle or other
factors outside of our control, these anticipated future
revenues may not materialize. If the anticipated revenues do not
materialize, we could end up with inventory levels and/or
purchase commitments with vendors that are significantly in
excess of our needs, which could diminish our

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working capital and/or cause significant losses.
We experienced such excesses in recent quarters as a result of
lower than expected revenues during such periods.




| |                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our products may contain defects that could
    harm our reputation, be costly to correct, expose us to
    litigation and harm our operating results.

We and our customers have from time to time
discovered defects in our products and additional defects may be
found in the future. If defects are discovered, we may not be
able to correct them in a timely manner or at all. Defects and
failures in our products could result in a loss of, or a delay
in, market acceptance of our products. In addition, defects in
our products could cause adverse publicity, damage our
reputation and impair our ability to acquire new customers. In
addition, we may need to make significant capital expenditures
to eliminate defects from our products.

Moreover, because our products are used in
critical telecommunications networks, we may be subject to
significant liability claims if our products do not work
properly. The provisions in our agreements with customers that
are intended to limit our exposure to liability claims may not
preclude all potential claims. In addition, any insurance
policies we have may not adequately limit our exposure with
respect to such claims. We warrant to our current customers that
our products will operate in accordance with our product
specifications. If our products fail to conform to these
specifications, our customers could require us to remedy the
failure or could assert claims for damages. Liability claims
could require us to spend significant time and money in
litigation or pay significant damages. Any such claims, whether
or not successful, would be costly and time-consuming to defend
and could seriously damage our reputation and our business.



| |                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------
| | Our business is subject to many factors
    that could cause our quarterly operating results to fluctuate
    and our stock price to be volatile.

Our quarterly and annual operating results have
fluctuated in the past and are likely to fluctuate significantly
in the future due to a variety of factors, many of which are
outside of our control. If our quarterly or annual operating
results do not meet the expectations of securities analysts and
investors, the trading price of our common stock could
significantly decline. Some of the factors that could affect our
quarterly or annual operating results include:



| |   |                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the timing and amount of, or cancellation or
    rescheduling of, orders for our products;                                                                                                                  
|
| |  | the timing and our ability to develop, introduce,
    ship and support new products and product enhancements, such as
    our planned introduction of our Angel product, and manage
    product transitions;
|
| |  | announcements, new product introductions and
    reductions in price of products offered by our competitors;                                                                                                
|
| |  | market acceptance of our products;                                                                                                                                                                          
|
| |  | a decrease in the average selling prices of our
    products;                                                                                                                                               
|
| |  | our ability to achieve cost reductions;                                                                                                                                                                     
|
| |  | our ability to obtain sufficient supplies of sole
    or limited source components for our products;                                                                                                        
|
| |  | our ability to achieve and maintain production
    volumes and quality levels for our products;                                                                                                             
|
| |  | the volume of products sold and the mix of
    distribution channels through which they are sold;                                                                                                           
|
| |  | the loss of any one of our major customers or a
    significant reduction in orders from those customers;                                                                                                   
|
| |  | increased competition, particularly from larger,
    better capitalized competitors;                                                                                                                        
|
| |  | fluctuations in demand for our products and
    services; and                                                                                                                                               
|
| |  | telecommunications and wireless market conditions
    and economic conditions generally.                                                                                                                    

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Due in part to factors such as the timing of
product release dates, purchase orders and product availability,
significant volume shipments of products could occur at the end
of our fiscal quarter. Failure to ship products by the end of a
quarter may adversely affect our operating results. In the
future, our customers may delay delivery schedules or cancel
their orders without notice. Due to these and other factors,
quarterly revenue, expenses and results of operations could vary
significantly in the future, and period-to-period comparisons
should not be relied upon as indications of future performance.



| |                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We depend on contract manufacturers. If
    these manufacturers are unable to fill our orders on a timely
    basis, and we are unable to find alternative sources, we may be
    unable to deliver products to meet customer
    orders.

We currently only manufacture prototypes of our
products and perform testing and staging at our own facilities.
The remaining manufacturing is performed by contact
manufacturers. If our manufacturers are unable or unwilling to
continue manufacturing our products in required volumes, we
would have to identify and train acceptable alternative
manufacturers, which could take as long as six months and cause
our results of operations to suffer. We also expect to use
contract manufacturers to manufacture the Angel product line,
however, none of our current contract manufacturing partners,
nor any of the other partners with whom we are in discussions,
have experience manufacturing the Angel product line. As a
result, we cannot be assured of their ability to manufacture the
Angel product at the costs we currently estimate or with
sufficient quality. Additionally, it will take these contract
manufacturers time and expense to establish the supply chain
necessary to obtain components and sub-assemblies. We cannot
assure that they will be able to timely establish the supply
chains and become qualified to manufacture the Angel product.

Our experience with these manufacturers provides
us with no basis to project their delivery schedules, yields or
costs. In addition, few manufacturers produce radios like ours
on a large scale. It is possible that a source may not be
available to us when needed, and we may not be able to satisfy
our production requirements at acceptable prices and on a timely
basis, if at all. Any significant interruption in supply would
affect the allocation of products to customers, which in turn
could have an adverse effect on our business. In addition, by
outsourcing our manufacturing we are less able to control the
quality of our finished products.



| |                                                                                   
| | ----------------------------------------------------------------------------------
| | If we do not meet product introduction
    deadlines, our business will be harmed.

Our inability to develop new products or product
features on a timely basis, or the failure of new products or
product features to achieve market acceptance, could adversely
affect our business. In the past, we have experienced design and
manufacturing difficulties that have delayed our development,
introduction or marketing of new products and enhancements which
has caused us to incur unexpected expenses. For example, the
first trial shipments of AirStar were delayed for almost one
year due to technical problems. In addition, some of our
customers have conditioned their future purchases of our
products on the addition of product features. In the past we
have experienced delays in introducing new features. We also
cannot assure that we will be successful in our efforts to
release product enhancements enabling significantly higher peak
transmission rates than we currently offer. Furthermore, in
order to compete in many markets, we will have to develop
different versions of our existing products that operate at
different frequencies and comply with diverse, new or varying
governmental regulations in each market.



| |                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Because some of our key components are from
    sole source suppliers or require long lead times, our business
    is subject to unexpected interruptions, which could cause our
    operating results to suffer.

Many of our key components are complex to
manufacture and have long lead times. They are purchased from
sole source vendors for which alternative sources are not
currently available. 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 alternative suppliers, if any. As a result,
product shipments could be delayed and our revenues and results
of operations would suffer. If we receive a smaller allocation
of component parts than is necessary to manufacture products in
quantities sufficient to meet customer demand, customers could
choose to purchase competing products and we could lose market
share.

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| |                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If high speed wireless telecommunications
    technology or our implementation of this technology is not
    accepted by service providers, we will not be able to sustain or
    grow our business.

Our future success is substantially dependent on
whether high speed wireless telecommunications equipment gains
market acceptance as a means to provide telecommunications voice
and data services. All of our products are based on this
technology. In the event that service providers adopt
technologies other than the high speed wireless technology that
we offer, we may not be able to sustain or grow our business.
Service providers continuously evaluate alternative high speed
access technologies, including wire-based technologies such as
digital subscriber lines, cable modems, fiber optic cable and T1
connections leased from the traditional service providers in a
given locale, as well as different wireless technologies. In
addition, widespread acceptance of our technology may be
hindered by inherent technological limitations, such as coverage
limitations or bandwidth limitations.



| |                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Because we must sell our products in many
    countries that have different regulatory schemes, if we cannot
    develop products that work with different standards, we will be
    unable to sell our products.

If our sales are to grow, we must sell our
products in many different countries. Many countries require
communications equipment used in their country to comply with
unique regulations, including safety regulations, radio
frequency allocation schemes and standards. If we cannot develop
products that work with different standards, we will be unable
to sell our products. If compliance proves to be more expensive
or time consuming than we anticipate, our business would be
adversely affected. Some countries have not completed their
radio frequency allocation process and therefore we do not know
the standards with which we would be forced to comply.
Furthermore, standards and regulatory requirements are subject
to change. If we fail to anticipate or comply with these new
standards, our business and results of operations will be
adversely affected.



| |                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------
| | If we are unable to manage our
    international operations effectively, our business would be
    adversely affected.

Sales of products which were ultimately deployed
internationally accounted for approximately 95 percent of
our revenues in 2002, 92 percent of our revenues in 2001
and 96 percent of our revenues in 2000. In addition, most
equipment purchased by domestic customers has been shipped to
international service providers. Our international operations
are subject to a number of risks and uncertainties, including:



| |   |                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------
| |  | changes in foreign currency exchange rates;                                                                            
|
| |  | changes in a specific countrys or
    regions political or economic conditions, particularly in
    emerging markets;
|
| |  | trade protection measures and import or export
    licensing requirements;                                             
|
| |  | potentially less effective protection of
    intellectual property;                                                    
|
| |  | the difficulties and costs of obtaining
    regulatory approvals for our products;                                     
|
| |  | unexpected changes in regulatory
    requirements; and                                                                 
|
| |  | legal uncertainties regarding liability, tax,
    tariffs and other trade barriers.                                    

Any of these factors could have an adverse impact
on our existing international operations and business or impair
our ability to expand into international markets.



| |                                                          
| | ---------------------------------------------------------
| | We face risks associated with shareholder
    litigation.

We and certain members of our board of directors
are currently being sued by alleged shareholders in two
lawsuits. One of the lawsuits alleges that our option
cancellation and re-grant program completed in 2001 was
impermissible and that options granted under the program were
invalid and should be rescinded. The second lawsuit involves
allegations relating to inadequate disclosure of underwriting
commissions and practices in violation of securities laws and
regulations in relation to our initial public offering. Although
we and the

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directors who have been sued believe all
allegations are without merit and intend to defend the suits
vigorously, we cannot predict with certainty the outcome of
these lawsuits. Our defense against such lawsuits could be
costly and could require a significant commitment of time and
resources by our management.




| |                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Claims that we infringe third-party
    intellectual property rights could result in significant
    expenses or restrictions on our ability to sell our products in
    particular markets.

From time to time, third parties may assert
patent, copyright, trademark and other intellectual property
rights to technologies in various jurisdictions that are
important to our business. Any claims could be time-consuming to
deal with, result in costly litigation, divert the efforts of
our technical and management personnel, cause product shipment
delays or require us to enter into royalty or licensing
agreements, any of which could have an adverse effect on our
operating results. Royalty or licensing agreements, if required,
may not be available on terms acceptable to us, if at all. In
addition, in our sales agreements, we agree to indemnify our
customers for any expenses or liabilities resulting from claimed
infringements of patents, trademarks or copyrights of third
parties. As part of our acquisition of assets from AT&T
Wireless, we were assigned by AT&T Wireless, and we assumed,
several contracts with third party software vendors. We are
required to indemnify AT&T Wireless against claims that
arise out of or in connection with the assumed contracts after
the date of assignment and against claims that the assigned
software infringes the intellectual or proprietary rights of
others.



| |                                                                        
| | -----------------------------------------------------------------------
| | We may not be able to adequately protect
    our intellectual property.

We rely on a combination of patent, copyright,
trademark and trade secret laws, as well as confidentiality
agreements and licensing arrangements, to establish and protect
our proprietary rights. We presently have four issued United
States patents, with additional applications in process. We have
also acquired from AT&T Wireless Services, Inc. a license to
several patents and numerous patent applications associated with
the Angel platform. These licenses are not transferable. In
addition, although AT&T Wireless has agreed not to license
these patents to our competitors for a period of five years, we
cannot assure that they will enforce their rights against
potential infringors. Despite our efforts to protect our
proprietary rights, existing copyright, trademark and trade
secret laws afford only limited protection. In addition, the
laws of some foreign countries do not protect our proprietary
rights to the same extent as do the laws of the United States.
Attempts may be made to copy or reverse engineer aspects of our
products or to obtain and use information that we regard as
proprietary. Accordingly, we may not be able to protect our
proprietary rights against unauthorized third-party copying or
use. Furthermore, policing the unauthorized use of our products
is difficult. Litigation may be necessary in the future to
enforce our intellectual property rights, to protect our trade
secrets or to determine the validity and scope of the
proprietary rights of others. This litigation could result in
substantial costs and diversion of resources and could have a
material adverse effect on our future operating results.



| |                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------
| | If we are unable to hire or retain our
    personnel, we might not be able to operate our business
    successfully.

The loss of the services of any key personnel
could restrict our ability to compete effectively. We are
dependent on personnel to complete the product cost reductions
and enhancements for our Angel product who have unique knowledge
regarding this product line. Retaining these employees may be
particularly challenging in light of the recent restructurings
and our announcement of our decision to pursue strategic
alternatives. We currently do not maintain key person life
insurance on any of our key executives.



| |                                                                                                               
| | --------------------------------------------------------------------------------------------------------------
| | Major stockholders have substantial control
    over us, which could delay or prevent a change in
    control.

Global Telecom LLC beneficially owned
approximately 24.5 percent of our common stock as of
March 1, 2003. As a result, they can exert significant
influence over our management and affairs and have the ability
to exercise significant influence over all matters submitted to
our stockholders for approval, including matters relating to the
election and removal of directors, merger or consolidation
transactions, the sale of all or substantially all our assets or
our liquidation. This concentration of ownership may delay or
prevent a change of control or discourage a potential acquirer
from making a tender offer or otherwise attempting to obtain

34



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control of our company, which could decrease the
market price of our common stock. The interests of this
stockholder may not always coincide with our interests or the
interests of our other stockholders.




| |                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Provisions of our certificate of
    incorporation and bylaws, our stockholder rights plan and
    delaware law could discourage or prevent a potential takeover,
    even if the transaction would benefit our
    stockholders.

An acquisition or takeover of our company by
another could result in benefits to our stockholders, such as a
premium over the market value of our common stock. There are
provisions in our certificate of incorporation and bylaws and in
Delaware law that could have the effect of deterring takeover
offers and provide greater defenses against takeovers, even if a
substantial number or a majority of our stockholders wish to
accept a takeover offer. These provisions include our classified
board of directors, limitations on the ability of our
stockholders to call special meetings and advance notice
requirements for nominating candidates for election to our board
of directors and for proposals that can be voted on at
stockholder meetings. In addition, we are party to a stockholder
rights agreement, which effectively prohibits persons from
acquiring more that 15 percent (other than Global Telecom
LLC) of our common stock without the approval of our board of
directors. All of these factors could have the effect of
thwarting takeover attempts that investors in our common stock
may view as beneficial and may wish to accept.






|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures
    About Market Risk

Foreign Currency Hedging Instruments.We transact business in various
foreign currencies and, accordingly, we are subject to exposure
from adverse movements in foreign currency exchange rates. To
date, the effect of changes in foreign currency exchange rates
on operating expenses have not been material. Our revenues are
denominated in U.S. dollars. Operating expenses incurred by
our foreign subsidiaries are denominated primarily in local
currencies. We currently do not use financial instruments to
hedge these operating expenses. We intend to assess the need to
utilize financial instruments to hedge currency exposures on an
ongoing basis.

We do not use derivative financial instruments
for speculative trading purposes.

Fixed Income Investments.Our exposure to market risks from
changes in interest rates relates primarily to corporate debt
securities. We place our investments with high credit quality
issuers and, by policy, limit the amount of the credit exposure
to any one issuer.

Our general policy is to limit the risk of
principal loss and ensure the safety of invested funds by
limiting market and credit risk. All highly liquid investments
with a maturity of less than three months at the date of
purchase are considered to be cash equivalents; all investments
with maturities of three months or greater and less than one
year are considered to be short-term marketable securities; all
investments with maturities greater than one year are considered
to be long-term marketable securities. All investments are
classified as either available for sale or
held-to-maturity and consist of government and
corporate debt securities.

The SECs rule related to market risk
disclosure requires that we describe and quantify our potential
losses from market risk sensitive instruments attributable to
reasonably possible market changes. We are exposed to changes in
interest rates on our investments in marketable securities. All
of our investments are in funds that hold investment grade
commercial paper, treasury bills or other United States
government obligations. This investment policy reduces our
exposure to long-term interest rate changes. A hypothetical 100
basis point decline in short-term interest rates would reduce
the annualized earnings on our $152.7 million of marketable
securities at December 31, 2002 by approximately
$1.5 million.

35



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|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data

INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

|                                                                         |                                                     |  |    |    | 
|------------------------------------------------------------------------ | --------------------------------------------------- |  | -- | -- | 
|Report of Independent Accountants and Independent
    Public Accountants |                                                     |  | 37 |   
|Financial Statements:                                                    |                                                     |  |    |   
|                                                                         | Consolidated Balance Sheets                         |  |    | 39 | 
|                                                                         | Consolidated Statements of Operations               |  |    | 40 | 
|                                                                         | Consolidated Statements of Stockholders
    Equity |  |    | 41 | 
|                                                                         | Consolidated Statements of Cash Flows               |  |    | 42 | 
|                                                                         | Notes to Consolidated Financial Statements          |  |    | 43 | 

36



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##### Table of Contents



REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
Netro Corporation:

In our opinion, the accompanying consolidated
balance sheet as of December 31, 2002 and the related
consolidated statements of operations, of stockholders
equity and of cash flows present fairly, in all material
respects, the financial position of Netro Corporation and its
subsidiaries (the Company) at December 31,
2002, and the results of their operations and their cash flows
for the year then ended in conformity with accounting principles
generally accepted in the United States of America. 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 audit. We
conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable
basis for our opinion. The financial statements of the Company
as of December 31, 2001 and for each of the two years in
the period ended December 31, 2001 were audited by other
independent accountants who have ceased operations. Those
independent accountants expressed an unqualified opinion on
those financial statements in their report dated
January 21, 2002.

/s/ PricewaterhouseCoopers

San Jose, California

February 6, 2003


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##### Table of Contents



THIS REPORT IS A CONFORMED COPY OF THE
REPORT

PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP
AND HAS NOT


BEEN REISSUED BY THAT FIRM.


REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS

To the Board of Directors and Stockholders of
Netro Corporation:

We have audited the accompanying consolidated
balance sheets of Netro Corporation (a Delaware corporation) and
subsidiaries as of December 31, 2001 and 2000, and the
related consolidated statements of operations,
stockholders equity and cash flows for each of the three
years in the period ended December 31, 2001. These
consolidated financial statements and the schedule referred to
below are the responsibility of the Companys management.
Our responsibility is to express an opinion on these
consolidated financial statements and schedule 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
consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
consolidated 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 consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of Netro Corporation and
subsidiaries as of December 31, 2001 and 2000, and the
results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the
United States of America.

Our audits were made for the purpose of forming
an opinion on the basic consolidated financial statements taken
as a whole. The schedule listed under Item 14(a) is
presented for the purpose of complying with the Securities and
Exchange Commissions rules and is not part of the basic
consolidated financial statements. This schedule has been
subjected to the auditing procedures applied in our audits of
the basic consolidated financial statements and, in our opinion,
fairly states in all material respects the financial data
required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.



| |                    
| | -------------------
| | ARTHUR ANDERSEN LLP

San Jose, California

January 21, 2002


ARTHUR ANDERSEN LLP WERE THE INDEPENDENT
ACCOUNTANTS FOR NETRO CORPORATION UNTIL MAY 24, 2002.
REPRESENTATIVES OF ARTHUR ANDERSEN LLP ARE NOT AVAILABLE TO
PROVIDE THE CONSENT REQUIRED FOR THE INCLUSION OF THEIR REPORT
ON THE FINANCIAL STATEMENTS OF NETRO CORPORATION APPEARING IN
THIS ANNUAL REPORT ON FORM 10-K. THEREFORE, IN ACCORDANCE WITH
SEC REGULATIONS, A CONFORMED COPY OF THEIR PREVIOUS OPINION IS
INCLUDED.

38



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NETRO CORPORATION

CONSOLIDATED BALANCE SHEETS

|                                           |                                                                                  |                                                                                                    |        |              |         |  |         |          |         | 
|------------------------------------------ | -------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------- | ------ | ------------ | ------- |  | ------- | -------- | ------- | 
|                                           |                                                                                  | December 31,                                                                                       |        | December 31,
|                                           |                                                                                  | 2002                                                                                               |        | 2001        
|                                           |                                                                                  |                                                                                                    |        |             
|                                           |                                                                                  |                                                                                                   
|                                           |                                                                                  | (In thousands, except                                                                             
|                                           |                                                                                  | share amounts)                                                                                    
|ASSETS                                    
|Current Assets:                            |                                                                                  |                                                                                                    |        |              |         |  |         |         
|                                           | Cash and cash equivalents                                                        |                                                                                                    | $      | 43,455       |         |  | $       | 90,494   |        
|                                           | Short-term marketable securities                                                 |                                                                                                    |        | 57,603       |         |  |         | 115,950  |        
|                                           | Trade accounts receivable, net of allowance of
    $583 and $1,500, respectively |                                                                                                    |        | 3,136        |         |  |         | 3,683    |        
|                                           | Inventory                                                                        |                                                                                                    |        | 6,227        |         |  |         | 6,874    |        
|                                           | Prepaid expenses and other                                                       |                                                                                                    |        | 3,367        |         |  |         | 2,832    |        
|                                           |                                                                                  |                                                                                                    |        |              |         |  |         |         
|                                           |                                                                                  | Total current assets                                                                               |        |              | 113,788 |  |         |          | 219,833 | 
|Equipment and leasehold improvements, net  |                                                                                  |                                                                                                    | 9,635  |              |         |  | 7,796   |         
|Long-term marketable securities            |                                                                                  |                                                                                                    | 57,335 |              |         |  | 119,858 |         
|Acquired intangible assets                 |                                                                                  |                                                                                                    | 20,331 |              |         |  |        |         
|Other assets                               |                                                                                  |                                                                                                    | 2,164  |              |         |  | 2,234   |         
|                                           |                                                                                  |                                                                                                    |        |              |         |  |         |         
|                                           |                                                                                  | Total assets                                                                                       |        | $            | 203,253 |  |         | $        | 349,721 | 
|                                           |                                                                                  |                                                                                                    |        |              |         |  |         |         
|                                          
|LIABILITIES AND STOCKHOLDERS
    EQUITY  
|                                          
|Current Liabilities:                       |                                                                                  |                                                                                                    |        |              |         |  |         |         
|                                           | Current portion of capital leases                                                |                                                                                                    | $      | 64           |         |  | $       | 1,272    |        
|                                           | Trade accounts payable                                                           |                                                                                                    |        | 2,040        |         |  |         | 1,649    |        
|                                           | Accrued liabilities                                                              |                                                                                                    |        | 22,359       |         |  |         | 25,789   |        
|                                           |                                                                                  |                                                                                                    |        |              |         |  |         |         
|                                           |                                                                                  | Total current liabilities                                                                          |        |              | 24,463  |  |         |          | 28,710  | 
|Capital leases, net of current portion     |                                                                                  |                                                                                                    |       |              |         |  | 64      |         
|Deferred facilities rent                   |                                                                                  |                                                                                                    | 269    |              |         |  | 71      |         
|                                           |                                                                                  |                                                                                                    |        |              |         |  |         |         
|                                           |                                                                                  | Total liabilities                                                                                  |        |              | 24,732  |  |         |          | 28,845  | 
|                                           |                                                                                  |                                                                                                    |        |              |         |  |         |         
|Commitments and contingencies
    (Note 7) |                                                                                  |                                                                                                    |        |              |         |  |         |         
|Stockholders equity:                      |                                                                                  |                                                                                                    |        |              |         |  |         |         
|                                           | Preferred stock, $.001 par value:                                                |                                                                                                    |        |              |         |  |         |          |        
|                                           |                                                                                  | Authorized  5,000,000 shares
    Outstanding  no shares                                          |        |              |        |  |         |          |        | 
|                                           | Common stock, $.001 par value:                                                   |                                                                                                    |        |              |         |  |         |          |        
|                                           |                                                                                  | Authorized  100,000,000 shares                                                                    |        |              |         |  |         |          |         | 
|                                           |                                                                                  | Outstanding  38,521,554 and
    52,481,253 shares at December 31, 2002 and 2001,
    respectively |        |              | 454,780 |  |         |          | 506,329 | 
|                                           | Deferred stock compensation                                                      |                                                                                                    |        | (84          | )       |  |         | (831     | )      
|                                           | Accumulated other comprehensive income                                           |                                                                                                    |        | 421          |         |  |         | 1,264    |        
|                                           | Accumulated deficit                                                              |                                                                                                    |        | (276,596     | )       |  |         | (185,886 | )      
|                                           |                                                                                  |                                                                                                    |        |              |         |  |         |         
|                                           |                                                                                  | Total stockholders equity                                                                         |        |              | 178,521 |  |         |          | 320,876 | 
|                                           |                                                                                  |                                                                                                    |        |              |         |  |         |         
|                                           |                                                                                  | Total liabilities and stockholders equity                                                         |        | $            | 203,253 |  |         | $        | 349,721 | 
|                                           |                                                                                  |                                                                                                    |        |              |         |  |         |         

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

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NETRO CORPORATION

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                                                           |                                              |                                       |                          |        |      |        |         |        |      |        |         |        |        |        | 
|------------------------------------------------------------------------------------------ | -------------------------------------------- | ------------------------------------- | ------------------------ | ------ | ---- | ------ | ------- | ------ | ---- | ------ | ------- | ------ | ------ | ------ | 
|                                                                                           |                                              |                                      
|                                                                                           |                                              | Years Ended December 31,             
|                                                                                           |                                              |                                      
|                                                                                           |                                              | 2002                                  |                          | 2001   |      | 2000  
|                                                                                           |                                              |                                       |                          |        |      |       
|                                                                                           |                                              |                                      
|                                                                                           |                                              | (In thousands, except per share data)
|Revenues                                                                                   |                                              | $                                     | 17,107                   |        |      | $      | 23,659  |        |      | $      | 68,527  |       
|Cost of revenues                                                                           |                                              |                                       | 17,167                   |        |      |        | 62,512  |        |      |        | 52,096  |       
|                                                                                           |                                              |                                       |                          |        |      |        |         |        |      |        |         |       
|Gross profit (loss)                                                                        |                                              |                                       | (60                      | )      |      |        | (38,853 | )      |      |        | 16,431  |       
|                                                                                           |                                              |                                       |                          |        |      |        |         |        |      |        |         |       
|Operating expenses:                                                                        |                                              |                                       |                          |        |      |        |         |        |      |        |         |       
|                                                                                           | Research and development                     |                                       |                          | 27,973 |      |        |         | 25,782 |      |        |         | 24,265 |       
|                                                                                           | Sales and marketing                          |                                       |                          | 13,877 |      |        |         | 13,281 |      |        |         | 10,455 |       
|                                                                                           | General and administrative                   |                                       |                          | 21,210 |      |        |         | 16,996 |      |        |         | 9,812  |       
|                                                                                           | Amortization of deferred stock compensation  |                                       |                          | 612    |      |        |         | 857    |      |        |         | 1,064  |       
|                                                                                           | Amortization of acquired intangibles         |                                       |                          | 7,820  |      |        |         |       |      |        |         |       |       
|                                                                                           | Acquired in-process research and development |                                       |                          | 17,600 |      |        |         |       |      |        |         |       |       
|                                                                                           | Restructuring and asset impairment charges   |                                       |                          | 8,079  |      |        |         |       |      |        |         |       |       
|                                                                                           |                                              |                                       |                          |        |      |        |         |        |      |        |         |       
|                                                                                           |                                              |                                       | Total operating expenses |        |      | 97,171 |         |        |      | 56,916 |         |        |        | 45,596 | 
|                                                                                           |                                              |                                       |                          |        |      |        |         |        |      |        |         |       
|Loss from operations                                                                       |                                              |                                       | (97,231                  | )      |      |        | (95,769 | )      |      |        | (29,165 | )     
|Other income, net Interest income and realized
    gains on sales of marketable securities |                                              |                                       | 7,127                    |        |      |        | 17,154  |        |      |        | 20,112  |       
|                                                                                           |                                              | Interest expense                      |                          |        | (503 | )      |         |        | (613 | )      |         |        | (1,125 | )     
|                                                                                           |                                              |                                       |                          |        |      |        |         |        |      |        |         |       
|                                                                                           |                                              |                                       | Total other income, net  |        |      | 6,624  |         |        |      | 16,541 |         |        |        | 18,987 | 
|                                                                                           |                                              |                                       |                          |        |      |        |         |        |      |        |         |       
|Net loss before provision for income taxes                                                 |                                              |                                       | (90,607                  | )      |      |        | (79,228 | )      |      |        | (10,178 | )     
|Provision for income taxes                                                                 |                                              |                                       | 103                      |        |      |        | 76      |        |      |        |        |       
|                                                                                           |                                              |                                       |                          |        |      |        |         |        |      |        |         |       
|Net loss                                                                                   |                                              | $                                     | (90,710                  | )      |      | $      | (79,304 | )      |      | $      | (10,178 | )     
|                                                                                           |                                              |                                       |                          |        |      |        |         |        |      |        |         |       
|Basic and diluted net loss per share                                                       |                                              | $                                     | (1.76                    | )      |      | $      | (1.52   | )      |      | $      | (0.21   | )     
|                                                                                           |                                              |                                       |                          |        |      |        |         |        |      |        |         |       
|Weighted-average shares used to compute basic and
    diluted net loss per share           |                                              |                                       | 51,521                   |        |      |        | 52,196  |        |      |        | 49,639  |       
|                                                                                           |                                              |                                       |                          |        |      |        |         |        |      |        |         |       

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

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NETRO CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

|                                                                       |                    |                                      |             |            |  |             |         |               |  |             |      |               |  |               |        |        |  |   |       |   |  |   |          |   |  |   |         |         |   |   |         |   | 
|---------------------------------------------------------------------- | ------------------ | ------------------------------------ | ----------- | ---------- |  | ----------- | ------- | ------------- |  | ----------- | ---- | ------------- |  | ------------- | ------ | ------ |  | - | ----- | - |  | - | -------- | - |  | - | ------- | ------- | - | - | ------- | - | 
|                                                                       |                    |                                      |             | Note       |  |             |         | Accumulated   |  |             |      |               |  |              
|                                                                       |                    | Common Stock                         |             | Receivable |  | Deferred    |         | Other         |  |             |      |               |  | Total        
|                                                                       |                    |                                      |             | from       |  | Stock       |         | Comprehensive |  | Accumulated |      | Comprehensive |  | Stockholders
|                                                                       |                    | Shares                               |             | Amount     |  | Stockholder |         | Compensation  |  | Income      |      | Deficit       |  | Loss          |        | Equity
|                                                                       |                    |                                      |             |            |  |             |         |               |  |             |      |               |  |               |        |       
|                                                                       |                    |                                     
|                                                                       |                    | (In thousands, except share amounts)
|Balance, December 31, 1999                                             |                    |                                      | 44,912,773  |            |  | $           | 146,490 |               |  | $           | (800 | )             |  | $             | (3,730 | )      |  | $ |      |   |  | $ | (96,404  | ) |  |   |         |         |   | $ | 45,556  |  
|Net loss                                                               |                    |                                      |            |            |  |             |        |               |  |             |     |               |  |               |       |        |  |   |      |   |  |   | (10,178  | ) |  | $ | (10,178 | )       |   |   | (10,178 | )
|Change in net unrealized holding gain on
    securities                |                    |                                      |            |            |  |             |        |               |  |             |     |               |  |               |       |        |  |   | 823   |   |  |   |         |   |  |   | 823     |         |   |   | 823     |  
|                                                                       |                    |                                      |             |            |  |             |         |               |  |             |      |               |  |               |        |        |  |   |       |   |  |   |          |   |  |   |         |         |   |   |         |  
|                                                                       | Comprehensive loss |                                      |             |            |  |             |         |               |  |             |      |               |  |               |        |        |  |   |       |   |  |   |          |   |  |   | $       | (9,355  | ) |   |         |   | 
|                                                                       |                    |                                      |             |            |  |             |         |               |  |             |      |               |  |               |        |        |  |   |       |   |  |   |          |   |  |   |         |         |   |   |         |  
|Repayment of note from stockholder                                     |                    |                                      |            |            |  |             |        |               |  |             | 800  |               |  |               |       |        |  |   |      |   |  |   |         |   |  |   |         |         |   |   | 800     |  
|Exercise of stock options for cash                                     |                    |                                      | 1,905,062   |            |  |             | 3,953   |               |  |             |     |               |  |               |       |        |  |   |      |   |  |   |         |   |  |   |         |         |   |   | 3,953   |  
|Shares issued under ESPP Plan                                          |                    |                                      | 240,092     |            |  |             | 1,664   |               |  |             |     |               |  |               |       |        |  |   |      |   |  |   |         |   |  |   |         |         |   |   | 1,664   |  
|Repurchase of Common Stock for cash                                    |                    |                                      | (15,626     | )          |  |             | (31     | )             |  |             |     |               |  |               |       |        |  |   |      |   |  |   |         |   |  |   |         |         |   |   | (31     | )
|Issuance of Common Stock in public offering, net
    of issuance costs |                    |                                      | 4,504,111   |            |  |             | 352,324 |               |  |             |     |               |  |               |       |        |  |   |      |   |  |   |         |   |  |   |         |         |   |   | 352,324 |  
|Amortization of deferred stock compensation                            |                    |                                      |            |            |  |             | (733    | )             |  |             |     |               |  |               | 1,797  |        |  |   |      |   |  |   |         |   |  |   |         |         |   |   | 1,064   |  
|                                                                       |                    |                                      |             |            |  |             |         |               |  |             |      |               |  |               |        |        |  |   |       |   |  |   |          |   |  |   |         |         |   |   |         |  
|Balance, December 31, 2000                                             |                    |                                      | 51,546,412  |            |  |             | 503,667 |               |  |             |     |               |  |               | (1,933 | )      |  |   | 823   |   |  |   | (106,582 | ) |  |   |         |         |   |   | 395,975 |  
|Net loss                                                               |                    |                                      |            |            |  |             |        |               |  |             |     |               |  |               |       |        |  |   |      |   |  |   | (79,304  | ) |  | $ | (79,304 | )       |   |   | (79,304 | )
|Change in net unrealized holding gain on
    securities                |                    |                                      |            |            |  |             |        |               |  |             |     |               |  |               |       |        |  |   | 547   |   |  |   |         |   |  |   | 547     |         |   |   | 547     |  
|Foreign currency translation adjustments                               |                    |                                      |            |            |  |             |        |               |  |             |     |               |  |               |       |        |  |   | (106  | ) |  |   |         |   |  |   | (106    | )       |   |   | (106    | )
|                                                                       |                    |                                      |             |            |  |             |         |               |  |             |      |               |  |               |        |        |  |   |       |   |  |   |          |   |  |   |         |         |   |   |         |  
|                                                                       | Comprehensive loss |                                      |             |            |  |             |         |               |  |             |      |               |  |               |        |        |  |   |       |   |  |   |          |   |  |   | $       | (78,863 | ) |   |         |   | 
|                                                                       |                    |                                      |             |            |  |             |         |               |  |             |      |               |  |               |        |        |  |   |       |   |  |   |          |   |  |   |         |         |   |   |         |  
|Exercise of stock options for cash                                     |                    |                                      | 599,575     |            |  |             | 1,373   |               |  |             |     |               |  |               |       |        |  |   |      |   |  |   |         |   |  |   |         |         |   |   | 1,373   |  
|Shares issued under ESPP Plan                                          |                    |                                      | 335,266     |            |  |             | 1,534   |               |  |             |     |               |  |               |       |        |  |   |      |   |  |   |         |   |  |   |         |         |   |   | 1,534   |  
|Amortization of deferred stock compensation                            |                    |                                      |            |            |  |             | (245    | )             |  |             |     |               |  |               | 1,102  |        |  |   |      |   |  |   |         |   |  |   |         |         |   |   | 857     |  
|                                                                       |                    |                                      |             |            |  |             |         |               |  |             |      |               |  |               |        |        |  |   |       |   |  |   |          |   |  |   |         |         |   |   |         |  
|Balance, December 31, 2001                                             |                    |                                      | 52,481,253  |            |  |             | 506,329 |               |  |             |     |               |  |               | (831   | )      |  |   | 1,264 |   |  |   | (185,886 | ) |  |   |         |         |   |   | 320,876 |  
|Net Loss                                                               |                    |                                      |            |            |  |             |        |               |  |             |     |               |  |               |       |        |  |   |      |   |  |   | (90,710  | ) |  | $ | (90,710 | )       |   |   | (90,710 | )
|Change in net unrealized holding gain on
    securities                |                    |                                      |            |            |  |             |        |               |  |             |     |               |  |               |       |        |  |   | (824  | ) |  |   |         |   |  |   | (824    | )       |   |   | (824    | )
|Foreign currency translation adjustments                               |                    |                                      |            |            |  |             |        |               |  |             |     |               |  |               |       |        |  |   | (19   | ) |  |   |         |   |  |   | (19     | )       |   |   | (19     | )
|                                                                       |                    |                                      |             |            |  |             |         |               |  |             |      |               |  |               |        |        |  |   |       |   |  |   |          |   |  |   |         |         |   |   |         |  
|                                                                       | Comprehensive loss |                                      |             |            |  |             |         |               |  |             |      |               |  |               |        |        |  |   |       |   |  |   |          |   |  |   | $       | (91,553 | ) |   |         |   | 
|                                                                       |                    |                                      |             |            |  |             |         |               |  |             |      |               |  |               |        |        |  |   |       |   |  |   |          |   |  |   |         |         |   |   |         |  
|Exercise of stock options for cash                                     |                    |                                      | 380,070     |            |  |             | 634     |               |  |             |     |               |  |               |       |        |  |   |      |   |  |   |         |   |  |   |         |         |   |   | 634     |  
|Shares issued under ESPP Plan                                          |                    |                                      | 438,831     |            |  |             | 1,165   |               |  |             |     |               |  |               |       |        |  |   |      |   |  |   |         |   |  |   |         |         |   |   | 1,165   |  
|Issuance of stock awards to employees                                  |                    |                                      | 21,400      |            |  |             | 67      |               |  |             |     |               |  |               |       |        |  |   |      |   |  |   |         |   |  |   |         |         |   |   | 67      |  
|Issuance of stock for asset acquisition                                |                    |                                      | 8,200,000   |            |  |             | 29,520  |               |  |             |     |               |  |               |       |        |  |   |      |   |  |   |         |   |  |   |         |         |   |   | 29,520  |  
|Repurchase and cancellation of stock                                   |                    |                                      | (23,000,000 | )          |  |             | (82,800 | )             |  |             |     |               |  |               |       |        |  |   |      |   |  |   |         |   |  |   |         |         |   |   | (82,800 | )
|Amortization of deferred stock compensation                            |                    |                                      |            |            |  |             | (135    | )             |  |             |     |               |  |               | 747    |        |  |   |      |   |  |   |         |   |  |   |         |         |   |   | 612     |  
|                                                                       |                    |                                      |             |            |  |             |         |               |  |             |      |               |  |               |        |        |  |   |       |   |  |   |          |   |  |   |         |         |   |   |         |  
|Balance, December 31, 2002                                             |                    |                                      | 38,521,554  |            |  | $           | 454,780 |               |  | $           |     |               |  | $             | (84    | )      |  | $ | 421   |   |  | $ | (276,596 | ) |  |   |         |         |   | $ | 178,521 |  
|                                                                       |                    |                                      |             |            |  |             |         |               |  |             |      |               |  |               |        |        |  |   |       |   |  |   |          |   |  |   |         |         |   |   |         |  

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

41



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##### Table of Contents



NETRO CORPORATION

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                 |                                                                                 |                                              |                                                           |          |        |         |        |          |        |         |        |          |       |          |  
|---------------------------------------------------------------- | ------------------------------------------------------------------------------- | -------------------------------------------- | --------------------------------------------------------- | -------- | ------ | ------- | ------ | -------- | ------ | ------- | ------ | -------- | ----- | -------- | -
|                                                                 |                                                                                 |                                             
|                                                                 |                                                                                 | Years Ended December 31,                    
|                                                                 |                                                                                 |                                             
|                                                                 |                                                                                 | 2002                                         |                                                           | 2001     |        | 2000   
|                                                                 |                                                                                 |                                              |                                                           |          |        |        
|                                                                 |                                                                                 |                                             
|                                                                 |                                                                                 | (In thousands)                              
|Cash flows from operating
    activities:                        |                                                                                 |                                              |                                                           |          |        |         |        |          |        |         |        |         
|                                                                 | Net loss                                                                        |                                              | $                                                         | (90,710  | )      |         | $      | (79,304  | )      |         | $      | (10,178  | )    
|                                                                 | Adjustments to reconcile net loss to net cash
    used in operating activities: |                                              |                                                           |          |        |         |        |          |        |         |        |          |      
|                                                                 |                                                                                 | Acquired in process research and development |                                                           |          | 17,600 |         |        |          |       |         |        |          |      |         
|                                                                 |                                                                                 | Write-down of impaired assets                |                                                           |          | 1,068  |         |        |          |       |         |        |          |      |         
|                                                                 |                                                                                 | Depreciation                                 |                                                           |          | 4,208  |         |        |          | 4,081  |         |        |          | 2,383 |         
|                                                                 |                                                                                 | Amortization of acquired intangible assets   |                                                           |          | 7,820  |         |        |          |       |         |        |          |      |         
|                                                                 |                                                                                 | Amortization of deferred stock compensation  |                                                           |          | 612    |         |        |          | 857    |         |        |          | 1,064 |         
|                                                                 |                                                                                 | Provision for excess and obsolete inventory  |                                                           |          | 4,203  |         |        |          | 25,700 |         |        |          | 1,214 |         
|                                                                 |                                                                                 | Provision for doubtful accounts              |                                                           |          | (900   | )       |        |          | 1,315  |         |        |          | 800   |         
|                                                                 |                                                                                 | Provision for material-related commitments   |                                                           |          | 508    |         |        |          | 16,000 |         |        |          |      |         
|                                                                 |                                                                                 | Loss on disposal of fixed assets             |                                                           |          | 202    |         |        |          | 802    |         |        |          | 90    |         
|                                                                 |                                                                                 | Issuance of employee stock awards            |                                                           |          | 67     |         |        |          |       |         |        |          |      |         
|                                                                 |                                                                                 | Changes in operating assets and liabilities: |                                                           |          |        |         |        |          |        |         |        |          |       |         
|                                                                 |                                                                                 |                                              | Trade accounts receivable                                 |          |        | 1,447   |        |          |        | 8,534   |        |          |       | (7,407   | )
|                                                                 |                                                                                 |                                              | Inventory                                                 |          |        | (2,988  | )      |          |        | (4,580  | )      |          |       | (21,299  | )
|                                                                 |                                                                                 |                                              | Prepaid expenses and other                                |          |        | 1,668   |        |          |        | 5,023   |        |          |       | (8,147   | )
|                                                                 |                                                                                 |                                              | Trade accounts payable, accrued liabilities and
    other |          |        | (6,673  | )      |          |        | (6,746  | )      |          |       | 8,454    |  
|                                                                 |                                                                                 |                                              |                                                           |          |        |         |        |          |        |         |        |         
|                                                                 |                                                                                 |                                              | Net cash used in operating activities                     |          |        | (61,868 | )      |          |        | (28,318 | )      |          |       | (33,026  | )
|                                                                 |                                                                                 |                                              |                                                           |          |        |         |        |          |        |         |        |         
|Cash flows from investing
    activities:                        |                                                                                 |                                              |                                                           |          |        |         |        |          |        |         |        |         
|                                                                 | Purchases of equipment and leasehold improvements                               |                                              |                                                           | (4,678   | )      |         |        | (5,830   | )      |         |        | (4,800   | )    
|                                                                 | Acquisition of assets                                                           |                                              |                                                           | (16,009  | )      |         |        |         |        |         |        |         |      
|                                                                 | Purchase of equity investment                                                   |                                              |                                                           |         |        |         |        | (1,500   | )      |         |        | (450     | )    
|                                                                 | Purchases of marketable securities                                              |                                              |                                                           | (196,461 | )      |         |        | (357,893 | )      |         |        | (406,960 | )    
|                                                                 | Maturities of marketable securities                                             |                                              |                                                           | 314,208  |        |         |        | 395,668  |        |         |        | 173,670  |      
|                                                                 |                                                                                 |                                              |                                                           |          |        |         |        |          |        |         |        |         
|                                                                 |                                                                                 |                                              | Net cash provided by (used in) investing
    activities   |          |        | 97,060  |        |          |        | 30,445  |        |          |       | (238,540 | )
|                                                                 |                                                                                 |                                              |                                                           |          |        |         |        |          |        |         |        |         
|Cash flows from financing
    activities:                        |                                                                                 |                                              |                                                           |          |        |         |        |          |        |         |        |         
|                                                                 | Proceeds from issuance of notes payable                                         |                                              |                                                           |         |        |         |        | 121      |        |         |        | 1,083    |      
|                                                                 | Payments on notes payable and capital leases                                    |                                              |                                                           | (1,272   | )      |         |        | (6,248   | )      |         |        | (4,017   | )    
|                                                                 | Repurchase of common stock through tender offer                                 |                                              |                                                           | (82,800  | )      |         |        |         |        |         |        |         |      
|                                                                 | Proceeds from issuance of common stock, net of
    issuance costs               |                                              |                                                           | 1,799    |        |         |        | 2,907    |        |         |        | 357,941  |      
|                                                                 | Repayments of notes receivable from stockholder                                 |                                              |                                                           |         |        |         |        |         |        |         |        | 800      |      
|                                                                 | Repurchase of common stock                                                      |                                              |                                                           |         |        |         |        |         |        |         |        | (31      | )    
|                                                                 |                                                                                 |                                              |                                                           |          |        |         |        |          |        |         |        |         
|                                                                 |                                                                                 |                                              | Net cash provided by (used in) financing
    activities   |          |        | (82,273 | )      |          |        | (3,220  | )      |          |       | 355,776  |  
|                                                                 |                                                                                 |                                              |                                                           |          |        |         |        |          |        |         |        |         
|Effect of exchange rate changes on cash and
    cash equivalents |                                                                                 |                                              | 42                                                        |          |        |         | (73    | )        |        |         |       |         
|                                                                 |                                                                                 |                                              |                                                           |          |        |         |        |          |        |         |        |         
|Net increase (decrease) in cash and cash
    equivalents         |                                                                                 |                                              | (47,039                                                   | )        |        |         | (1,166 | )        |        |         | 84,210 |         
|Cash and cash equivalents, beginning of
    period               |                                                                                 |                                              | 90,494                                                    |          |        |         | 91,660 |          |        |         | 7,450  |         
|                                                                 |                                                                                 |                                              |                                                           |          |        |         |        |          |        |         |        |         
|Cash and cash equivalents, end of
    period                     |                                                                                 | $                                            | 43,455                                                    |          |        | $       | 90,494 |          |        | $       | 91,660 |         
|                                                                 |                                                                                 |                                              |                                                           |          |        |         |        |          |        |         |        |         
|Supplemental cash flow information                               |                                                                                 |                                              |                                                           |          |        |         |        |          |        |         |        |         
|                                                                 | Value of common stock issued for acquisition of
    assets                      |                                              | $                                                         | 29,520   |        |         |        |         |        |         |        |         |      
|                                                                 | Cash paid for interest                                                          |                                              | $                                                         | 503      |        |         | $      | 722      |        |         | $      | 1,045    |      

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

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##### Table of Contents



NETRO CORPORATION

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS



|   |                        
|-- | -----------------------
|1. | Description of Business

Netro Corporation (collectively, with its
subsidiaries, Netro or the Company) was
incorporated in California on November 14, 1994 and
reincorporated in Delaware on June 19, 2001. Netro designs,
markets and sells broadband, point-to-multipoint fixed wireless
equipment. Telecommunications service providers use Netros
equipment as an alternative to using wired connectivity or
point-to-point fixed wireless equipment. The Company operates in
one business segment.

The Company believes that its cash and cash
equivalents balances, short-term and long-term marketable
securities and funds available under the existing line of credit
will be sufficient to satisfy its cash requirements for at least
the next twelve months. However, the Company announced in
November 2002 its plans to evaluate strategic alternatives which
could include a possible sale, merger or liquidation of the
Company. The accompanying consolidated financial statements have
been prepared on the basis that the Company continues to pursue
its ongoing operating objectives and do not reflect the impact
of any of these potential courses of action.



|   |                                               
|-- | ----------------------------------------------
|2. | Summary of Significant Accounting
    Policies



| |                            
| | ---------------------------
| | Principles of Consolidation

The consolidated financial statements include the
accounts of the Company and its subsidiaries in Germany, France,
Israel and Mexico. All intercompany accounts and transactions
have been eliminated in consolidation. Certain amounts from
prior years have been reclassified to conform to the current
year presentation.



| |                             
| | ----------------------------
| | Foreign Currency Translation

The functional currency of the Companys
subsidiaries is the local currency. Accordingly, all assets and
liabilities are translated into United States dollars at the
current exchange rate as of the applicable balance sheet date.
Revenues and expenses are translated at the average exchange
rate prevailing during the period. Gains and losses resulting
from the translation of the financial statements are included in
accumulated other comprehensive income in the accompanying
consolidated statements of stockholders equity. Foreign
exchange gains and losses resulting from foreign currency
transactions were not material in any of the periods presented.
Currently, the Company does not employ a foreign currency hedge
program as the foreign currency transactions and risks to date
have not been significant.



| |                                                            
| | -----------------------------------------------------------
| | Use of Estimates in Preparation of
    Financial Statements

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



| |                          
| | -------------------------
| | Cash and Cash Equivalents

Cash and cash equivalents consist of short-term,
highly liquid investments with original maturities of less than
three months.



| |                      
| | ---------------------
| | Marketable Securities

The Company classifies its marketable securities
as either available-for-sale or
held-to-maturity. Available-for-sale
securities are stated at fair value, with unrealized gains and
losses recorded as

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NETRO CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Accumulated other comprehensive income, while
held-to-maturity securities are stated at amortized
cost. Realized gains or losses from the sales of marketable
securities are based on the specific identification method.

At December 31, 2002 and 2001, marketable
securities consisted of the following (in thousands):

|                         |                                          |      |         |            |  |        |       |            |  |   |      |      |   |   |         |         | 
|------------------------ | ---------------------------------------- | ---- | ------- | ---------- |  | ------ | ----- | ---------- |  | - | ---- | ---- | - | - | ------- | ------- | 
|                         |                                          |      |         |            |  |       
|                         |                                          |      |         | Unrealized |  |       
|                         |                                          |      |         |            |  |       
|                         |                                          | Cost |         | Gains      |  | Losses |       | Fair Value
|                         |                                          |      |         |            |  |        |       |           
|2002                     |                                          |      |         |            |  |        |       |            |  |   |      |      |   |   |         |        
|Available-for-sale:      |                                          |      |         |            |  |        |       |            |  |   |      |      |   |   |         |        
|                         | Commercial Paper                         |      | $       | 12,377     |  |        | $     | 3          |  |   | $    |     |   |   | $       | 12,380  | 
|                         | Corporate Bonds                          |      |         | 43,332     |  |        |       | 249        |  |   |      | (2   | ) |   |         | 43,579  | 
|                         | Government Securities                    |      |         | 81,718     |  |        |       | 298        |  |   |      | (13  | ) |   |         | 82,003  | 
|                         | Time Deposits and Other Bank Obligations |      |         | 14,688     |  |        |       | 11         |  |   |      |     |   |   |         | 14,699  | 
|                         |                                          |      |         |            |  |        |       |            |  |   |      |      |   |   |         |        
|Total Available-for-sale |                                          | $    | 152,115 |            |  | $      | 561   |            |  | $ | (15  | )    |   | $ | 152,661 |        
|                         |                                          |      |         |            |  |        |       |            |  |   |      |      |   |   |         |        
|2001                     |                                          |      |         |            |  |        |       |            |  |   |      |      |   |   |         |        
|Available-for-sale:      |                                          |      |         |            |  |        |       |            |  |   |      |      |   |   |         |        
|                         | Commercial Paper                         |      | $       | 48,057     |  |        | $     | 80         |  |   | $    |     |   |   | $       | 48,137  | 
|                         | Corporate Bonds                          |      |         | 73,236     |  |        |       | 981        |  |   |      | (12  | ) |   |         | 74,205  | 
|                         | Government Securities                    |      |         | 136,998    |  |        |       | 506        |  |   |      | (188 | ) |   |         | 137,316 | 
|                         | Time Deposits and Other Bank Obligations |      |         | 52,834     |  |        |       | 7          |  |   |      | (4   | ) |   |         | 52,837  | 
|                         |                                          |      |         |            |  |        |       |            |  |   |      |      |   |   |         |        
|Total Available-for-sale |                                          | $    | 311,125 |            |  | $      | 1,574 |            |  | $ | (204 | )    |   | $ | 312,495 |        
|                         |                                          |      |         |            |  |        |       |            |  |   |      |      |   |   |         |        
|1999                     |                                          |      |         |            |  |        |       |            |  |   |      |      |   |   |         |        
|Held-to-maturity         |                                          |      |         |            |  |        |       |            |  |   |      |      |   |   |         |        
|                         | U.S. Government Securities               |      |         | 37,887     |  |        |       |           |  |   |      |     |   |   |         | 37,887  | 
|                         |                                          |      |         |            |  |        |       |            |  |   |      |      |   |   |         |        
|Total Held-to-maturity   |                                          |      | 37,887  |            |  |        |      |            |  |   |     |      |   |   | 37,887  |        
|                         |                                          |      |         |            |  |        |       |            |  |   |      |      |   |   |         |        

The contractual maturities of
available-for-sale marketable securities at
December 31, 2002 are as follows:

|                               |  |            |         | 
|------------------------------ |  | ---------- | ------- | 
|                               |  | Fair Value
|                               |  |           
|Maturities in less than 1 year |  | $          | 134,767 | 
|Maturities in 1 to 2 years     |  |            | 17,894  | 
|                               |  |            |         | 
|                               |  | $          | 152,661 | 
|                               |  |            |         | 

Approximately $38,755,000 and $79,073,000 of the
total marketable securities were included in cash and cash
equivalents at December 31, 2002 and 2001, respectively.
The remainder was classified as short-term marketable securities
or long-term marketable securities. Approximately $1,032,000 and
$2,386,000 of accrued interest was also included in short-term
and long-term marketable securities at December 31, 2002
and 2001, respectively.



| |          
| | ---------
| | Inventory

Inventory, which includes material and labor
costs, is valued at standard cost, which approximates actual
cost computed on a first-in, first-out basis, not in excess of
market value. The Company provides for estimated excess or
obsolete inventory based upon assumptions about future demand
for products and the conditions of the markets in which the
products are sold. This reserve is reflected as a reduction to
inventory in the accompanying consolidated balance sheets. In
2002 and 2001, the Company provided $4.2 million and

44



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##### Table of Contents



NETRO CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

$25.7 million, respectively, for excess and
obsolete inventory. Significant management judgment and
estimates must be made and used in connection with establishing
this provision. Inventory consists of the following (in
thousands):

|                |  |              |       |              |  |   |       | 
|--------------- |  | ------------ | ----- | ------------ |  | - | ----- | 
|                |  | December 31, |       | December 31,
|                |  | 2002         |       | 2001        
|                |  |              |       |             
|Raw materials   |  | $            | 2,180 |              |  | $ | 2,534 | 
|Work-in-process |  |              | 359   |              |  |   | 219   | 
|Finished goods  |  |              | 3,688 |              |  |   | 4,121 | 
|                |  |              |       |              |  |   |       | 
|                |  | $            | 6,227 |              |  | $ | 6,874 | 
|                |  |              |       |              |  |   |       | 



| |                                         
| | ----------------------------------------
| | Equipment and Leasehold
    Improvements

Equipment is recorded at cost and depreciated
using the straight-line method over the estimated useful lives
of the assets, which range from three to seven years. Leasehold
improvements are recorded at cost and are amortized over the
estimated lives of the improvements or the term of the lease,
whichever is shorter. Maintenance and repairs that do not
improve or extend the life of assets are expensed as incurred.



| |                                                  
| | -------------------------------------------------
| | Assessment of Impairment of Long-lived
    Assets

The Company periodically evaluates whether events
and circumstances have occurred which indicate that the carrying
value of its long-lived assets may not be recoverable. In the
recent past, many telecommunications equipment companies with
significant long-lived intangible assets resulting from
acquisition activity have recorded significant charges
associated with the write off of those long-lived assets. If the
Company determines an asset has been impaired, the impairment
charge is recorded based on the excess of the carrying value
over the fair value of the impaired asset, with the reduction in
value charged to expense. As of December 31, 2002,
long-lived assets included $20.3 million of intangible
assets related to the Companys acquisition of Project
Angel and $9.6 million of fixed assets and tenant
improvements.



| |                                           
| | ------------------------------------------
| | Accumulated Other Comprehensive
    Income

Comprehensive income includes unrealized holding
gains and losses and other items that have previously been
excluded from net loss and reflected instead in
stockholders equity. Comprehensive income for the Company
consists of net loss plus the effect of unrealized holding gains
and losses on investments classified as available-for-sale and
foreign currency translation adjustments. Accumulated other
comprehensive income consists of the following (in thousands):

|                                                             |  |              |      |              |  |   |       |  
|------------------------------------------------------------ |  | ------------ | ---- | ------------ |  | - | ----- | -
|                                                             |  | December 31, |      | December 31,
|                                                             |  | 2002         |      | 2001        
|                                                             |  |              |      |             
|Unrealized holding gain on available-for-sale
    securities |  | $            | 546  |              |  | $ | 1,370 |  
|Cumulative translation adjustment                            |  |              | (125 | )            |  |   | (106  | )
|                                                             |  |              |      |              |  |   |       |  
|                                                             |  | $            | 421  |              |  | $ | 1,264 |  
|                                                             |  |              |      |              |  |   |       |  



| |                           
| | --------------------------
| | Software Development Costs

The Company capitalizes software development
costs when the technological feasibility of the product is
established. The establishment of technological feasibility and
the ongoing assessment of the recoverability of these costs
requires considerable judgment by management with respect to
certain external factors, including, but not limited to,
anticipated future gross product revenues, estimated economic
life and changes in software and hardware technology. Amounts
qualifying for capitalization under this statement after
consideration of the

45



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NETRO CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

above factors were immaterial and, therefore, no
software development costs have been capitalized by the Company
to date.



| |                    
| | -------------------
| | Revenue Recognition

Revenues consist of sales made directly to end
users and indirectly through original equipment manufacturers
(OEMs) and local resellers. Revenues from product
sales are recognized when all of the following conditions are
met: the product has shipped, an arrangement exists with the
customer and the Company has the right to invoice the customer,
collection of the receivable is reasonably assured and the
Company has fulfilled all of its material contractual
obligations to the customer. In cases where one of the above
factors has not been met, the Company defers the associated
revenue until all conditions have been met. Provisions are made
at the time of revenue recognition for estimated warranty costs.



| |                 
| | ----------------
| | Deferred Revenue

From time to time, the Company enters into
agreements to sell products to customers on open credit terms or
may agree in writing to the delivery of product subject to
installation or formal customer acceptance criteria. In such
cases, if management believes that the Company has not fulfilled
all of its material contractual obligations to the customer
(such as when it has primary responsibility for installation or
if there are acceptance criteria), or if the collectability of
the associated receivable is not reasonably assured, revenue
recognition is deferred until such time as the Companys
obligations are fulfilled and/or the amounts due have been
collected. Some of the factors used in evaluating whether or not
to defer revenue from a particular customer include:



| |   |                                                                                              
| | - | ---------------------------------------------------------------------------------------------
| |  | any material contractual obligations not
    fulfilled,                                      
|
| |  | acceptance criteria not yet met,                                                             
|
| |  | the customers liquid assets,                                                                
|
| |  | actual and projected cash flows for the
    customer, and                                    
|
| |  | the political and economic environment in the
    country in which the customer operates, and

Deferred revenue was $1.8 million at
December 31, 2002 and $1.9 million at
December 31, 2001.



| |                                    
| | -----------------------------------
| | Allowance for Doubtful
    Accounts

The Company performs ongoing credit evaluations
of its customers financial condition and establishes an
allowance for doubtful accounts based upon factors surrounding
the financial position of specific customers, historical trends
and other available information.



| |                     
| | --------------------
| | Warranty Obligations

The Company evaluates its obligations related to
product warranties on a quarterly basis. Netro offers a standard
one-year warranty on all products shipped. The Company monitors
historical warranty rates and tracks costs incurred to repair
units under warranty. These costs include labor, replacement
parts and certain freight costs. This information is then used
to calculate the accrual needed based on actual sales and
remaining warranty periods. For new product introductions,
estimates are made based on test and manufacturing data as well
as the Companys historical experience on similar products.
If circumstances change, or if the Company experiences a
significant change in its failure rates, the Companys
warranty accrual estimate could change significantly.

46



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##### Table of Contents



NETRO CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following is a reconciliation of the changes
in the warranty liability for the year ended December 31,
2002 (in thousands):

|                                      |  |   |        |  
|------------------------------------- |  | - | ------ | -
|Warranty accrual at December 31, 2001 |  | $ | 2,174  |  
|Warranty expenses incurred            |  |   | (310   | )
|Warranty accrual for 2002 revenues    |  |   | 756    |  
|Change in warranty estimate           |  |   | (2,000 | )
|                                      |  |   |        |  
|Warranty accrual at December 31, 2002 |  | $ | 620    |  
|                                      |  |   |        |  

The Company also indemnifies its customers
against any actions from third parties related to intellectual
property claims arising from use of the Companys product.
In the Companys experience, claims made under such
indemnifications are rare and the associated fair value of the
liability is not material.



| |                         
| | ------------------------
| | Research and Development

Research and development costs are expensed as
incurred and consist primarily of payroll costs, other direct
expenses and overhead.



| |                         
| | ------------------------
| | Stock-Based Compensation

On December 31, 2002, the Financial
Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS)
No. 148, Accounting for Stock Based
Compensation  Transition and Disclosure, which
amends SFAS No. 123. SFAS No. 148 requires
more prominent and frequent disclosures about the effects of
stock-based compensation, which the Company has adopted for the
year ended December 31, 2002. The Company accounts for its
stock-based compensation plans using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees.
Compensation cost for stock options, if any, is measured by the
excess of the quoted market price of the Companys stock at
the date of grant over the amount an employee must pay to
acquire the stock. SFAS No. 123, Accounting for
Stock-Based Compensation, established accounting and
disclosure requirements using a fair-value based method of
accounting for stock-based employee compensation plans. Had
compensation expense for the Plans been determined consistent
with SFAS No. 123, the Companys net loss and
basic and diluted net loss per share would have increased to the
following pro forma amounts (dollars, in thousands, except per
share amounts):

|                                                               |  |                          |          |      |  |      |          |   |  |   |         |  
|-------------------------------------------------------------- |  | ------------------------ | -------- | ---- |  | ---- | -------- | - |  | - | ------- | -
|                                                               |  |                         
|                                                               |  | Years Ended December 31,
|                                                               |  |                         
|                                                               |  | 2002                     |          | 2001 |  | 2000
|                                                               |  |                          |          |      |  |     
|Net loss, as reported                                          |  | $                        | (90,710  | )    |  | $    | (79,304  | ) |  | $ | (10,178 | )
|Fair value of stock-based compensation                         |  |                          | (30,739  | )    |  |      | (24,841  | ) |  |   | (16,822 | )
|                                                               |  |                          |          |      |  |      |          |   |  |   |         |  
|Net loss, pro forma                                            |  | $                        | (121,449 | )    |  | $    | (104,145 | ) |  | $ | (27,000 | )
|                                                               |  |                          |          |      |  |      |          |   |  |   |         |  
|Basic and diluted net loss per share, as reported              |  | $                        | (1.76    | )    |  | $    | (1.52    | ) |  | $ | (0.21   | )
|Basic and diluted net loss per share, pro forma                |  | $                        | (2.36    | )    |  | $    | (2.00    | ) |  | $ | (0.54   | )
|Stock-based compensation included in net loss, as
    reported |  | $                        | 679      |      |  | $    | 857      |   |  | $ | 1,064   |  

47



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##### Table of Contents



NETRO CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                                
| | -----------------------------------------------
| | Amortization of Deferred Stock
    Compensation

Amortization of deferred stock compensation
results from the granting of stock options to employees with
exercise prices per share determined to be below the estimated
fair values per share of the Companys common stock at
dates of grant. For the periods presented, amortization is
classified as follows (in thousands):

|                                            |  |      |     |      |  |      |     |  |  |   |       | 
|------------------------------------------- |  | ---- | --- | ---- |  | ---- | --- |  |  | - | ----- | 
|                                            |  | 2002 |     | 2001 |  | 2000
|                                            |  |      |     |      |  |     
|Research and development                    |  | $    | 360 |      |  | $    | 452 |  |  | $ | 497   | 
|Sales and marketing                         |  |      | 83  |      |  |      | 231 |  |  |   | 284   | 
|General and administrative                  |  |      | 169 |      |  |      | 174 |  |  |   | 283   | 
|                                            |  |      |     |      |  |      |     |  |  |   |       | 
|Amortization of deferred stock compensation |  | $    | 612 |      |  | $    | 857 |  |  | $ | 1,064 | 
|                                            |  |      |     |      |  |      |     |  |  |   |       | 



| |                                      
| | -------------------------------------
| | Computation of Net Loss Per
    Share

Basic and diluted net loss per share is computed
using the weighted average number of shares of common stock
outstanding. Potential common shares from the exercise of stock
options and warrants are excluded from diluted net loss per
share because they would be antidilutive. The total number of
shares excluded from diluted net loss per share relating to
these securities was as follows (in thousands):

|         |  |                          |        |      |  |      |       |  |  |  |       | 
|-------- |  | ------------------------ | ------ | ---- |  | ---- | ----- |  |  |  | ----- | 
|         |  |                         
|         |  | Years Ended December 31,
|         |  |                         
|         |  | 2002                     |        | 2001 |  | 2000
|         |  |                          |        |      |  |     
|Options  |  |                          | 10,277 |      |  |      | 8,193 |  |  |  | 4,894 | 
|Warrants |  |                          | 28     |      |  |      | 57    |  |  |  | 57    | 
|         |  |                          |        |      |  |      |       |  |  |  |       | 
|         |  |                          | 10,305 |      |  |      | 8,250 |  |  |  | 4,951 | 
|         |  |                          |        |      |  |      |       |  |  |  |       | 

The following table presents the calculation of
net loss per share (in thousands, except per share data):

|                                                                                                 |  |                          |         |      |  |      |         |   |  |   |         |  
|------------------------------------------------------------------------------------------------ |  | ------------------------ | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                                                                 |  |                         
|                                                                                                 |  | Years Ended December 31,
|                                                                                                 |  |                         
|                                                                                                 |  | 2002                     |         | 2001 |  | 2000
|                                                                                                 |  |                          |         |      |  |     
|Net loss                                                                                         |  | $                        | (90,710 | )    |  | $    | (79,304 | ) |  | $ | (10,178 | )
|                                                                                                 |  |                          |         |      |  |      |         |   |  |   |         |  
|Weighted average shares of common stock used to
    compute basic and diluted net loss per share |  |                          | 51,521  |      |  |      | 52,196  |   |  |   | 49,639  |  
|                                                                                                 |  |                          |         |      |  |      |         |   |  |   |         |  
|Basic and diluted net loss per share                                                             |  | $                        | (1.76   | )    |  | $    | (1.52   | ) |  | $ | (0.21   | )
|                                                                                                 |  |                          |         |      |  |      |         |   |  |   |         |  



| |                                              
| | ---------------------------------------------
| | Recently Issued Accounting
    Pronouncements

In June 2001, the Financial Accounting Standards
Board (FASB) issued SFAS No. 143,
Accounting for Asset Retirement Obligations, which
addresses the financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and
associated retirement costs. SFAS No. 143 requires
that the fair value of a liability for an asset retirement
obligation be recognized in the period in which it is incurred
if a reasonable estimate of fair value can be made.
SFAS No. 143 is effective for fiscal years beginning
after June 15, 2002. The adoption of SFAS No. 143
is not anticipated to have a material effect on the
Companys results of operations or consolidated financial
statements.

In July 2002, FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities. SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities when
they are incurred rather than at the date of a commitment to an
exit or disposal plan. Examples of costs covered by the standard
include lease termination costs and certain employee severance
costs that are associated with a restructuring, discontinued
operation, plant closing, or other exit or disposal activity.

48



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NETRO CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

SFAS No. 146 replaces EITF Issue
No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring).
SFAS No. 146 is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002.
Management does not expect this statement to have a material
impact on the Companys results of operations or
consolidated financial statements, although SFAS No. 146
may impact the timing of recognition of costs associated with
future restructuring, exit or disposal activities.

In November 2002, the FASB issued FASB
Interpretation No. 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN 45).
FIN 45 requires that upon issuance of a guarantee, a
guarantor must recognize a liability for the fair value of an
obligation assumed under a guarantee. FIN 45 also requires
additional disclosures by a guarantor in its interim and annual
financial statements about the obligations associated with
guarantees issued. The recognition provisions of FIN 45 are
effective for any guarantees issued or modified after
December 31, 2002. These consolidated financial statements
comply with the disclosure requirements of this interpretation.

On December 31, 2002, the FASB issued
SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure that amends
SFAS No. 123, Accounting for Stock-Based Compensation,
to provide alternative methods of transition to
SFAS No. 123s fair value method of accounting
for stock-based employee compensation. SFAS No. 148
also amends the disclosure provisions of SFAS No. 123
and APB Opinion No. 28, Interim Financial Reporting, to
require disclosure in the summary of significant accounting
policies of the effects of an entitys accounting policy
with respect to stock-based employee compensation on reported
net income and earnings per share in annual and interim
financial statements. SFAS No. 148 does not amend
SFAS No. 123 to require companies to account for
employee stock options using the fair value method.
SFAS No. 148 is effective for fiscal years ending
after December 15, 2002. These consolidated financial
statements comply with the requirements of
SFAS No. 148.

In January 2003, the FASB issued FASB
Interpretation No. 46, Consolidation of Variable
Interest Entities (FIN 46). FIN 46
addresses consolidation by business enterprises of variable
interest entities. Under that interpretation, certain entities
known as Variable Interest Entities (VIEs) must be
consolidated by the primary beneficiary of the entity. The
primary beneficiary is generally defined as having the majority
of the risks and rewards arising from the VIE. For VIEs in which
a significant (but not majority) variable interest is held,
certain disclosures are required. It applies immediately to
variable interest entities created after January 31, 2003,
and applies in the first year or interim period beginning after
June 15, 2003 to variable interest entities in which an
enterprise holds a variable interest that it acquired before
February 1, 2003. The Company is currently assessing the
impact the adoption of this interpretation will have on its
results of operations and consolidated financial statements.



|   |                              
|-- | -----------------------------
|3. | Concentrations of Credit Risk

Financial instruments that potentially subject
the Company to concentrations of credit risk consist principally
of trade receivables, cash equivalents, short-term marketable
securities and long-term marketable securities. With respect to
trade receivables, the Company performs ongoing credit
evaluations of its customers financial condition.
Additionally, the Company establishes an allowance for doubtful
accounts based upon factors surrounding the credit risk of
specific customers, historical trends and other available
information. At December 31, 2002, approximately
61 percent of the Companys trade accounts receivable
balance was represented by three customers. At December 31,
2001, approximately 81 percent of the Companys trade
accounts receivable balance was represented by four customers.
Although the Company does not require collateral on certain
accounts receivable on sales to large, well-established
companies, it does require standby letters of credit or
prepayments on certain sales to foreign and smaller companies.

49



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##### Table of Contents



NETRO CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

With respect to cash equivalents, short-term
marketable securities and long-term marketable securities, the
Company has cash investment policies that limit the amount of
credit exposure to any one issuer and restrict placement of
these investments to issuers evaluated as creditworthy.



|   |                                     
|-- | ------------------------------------
|4. | Equipment and Leasehold Improvements

Equipment and leasehold improvements consisted of
the following (in thousands):

|                                                |  |              |         |      |  |   |         |  
|----------------------------------------------- |  | ------------ | ------- | ---- |  | - | ------- | -
|                                                |  |             
|                                                |  | December 31,
|                                                |  |             
|                                                |  | 2002         |         | 2001
|                                                |  |              |         |     
|Engineering and test equipment                  |  | $            | 16,509  |      |  | $ | 14,236  |  
|Office and computer equipment                   |  |              | 7,157   |      |  |   | 5,201   |  
|Furniture and fixtures                          |  |              | 586     |      |  |   | 573     |  
|Leasehold improvements                          |  |              | 709     |      |  |   | 593     |  
|                                                |  |              |         |      |  |   |         |  
|                                                |  |              | 24,961  |      |  |   | 20,603  |  
|Less: Accumulated depreciation and amortization |  |              | (15,326 | )    |  |   | (12,807 | )
|                                                |  |              |         |      |  |   |         |  
|Equipment and leasehold improvements, net       |  | $            | 9,635   |      |  | $ | 7,796   |  
|                                                |  |              |         |      |  |   |         |  



|   |                    
|-- | -------------------
|5. | Accrued Liabilities

Accrued liabilities consisted of the following
(in thousands):

|                                                           |       |              |        |        |  |   |        |        | 
|---------------------------------------------------------- | ----- | ------------ | ------ | ------ |  | - | ------ | ------ | 
|                                                           |       |             
|                                                           |       | December 31,
|                                                           |       |             
|                                                           |       | 2002         |        | 2001  
|                                                           |       |              |        |       
|Accrued payroll and related benefits                       |       | $            | 1,690  |        |  | $ | 1,995  |       
|Warranty reserve                                           |       |              | 620    |        |  |   | 2,174  |       
|Customer deposits and deferred revenue                     |       |              | 2,204  |        |  |   | 2,306  |       
|Material-related commitments to contract
    manufacturers |       |              | 14,000 |        |  |   | 15,723 |       
|Other                                                      |       |              | 3,845  |        |  |   | 3,591  |       
|                                                           |       |              |        |        |  |   |        |       
|                                                           | Total |              | $      | 22,359 |  |   | $      | 25,789 | 
|                                                           |       |              |        |        |  |   |        |       



|   |                                   
|-- | ----------------------------------
|6. | Lines of Credit and Capital Leases

The following table summarizes obligations under
capital leases (in thousands):

|                                 |  |              |     |      |  |   |        |  
|-------------------------------- |  | ------------ | --- | ---- |  | - | ------ | -
|                                 |  |             
|                                 |  | December 31,
|                                 |  |             
|                                 |  | 2002         |     | 2001
|                                 |  |              |     |     
|Capital leases, due through 2003 |  | $            | 64  |      |  | $ | 1,336  |  
|Less: current portion            |  |              | (64 | )    |  |   | (1,272 | )
|                                 |  |              |     |      |  |   |        |  
|                                 |  | $            |    |      |  | $ | 64     |  
|                                 |  |              |     |      |  |   |        |  

In January 1998, the Company entered into a bank
line of credit under which up to $10,000,000 is available for
borrowings and letters of credit and which expires in March
2003. Borrowings are limited to an aggregate amount equaling
approximately 80 percent of eligible domestic trade
accounts receivable, 90 percent of eligible foreign trade
accounts receivable and 50 percent of eligible inventories
destined for foreign markets. The line of credit is secured by
the Companys trade accounts receivable and inventory. The
borrowings under the line accrue interest at the 30-day LIBOR
rate plus 1.5 percent or the banks prime rate, at the
Companys option. Under the agreement, the Company must
comply with certain financial and other

50



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##### Table of Contents



NETRO CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

covenants. At December 31, 2002, the Company
was in compliance with all covenants. As of December 31,
2002, there were no borrowings outstanding under this agreement
and amounts utilized for outstanding letters of credit were
$6.1 million.

A portion of the Companys machinery and
equipment is leased under agreements accounted for as capital
leases. The cost of equipment under capital leases included in
property and equipment at December 31, 2002 and 2001 was
approximately $399,000 and $5,793,000, respectively. Associated
accumulated depreciation was approximately $355,000 at
December 31, 2002 and $5,292,000 at December 31, 2001.

Future minimum lease payments under all
noncancelable capital lease agreements as of December 31,
2002, are summarized as follows (in thousands):

|                                            |  |   |    |  
|------------------------------------------- |  | - | -- | -
|2003                                        |  | $ | 65 |  
|Less: amount representing interest at 13.8% |  |   | (1 | )
|                                            |  |   |    |  
|Present value of lease payments             |  | $ | 64 |  
|                                            |  |   |    |  



|   |                              
|-- | -----------------------------
|7. | Commitments and Contingencies



| |            
| | -----------
| | Commitments

The Company leases its facilities and certain
equipment under noncancelable operating lease agreements
expiring at various dates through 2006. Future minimum lease
payments under all noncancelable operating lease agreements as
of December 31, 2002, are summarized as follows (in
thousands):

|     |  |   |        | 
|---- |  | - | ------ | 
|2003 |  | $ | 5,124  | 
|2004 |  |   | 5,220  | 
|2005 |  |   | 5,186  | 
|2006 |  |   | 3,227  | 
|     |  |   |        | 
|     |  | $ | 18,757 | 
|     |  |   |        | 

Rent expense for all operating leases was
approximately $5,723,000, $2,757,000 and $1,401,000 in 2002,
2001 and 2000, respectively.

As of December 31, 2002, the Company had
outstanding a standby letter of credit for $240,000 to secure
the Companys warranty obligations to one customer relating
to a discontinued product. The letter of credit is secured by a
certificate of deposit for $80,000. The letter of credit is
subject to draw if the Company fails to meet its obligation for
liquidated damages to the customer for downtime.

In July 2001, the Company issued a letter of
credit as a security deposit for the Companys
San Jose, California office space. The amount of the letter
of credit is approximately $1.6 million and expires in
September 2006. In February 2002, the Company issued a letter of
credit for $4.2 million ultimately expiring July 2006 as a
security deposit for the Companys Redmond, Washington
office space. These letters of credit are subject to draw if the
Company fails to meet its obligations under the facilities
leases.

The capital required for volume manufacturing is
being committed by the Companys contract manufacturers.
The Company provides six or twelve month forecasts to its
contract manufacturers. The Company generally commits to
purchase products to be delivered within the most recent
60 days covered by these forecasts with cancellation fees.
As of December 31, 2002, Netro had committed to make
purchases totaling $2.7 million from these manufacturers in
the next 60 days. In addition, in specific instances Netro
may agree to assume liability for limited quantities of
specialized components with lead times beyond this 60-day period.

51



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NETRO CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In addition, from time to time in the past, the
Company has committed to purchase minimum volumes of products
from certain of its contract manufacturers. As of
December 31, 2002, the Company had no minimum purchase
commitments for which it had not yet placed purchase orders.
Netro believes that its currently forecasted demand for
products, combined with its reserves for inventory and
material-related commitments will be sufficient to meet these
commitments in the future.



| |              
| | -------------
| | Contingencies

Coates
Litigation.On or around October 5, 2001, C.
Robert Coates, a holder of shares of the Companys common
stock, commenced an action in the Delaware Chancery Court
against the Company, the former Netro Corporation, which was
incorporated in California (Netro California), and
the members of the Companys board of directors, styled
Coates v. Netro Corp., et al., C.A.
No. 19154 (Coates I). The complaint in
Coates I made a number of allegations relating to the
approval by the shareholders of Netro California of the merger
transaction by which the Companys state of incorporation
was changed from California to Delaware and also claimed that
the adoption by the Companys board of directors of a
stockholder rights plan sometime after that merger transaction
was in violation of Delaware law. On November 30, 2001,
defendants filed a motion to dismiss the complaint in
Coates I for failure to state a claim. In a decision issued
on September 11, 2002, the Delaware Court of Chancery
granted defendants motion to dismiss. Mr. Coates did
not appeal from that decision.

Separately, on or about December 10, 2001,
Mr. Coates filed a complaint in a second action that names
as defendants the Company and certain members of the
Companys board of directors, styled Coates v.
Netro Corp., et al., C.A. No. 19309
(Coates II). Mr. Coates filed an amended
complaint in that action in October 2002. In the amended
complaint, Mr. Coates challenges a stock option
cancellation and regrant program for employees that was adopted
by the Companys board of directors in 2001. He also
challenges an award of options to the Companys outside
directors in July 2001. The complaint seeks an order declaring
the options at issue to be invalid and void, rescinding those
options, preliminarily and permanently enjoining the exercise of
those options, imposing a constructive trust on any such options
that were granted to defendants, and awarding monetary damages
in an unspecified amount as well as plaintiffs attorneys
fees and expenses. Defendants filed a motion to dismiss the
amended complaint on October 18, 2002. During the period
for briefing of that motion, the parties reached an agreement in
principle to settle the action. Under the proposed settlement:
(i) Each of the Companys outside directors (other
than Ms. Young, who is not named as a defendant) would
agree to forego any award of the Companys options in
calendar year 2003; (ii) the Companys governing
documents will be amended to reflect that any future option
awards to directors must be made by the Compensation Committee
of the Companys board of directors; and (iii) the
Company and the Companys directors will agree that any
future grant of options made to the Companys directors
will be publicly disclosed within 30 days after such a
grant. The proposed settlement is subject to approval by the
Delaware Court of Chancery. In connection with such court
approval, plaintiffs counsel intends to make an
application for an award of fees and expenses, which the Company
and other defendants have agreed not to oppose up to $40,000.

IPO Allocation
Litigation.On or around
August 23, 2001, Ramiro Soto-Gonzalez, who alleges that he
is a former shareholder of the Companys common stock,
commenced a purported class action lawsuit in the
U.S. District Court for the Southern District of New York
against the Company, Richard Moley, Gideon Ben-Efraim and
Michael T. Everett (Individual Defendants), as well
as against Dain Rauscher, Inc., FleetBoston Robertson Stephens,
Inc., and Merrill Lynch, Pierce, Fenner and Smith, Inc.
(Underwriter Defendants). The action is styled
Soto-Gonzalez v. Netro Corporation, Inc.,
et al., No. 01 Civ. 7993 (S.D.N.Y.). On or
around December 6, 2001, Zion Badichi, who alleges that he
is a former shareholder of the Companys common stock,
commenced a purported class action lawsuit in the
U.S. District Court for the Southern District of New York
against the Company, the Individual Defendants (except
Mr. Moley) and the

52



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NETRO CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Underwriter Defendants. The action is styled
Badichi v. Netro Corporation, Inc., et al.,
No. 01 Civ. 8348 (S.D.N.Y.).

The Soto-Gonzalez and Badichi
actions are two of more than 1,000 lawsuits filed in the
U.S. District Court for the Southern District of New York
against more than 300 different issuers, certain officers and
directors of these issuers and more than 45 different
underwriters arising out of initial public offerings occurring
between December 1997 and December 2000 (collectively IPO
Allocation Litigation). By Order dated August 9,
2001, Chief Judge Michael B. Mukasey assigned the IPO Allocation
Litigation, including the Soto-Gonzalez and
Badichi actions, to the Honorable Shira A. Scheindlin for
all pre-trial purposes. On September 7, 2001, Judge
Scheindlin adjourned the time for all defendants in the IPO
Allocation Litigation, including the Company and the Individual
Defendants, to answer, move or otherwise respond to current and
future complaints indefinitely pending further instruction from
the court. On or about March 2002, the Soto-Gonzalez and
Badichi actions were consolidated into a single action
styled In re Netro Corp. Initial Public Offering Securities
Litigation, No. 01 Civ. 7035, 21 MC 92 (SAS)
(Netro Litigation). Other lawsuits alleging similar
claims arising out of the Companys August 1999 initial
public offering against the Underwriter Defendants 
but not against the Company or the Individual
Defendants  were also consolidated into the Netro
Litigation. Those actions are styled Gutner v. Merrill
Lynch, Pierce, Fenner & Smith Incorporated
et al., No. 01 Civ. 7035 (S.D.N.Y.) and
Bryant v. Merrill Lynch, Pierce, Fenner & Smith
Incorporated et al., No. 01 Civ. 9184
(S.D.N.Y.).

On April 19, 2002, plaintiffs filed a
consolidated amended class action complaint in the Netro
Litigation (Complaint). The Complaint alleges claims
against the Company arising under Section 11 of the
Securities Act of 1933 (33 Act) and
Section 10(b) of the Securities Exchange Act of 1934
(Exchange Act), and Rule 10b-5 promulgated
thereunder, and against the Individual Defendants under
Section 10(b), Rule 10b-5 and Section 20(a) of
the Exchange Act, and Section 15 of the 33 Act.
The claims allege various misconduct arising from the
Companys August 1999 initial public offering and March
2000 follow-on offering of its common stock, including, among
other things, that the disclosures made in connection with the
offerings were incomplete or misleading in various respects. The
allegations include, among other things, that the Company and
the Individual Defendants failed to disclose that the
Underwriter Defendants: (1) charged the Company excessive
commissions and inflated transaction fees in violation of the
securities laws and regulations; and (2) allowed certain
investors to take part in the Companys initial public
offering in exchange for promises that these investors would
purchase additional shares in the after-market for the purpose
of inflating and maintaining the market price of the
Companys common stock. The Complaint seeks to certify a
class of shareholders who purchased the Companys common
stock between August 18, 1999 and December 6, 2000,
and to recover monetary damages from defendants in an
unspecified amount, as well as plaintiffs attorneys
fees and expenses in bringing the action.

On October 9, 2002, the claims against the
Individual Defendants were dismissed without prejudice on
consent of the parties. In addition, counsel for the plaintiffs,
liaison counsel for the issuer defendants and counsel for
insurers of the issuer defendants have taken part in continuing
discussions mediated by a former federal district court judge to
explore a possible settlement of the claims against all of the
issuer defendants in the IPO Allocation Litigation, including
the Company.

The IPO Allocation Litigation in general, and the
Netro Litigation in particular, are in an early phase, and no
date has yet been set by the court for completion of pre-trial
discovery or trial. The Company believes the claims asserted
against it in the Netro Litigation are without merit, and Netro
intends vigorously to defend itself against those claims.

FCC Kuwait
Litigation.This matter involves a
dispute regarding the alleged improper draw down by the Company
of a letter of credit opened by Future Communications Company
(FCC) with the Bank of Kuwait and the Middle East in
Kuwait, and the alleged refusal by the Company to accept return
by FCC of certain equipment provided to FCC by the Company. At
the January 15, 2003, hearing, the Court ruled that

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NETRO CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Netro Corporation had not yet been properly
served. The case has been adjourned until May 2, 2003, at
which time FCC will be required to prove completed service of
process or risk dismissal. The amount in dispute is
approximately $1,013,000 plus interest from December 31,
1999.

Solectron
Arbitration.On or around
December 19, 2002, Solectron California Corporation
(Solectron) demanded arbitration to resolve disputes
arising under its May 31, 1998 Manufacturing
Agreement with Netro. Solectrons principal claim is
that during the third quarter of 2000, it purchased materials on
the basis of Netros forecasts which were not followed by
corresponding orders. Solectron claims that as a result it now
has an excess inventory of materials which it cannot sell. Netro
vigorously disputes the claims on the ground that the
acquisition of material had not been approved by Netro as
required by the agreement. The total claim, including the cost
of materials and asserted carrying charges, is approximately
$14.5 million. The matter is set for mediation which is
scheduled to commence in the second quarter of 2003. Unless the
matter is resolved, arbitration will proceed thereafter before
the American Arbitration Association.

From time to time, the Company is involved in
various legal proceedings in the ordinary course of business.
The Company is not currently involved in any additional
litigation which, in managements opinion, would have a
material adverse effect on its business, operating results, cash
flows or financial condition; however, there can be no assurance
that any such proceeding will not escalate or otherwise become
material to the Companys business in the future.



|   |                      
|-- | ---------------------
|8. | Employee Benefit Plan

The Company maintains an employee savings plan
for all of its full-time employees. This plan qualifies under
Section 401(k) of the Internal Revenue Code (the
Code). The plan allows employees to make pre-tax
contributions in specified percentages up to the maximum dollar
limitations prescribed by the Code. The Company has the option
to contribute to the plan, but has not made contributions to
date and, accordingly, has not recorded any expense in the
consolidated statement of operations related to the plan.



|   |              
|-- | -------------
|9. | Capital Stock



| |                
| | ---------------
| | Public Offering

On March 17, 2000, the Company completed a
public offering for the sale of 6,000,000 shares of common
stock at a price of $82.50 per share. Of the
6,000,000 shares offered, the Company sold
4,504,111 shares and selling shareholders sold
1,495,889 shares. The offering resulted in net proceeds to
the Company of $352.3 million.



| |             
| | ------------
| | Tender Offer

In August 2002, the Company purchased
23,000,000 shares or approximately 38 percent of its
then outstanding common stock at $3.50 per share pursuant
to terms and subject to the conditions set forth in the Offer to
Purchase, dated July 19, 2002, and the related letter of
transmittal. The Company conducted the tender offer through a
procedure commonly referred to as a Dutch auction.
This procedure allowed each stockholder to select the price
within a per-share price range of $4.00 to $3.50 at which such
stockholder was willing to sell shares to the Company.
Stockholders alternatively could tender shares at the price
determined in the tender offer. The purchase price paid by the
Company for each share was determined in accordance with the
Dutch auction procedures to be the lowest price at which, based
on the number of shares tendered and the prices specified by the
tendering stockholders, the Company could
purchase 23,000,000 shares, or such lesser number of
shares as were properly tendered. All shares purchased under the
tender offer received the same purchase price. Due to over
subscription of the tender offer, shares tendered at
$3.50 per share and shares tendered by stockholders who
indicated that they were willing to accept whatever price was
determined in the offer were accepted for purchase on a pro-rata
basis using a pro-ration factor of approximately
73.9 percent.

54



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NETRO CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The aggregate purchase price paid was
$80.5 million. In addition, fees and expenses related to
the tender offer totaled approximately $2.3 million and
were recorded as a reduction of stockholders equity.



| |              
| | -------------
| | Capital Stock

The Companys capital stock is divided into
two classes: Common Stock and Preferred Stock.

At December 31, 2002, 4,668,447 shares
of Common Stock were reserved for issuance, including
4,154,576 shares for issuance under the Companys
stock option plans, 28,278 shares issuable upon the
exercise of warrants to purchase Common Stock and
485,593 shares issuable under the Companys employee
stock purchase plan.

The Company is authorized to issue
5,000,000 shares of undesignated preferred stock. The Board
of Directors will have the authority, without any further vote
or action by the stockholders:



| |   |                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | to issue the undesignated preferred stock in one
    or more series.                                                                                                                                      
|
| |  | to determine the powers, preferences and rights
    and the qualifications, limitations or restrictions granted to
    or imposed upon any wholly unissued series of undesignated
    preferred stock; and
|
| |  | to fix the number of shares constituting any
    series and the designation of that series.                                                                                                               

The rights of the holders of the common stock are
subject to, and may be adversely affected by, the rights of the
holders of any preferred stock that may be issued in the future.



| |                        
| | -----------------------
| | Stockholder Rights Plan

In July 2001, the Company adopted a stockholder
rights plan. This plan was amended and restated in July 2002. As
a part of the plan, the Company declared a dividend distribution
of one right for each outstanding share of common stock to
stockholders of record as of August 16, 2001. Each right
entitles the holder to purchase one unit consisting of one
one-hundredth of a share of a new series of participating
preferred stock at an initial purchase price of $20.00 per
unit. If a person or group acquires 15 percent or more of
the Companys outstanding common stock, holders of the
rights (other than the person or group triggering their
exercise) will be able to purchase, in exchange for the $20.00
exercise price, shares of the Companys common stock having
twice the value of the exercise price. If, following an
acquisition of 15 percent or more of the Companys
common stock by a stockholder, the Company is involved in
certain mergers or other business combinations each right will
entitle the holder to purchase, in exchange for the exercise
price, common stock of the other party to such transaction
having twice the value of the exercise price. Holders who, as of
the date of adoption of the plan, already held more than
15 percent of the Companys common stock will not
trigger any rights under the plan so long as neither they nor
their affiliates or associates acquire more than
19.9 percent of the Companys common stock. The rights
expire on July 23, 2011 unless extended by the
Companys Board of Directors.

The Carso Global Group is specifically excluded
from the definition of an Acquiring Person in the
plan in cases in which, as a result of any acquisition of shares
of common stock by the Company which, by reducing the number of
shares of common stock outstanding, increase the proportionate
number of shares of common stock beneficially owned by the Carso
Global Group to 19.9 percent or more of the shares of
common stock then outstanding. If, however, the Carso Global
Group shall thereafter become the beneficial owner of any
additional shares of common stock (other than pursuant to a
dividend or distribution paid or made by the Company on the
outstanding common stock, or pursuant to a split or subdivision
of the outstanding common stock,) then the Carso Global Group
shall be deemed to be an Acquiring Person unless,
upon becoming the beneficial owner of such additional shares of
common stock, the Carso Global Group does not beneficially own
19.9 percent or more of the shares of common stock then
outstanding.

55



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##### Table of Contents



NETRO CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                   
| | ------------------
| | Stock Option Plans



| |                                            
| | -------------------------------------------
| | 2000 Non-Executive Stock Incentive
    Plan

The 2000 Non-executive Stock Incentive Plan (the
2000 Plan) was adopted by the Board of Directors in
January 2000 and, unless terminated earlier by the Board of
Directors, will terminate in January 2010. It did not require
stockholder approval. The 2000 Plan provides for the grant of
nonstatutory stock options and restricted stock to non-executive
employees and consultants of the Company. The purposes of the
2000 Plan are: to attract and retain the best available
personnel; to provide additional incentives to non-executive
employees and consultants; and to promote the success of the
Company. The Company has reserved 5,700,000 shares for
issuance under the 2000 Plan, of which 1,746,436 shares
remained available for future grants as of December 31,
2002. To date, no options have been granted to non-employees
under this plan.

The compensation committee currently administers
the 2000 Plan. The administrator of the plan determines the
terms of the awards, including: the number of shares subject to
options or restricted stock grants, provided that no individual
employee may receive option grants for more than
1,000,000 shares in any fiscal year; vesting schedules,
which are typically  1/4 after one year
and  1/48 per month thereafter; exercise prices, which
must be at least 85 percent of the fair market value of
Netros common stock; the term of the options, which may
not exceed ten years; and the transferability of the options,
which are generally non-transferable other than by will or the
laws of descent or distribution, unless otherwise determined by
the administrator. Only nonstatutory stock options are granted
under the 2000 Plan. Executive officers of the Company may not
receive grants under the plan.

In the event of a change of control of the
Company, outstanding options will be assumed or substituted by
the successor corporation. If the successor corporation does not
agree to this assumption or substitution, the options will
terminate upon the closing of the transaction. The
Companys Board of Directors may amend, modify or terminate
the 2000 Plan if the amendment, modification or termination does
not impair vesting rights of the plan participants.



| |                          
| | -------------------------
| | 1999 Executive Stock Plan

The 1999 Executive Stock Plan (the 1999
Plan) was adopted by the Board of Directors in April 1999
and approved by the stockholders in May 1999. A total of
1,195,000 shares of common stock has been reserved for
issuance under the 1999 Plan, of which 288,022 shares
remained available for future option grants as of
December 31, 2002. Unless terminated earlier, the 1999 Plan
will terminate in April 2009. The 1999 Plan does not impose an
annual limitation on the number of shares subject to options
that may be issued to any individual employee.

The terms of options issued under the 1999 Plan
are generally the same as those that may be issued under the
1996 Stock Option Plan. However, all options granted under the
1999 Plan may be exercised immediately after the grant date,
subject to the Companys right to repurchase at cost any
shares that remain unvested at the time of the optionees
termination of employment. Options granted under the 1999 Plan
generally vest at the rate of  1/4 of the total number of
shares subject to the options twelve months after the date of
grant and  1/48 of the total number of shares subject to
the options each month thereafter.

In the event of a change of control of the
Company, outstanding options will be assumed or substituted by
the successor corporation. If the successor corporation does not
agree to this assumption or substitution, the options will
terminate upon the closing of the transaction. The
Companys Board of Directors may amend, modify or terminate
the 1999 Plan if the amendment, modification or termination does
not impair vesting rights of the plan participants.

56



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##### Table of Contents



NETRO CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                      
| | -------------------------------------
| | 1997 Directors Stock Option
    Plan

The 1997 Directors Stock Option Plan (the
Directors Plan) was adopted by the Board of
Directors in December 1997, amended in June 1999, and further
amended in May 2000. A total of 300,000 shares of common
stock has been reserved for issuance under the Directors
Plan, of which options to purchase 13,750 shares remained
available for future option grant as of December 31, 2002.
Under the Directors Plan, as amended, each individual who
first becomes a non-employee director after the effective date
of the amendment will receive an automatic initial grant of an
option to purchase 50,000 shares of common stock upon
appointment or election. Initial grants to non-employee
directors will vest in four equal annual installments. The
Directors Plan also provides for annual grants of options
to purchase 12,500 shares of common stock on the first
day of each fiscal year to each non-employee director who has
served on the Board of Directors for at least six months. The
annual grants to non-employee directors will vest in full on the
fourth anniversary of the date of grant. The per share exercise
price of all stock options granted under the Directors
Plan must be equal to the fair market value of a share of the
Companys common stock on the date of grant of the option.
Options granted under the Directors Plan have a term of
ten years. However, unvested options will terminate when the
optionee ceases to serve as a director and vested options will
terminate if they are not exercised within six months after the
directors death or disability or within 90 days after
the director ceases to serve as a director for any other reason.

In the event of a change of control of the
Company, all options outstanding under the Directors Plan
become vested and exercisable.



| |                                 
| | --------------------------------
| | 1995 and 1996 Stock Option Plans

In December 1996, the Company established the
1996 Stock Option Plan (the 1996 Plan). All shares
previously available for issuance under the Companys 1995
Stock Option Plan are reserved for issuance under the 1996 Plan.
As of December 31, 2002, 12,550,000 shares of Common
Stock had been authorized for issuance under the 1995 and 1996
Plan, of which 2,106,368 shares remained available for
future option grants. Under the 1996 Plan, the Company may grant
incentive stock options or nonstatutory stock options to
employees, officers, employee directors and consultants at an
exercise price of not less than 100 percent of the fair
market value of the Common Stock on the date of grant, except
that nonstatutory stock options may be granted at
85 percent of such fair market value. As is the case with
options granted under the 1999 Plan, the terms of the options
granted under the 1996 Plan are as determined by the
administrator and reflected in the option agreement. Options
granted generally become exercisable at a rate of  1/4 of
the shares subject to the option at the end of the first year
and  1/48 of the shares subject to the option at the end of
each calendar month thereafter. However, at the discretion of
the administrator, the optionee may have the immediate right to
exercise the option subject to a restricted stock agreement that
gives the Company the right to repurchase unvested shares at the
original issuance price in the event of termination of
employment. The maximum term of a stock option under the plans
is ten years, but if the optionee at the time of grant has
voting power of more than 10 percent of the Companys
outstanding capital stock, the maximum term is five years. The
number of shares reserved for issuance under the 1996 Plan will
be subject to an automatic annual increase on the first day of
each year beginning from 2001 through 2006 equal to the least
of: (1) 1,500,000 shares, (2) 3 percent of
Netros outstanding common stock on the last day of the
immediately preceding fiscal year, or (3) a lesser number
of shares determined by the administrator.

In the event of a change of control of the
Company, outstanding options will be assumed or substituted by
the successor corporation. If the successor corporation does not
agree to this assumption or substitution, the options will
terminate upon the closing of the transaction. The
Companys Board of Directors may amend, modify or terminate
the 1996 Plan if the amendment, modification or termination does
not impair vesting rights of the plan participants.

57



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##### Table of Contents



NETRO CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                            
| | ---------------------------
| | Cancel and Re-Grant Program

In March 2001, the Company effected a plan, under
which employees holding options to purchase the Companys
common stock with exercise prices in excess of $34.00 per
share could choose to cancel those stock option grants in
exchange for a commitment that options to purchase the same
number of common shares would be granted in October 2001,
provided that the participant has not terminated employment
prior to such time (the Cancel and Re-grant
Program). Options granted under the Cancel and Re-grant
Program have an exercise price equal to the fair value of the
Companys common stock on the date of the new grant, and
vest according to the original vesting terms,
typically  1/4 after one year and  1/48 per month
thereafter, beginning at the date of cancellation. All other
terms of options granted under the Cancel and Re-grant Program
are substantially the same as the cancelled options. On
October 26, 2001, the Company granted 1,209,584 options to
purchase the Companys common stock at the fair market
value of $3.07 per share in accordance with the Cancel and
Re-grant Program.



| |                          
| | -------------------------
| | Stock Option Plan Summary

The following table summarizes option activity
under the 2000 Plan, the 1999 Plan, the Directors Plan and
the 1995 and 1996 Stock Option Plans (the Plans):

|                             |  |           |            |                     |  |                |            |   |  |   |        | 
|---------------------------- |  | --------- | ---------- | ------------------- |  | -------------- | ---------- | - |  | - | ------ | 
|                             |  |           |            |                    
|                             |  |           |            | Options Outstanding
|                             |  |           |            |                    
|                             |  |           |            |                     |  | Weighted      
|                             |  | Options   |            |                     |  | Average       
|                             |  | Available |            | Shares              |  | Exercise Price
|                             |  |           |            |                     |  |               
|Balance at December 31, 1999 |  |           | 1,005,981  |                     |  |                | 6,844,460  |   |  | $ | 7.178  | 
|Authorized                   |  |           | 2,000,000  |                     |  |                |           |   |  |   |       | 
|Granted                      |  |           | (3,182,668 | )                   |  |                | 3,182,668  |   |  | $ | 37.025 | 
|Exercised                    |  |           |           |                     |  |                | (1,905,062 | ) |  | $ | 2.073  | 
|Terminated                   |  |           | 771,848    |                     |  |                | (771,848   | ) |  | $ | 18.347 | 
|Unvested shares repurchased  |  |           | 15,626     |                     |  |                |           |   |  |   |       | 
|                             |  |           |            |                     |  |                |            |   |  |   |        | 
|Balance at December 31, 2000 |  |           | 610,787    |                     |  |                | 7,350,218  |   |  | $ | 20.424 | 
|Authorized                   |  |           | 3,750,000  |                     |  |                |           |   |  |   |       | 
|Granted                      |  |           | (4,590,782 | )                   |  |                | 4,590,782  |   |  | $ | 5.210  | 
|Exercised                    |  |           |           |                     |  |                | (599,575   | ) |  | $ | 2.293  | 
|Terminated                   |  |           | 3,148,663  |                     |  |                | (3,148,663 | ) |  | $ | 31.577 | 
|                             |  |           |            |                     |  |                |            |   |  |   |        | 
|Balance at December 31, 2001 |  |           | 2,918,668  |                     |  |                | 8,192,762  |   |  | $ | 8.945  | 
|Authorized                   |  |           | 3,700,000  |                     |  |                |           |   |  |   |       | 
|Granted                      |  |           | (4,829,956 | )                   |  |                | 4,829,956  |   |  | $ | 3.174  | 
|Exercised                    |  |           |           |                     |  |                | (380,070   | ) |  | $ | 1.668  | 
|Terminated                   |  |           | 2,365,864  |                     |  |                | (2,365,864 | ) |  | $ | 7.140  | 
|                             |  |           |            |                     |  |                |            |   |  |   |        | 
|Balance at December 31, 2002 |  |           | 4,154,576  |                     |  |                | 10,276,784 |   |  | $ | 6.924  | 
|                             |  |           |            |                     |  |                |            |   |  |   |        | 

Shares of common stock issued pursuant to options
granted under the 1995 and 1996 stock option plans that had not
vested at the date of employee termination were repurchased by
the Company at cost, as reflected in the table above as
unvested shares repurchased. The repurchased shares
were cancelled and returned to the pool of options available for
grant.

58



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##### Table of Contents



NETRO CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

|                |  |                     |            |                     |  |                  |           |                 |  |                  |       |  |  |  |           |  |  |   |       | 
|--------------- |  | ------------------- | ---------- | ------------------- |  | ---------------- | --------- | --------------- |  | ---------------- | ----- |  |  |  | --------- |  |  | - | ----- | 
|                |  |                     |            |                    
|                |  | Options Outstanding |            | Options Exercisable
|                |  |                     |            |                    
|                |  |                     |            | Remaining           |  | Weighted Average |           | Number Vested   |  | Weighted Average
|Exercise Prices |  | Number              |            | Contractual Life    |  | Exercise Price   |           | and Exercisable |  | Exercise Price  
|                |  |                     |            |                     |  |                  |           |                 |  |                 
|$0.20           |  |                     | 14,200     |                     |  |                  | 3.6 years |                 |  | $                | 0.20  |  |  |  | 14,200    |  |  | $ | 0.20  | 
|$1.00-$1.50     |  |                     | 34,105     |                     |  |                  | 4.0 years |                 |  | $                | 1.47  |  |  |  | 34,105    |  |  | $ | 1.47  | 
|$1.85-$2.77     |  |                     | 820,523    |                     |  |                  | 5.7 years |                 |  | $                | 2.00  |  |  |  | 749,643   |  |  | $ | 2.00  | 
|$2.80-$3.84     |  |                     | 6,292,922  |                     |  |                  | 8.6 years |                 |  | $                | 3.20  |  |  |  | 1,470,894 |  |  | $ | 3.29  | 
|$4.50-$6.50     |  |                     | 301,866    |                     |  |                  | 8.2 years |                 |  | $                | 5.01  |  |  |  | 109,651   |  |  | $ | 4.71  | 
|$6.97-$8.00     |  |                     | 1,502,855  |                     |  |                  | 7.1 years |                 |  | $                | 7.67  |  |  |  | 891,045   |  |  | $ | 7.63  | 
|$14.50-$19.56   |  |                     | 520,969    |                     |  |                  | 7.4 years |                 |  | $                | 17.54 |  |  |  | 285,712   |  |  | $ | 17.54 | 
|$21.81-$28.00   |  |                     | 218,450    |                     |  |                  | 7.4 years |                 |  | $                | 24.91 |  |  |  | 146,289   |  |  | $ | 24.86 | 
|$34.31-$49.88   |  |                     | 570,894    |                     |  |                  | 6.9 years |                 |  | $                | 38.01 |  |  |  | 398,927   |  |  | $ | 37.68 | 
|                |  |                     |            |                     |  |                  |           |                 |  |                  |       |  |  |  |           |  |  |   |       | 
|                |  |                     | 10,276,784 |                     |  |                  |           |                 |  |                  |       |  |  |  | 4,100,466 |  |  |   |       | 
|                |  |                     |            |                     |  |                  |           |                 |  |                  |       |  |  |  |           |  |  |   |       | 



| |             
| | ------------
| | SFAS No. 123

The Company accounts for the Plans under APB
No. 25; however, the Company has computed, for pro forma
disclosure purposes, the fair value of each option grant on the
date of grant using the Black-Scholes option valuation model
with the following assumptions:

|                                                                   |  |                   |               |                   |  |                   |               |  |  |  |               | 
|------------------------------------------------------------------ |  | ----------------- | ------------- | ----------------- |  | ----------------- | ------------- |  |  |  | ------------- | 
|                                                                   |  | Year Ended        |               | Year Ended        |  | Year Ended       
|                                                                   |  | December 31, 2002 |               | December 31, 2001 |  | December 31, 2000
|                                                                   |  |                   |               |                   |  |                  
|Risk-free interest rate                                            |  |                   | 2.96% - 4.64% |                   |  |                   | 4.57% - 4.89% |  |  |  | 5.72% - 6.68% | 
|Average Expected Life of Option                                    |  |                   | 4 years       |                   |  |                   | 4 years       |  |  |  | 4 years       | 
|Dividend Yield                                                     |  |                   | 0%            |                   |  |                   | 0%            |  |  |  | 0%            | 
|Volatility of Common Stock                                         |  |                   | 67.1%         |                   |  |                   | 75.5%         |  |  |  | 157.5%        | 
|Weighted average fair value of options granted
    during the year |  |                   | $1.95         |                   |  |                   | $8.72         |  |  |  | $69.45        | 



| |                                      
| | -------------------------------------
| | 1999 Employee Stock Purchase
    Plan

In June 1999, the Board of Directors adopted the
1999 Employee Stock Purchase Plan (the Purchase
Plan). The Purchase Plan was intended to qualify under
Section 423 of the Internal Revenue Code. A total of
1,500,000 shares of common stock have been reserved for
issuance under the Purchase Plan, of which 485,593 shares
remained available for issuance at December 31, 2002. The
number of shares reserved for issuance under the Purchase Plan
is subject to an automatic annual increase on the first day of
each of 2002 through 2005 equal to the least of:
(1) 250,000 shares, (2) 1 percent of the
outstanding common stock on the last day of the immediately
preceding fiscal year, or (3) a lesser number of shares
determined by the administrator. The price of shares purchased
under the plan will be equal to 85 percent of the fair
market value of the Common Stock on the first day of the
offering period or the last day of the purchase period,
whichever is lower.

In the event of certain corporate transactions,
if the surviving corporation does not agree to assume the plan,
the offering period will be shortened and employees will be
entitled to purchase the number of shares then allowable under
the Purchase Plan.

59



---



##### Table of Contents



NETRO CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The fair value of purchase rights granted under
the Employee Stock Purchase Plan is estimated on the date of
grant using the Black-Scholes option pricing model with the
following weighted-average assumptions:

|                                                                                                   |  |                         |               |      |  |      |               |  |  |  |               | 
|-------------------------------------------------------------------------------------------------- |  | ----------------------- | ------------- | ---- |  | ---- | ------------- |  |  |  | ------------- | 
|                                                                                                   |  |                        
|                                                                                                   |  | Year Ended December 31,
|                                                                                                   |  |                        
|                                                                                                   |  | 2002                    |               | 2001 |  | 2000
|                                                                                                   |  |                         |               |      |  |     
|Risk-free interest rate                                                                            |  |                         | 1.69% - 2.33% |      |  |      | 3.47% - 5.01% |  |  |  | 5.89% - 6.31% | 
|Average expected life of option                                                                    |  |                         | 0.5 years     |      |  |      | 0.5 years     |  |  |  | 0.5 years     | 
|Dividend yield                                                                                     |  |                         | 0%            |      |  |      | 0%            |  |  |  | 0%            | 
|Volatility of Common Stock                                                                         |  |                         | 67.1%         |      |  |      | 75.5%         |  |  |  | 157.5%        | 
|Weighted average fair value of purchase rights
    granted during the year under the Purchase Plan |  |                         | $1.00         |      |  |      | $5.19         |  |  |  | $21.55        | 



| |                            
| | ---------------------------
| | Deferred Stock Compensation

In connection with the grant of stock options to
purchase 2,338,550 shares of common stock with a
weighted average exercise price of $2.84 per share to
employees during 1998 and 1999, the Company recorded deferred
compensation of $4,834,000, representing the difference between
the estimated fair value of the common stock and the aggregate
option exercise price of such options at the date of grant. This
amount was presented as a reduction of stockholders equity
and is being amortized ratably over the vesting period of the
applicable options (generally four years). Amortization expense
related to deferred stock compensation was $612,000, $857,000
and $1,064,000 in 2002, 2001 and 2000, respectively.
Compensation expense is decreased in the period of forfeiture
for any accrued but unvested compensation arising from the early
termination of an option holders services.



| |         
| | --------
| | Warrants

In connection with the Companys capital
lease financing arrangements, the Company issued warrants to its
lessors as follows:

|                         |  |         |      |        |  |          |        |  |  |   |      | 
|------------------------ |  | ------- | ---- | ------ |  | -------- | ------ |  |  | - | ---- | 
|                         |  | Year    |      | Share  |  | Exercise
|Class of Stock           |  | Granted |      | Amount |  | Price   
|                         |  |         |      |        |  |         
|Series C Preferred Stock |  |         | 1997 |        |  |          | 28,750 |  |  | $ | 7.00 | 
|Series D Preferred Stock |  |         | 1998 |        |  |          | 8,997  |  |  | $ | 7.78 | 
|Series D Preferred Stock |  |         | 1999 |        |  |          | 19,281 |  |  | $ | 7.78 | 

Warrants to purchase 23,750 shares at
$7.00 per share expired in June 2002. Warrants to
purchase 5,000 shares at $7.00 per share expired
in September 2002. Warrants to purchase 8,997 shares
at $7.78 per share will expire in February 2003. Warrants
to purchase 19,281 shares at $7.78 per share will
expire in March 2006. The fair value of the warrants was
estimated at the date of grant using the Black-Scholes model and
the value was determined to be immaterial.

All of the outstanding warrants to purchase
Preferred Stock were converted upon completion of the
Companys initial public offering into warrants to purchase
shares of Common Stock on a one for one basis. As of
December 31, 2002, none of these warrants had been
exercised.



|    |             
|--- | ------------
|10. | Income Taxes

The Company uses an asset and liability based
approach in accounting for income taxes. Deferred income tax
assets and liabilities are recorded to reflect the tax
consequences on future years of temporary differences of revenue
and expense items for financial statement and income tax
purposes. Valuation allowances are provided against assets that
are not likely to be realized.

60



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##### Table of Contents



NETRO CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Netro has incurred a net loss for each period
since inception. Recorded income taxes for 2002 and 2001
represent taxes paid by the Companys foreign subsidiaries.
The provision for income taxes differs from the expected tax
benefit amount computed by applying the statutory federal income
tax rate of 35 percent to loss before income taxes as
follows:

|                                    |  |              |     |      |  |      |     |    |  |  |     |   
|----------------------------------- |  | ------------ | --- | ---- |  | ---- | --- | -- |  |  | --- | --
|                                    |  |             
|                                    |  | Years Ended 
|                                    |  | December 31,
|                                    |  |             
|                                    |  | 2002         |     | 2001 |  | 2000
|                                    |  |              |     |      |  |     
|Federal statutory rate              |  |              | (35 | )%   |  |      | (35 | )% |  |  | (35 | )%
|State taxes, net of federal benefit |  |              | (6  | )    |  |      | (6  | )  |  |  | (6  | ) 
|Foreign taxes                       |  |              | (0  | )    |  |      | (0  | )  |  |  | (0  | ) 
|Change in valuation allowance       |  |              | 41  |      |  |      | 41  |    |  |  | 41  |   
|                                    |  |              |     |      |  |      |     |    |  |  |     |   
|                                    |  |              |    | %    |  |      |    | %  |  |  |    | % 
|                                    |  |              |     |      |  |      |     |    |  |  |     |   

The major components of the net deferred tax
asset were as follows (in thousands):

|                                  |                                |                          |          |        |         |  |         |        |        | 
|--------------------------------- | ------------------------------ | ------------------------ | -------- | ------ | ------- |  | ------- | ------ | ------ | 
|                                  |                                |                         
|                                  |                                | December 31,            
|                                  |                                |                         
|                                  |                                | 2002                     |          | 2001  
|                                  |                                |                          |          |       
|Net operating losses:             |                                |                          |          |        |         |  |         |       
|                                  | Federal                        |                          | $        | 86,955 |         |  | $       | 60,542 |       
|                                  | State                          |                          |          | 6,186  |         |  |         | 3,779  |       
|Tax credit carryforwards          |                                |                          | 9,358    |        |         |  | 9,186   |       
|Cumulative temporary differences: |                                |                          |          |        |         |  |         |       
|                                  | Reserves                       |                          |          | 9,723  |         |  |         | 13,590 |       
|                                  | Research and development costs |                          |          | 5,745  |         |  |         | 3,915  |       
|                                  | Start-up costs                 |                          |          | 508    |         |  |         | 508    |       
|                                  | Acquired intangibles           |                          |          | 9,276  |         |  |         |       |       
|                                  | Other                          |                          |          | 8,718  |         |  |         | 4,943  |       
|                                  |                                |                          |          |        |         |  |         |       
|                                  |                                | Total deferred tax asset |          |        | 136,469 |  |         |        | 96,463 | 
|Valuation allowance               |                                |                          | (136,469 | )      |         |  | (96,463 | )     
|                                  |                                |                          |          |        |         |  |         |       
|                                  |                                | Net deferred tax asset   |          | $      |        |  |         | $      |       | 
|                                  |                                |                          |          |        |         |  |         |       

The Company has established a valuation allowance
for the total deferred tax asset because, given the
Companys limited operating history and accumulated
deficit, it is uncertain that the deferred tax asset will be
realized.

As of December 31, 2002, the Company had
Federal and state net operating loss carry forwards of
approximately $248,444,000 and $103,102,000, respectively. The
Companys net operating loss carry forwards expire at
various dates through 2023. Under current tax law, the net
operating loss and tax credit carry forwards available for use
in any given year may be limited upon the occurrence of certain
events, including significant changes in ownership interest.



|    |                  
|--- | -----------------
|11. | Segment Reporting

The Company is organized and operates as one
operating segment: the design, development, manufacturing,
marketing and selling of broadband wireless point-to-multipoint
access systems.

The Company sells its products indirectly through
OEMs and local resellers in addition to through a direct sales
force. Netro generally offers installation and maintenance
services through its system integration

61



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NETRO CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

partners and third-party installation and support
organizations. Revenue by geography based on sales to original
customers was as follows:

|              |  |          |        |                     |  |      |        |      |  |      |        |      |  |  |     |   |  |  |     |   |  |  |     |  
|------------- |  | -------- | ------ | ------------------- |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  |  | --- | - |  |  | --- | - |  |  | --- | -
|              |  |          |        |                     |  |      |        |     
|              |  |          |        | Percentage of Total
|              |  | Revenues |        | Revenues           
|              |  |          |        |                    
|              |  | 2002     |        | 2001                |  | 2000 |        | 2002 |  | 2001 |        | 2000
|              |  |          |        |                     |  |      |        |      |  |      |        |     
|Latin America |  | $        | 1,815  |                     |  | $    | 9,872  |      |  | $    | 6,661  |      |  |  | 11  | % |  |  | 42  | % |  |  | 10  | %
|Europe        |  |          | 12,998 |                     |  |      | 6,028  |      |  |      | 1,447  |      |  |  | 76  |   |  |  | 25  |   |  |  | 2   |  
|Middle East   |  |          | 471    |                     |  |      | 482    |      |  |      | 40     |      |  |  | 3   |   |  |  | 2   |   |  |  |    |  
|Asia          |  |          | 910    |                     |  |      | 468    |      |  |      | 192    |      |  |  | 5   |   |  |  | 2   |   |  |  |    |  
|              |  |          |        |                     |  |      |        |      |  |      |        |      |  |  |     |   |  |  |     |   |  |  |     |  
|International |  |          | 16,194 |                     |  |      | 16,850 |      |  |      | 8,340  |      |  |  | 95  |   |  |  | 71  |   |  |  | 12  |  
|United States |  |          | 913    |                     |  |      | 6,809  |      |  |      | 60,187 |      |  |  | 5   |   |  |  | 29  |   |  |  | 88  |  
|              |  |          |        |                     |  |      |        |      |  |      |        |      |  |  |     |   |  |  |     |   |  |  |     |  
|              |  | $        | 17,107 |                     |  | $    | 23,659 |      |  | $    | 68,527 |      |  |  | 100 | % |  |  | 100 | % |  |  | 100 | %
|              |  |          |        |                     |  |      |        |      |  |      |        |      |  |  |     |   |  |  |     |   |  |  |     |  

Substantially all of the Companys domestic
revenues are related to products sold to OEMs. In the past,
these OEMs have typically resold these products to end users in
international locations. However, for the year ended
December 31, 2002, a significant portion of Netros
domestic revenues were related to products sold to end users in
the United States.



|    |                                   
|--- | ----------------------------------
|12. | Restructuring and Asset Impairment



| |                                                          
| | ---------------------------------------------------------
| | First Quarter 2002 Restructuring and Asset
    Impairment

In the first quarter of 2002, the Company
incurred $1.8 million in restructuring charges related to
various initiatives undertaken by the Company to reduce its cost
structure. The Company closed Bungee Communications, Inc., the
Companys Israeli engineering entity, and reduced its
workforce in its San Jose, California headquarters
location. The charges included the termination of approximately
54 employees (50 research and development employees, 3 sales and
marketing employees and 1 general and administrative employee),
the termination of the Bungee office lease and the write down of
assets associated with the Bungee operations. The following
table summarizes the activity related to the first quarter
restructuring charges for the year ended December 31, 2002
(in thousands):

|                        |  |               |       |               |  |                     |        |   |  |  |   | 
|----------------------- |  | ------------- | ----- | ------------- |  | ------------------- | ------ | - |  |  | - | 
|                        |  |               |       |               |  | Remaining Liability
|                        |  | Restructuring |       | Amounts Paid/ |  | at December 31,    
|                        |  | Charges       |       | Written-off   |  | 2002               
|                        |  |               |       |               |  |                    
|Impairment of assets    |  | $             | 797   |               |  | $                   | (797   | ) |  |  |  | 
|Severance               |  |               | 763   |               |  |                     | (763   | ) |  |  |  | 
|Lease and other expense |  |               | 265   |               |  |                     | (265   | ) |  |  |  | 
|                        |  |               |       |               |  |                     |        |   |  |  |   | 
|Total                   |  | $             | 1,825 |               |  | $                   | (1,825 | ) |  |  |  | 
|                        |  |               |       |               |  |                     |        |   |  |  |   | 



| |                                                          
| | ---------------------------------------------------------
| | Third Quarter 2002 Restructuring and Asset
    Impairment

In the third quarter of 2002, the Company
incurred $2.0 million in restructuring charges to further
reduce its cost structure. The Company reduced its worldwide
workforce by approximately 68 employees (43 research and
development employees, 13 sales and marketing employees and 12
general and administrative employees)

62



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##### Table of Contents



NETRO CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

and wrote down certain fixed assets. The
following table summarizes the activity related to the third
quarter restructuring charges for the year ended
December 31, 2002 (in thousands):

|                     |  |               |       |               |  |                     |        |   |  |  |   | 
|-------------------- |  | ------------- | ----- | ------------- |  | ------------------- | ------ | - |  |  | - | 
|                     |  |               |       |               |  | Remaining Liability
|                     |  | Restructuring |       | Amounts Paid/ |  | at December 31,    
|                     |  | Charges       |       | Written-off   |  | 2002               
|                     |  |               |       |               |  |                    
|Impairment of assets |  | $             | 117   |               |  | $                   | (117   | ) |  |  |  | 
|Severance            |  |               | 1,883 |               |  |                     | (1,883 | ) |  |  |  | 
|                     |  |               |       |               |  |                     |        |   |  |  |   | 
|Total                |  | $             | 2,000 |               |  | $                   | (2,000 | ) |  |  |  | 
|                     |  |               |       |               |  |                     |        |   |  |  |   | 



| |                                      
| | -------------------------------------
| | Fourth Quarter 2002
    Restructuring

In the fourth quarter of 2002, the Company
incurred $4.3 million in restructuring charges to further
reduce its cost structure. The Company reduced its worldwide
workforce by approximately 110 employees (80 research and
development employees, 21 sales and marketing employees and 9
general and administrative employees), closed two sales offices
and wrote down certain fixed assets. The following table
summarizes the activity related to the fourth quarter
restructuring charges for the year ended December 31, 2002
(in thousands):

|                     |  |               |       |               |  |                     |        |   |  |   |     | 
|-------------------- |  | ------------- | ----- | ------------- |  | ------------------- | ------ | - |  | - | --- | 
|                     |  |               |       |               |  | Remaining Liability
|                     |  | Restructuring |       | Amounts Paid/ |  | at December 31,    
|                     |  | Charges       |       | Written-off   |  | 2002               
|                     |  |               |       |               |  |                    
|Impairment of assets |  | $             | 154   |               |  | $                   | (154   | ) |  |   |    | 
|Severance            |  |               | 4,100 |               |  |                     | (3,429 | ) |  | $ | 671 | 
|                     |  |               |       |               |  |                     |        |   |  |   |     | 
|Total                |  | $             | 4,254 |               |  | $                   | (3,583 | ) |  | $ | 671 | 
|                     |  |               |       |               |  |                     |        |   |  |   |     | 

The remaining liability relates to severance
charges and is expected to be paid in the first quarter of 2003.



|    |                      
|--- | ---------------------
|13. | Acquisition of Assets

On February 12, 2002, the Company acquired
AT&T Wireless fixed wireless development team, a
license to intellectual property, inventory, equipment and
proprietary software assets. The technology was originally
developed under the code name Project Angel. The
acquisition was accounted for as a purchase of assets. The
purchase price was allocated based on the estimated fair value
of the assets acquired. The purchase consideration was
approximately $48.8 million, consisting of 8.2 million
shares of the Companys common stock, valued at
approximately $29.5 million, approximately
$16.0 million in cash and transaction costs of
approximately $3.3 million.

A total of $45.7 million of the purchase
consideration was allocated to intangible assets, including
$24.9 million of developed and core technology,
$17.6 million of in-process research and development costs,
and $3.2 million of other intangibles, which include the
acquired workforce. The remaining $3.1 million of purchase
consideration was allocated to fixed assets ($2.5 million)
and inventory ($0.6 million). Acquired in-process research
and development costs represent research and development
projects relating to expanding product capacity. These projects
had not yet reached technological feasibility and, accordingly,
this amount was expensed in the first quarter of 2002. The value
of acquired in-process technology was computed using a
discounted cash flow analysis on the anticipated income stream
of the related product revenues. This analysis was conducted by
an independent appraisal firm based on managements
forecast of future revenues, cost of revenues, and operating
expenses related to the purchased technologies. The intangible
assets are being amortized over an estimated useful life of
three years based on the product life cycle of the acquired
technology.

63



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##### Table of Contents








|        |                                                                           
|------- | --------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with
    Accountants and Financial Disclosure

On May 24, 2002, Netro Corporation (the
Company), with the approval of the audit committee
dismissed its independent auditors, Arthur Andersen LLP
(Arthur Andersen), who had provided auditing
services in addition to providing advice on Federal, State and
Local tax matters to the Company for eight years. After an
evaluation of services provided by a number of independent
accounting firms as well as their knowledge of the industry, the
Companys Audit Committee and full Board of Directors has
decided to engage PricewaterhouseCoopers LLP
(PricewaterhouseCoopers) as their independent
accountants effective as of May 24, 2002.

Arthur Andersens reports on the financial
statements of the Company for each of the past two fiscal years
contained no adverse opinion or disclaimer of opinion and were
not qualified or modified as to uncertainty, audit scope or
accounting principle. During the Companys two most recent
fiscal years, the Company had no disagreements with Arthur
Andersen on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure,
which disagreements if not resolved to the satisfaction of
Arthur Andersen would have caused them to make reference thereto
in their report on the financial statements of the Company for
such years. During the Companys two most recent fiscal
years, the Company had no reportable events (as defined in
Item 304(a)(1)(v) of Regulation S-K).

The Company requested that Arthur Andersen
furnish it with a letter addressed to the SEC stating whether or
not it agrees with the above statements. A copy of such letter,
dated May 28, 2002 was filed as Exhibit 16 to the
Companys current report on Form 8-K, filed with the
SEC on May 31, 2002.

During the two most recent fiscal years prior to
the change of accountants, the Company did not consult with
PricewaterhouseCoopers on items which (1) concerned the
application of accounting principles to any specific
transaction, either completed or proposed, or the type of audit
opinion that might be rendered on the Companys
consolidated financial statements or (2) concerned the
subject matter of a disagreement or reportable event with the
former auditor (as described in Item 304(a)(2)
Regulation S-K).




PART III






|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant

The following table sets forth information
concerning the directors and executive officers of the Company
as of March 1, 2003:

|                  |  |     |    |          |  |                                                                              
|----------------- |  | --- | -- | -------- |  | -----------------------------------------------------------------------------
|Name              |  | Age |    | Position
|                  |  |     |    |         
|Gideon Ben-Efraim |  |     | 60 |          |  | Chief Executive Officer, President and Chairman
    of the Board of Directors
|Thomas R. Baruch  |  |     | 64 |          |  | Director                                                                     
|Irwin Federman    |  |     | 66 |          |  | Director                                                                     
|Richard M. Moley  |  |     | 64 |          |  | Director                                                                     
|Sanford Robertson |  |     | 71 |          |  | Director                                                                     
|Shirley Young     |  |     | 67 |          |  | Director                                                                     
|Shlomo Yariv      |  |     | 55 |          |  | Chief Operating Officer                                                      
|Sanjay Khare      |  |     | 35 |          |  | Vice President and Chief Financial Officer                                   
|John Saw, Ph.D.   |  |     | 41 |          |  | Senior Vice President, Fixed Wireless Access                                 
|Peter Carson      |  |     | 55 |          |  | Senior Vice President, Worldwide Sales                                       

Gideon Ben-Efraimhas served as our President, Chief Executive Officer and a
director since founding Netro in November 1994. From November
1994 to March 1998, Mr. Ben-Efraim was also Chairman of the
Board of Directors and he was re-appointed as Chairman in April
2000. Prior to joining Netro, Mr. Ben-Efraim was a founder
of and Executive Vice President, Engineering and Business
Development at P-Com

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Inc., a digital microwave radio company, from
June 1991 to November 1994. Mr. Ben-Efraim received a B.S.
in Industrial Engineering and Management from Tel Aviv
University.


Thomas R. Baruchhas
been a director since November 1994. He has also been a General
Partner in CMEA Ventures (CMEA), a venture capital
firm, since 1988. Mr. Baruch was also a Special Partner in
New Enterprise Associates, a venture capital firm from 1990
until 1996. Prior to joining CMEA, Mr. Baruch was the
President and Chief Executive Officer of Microwave Technology,
Inc., a wireless technology firm, from 1983 to 1988.
Mr. Baruch serves on the boards of directors of
Physiometrix Inc., a developer and manufacturer of non-invasive
advanced medical products, Symyx Technologies, Inc., a developer
of industrial materials, ACLARA BioSciences, Inc., a developer
and manufacturer of analytical tools for biotechnology, and
AeroGen, a developer and manufacturer of inhalation drug
delivery products, in addition those of several privately held
companies.

Irwin Federmanhas
been a director since June 1995. Mr. Federman has been a
General Partner of U.S. Venture Partners, a venture capital
firm, since 1990. Mr. Federman serves on the boards of
directors of Centillium Communications, Inc., a developer and
supplier of communications integrated circuits, CheckPoint
Software Technologies, Inc., a network security software
company, Nuance Communications, Inc., a speech recognition
software company, SanDisk Corporation, a solid-state memory
system company, and several privately-held companies.

Richard M. Moleyhas
been a director since November 1997, Chairman of the Board of
Directors from March 1998 to April 2000 and Chairman Emeritus
since April 2000. Since August 1997, Mr. Moley has been a
private investor. From July 1996 to August 1997, he served as
Senior Vice President, Networking and as a director of Cisco
Systems, Inc., a networking and network solutions company.
Mr. Moley became a director at Cisco following Ciscos
purchase of StrataCom, Inc., a company at which Mr. Moley
had been the Chairman of the Board, Chief Executive Officer and
President from June 1986 to July 1996. Mr. Moley serves on
the boards of directors of Linear Technology Corporation, a
designer and manufacturer of linear integrated circuits, Echelon
Corporation, a developer of control network hardware and
software products, Spirent PLC, a British international
networking technology company, and several privately held
companies. Mr. Moley holds a B.Sc. from Manchester
University in the United Kingdom, an MSEE from Stanford
University and an MBA from Santa Clara University.

Sanford Robertsonhas been a director since April 2000. Mr. Robertson is a
founding partner of Francisco Partners, a leveraged buyout firm,
where he has served since January 2000. From September 1998 to
January 2000, Mr. Robertson served as President of S.R.
Robertson & Co., LLC, an investment services company.
Mr. Robertson also founded Robertson, Stephens &
Co., an investment bank, and served as its Chairman from 1978 to
September 1998. Mr. Robertson serves on the board of
directors of Pain Therapeutics, a medical research and
pharmaceutical company. Mr. Robertson received a BBA and an
MBA from the University of Michigan.

Shirley Younghas
been a director of the Company since October 2001.
Ms. Young is the President of Shirley Young Associates,
LLC, a business advisory company that she founded in January
2000, and has been a Senior Advisor to General Motors-Asia
Pacific since 2000. From 1988 until December 31, 1999, she
served as Corporate Vice President of General Motors
Corporations, where her most recent assignments were as Vice
President for China Strategic Development and as Asia Pacific
Counselor. Ms. Young holds a BA from Wellesly College and
is a member of Phi Beta Kappa.

Shlomo Yarivhas
served as the Companys Chief Operating Officer since May
2001, prior to which time, he served as President of the
Companys subsidiary, Bungee Communications, Ltd.
(Bungee) from July of 2000. Mr. Yariv served as
a director of Bungee from August 2000 to January 2002. Prior to
joining Bungee, he was President and CEO of Innowave Wireless
Systems, Ltd., a wireless local loop company, from October 1996
to July 2000. From October 1995 to October 1996, he was
Assistant to the Development Division General Manager at
Motorola Communications Israel, a land mobile radios development
company, and from October 1994 to October 1995 he was a Division
General Manager for Tadiran Communications, Ltd., a military
communications equipment company. Mr. Yariv received a
B.Sc. in Electrical Engineering from Technion-Haifa (Israel) and
an M.Sc. in Electrical Engineering from Columbia University.

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Sanjay Kharehas
served as the Companys Chief Financial Officer since
November 2000. Prior to serving as the Companys Chief
Financial Officer, Mr. Khare served as the Companys
Vice President, Business Development since May 2000. Before
joining Netro, Mr. Khare was a corporate attorney from
October 1995 to May 2000 with Venture Law Group, a law firm.
Prior to practicing law, Mr. Khare was a management
consultant with Monitor Company, a strategy consulting firm in
Cambridge, Massachusetts. Mr. Khare received an M.B.A. and
a J.D. from Stanford University, and a B.A. in Economics and
Statistics from the University of Chicago.

John Saw, Ph.D.has
served as the Companys Senior Vice President, Fixed
Wireless Access since February 2002. Prior to joining Netro,
Dr. Saw served as a Vice President, Engineering and Chief
Engineer, Fixed Wireless Services at AT&T Wireless, a
digital wireless network operator and wireless communications
services company, from May 2001 until February 2002. He also
served as Vice President, Platform Realization, Fixed Wireless
Services at AT&T Wireless from November 1999 until May 2001,
and as Director, Hardware Development, Wireless Local
Technologies Group at AT&T, a voice, video and data
communications company, from April 1997 until November 1999.
Dr. Saw holds B.Eng., M.Eng. and Ph.D. degrees in
electrical engineering from McMast University in Canada.

Peter Carsonhas
served as the Companys Senior Vice President, Worldwide
Sales since May 2001, prior to which time he served as the
Companys Vice President, Worldwide Sales since November
2000 and the Companys Vice President, Americas Sales since
January 2000. From April 1993 to November 1999, Mr. Carson
was Vice President  General Manager of the worldwide
Transportation Electronics Division at Raychem Corporation, a
diversified manufacturing company. Prior to that, he was in
charge of Raychems Interconnect Division from April 1989
to March 1993. Mr. Carson received a B.S. from Vanderbilt
University in Materials Engineering and an M.B.A. from Harvard
University.

Section 16(a) Beneficial Ownership
Reporting Compliances.Section 16(a) of the Exchange Act requires the
Companys directors, executive officers and persons who own
more than 10% of the Companys Common Stock (collectively,
Reporting Persons) to file with the SEC initial
reports of ownership and changes in ownership of the
Companys Common Stock. Reporting Persons are required by
SEC regulations to furnish the Company with copies of all
Section 16(a) reports they file. To the Companys
knowledge, based solely on its review of the copies of such
reports received or written representations from certain
Reporting Persons that no other reports were required, the
Company believes that during its fiscal year ended
December 31, 2002, all Reporting Persons complied with all
applicable filing requirements.

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|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

The following table provides certain summary
information concerning the compensation received for all
services rendered to the Company during the fiscal years ended
December 31, 2002, 2001 and 2000, by each of our named
executive officers as of December 31, 2002.

Summary Compensation Table

|                            |                                    |  |      |                     |  |              |         |              |  |              |        |        |  |   |        |        |  |  |         |         | 
|--------------------------- | ---------------------------------- |  | ---- | ------------------- |  | ------------ | ------- | ------------ |  | ------------ | ------ | ------ |  | - | ------ | ------ |  |  | ------- | ------- | 
|                            |                                    |  |      |                     |  |              |         |              |  | Long-Term   
|                            |                                    |  |      |                     |  |              |         |              |  | Compensation
|                            |                                    |  |      |                     |  | Awards      
|                            |                                    |  |      | Annual Compensation |  |             
|                            |                                    |  |      |                     |  | Securities  
|                            |                                    |  |      |                     |  | Other Annual |         | Underlying  
|Name and Principal Position |                                    |  |      | Salary              |  | Bonus        |         | Compensation |  | Options     
|                            |                                    |  |      |                     |  |              |         |              |  |             
|Gideon Ben-Efraim           |                                    |  | 2002 |                     |  | $            | 288,750 |              |  |              |       |        |  |   |       |        |  |  | 500,000 |        
|                            | Chief Executive Officer, President |  |      | 2001                |  |              |         | 272,917      |  |              |        |       |  |   |        |       |  |  |         | 425,000 | 
|                            | and Chairman                       |  |      | 2000                |  |              |         | 250,000      |  |              | $      | 93,750 |  |   |        |       |  |  |         |        | 
|Shlomo Yariv(1)             |                                    |  | 2002 |                     |  |              | 231,000 |              |  |              | 40,000 |        |  | $ | 38,200 |        |  |  | 250,000 |        
|                            | Chief Operating Officer            |  |      | 2001                |  |              |         | 220,493      |  |              |        | 61,653 |  |   |        | 27,000 |  |  |         | 370,000 | 
|                            |                                    |  | 2000 |                     |  |              | 73,790  |              |  |              | 36,710 |        |  |   |       |        |  |  | 80,000  |        
|Sanjay Khare                |                                    |  | 2002 |                     |  |              | 189,000 |              |  |              | 25,000 |        |  |   |       |        |  |  | 150,000 |        
|                            | Vice President and Chief           |  |      | 2001                |  |              |         | 179,583      |  |              |        | 40,000 |  |   |        |       |  |  |         | 170,000 | 
|                            | Financial Officer                  |  |      | 2000                |  |              |         | 100,756      |  |              |        | 35,000 |  |   |        |       |  |  |         | 150,000 | 
|John Saw, Ph.D.             |                                    |  | 2002 |                     |  |              | 159,577 |              |  |              | 45,000 |        |  |   |       |        |  |  | 250,000 |        
|                            | Senior Vice President, Fixed       |  |      | 2001                |  |              |         |             |  |              |        |       |  |   |        |       |  |  |         |        | 
|                            | Wireless Access                    |  |      | 2000                |  |              |         |             |  |              |        |       |  |   |        |       |  |  |         |        | 
|Peter Carson                |                                    |  | 2002 |                     |  |              | 183,750 |              |  |              | 15,000 |        |  |   |       |        |  |  | 80,000  |        
|                            | Senior Vice President, Worldwide   |  |      | 2001                |  |              |         | 193,899      |  |              |        | 55,000 |  |   |        | 18,899 |  |  |         | 160,000 | 
|                            | Sales                              |  |      | 2000                |  |              |         | 199,518      |  |              |        |       |  |   |        | 58,861 |  |  |         | 140,000 | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                      
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Mr. Yarivs salary for 2001 was paid
    partially by the Company and partially by the Companys
    subsidiary Bungee Communications Ltd. (Bungee). For
    2000, Mr. Yarivs salary was paid entirely by Bungee.
    The exchange rate used to determine the Bungee portions of
    Mr. Yarivs compensation listed in the table above was
    4.14809 shekels per 1 U.S. dollar.

OPTION GRANTS IN FISCAL YEAR 2002

The following table provides summary information
regarding stock options granted to the named executive officers
from our 1996 stock option plan, 1999 executive stock option
plan and our 2000 Non-executive Option Plan during the fiscal
year ended December 31, 2001. The 5 percent and
10 percent assumed annual rates of compounded stock price
appreciation are mandated by the rules of the SEC and do not
reflect managements projections of future performance of
Netros stock price.

|                  |  |                 |         |                  |  |                |       |            |  |                              |      |     |  |  |           |  |  |   |         |  |  |   |           | 
|----------------- |  | --------------- | ------- | ---------------- |  | -------------- | ----- | ---------- |  | ---------------------------- | ---- | --- |  |  | --------- |  |  | - | ------- |  |  | - | --------- | 
|                  |  |                 |         |                  |  |                |       |            |  |                             
|                  |  |                 |         |                  |  |                |       |            |  | Potential Realizable Value  
|                  |  |                 |         | Percent of Total |  |                |       |            |  | at Assumed Annual Rates of  
|                  |  | Number of       |         | Options          |  |                |       |            |  | Stock Price Appreciation for
|                  |  | Securities      |         | Granted to       |  |                |       |            |  | Option Term                 
|                  |  | Underlying      |         | Employees in     |  | Exercise Price |       | Expiration |  |                             
|                  |  | Options Granted |         | Fiscal Year(1)   |  | Per Share      |       | Date       |  | 5%                           |      | 10%
|                  |  |                 |         |                  |  |                |       |            |  |                              |      |    
|Gideon Ben-Efraim |  |                 | 500,000 |                  |  |                | 10.35 | %          |  | $                            | 3.17 |     |  |  | 1/23/2012 |  |  | $ | 996,798 |  |  | $ | 2,526,082 | 
|Shlomo Yariv      |  |                 | 250,000 |                  |  |                | 5.18  | %          |  | $                            | 3.17 |     |  |  | 1/23/2012 |  |  | $ | 498,399 |  |  | $ | 1,263,041 | 
|Sanjay Khare      |  |                 | 150,000 |                  |  |                | 3.11  | %          |  | $                            | 3.17 |     |  |  | 1/23/2012 |  |  | $ | 299,039 |  |  | $ | 757,825   | 
|John Saw          |  |                 | 250,000 |                  |  |                | 5.18  | %          |  | $                            | 3.00 |     |  |  | 2/12/2012 |  |  | $ | 471,671 |  |  | $ | 1,195,307 | 
|Peter Carson      |  |                 | 80,000  |                  |  |                | 1.66  | %          |  | $                            | 3.17 |     |  |  | 1/23/2012 |  |  | $ | 159,488 |  |  | $ | 404,173   | 



---



|    |                                                                                    
|--- | -----------------------------------------------------------------------------------
|(1) | Based on a total of 4,829,956 options granted to
    employees in fiscal year 2002.

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AGGREGATED OPTION EXERCISES IN FISCAL YEAR
2002 AND

FISCAL YEAR-END OPTION VALUES


The following table provides summary information
concerning the exercise of options by the Named Executive
Officers in 2002 and the shares of common stock represented by
outstanding stock options held by each of them as of
December 31, 2002. The value realized is based on the
market value on the date of exercise, net of the exercise price.
The value of unexercised in-the-money options is calculated
based on the difference between the exercise price of the option
and the fair market value of the common stock at
December 31, 2002. At December 31, 2002, the fair
market value of the Companys common stock was
$2.72 per share.

|                  |  |                  |   |                |  |                            |   |                      |  |             |         |               |  |  |         |  |  |   |        |  |  |   |   | 
|----------------- |  | ---------------- | - | -------------- |  | -------------------------- | - | -------------------- |  | ----------- | ------- | ------------- |  |  | ------- |  |  | - | ------ |  |  | - | - | 
|                  |  |                  |   |                |  |                            |   |                     
|                  |  |                  |   |                |  | Number of Securities       |   | Value of Unexercised
|                  |  |                  |   |                |  | Underlying Unexercised     |   | In-the-Money Options
|                  |  | Number of Shares |   |                |  | Options at Fiscal Year End |   | at Fiscal Year End  
|                  |  | Acquired on      |   |                |  |                            |   |                     
|Name              |  | Exercise         |   | Value Realized |  | Exercisable                |   | Unexercisable        |  | Exercisable |         | Unexercisable
|                  |  |                  |   |                |  |                            |   |                      |  |             |         |              
|Gideon Ben-Efraim |  | $                |  |                |  | $                          |  |                      |  |             | 742,084 |               |  |  | 775,001 |  |  | $ | 88,801 |  |  | $ |  | 
|Shlomo Yariv      |  | $                |  |                |  | $                          |  |                      |  |             | 219,999 |               |  |  | 480,001 |  |  | $ |       |  |  | $ |  | 
|Sanjay Khare      |  | $                |  |                |  | $                          |  |                      |  |             | 176,990 |               |  |  | 295,001 |  |  | $ | 1,440  |  |  | $ |  | 
|John Saw          |  | $                |  |                |  | $                          |  |                      |  |             |        |               |  |  | 250,000 |  |  | $ |       |  |  | $ |  | 
|Peter Carson      |  | $                |  |                |  | $                          |  |                      |  |             | 138,540 |               |  |  | 241,460 |  |  | $ |       |  |  | $ |  | 

COMPENSATION OF DIRECTORS

Directors currently receive no cash fees for
services provided in their capacity as such but are reimbursed
for out-of-pocket expenses incurred in connection with
attendance of meetings of the Board. The Companys 1997
Directors Stock Option Plan (the Directors
Plan) provides that each non-employee director of the
Company will receive an initial grant of an option to
purchase 50,000 shares, which vests in four equal
increments on the first four anniversaries of the date the
director joins the Board of Directors. In addition, it provides
that each director of the Company will receive an annual grant
of an option to purchase 12,500 shares on the first
day of each fiscal year, which vests in full on the fourth
anniversary of the date of grant, provided such non-employee
director has served on the Board for at least six months on the
date of grant.

EMPLOYMENT CONTRACTS, TERMINATION OF
EMPLOYMENT

AND CHANGE OF CONTROL ARRANGEMENTS


In March 1995, the Company entered into an
employment agreement with Gideon Ben-Efraim, the Companys
Chief Executive Officer, President and Chairman. The agreement
was amended in June 1995. Under the agreement, as amended,
Mr. Ben-Efraims base salary is established annually
pursuant to review by the Board. Pursuant to the agreement,
Mr. Ben-Efraim is entitled to participate in any annual
executive bonus plan of the Company in addition to the
Companys employee benefit plans of general application. In
the event that (i) Mr. Ben-Efraims employment is
terminated other than for cause, as defined in the employment
agreement, (ii) he voluntarily terminates his employment
with the Company within 180 days of the commencement of
employment of a Chief Executive Officer not previously approved
by him or the Board of Directors, (iii) he voluntarily
terminates his employment relationship with the Company within
30 days of a non-consensual change in the place of his
employment to outside of the Silicon Valley in Northern
California, or (iv) he voluntarily terminates his
employment relationship with the Company within 60 days of
a failure by the Company to comply with any material provision
of this Agreement which has not been cured within 30 days
of written notice from Mr. Ben-Efraim, then he shall be
entitled to receive severance payments equal to 12 months
of his then-current base salary and continued benefits for
12 months under the Companys benefit plans of general
application. If his termination is other than for cause, the
agreement also entitles Mr. Ben-Efraim to a lapse of
25 percent of the Companys repurchase option on his
then currently unvested shares, including those held by his
family trust. If the Company enters into certain
change-of-control transactions, as defined in the employment
agreement, Mr. Ben-Efraims options and shares subject
to repurchase, including those held by his family trust, will
become fully vested and will no longer be subject to

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repurchase by the Company. The agreement also
provides that, in the event the Company grants registration
rights to any officers or investors, the Company will grant no
less favorable rights to Mr. Ben-Efraim.


The company has entered into retention agreements
with each of Sanjay Khare, Shlomo Yariv and Peter Carson,
pursuant to which, if the executives employment terminates
for any reason within twelve months after a change of control or
if the executive is terminated by the company at any time within
twelve months after a change of control or after the filing of a
plan of liquidation which has been approved by the
companys stockholders, the executive will be entitled to
eight months severance pay in the case of Mr. Khare and
Mr. Carson and ten months severance pay in the case of
Mr. Yariv. Each of the three executives will also in the
event of such a termination receive one years accelerated
vesting of stock options held by him on the date of his
termination and all vested options will remain exercisable until
one year from the date of the executives termination.

Other than the employment agreements of
Mr. Ben-Efraim, Mr. Khare, Mr. Carson, and
Mr. Yariv and options granted to directors as described
under Compensation of Directors, none of the
Participants is or was within the last fiscal year a party to
any contract, arrangement or understanding with respect to any
future employment by the Company or its affiliates or any future
transactions to which the Company or any of its affiliates will
or may be a party.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER
PARTICIPATION

The Compensation Committee of the Board of
Directors currently consists of Thomas R. Baruch and Irwin
Federman. Neither member of the Compensation Committee serves as
a member of the board of directors or compensation committee of
any entity that has one or more executive officers serving as a
member of the Companys Board of Directors or Compensation
Committee. Furthermore, no executive officer of the Company
served as a member of the board of directors or the compensation
committee of another entity, one of whose executive officers
served on either the Companys Board of Directors or
Compensation Committee.

COMPENSATION COMMITTEE REPORT ON EXECUTIVE
COMPENSATION

Notwithstanding anything to the contrary set
forth in any of the Companys filings under the Securities
Act or the Exchange Act that might incorporate future filings,
including this report on Form 10-K, in whole or in part,
the following report and the Stock Performance Graph included
elsewhere in this Form 10-K shall not be deemed to be
incorporated by reference into any such filings.

The following is a report of the Compensation
Committee of the Board of Directors (the Committee)
describing the compensation policies applicable to the
Companys executive officers and other employees during the
fiscal year ended December 31, 2002. The Committee is
responsible for establishing and monitoring the general
compensation policies and compensation plans of the Company, as
well as the specific compensation levels for executive officers.
Executive officers who are also directors have not participated
in deliberations or decisions involving their own compensation.

General Compensation Policy

Under the supervision of the Board, the
Companys compensation policy is designed to attract and
retain qualified key executives critical to the Companys
growth and long-term success. It is the objective of the Board
to have a portion of each executives compensation
contingent upon the Companys performance as well as upon
the individuals personal performance. Accordingly, each
executive officers compensation package is comprised of
three elements: (i) base salary, which reflects individual
performance and expertise, (ii) variable bonus awards
payable in cash and tied to the achievement of certain
performance goals that the Board establishes form time to time
for the Company and (iii) stock-based incentive awards
which are designed to strengthen the mutuality of interests
between the executive officers and the Companys
stockholders.

The summary below describes in more detail the
factors that the Board considers in establishing each of the
three primary components of the compensation package provided to
the executive officers.

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Base Salary

The level of base salary is established primarily
on the basis of the individuals qualifications and
relevant experience, the strategic goals for which he or she has
responsibility, the compensation level at companies that compete
with the Company for business and executive talent, and the
incentives necessary to attract and retain qualified management.
Base salary is adjusted each year to take into account the
individuals performance and to maintain a competitive
salary structure. Company performance does not play a
significant role in the determination of base salary.

Cash-Based Incentive Compensation

Cash bonuses are discretionarily awarded to
executive officers on the basis of their success in achieving
designated individual goals and on the Companys success in
achieving specific company-wide goals, such as customer
satisfaction, revenue growth and earnings growth.

Stock-Based Incentive Compensation

The Company has utilized its stock option plans
to provide executives and other key employees with incentives to
maximize long-term stockholder values. Awards granted under
stock option plans by the Board take the form of stock options
designed to give the recipient a significant equity stake in the
Company and thereby closely align his or her interests with
those of the Companys stockholders. Factors considered in
making such awards include the individuals position in the
Company, his or her performance and responsibilities, and
internal comparability considerations.

Each option grant allows the executive officers
to acquire shares of common stock at a fixed price per share
(the fair market value on the date of grant) over a specified
period of time (up to 10 years). The options typically vest
in periodic installments over a four-year period, contingent
upon the executive officers continued employment with the
Company. Accordingly, the option will provide a return to the
executive officer only if he or she remains in the
Companys service, and then only if the market price of the
common stock appreciates over the option term.

Compensation of the Chief Executive
Officer

Gideon Ben-Efraim has served as the
Companys Chief Executive Officer, President and Chairman
since the Companys inception in 1994. His base salary for
fiscal 2002 was $288,750 and he received no cash bonus. The
Compensation Committee determined Mr. Ben-Efraims
salary and bonus targets for fiscal 2002 in January 2002. At the
end of the year, it was determined that Mr. Ben-Efraim
should not be awarded a cash bonus based on the Companys
overall financial performance in 2002.

The factors discussed above in Base
Salaries, Cash-Based Incentive Compensation,
and Stock-Based Compensation were also applied in
establishing the amount of Mr. Ben-Efraims salary and
stock option grants. Significant factors in establishing
Mr. Ben-Efraims cash and stock-based compensation
were the amount of his current stock ownership, including the
portion that was unvested, changes in the compensation for
similarly situated chief executive officers, whether revenue
targets were achieved, whether customer contracts were obtained
and the growth of the Company.

Deductibility of Executive
Compensation

The Committee has considered the impact of
Section 162(m) of the Internal Revenue Code adopted under
the Omnibus Budget Reconciliation Act of 1993, which section
disallows a deduction for any publicly held corporation for
individual compensation exceeding $1 million in any taxable
year for the CEO and four other most highly compensated
executive officers, respectively, unless such compensation meets
the requirements for the performance-based exception
to Section 162(m). As the cash compensation paid by the
Company to each of its executive officers is expected to be
below $1 million and the Committee believes that options
granted under the Companys 1996 Stock Option Plan and its
1999 Executive Stock Plan to such officers will meet the
requirements for qualifying as performance-based, the Committee
believes that

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Section 162(m) will not affect the tax
deductions available to the Company with respect to the
compensation of its executive officers. It is the
Committees policy to establish executive compensation at
levels which should qualify for deductibility under applicable
tax law.




| |                        
| | -----------------------
| | COMPENSATION COMMITTEE:
|
| | Thomas Baruch          
| | Irwin Federman         

71



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##### Table of Contents



STOCK PERFORMANCE GRAPH

The following graph compares the cumulative total
stockholder return data for the Companys common stock
since August 19, 1999 (the date on which the Companys
stock was first traded on Nasdaq) through December 31,
2002, to the cumulative return over such period of (i) The
Nasdaq Stock Market Composite Index, and (ii) the Nasdaq
Telecommunications Index. The graph assumes that $100 was
invested in the common stock of the Company and in each of the
comparative indices on August 19, 1999. The graph further
assumes (i) that such amount was initially invested in the
common stock of the Company at the price at which such stock was
first offered to the public by the Company on the date of its
initial public offering and (ii) the reinvestment of any
dividends. The stock price performance on the following graph is
not necessarily indicative of future stock price performance.

(PERFORMANCE GRAPH)

CUMULATIVE TOTAL RETURN

|                                |  |         |        |          |  |          |        |          |  |          |       |  |  |   |       |  |  |   |       | 
|------------------------------- |  | ------- | ------ | -------- |  | -------- | ------ | -------- |  | -------- | ----- |  |  | - | ----- |  |  | - | ----- | 
|                               
|                               
|                                |  | 8/19/99 |        | 12/31/99 |  | 12/31/00 |        | 12/31/01 |  | 12/31/02
|                               
|                               
|Netro Corporation               |  | $       | 100.00 |          |  | $        | 637.50 |          |  | $        | 86.73 |  |  | $ | 45.88 |  |  | $ | 34.01 | 
|Nasdaq Stock Market (U.S.)      |  | $       | 100.00 |          |  | $        | 154.99 |          |  | $        | 93.22 |  |  | $ | 73.97 |  |  | $ | 51.12 | 
|Nasdaq Telecommunications Index |  | $       | 100.00 |          |  | $        | 145.81 |          |  | $        | 62.10 |  |  | $ | 41.58 |  |  | $ | 19.19 | 



72



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##### Table of Contents








|         |                                                                                                       
|-------- | ------------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder
    Matters

COMMON STOCK OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT

The following table sets forth information
regarding the beneficial ownership of the Companys Common
Stock as of March 13, 2003, by:



| |   |                                                                                                                                             
| | - | --------------------------------------------------------------------------------------------------------------------------------------------
| |  | each person who is known by us to own
    beneficially more than 5 percent of our Common Stock;                                             
|
| |  | each of our directors;                                                                                                                      
|
| |  | the Companys Chief Executive Officer and
    next four most highly compensated executive officers (the
    named executive officers); and
|
| |  | all directors and executive officers as a group.                                                                                            

Percentage of beneficial ownership is based on
shares of Common Stock outstanding as of March 13, 2003,
together with options that are exercisable within 60 days
of March 13, 2003 for each shareholder. Beneficial
ownership is determined in accordance with the rules of the SEC.

|                                                                     |  |                     |           |         |  |  |       |  
|-------------------------------------------------------------------- |  | ------------------- | --------- | ------- |  |  | ----- | -
|                                                                     |  |                    
|                                                                     |  | Shares Beneficially
|                                                                     |  | Owned              
|                                                                     |  |                    
|Name and Address of Beneficial Owner                                 |  | Number              |           | Percent
|                                                                     |  |                     |           |        
|Global Telecom LLC(1)                                                |  |                     | 9,440,000 |         |  |  | 24.40 | %
|Gideon Ben-Efraim(2)                                                 |  |                     | 3,781,750 |         |  |  | 9.78  |  
|Dimensional Fund Advisors(3)                                         |  |                     | 2,082,641 |         |  |  | 5.38  |  
|Shlomo Yariv(4)                                                      |  |                     | 344,823   |         |  |  | *     |  
|Richard M. Moley(5)                                                  |  |                     | 278,234   |         |  |  | *     |  
|Sanjay Khare(6)                                                      |  |                     | 265,259   |         |  |  | *     |  
|Thomas R. Baruch(7)                                                  |  |                     | 242,451   |         |  |  | *     |  
|Peter Carson(8)                                                      |  |                     | 192,360   |         |  |  | *     |  
|Sanford Robertson(9)                                                 |  |                     | 174,165   |         |  |  | *     |  
|Irwin Federman(10)                                                   |  |                     | 154,542   |         |  |  | *     |  
|John Saw(11)                                                         |  |                     | 79,678    |         |  |  | *     |  
|Shirley Young(12)                                                    |  |                     | 22,500    |         |  |  | *     |  
|All directors and executive officers as a group
    (10 persons)(13) |  |                     | 5,535,762 |         |  |  | 14.31 |  



---



| |   |                               
| | - | ------------------------------
| | * | Indicates less than 1 percent.



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | The information in this footnote is based on an
    amended Schedule 13G filed on February 8, 2002, by Global
    Telecom LLC. (Telecom). 9,440,000 shares are
    held by Telecom. Carso Global Telecom, S.A. de C.V.
    (CGT), as the sole member of Telecom, is deemed to
    beneficially own indirectly the 9,440,000 shares. Members
    of the family of Carlos Slim Helu directly and indirectly own a
    majority of the issued and outstanding voting securities of CGT
    and are also deemed to beneficially own individually the
    9,440,000 shares. Telecom, CGT and the Slim family share
    voting and investment power with respect to the shares held by
    these entities. The address for Telecom is 1000 Louisiana
    Street, Suite 565, Houston, Texas 77002.
|
| | (2) | Includes 977,500 shares issuable upon
    exercise of options exercisable within 60 days of
    March 13, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| | (3) | The information in this footnote is based on a
    Schedule 13G filed with the Securities and Exchange
    Commission on February 7, 2003, by Dimensional Fund
    Advisors Inc. (Dimensional). Dimensional, an
    investment advisor registered under Section 203 of the
    Investment Advisors Act of 1940, furnishes investment advice to
    four investment companies registered under the Investment
    Company Act of 1940,                                                                                                                                                                                                                                                                                                                                                        

73



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##### Table of Contents



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     | and serves as investment manager to certain other
    commingled group trusts and separate accounts (collectively, the
    Funds). In its role as investment advisor or
    manager, Dimensional possesses voting and investment power over
    the shares owned by the Funds, and may be deemed to be the
    beneficial owner. However, the shares are owned by the Funds.
    Dimensional disclaims beneficial ownership of these shares. The
    address for Dimensional Fund Advisors is 1299 Ocean Avenue, 11th
    Floor, Santa Monica, CA 90401.
|
| | (4) | Includes 340,823 shares issuable upon
    exercise of options exercisable within 60 days of
    March 13, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| | (5) | Includes 176,665 shares issuable upon
    exercise of options exercisable within 60 days of
    March 13, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| | (6) | Includes 258,456 shares issuable upon
    exercise of options exercisable within 60 days of
    March 13, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| | (7) | Includes 71,666 shares issuable upon
    exercise of options exercisable within 60 days of
    March 13, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| | (8) | Includes 190,830 shares issuable upon
    exercise of options exercisable within 60 days of
    March 13, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| | (9) | Includes 74,165 shares issuable upon
    exercise of options exercisable within 60 days of
    March 13, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                            



|     |                                                                                                               
|---- | --------------------------------------------------------------------------------------------------------------
|(10) | Includes 71,666 shares issuable upon
    exercise of options exercisable within 60 days of
    March 13, 2003.
|    
|(11) | Includes 78,124 shares issuable upon
    exercise of options exercisable within 60 days of
    March 13, 2003.
|    
|(12) | Includes 12,500 shares issuable upon
    exercise of options exercisable within 60 days of
    March 13, 2003.
|    
|(13) | Includes the information in the notes above, as
    applicable.                                               

Except as otherwise noted, the address of each
person listed in the table is c/o Netro Corporation,
3860 N. First Street, San Jose, CA 95134, and the
persons named in the table have sole voting and investment power
with respect to all shares of Common Stock shown as beneficially
owned by them, subject to community property laws where
applicable.

DISCLOSURE WITH RESPECT TO THE COMPANYS
EQUITY COMPENSATION PLANS

The following table summarizes common stock
subject to future issuance under the Companys equity
compensation plans:

|                                                           |  |                            |            |                  |  |                              |      |  |  |  |           |       
|---------------------------------------------------------- |  | -------------------------- | ---------- | ---------------- |  | ---------------------------- | ---- |  |  |  | --------- | ------
|                                                           |  | Number of Securities to Be |            |                  |  | Number of Securities        
|                                                           |  | Issued upon Exercise of    |            |                  |  | Remaining Available for     
|                                                           |  | Outstanding Options,       |            | Weighted-Average |  | Future Issuance Under Equity
|                                                           |  | Warrants and Rights        |            | Exercise Price   |  | Compensation Plans          
|                                                           |  |                            |            |                  |  |                             
|Equity Compensation Plans approved by stockholders         |  |                            | 6,324,844  |                  |  |                              | 7.49 |  |  |  | 2,893,733 | (1)(2)
|Equity Compensation Plans not approved by
    stockholders |  |                            | 3,951,940  |                  |  |                              | 6.01 |  |  |  | 1,746,436 |       
|                                                           |  |                            |            |                  |  |                              |      |  |  |  |           |       
|Total                                                      |  |                            | 10,276,784 |                  |  |                              | 6.92 |  |  |  | 4,640,169 |       
|                                                           |  |                            |            |                  |  |                              |      |  |  |  |           |       



---



|    |                                                                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The 1996 Stock Plan provides that on the first
    day of each fiscal year, the number of shares available for
    issuance under the plan will be increased by the least of:
    (i) 750,000 Shares; (ii) 3% of the outstanding

74



---



##### Table of Contents



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | common stock on the last day of the immediately
    preceding fiscal year, or (iii) such lesser number of
    Shares as is determined by the Board                                                                                                                                                                                                                                                                                                                                                                          
|   
|(2) | Includes 485,593 shares of common stock
    reserved for issuance pursuant to the 1999 Employee Stock
    Purchase Plan (the ESPP). The ESPP provides that on
    the first day of each fiscal year, the number of shares
    available for issuance under the plan will be increased by the
    least of: (i) 250,000 shares, (ii) 1% of the
    outstanding common stock on the last day of the immediately
    preceding fiscal year or (iii) a lesser number of shares as
    is determined by the Board of Directors.

See Notes to Consolidated Financial
Statements  Capital Stock  Stock Option
Plans for descriptions of our equity compensation plans,
including our non-shareholder approved plans.






|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

INDEMNIFICATION AGREEMENTS

The Companys Certificate of Incorporation
and Bylaws require the Company to indemnify its officers and
directors in certain circumstances and permit indemnification of
employees and agents as determined appropriate by the Board of
Directors and authorized by Delaware General Corporation Law
(the DGCL). Under these documents, the liability of
directors for breach of fiduciary duty is limited to the maximum
extent permitted by the DGCL. The Company must also indemnify
its directors and officers to the fullest extent permitted by
the DGCL with respect to certain third party actions and actions
by or in the right of the Company. In addition, the Company has
entered into indemnification agreements with its officers,
directors and key employees. The indemnification agreements may
require the Company:



| |   |                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------
| |  | to advance their expenses incurred as a result of
    any proceeding against them as to which they could be
    indemnified; and
|
| |  | to obtain directors and officers
    insurance if available on reasonable terms.                                              

The Company currently has a policy for
directors and officers insurance. The Company
believes that the indemnification agreements are necessary to
attract and retain qualified persons as directors and officers.






|         |                        
|-------- | -----------------------
|Item 14. | Controls and Procedures

Evaluation of Disclosure Controls and
Procedures.Our Chief Executive
Officer and our Chief Financial Officer, after evaluating the
effectiveness of the Companys disclosure controls
and procedures (as defined in the Securities Exchange Act
of 1934 Rules 13a-14(c) and 15d-14(c)) as of a date
(Evaluation Date) within 90 days before the
filing of this annual report, have concluded that as of the
Evaluation Date, our disclosure controls and procedures were
adequate and designed to ensure that material information
relating to us and our consolidated subsidiaries would be made
known to them by others within those entities.

Change in Internal Controls.There were no significant changes in
our internal controls or to our knowledge, in other factors that
could significantly affect our internal controls subsequent to
the Evaluation Date.




PART IV






|         |                                                                    
|-------- | -------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statement Schedules and
    Reports On Form 8-K

(a) Financial Statements



| |                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The financial statements (including the Notes
    thereto) listed in the Index to Consolidated Financial
    Statements are included in Item 8 of Part II of this
    Form 10-K

75



---



##### Table of Contents



Financial Statement Schedules



| |                                                                   
| | ------------------------------------------------------------------
| | The following financial statement schedule is
    included herein:



| |                                                    
| | ---------------------------------------------------
| | Schedule II  Valuation and
    Qualifying Accounts



| |                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | All other schedules are omitted because they are
    not applicable or the required information is shown in the
    consolidated financial statements or notes thereto.

(b) Reports on Form 8-K



| |     
| | ----
| | None

(c) Exhibits

| |    |            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | -- | ---------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2  | .1(8)      |  | Asset Purchase Agreement among Netro Corporation,
    AAS, Inc. and AT&T Wireless Services, Inc. dated
    January 14, 2002 (exhibits have been excluded; such
    exhibits will be furnished supplementally upon request by the
    Securities and Exchange Commission).                                                                                                                                                                                                                                                                                         
| | 3  | .1(6)      |  | Amended and Restated Certificate of Incorporation
    of the Registrant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | 3  | .2(7)      |  | Amended and Restated Bylaws of the Registrant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | 4  | .1(3)      |  | Form of the Registrants common stock
    certificate.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | 4  | .2(9)      |  | Registration Rights Agreement by and among the
    Registrant and the selling stockholder dated February 12,
    2002                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | 4  | .3         |  | Second Amended and Restated Rights Agreement
    dated July 31, 2002, as previously filed as an exhibit to
    Form 8-A on August 1, 2002, and incorporated herein by
    reference thereto.                                                                                                                                                                                                                                                                                                                                                                      
| | 10 | .1(7)      |  | Form of Indemnification Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | 10 | .2(2)      |  | 1995 Stock Option Plan, as amended, and form of
    stock option agreement and restricted stock purchase agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | 10 | .3(2)      |  | 1996 Stock Option Plan, as amended, and form of
    stock option agreement and restricted stock purchase agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | 10 | .4(2)      |  | 1997 Directors Stock Option Plan, as
    amended, and form of stock option agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | 10 | .5(1)      |  | 1999 Executive Stock Plan and form of
    subscription agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | 10 | .6(1)      |  | 1999 Employee Stock Purchase Plan and form of
    subscription agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | 10 | .7(4)      |  | 2000 Non-Executive Stock Incentive Plan and form
    of stock option agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | 10 | .8(10)     |  | Lease between North San Jose Interests and
    Netro Corporation dated April 20, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | 10 | .9(11)     |  | Net Lease Agreement dated October 31, 1995
    among L&A Kessler Family Partners, L.P., Marilyn Dreyfuss,
    Phillip Francis and J. Richard Lombardi, as successor Trustees
    of the Edward S. Ageno 1992 Revocable Trust, and Kay
    Enterprises, successors in interest to Opus/ Puget
    Western I, LLC, McCaw Property Investments, Inc. and
    AT&T Wireless Services, Inc., as amended by Amendment 1 to
    Net Lease Agreement dated as of January 3, 1996, as amended
    by Amendment 2 to Net Lease Agreement dated as of
    September 18, 1996.
| | 10 | .10(1)    |  | Manufacturing and Engineering Services Agreement
    between Registrant and Microelectronics Technology Inc., dated
    January 11, 1999 and first amendment.                                                                                                                                                                                                                                                                                                                                                                                                     
| | 10 | .10.1(5) |  | Amendment Agreement to the Manufacturing and
    Engineering Services Agreement between the Company and
    Microelectronics Technology, Inc., Dated August 29, 2000.                                                                                                                                                                                                                                                                                                                                                                                             
| | 10 | .11(1)     |  | Employment Agreement between Registrant and
    Gideon Ben-Efraim, and amendment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | 10 | .12(1)     |  | Form of Change-of-Control Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | 10 | .13(5)     |  | Preferred Stock Purchase Agreement between the
    Company and Bungee Communications, Inc., dated October 27,
    2000.                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | 10 | .14(5)   |  | Option Agreement between the Company and Bungee
    Communications, Inc., dated October 27, 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | 10 | .15(11)    |  | Assignment and Assumption Agreement between
    AT&T Wireless Services, Inc. and AAS, Inc. dated
    February 12, 2002                                                                                                                                                                                                                                                                                                                                                                                                                                            

76



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##### Table of Contents



| |    |     |  |                                                                                               
| | -- | --- |  | ----------------------------------------------------------------------------------------------
| | 10 | .16 |  | Executive Retention Agreement between Registrant
    and Shlomo Yariv dated February 21, 2003.
| | 10 | .17 |  | Executive Retention Agreement between Registrant
    and Sanjay Khare dated February 21, 2003.
| | 10 | .18 |  | Executive Retention Agreement between Registrant
    and Peter Carson dated February 21, 2003.
| | 21 | .1  |  | Subsidiaries of the Registrant.                                                               
| | 23 | .1  |  | Consent of PricewaterhouseCoopers LLP,
    Independent Accountants.                           
| | 99 | .1  |  | Certification of Chief Executive Officer and
    Chief Financial Officer                      



---



| |     |                                                                                                                                                                         
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Incorporated by reference to our registration
    statement on Form S-1 (File No. 333-81325) initially
    filed with the SEC on June 22, 1999.                         
|
| | (2) | Incorporated by reference to Amendment No. 1
    to our registration statement on Form S-1 (File
    No. 333-81325) initially filed with the SEC on
    July 28, 1999.  
|
| | (3) | Incorporated by reference to Amendment No. 3
    to our registration statement on Form S-1 (File
    No. 333-81325) initially filed with the SEC on
    August 16, 1999.
|
| | (4) | Incorporated by reference to our quarterly report
    on Form 10-Q for the quarter ended June 30, 2002.                                                                 
|
| | (5) | Incorporated by reference to our quarterly report
    on Form 10-Q for the quarter ended September 31, 2000.                                                            
|
| | (6) | Incorporated by reference to our quarterly report
    on Form 10-Q for the quarter ended June 30, 2001.                                                                 
|
| | (7) | Incorporated by reference to our quarterly report
    on Form 10-Q for the quarter ended September 31, 2001.                                                            
|
| | (8) | Incorporated by reference to our periodic report
    on Form 8-K filed with the SEC on February 27, 2002.                                                               
|
| | (9) | Incorporated by reference to our registration
    statement on Form S-3 (File No. 333-84316) filed with
    the SEC on March 14, 2002.                                  



|     |                                                                                                         
|---- | --------------------------------------------------------------------------------------------------------
|(10) | Incorporated by reference to our annual report on
    Form 10-K for the year ended December 31, 2001.   
|    
|(11) | Incorporated by reference to our quarterly report
    on Form 10-Q for the quarter ended March 31, 2002.



| |   |                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------
| |  | Confidential treatment granted with respect to
    certain portions of this Exhibit by order of the SEC dated
    August 18, 1999.



| |    |                                                                                                                                     
| | -- | ------------------------------------------------------------------------------------------------------------------------------------
| |  | Confidential treatment granted with respect to
    certain portions of this Exhibit by order of the SEC dated
    February 16, 2001.

77



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##### Table of Contents



REPORT OF INDEPENDENT ACCOUNTANTS ON

FINANCIAL STATEMENT SCHEDULES


To the Board of Directors 
 of Netro Corporation:

Our audit of the consolidated financial
statements referred to in our report dated February 6,
2003, which report and consolidated financial statements are
included in this Annual Report on Form 10-K, also included
an audit of the financial statement schedule for Fiscal 2002
listed in Item 15(a)(2) of this Form 10-K. In our
opinion, this financial statement schedule presents fairly, in
all material respects, the information set forth therein when
read in conjunction with the related consolidated financial
statements.

/s/ PricewaterhouseCoopers LLP

San Jose, California 
 February 6, 2003

78



---



##### Table of Contents



NETRO CORPORATION

SCHEDULE II  VALUATION AND
QUALIFYING ACCOUNTS AND RESERVES

|                                 |                              |                |   |            |  |            |   |            |  |  |   |       |  |  |   |        | 
|-------------------------------- | ---------------------------- | -------------- | - | ---------- |  | ---------- | - | ---------- |  |  | - | ----- |  |  | - | ------ | 
|                                 |                              | Balance at     |   | Additions  |  |            |   | Balance at
|                                 |                              | the Beginning  |   | Charged to |  |            |   | End of the
|                                 |                              | of the Year    |   | Expenses   |  | Deductions |   | Year      
|                                 |                              |                |   |            |  |            |   |           
|                                 |                              |               
|                                 |                              | (In thousands)
|Allowance for Doubtful Accounts: |                              |                |   |            |  |            |   |            |  |  |   |       |  |  |   |       
|                                 | Year ended December 31, 2000 |                | $ | 150        |  |            | $ | 800        |  |  | $ | 342   |  |  | $ | 608    | 
|                                 | Year ended December 31, 2001 |                | $ | 608        |  |            | $ | 1,315      |  |  | $ | 423   |  |  | $ | 1,500  | 
|                                 | Year ended December 31, 2002 |                | $ | 1,500      |  |            | $ |           |  |  | $ | 917   |  |  | $ | 583    | 
|Reserve for Inventory:           |                              |                |   |            |  |            |   |            |  |  |   |       |  |  |   |       
|                                 | Year ended December 31, 2000 |                | $ | 1,218      |  |            | $ | 1,214      |  |  | $ | 538   |  |  | $ | 1,894  | 
|                                 | Year ended December 31, 2001 |                | $ | 1,894      |  |            | $ | 25,700     |  |  | $ | 4,275 |  |  | $ | 23,319 | 
|                                 | Year ended December 31, 2002 |                | $ | 23,319     |  |            | $ | 4,203      |  |  | $ | 6,355 |  |  | $ | 21,167 | 

79



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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 Report to be signed on its behalf by the
undersigned, thereunto duly authorized.



| |                  
| | -----------------
| | NETRO CORPORATION

Date: March 21, 2003

| |     |                    
| | --- | -------------------
| | By: | /s/ SANJAY K. KHARE

| |                                                 
| | ------------------------------------------------
| |                                                 
| | Sanjay K. Khare                                 
| | Vice President and Chief Financial
    Officer  
| | (Principal Financial and Accounting
    Officer)

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

|                                         |  |                                                                                                  |  |                |  | 
|---------------------------------------- |  | ------------------------------------------------------------------------------------------------ |  | -------------- |  | 
|                                         |  |                                                                                                  |  |               
|Signature                                |  | Title                                                                                            |  | Date          
|                                         |  |                                                                                                  |  |               
|                                        
|/s/ GIDEON BEN-EFRAIM(Gideon Ben-Efraim) |  | Chairman of the Board of Directors and Chief
    Executive Officer (Principal Executive Officer) |  | March 21, 2003
|                                        
|/s/ SANJAY K. KHARE(Sanjay K. Khare)     |  | Vice President and Chief Financial Officer
    (Principal Financial and Accounting Officer)      |  | March 21, 2003
|                                        
|/s/ RICHARD M. MOLEY(Richard M. Moley)   |  | Chairman Emeritus of the Board of Directors                                                      |  | March 21, 2003
|                                        
|/s/ THOMAS R. BARUCH(Thomas R. Baruch)   |  | Director                                                                                         |  | March 21, 2003
|                                        
|/s/ IRWIN FEDERMAN(Irwin Federman)       |  | Director                                                                                         |  | March 21, 2003
|                                        
|/s/ SANFORD ROBERTSON(Sanford Robertson) |  | Director                                                                                         |  | March 21, 2003
|                                        
|/s/ SHIRLEY YOUNG(Shirley Young)         |  | Director                                                                                         |  | March 21, 2003

80



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CERTIFICATIONS

CERTIFICATION OF CHIEF EXECUTIVE
OFFICER

I, Gideon Ben-Efraim, certify that:

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

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

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

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



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

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



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    

6. The registrants other certifying
officers and I have indicated in this annual report whether
or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.



| |                        
| | -----------------------
| | /s/ GIDEON BEN-EFRAIM  
| |                        
| | Chief Executive Officer

Date: March 21, 2003

81



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##### Table of Contents



CERTIFICATION OF CHIEF FINANCIAL
OFFICER

I, Sanjay K. Khare, certify that:

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

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

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

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



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

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



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    

6. The registrants other certifying
officers and I have indicated in this annual report whether
or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.



| |                        
| | -----------------------
| | /s/ SANJAY K. KHARE    
| |                        
| | Chief Financial Officer

Date: March 21, 2003

82



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##### Table of Contents






EXHIBIT INDEX

|       |    |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|------ | -- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |    | Description
|       |    |            
|       | 2  | .1(8)       |  | Asset Purchase Agreement among Netro Corporation,
    AAS, Inc. and AT&T Wireless Services, Inc. dated
    January 14, 2002 (exhibits have been excluded; such
    exhibits will be furnished supplementally upon request by the
    Securities and Exchange Commission).                                                                                                                                                                                                                                                                                         
|       | 3  | .1(6)       |  | Amended and Restated Certificate of Incorporation
    of the Registrant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|       | 3  | .2(7)       |  | Amended and Restated Bylaws of the Registrant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|       | 4  | .1(3)       |  | Form of the Registrants common stock
    certificate.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|       | 4  | .2(9)       |  | Registration Rights Agreement by and among the
    Registrant and the selling stockholder dated February 12,
    2002                                                                                                                                                                                                                                                                                                                                                                                                                                             
|       | 4  | .3          |  | Second Amended and Restated Rights Agreement
    dated July 31, 2002, as previously filed as an exhibit to
    Form 8-A on August 1, 2002, and incorporated herein by
    reference thereto.                                                                                                                                                                                                                                                                                                                                                                      
|       | 10 | .1(7)       |  | Form of Indemnification Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|       | 10 | .2(2)       |  | 1995 Stock Option Plan, as amended, and form of
    stock option agreement and restricted stock purchase agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                               
|       | 10 | .3(2)       |  | 1996 Stock Option Plan, as amended, and form of
    stock option agreement and restricted stock purchase agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                               
|       | 10 | .4(2)       |  | 1997 Directors Stock Option Plan, as
    amended, and form of stock option agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|       | 10 | .5(1)       |  | 1999 Executive Stock Plan and form of
    subscription agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|       | 10 | .6(1)       |  | 1999 Employee Stock Purchase Plan and form of
    subscription agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|       | 10 | .7(4)       |  | 2000 Non-Executive Stock Incentive Plan and form
    of stock option agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|       | 10 | .8(10)      |  | Lease between North San Jose Interests and
    Netro Corporation dated April 20, 2001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|       | 10 | .9(11)      |  | Net Lease Agreement dated October 31, 1995
    among L&A Kessler Family Partners, L.P., Marilyn Dreyfuss,
    Phillip Francis and J. Richard Lombardi, as successor Trustees
    of the Edward S. Ageno 1992 Revocable Trust, and Kay
    Enterprises, successors in interest to Opus/ Puget
    Western I, LLC, McCaw Property Investments, Inc. and
    AT&T Wireless Services, Inc., as amended by Amendment 1 to
    Net Lease Agreement dated as of January 3, 1996, as amended
    by Amendment 2 to Net Lease Agreement dated as of
    September 18, 1996.
|       | 10 | .10(1)     |  | Manufacturing and Engineering Services Agreement
    between Registrant and Microelectronics Technology Inc., dated
    January 11, 1999 and first amendment.                                                                                                                                                                                                                                                                                                                                                                                                     
|       | 10 | .10.1(5)  |  | Amendment Agreement to the Manufacturing and
    Engineering Services Agreement between the Company and
    Microelectronics Technology, Inc., Dated August 29, 2000.                                                                                                                                                                                                                                                                                                                                                                                             
|       | 10 | .11(1)      |  | Employment Agreement between Registrant and
    Gideon Ben-Efraim, and amendment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|       | 10 | .12(1)      |  | Form of Change-of-Control Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|       | 10 | .13(5)      |  | Preferred Stock Purchase Agreement between the
    Company and Bungee Communications, Inc., dated October 27,
    2000.                                                                                                                                                                                                                                                                                                                                                                                                                                           
|       | 10 | .14(5)    |  | Option Agreement between the Company and Bungee
    Communications, Inc., dated October 27, 2000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|       | 10 | .15(11)     |  | Assignment and Assumption Agreement between
    AT&T Wireless Services, Inc. and AAS, Inc. dated
    February 12, 2002                                                                                                                                                                                                                                                                                                                                                                                                                                            
|       | 10 | .16         |  | Executive Retention Agreement between Registrant
    and Shlomo Yariv dated February 21, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|       | 10 | .17         |  | Executive Retention Agreement between Registrant
    and Sanjay Khare dated February 21, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|       | 10 | .18         |  | Executive Retention Agreement between Registrant
    and Peter Carson dated February 21, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|       | 21 | .1          |  | Subsidiaries of the Registrant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|       | 23 | .1          |  | Consent of PricewaterhouseCoopers LLP,
    Independent Accountants.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|       | 99 | .1          |  | Certification of Chief Executive Officer and
    Chief Financial Officer                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          



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##### Table of Contents





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| |     |                                                                                                                                                                         
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Incorporated by reference to our registration
    statement on Form S-1 (File No. 333-81325) initially
    filed with the SEC on June 22, 1999.                         
|
| | (2) | Incorporated by reference to Amendment No. 1
    to our registration statement on Form S-1 (File
    No. 333-81325) initially filed with the SEC on
    July 28, 1999.  
|
| | (3) | Incorporated by reference to Amendment No. 3
    to our registration statement on Form S-1 (File
    No. 333-81325) initially filed with the SEC on
    August 16, 1999.
|
| | (4) | Incorporated by reference to our quarterly report
    on form 10-Q for the quarter ended June 30, 2002.                                                                 
|
| | (5) | Incorporated by reference to our quarterly report
    on Form 10-Q for the quarter ended September 31, 2000.                                                            
|
| | (6) | Incorporated by reference to our quarterly report
    on Form 10-Q for the quarter ended June 30, 2001.                                                                 
|
| | (7) | Incorporated by reference to our quarterly report
    on Form 10-Q for the quarter ended September 31, 2001.                                                            
|
| | (8) | Incorporated by reference to our periodic report
    on Form 8-K filed with the SEC on February 27, 2002.                                                               
|
| | (9) | Incorporated by reference to our registration
    statement on Form S-3 (File No. 333-84316) filed with
    the SEC on March 14, 2002.                                  



|     |                                                                                                         
|---- | --------------------------------------------------------------------------------------------------------
|(10) | Incorporated by reference to our annual report on
    Form 10-K for the year ended December 31, 2001.   
|    
|(11) | Incorporated by reference to our quarterly report
    on form 10-Q for the quarter ended March 31, 2002.



| |   |                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------
| |  | Confidential treatment granted with respect to
    certain portions of this Exhibit by order of the SEC dated
    August 18, 1999.



| |    |                                                                                                                                     
| | -- | ------------------------------------------------------------------------------------------------------------------------------------
| |  | Confidential treatment granted with respect to
    certain portions of this Exhibit by order of the SEC dated
    February 16, 2001.