##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549


Form 10-Q

|   |  |                                                                                                  
|-- |  | -------------------------------------------------------------------------------------------------
|þ  |  | QUARTERLY REPORT PURSUANT TO SECTION 13
    OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934. 
|   |  | For the quarterly period ended July 2,
    2004                                                  
|  
|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 000-30993

Proxim Corporation

(formerly Western Multiplex
Corporation)


(Exact name of registrant as specified in its
charter)


|                         |  |                                     
|------------------------ |  | ------------------------------------
|Delaware                 |  | 52-2198231                          
|(State of Incorporation) |  | (I.R.S. Employer Identification No.)

935 Stewart Drive

Sunnyvale, California 94085


(408) 731-2700


(Address, including zip code, and telephone
number,


including area code, of registrants
principal executive offices)


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

The number of shares outstanding of the
Companys Class A common stock, par value
$.01 per share, as of August 4, 2004, was 123,510,674.
No shares of the Companys Class B common stock, par
value $.01 per share, are outstanding.



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TABLE OF CONTENTS

|                                 |  |                                                                                                                                              |    |      |    | 
|-------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|                                 |  |                                                                                                                                              |    | Page
|                                 |  |                                                                                                                                              |    |     
|PART I FINANCIAL
    INFORMATION
|Item 1                           |  | Financial Statements                                                                                                                         |    |      | 2  | 
|                                 |  | Condensed Consolidated
    Balance Sheets at July 2, 2004 and December 31, 2003
    (unaudited)                                              |    |      | 2  | 
|                                 |  | Condensed Consolidated
    Statements of Operations for the three months and six months
    ended July 2, 2004 and June 27, 2003 (unaudited) |    |      | 3  | 
|                                 |  | Condensed Consolidated
    Statements of Cash Flows for the six months ended July 2,
    2004 and June 27, 2003 (unaudited)                  |    |      | 4  | 
|                                 |  | Notes to Condensed
    Consolidated Financial Statements (unaudited)                                                                         |    |      | 5  | 
|Item 2                           |  | Managements Discussion
    and Analysis of Financial Condition and Results of Operations                                                    |    |      | 30 | 
|Item 3                           |  | Quantitative and Qualitative
    Disclosures About Market Risk                                                                               |    |      | 68 | 
|Item 4                           |  | Controls and Procedures                                                                                                                      |    |      | 68 | 
|PART II OTHER
    INFORMATION   
|Item 1                           |  | Legal Proceedings                                                                                                                            |    |      | 69 | 
|Item 6                           |  | Exhibits and Reports on
    Form 8-K                                                                                                         |    |      | 71 | 
|Signatures                       |  |                                                                                                                                              | 73 |     
|Index to Exhibits                |  |                                                                                                                                              |    |     
|EXHIBIT 10.68                   
|EXHIBIT 31.1                    
|EXHIBIT 31.2                    
|EXHIBIT 32.1                    
|EXHIBIT 32.2                    





1



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##### Table of Contents






PART I. FINANCIAL INFORMATION






|        |                     
|------- | --------------------
|Item 1. | Financial Statements

PROXIM CORPORATION



CONDENSED CONSOLIDATED BALANCE
SHEETS


|                                                                                                                                                                                                                    |                                                                                                                                                                                                 |                                                                                                     |        |              |          |   |        |          |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------- | ------ | ------------ | -------- | - | ------ | -------- | ------- | -
|                                                                                                                                                                                                                    |                                                                                                                                                                                                 | July 2,                                                                                             |        | December 31,
|                                                                                                                                                                                                                    |                                                                                                                                                                                                 | 2004                                                                                                |        | 2003        
|                                                                                                                                                                                                                    |                                                                                                                                                                                                 |                                                                                                     |        |             
|                                                                                                                                                                                                                    |                                                                                                                                                                                                 |                                                                                                    
|                                                                                                                                                                                                                    |                                                                                                                                                                                                 | (In thousands, except share                                                                        
|                                                                                                                                                                                                                    |                                                                                                                                                                                                 | and per share data)                                                                                
|                                                                                                                                                                                                                    |                                                                                                                                                                                                 | (Unaudited)                                                                                        
|ASSETS                                                                                                                                                                                                             
|Current assets:                                                                                                                                                                                                     |                                                                                                                                                                                                 |                                                                                                     |        |              |          |   |        |         
|                                                                                                                                                                                                                    | Cash and cash equivalents                                                                                                                                                                       |                                                                                                     | $      | 11,441       |          |   | $      | 19,756   |        
|                                                                                                                                                                                                                    | Short-term investments                                                                                                                                                                          |                                                                                                     |        | 2,510        |          |   |        |         |        
|                                                                                                                                                                                                                    | Accounts receivable, net                                                                                                                                                                        |                                                                                                     |        | 9,134        |          |   |        | 13,961   |        
|                                                                                                                                                                                                                    | Inventory                                                                                                                                                                                       |                                                                                                     |        | 18,056       |          |   |        | 19,939   |        
|                                                                                                                                                                                                                    | Other current assets                                                                                                                                                                            |                                                                                                     |        | 4,466        |          |   |        | 5,301    |        
|                                                                                                                                                                                                                    |                                                                                                                                                                                                 |                                                                                                     |        |              |          |   |        |         
|                                                                                                                                                                                                                    |                                                                                                                                                                                                 | Total current assets                                                                                |        |              | 45,607   |   |        |          | 58,957  |  
|Property and equipment, net                                                                                                                                                                                         |                                                                                                                                                                                                 |                                                                                                     | 6,373  |              |          |   | 7,522  |         
|Goodwill                                                                                                                                                                                                            |                                                                                                                                                                                                 |                                                                                                     | 9,726  |              |          |   | 9,726  |         
|Intangible assets, net                                                                                                                                                                                              |                                                                                                                                                                                                 |                                                                                                     | 29,604 |              |          |   | 40,333 |         
|Restricted cash                                                                                                                                                                                                     |                                                                                                                                                                                                 |                                                                                                     | 770    |              |          |   | 1,254  |         
|Other assets                                                                                                                                                                                                        |                                                                                                                                                                                                 |                                                                                                     | 427    |              |          |   | 2,316  |         
|                                                                                                                                                                                                                    |                                                                                                                                                                                                 |                                                                                                     |        |              |          |   |        |         
|                                                                                                                                                                                                                    |                                                                                                                                                                                                 | Total assets                                                                                        |        | $            | 92,507   |   |        | $        | 120,108 |  
|                                                                                                                                                                                                                    |                                                                                                                                                                                                 |                                                                                                     |        |              |          |   |        |         
|                                                                                                                                                                                                                   
|LIABILITIES, MANDATORILY REDEEMABLE
    CONVERTIBLE PREFERRED STOCK
    AND STOCKHOLDERS DEFICIT                                                                                                                  
|Current liabilities:                                                                                                                                                                                                |                                                                                                                                                                                                 |                                                                                                     |        |              |          |   |        |         
|                                                                                                                                                                                                                    | Accounts payable                                                                                                                                                                                |                                                                                                     | $      | 9,738        |          |   | $      | 10,500   |        
|                                                                                                                                                                                                                    | Capital lease obligations, current                                                                                                                                                              |                                                                                                     |        | 1,218        |          |   |        | 1,176    |        
|                                                                                                                                                                                                                    | Accrued royalties and interest                                                                                                                                                                  |                                                                                                     |        | 28,738       |          |   |        | 26,906   |        
|                                                                                                                                                                                                                    | Other accrued liabilities                                                                                                                                                                       |                                                                                                     |        | 18,311       |          |   |        | 20,804   |        
|                                                                                                                                                                                                                    | Convertible promissory notes                                                                                                                                                                    |                                                                                                     |        |             |          |   |        | 34,735   |        
|                                                                                                                                                                                                                    |                                                                                                                                                                                                 |                                                                                                     |        |              |          |   |        |         
|                                                                                                                                                                                                                    |                                                                                                                                                                                                 | Total current liabilities                                                                           |        |              | 58,005   |   |        |          | 94,121  |  
|Convertible promissory notes refinanced
    (Note 1)                                                                                                                                                                |                                                                                                                                                                                                 |                                                                                                     | 45,551 |              |          |   |       |         
|Capital lease obligations, long-term                                                                                                                                                                                |                                                                                                                                                                                                 |                                                                                                     | 342    |              |          |   | 934    |         
|Long-term debt                                                                                                                                                                                                      |                                                                                                                                                                                                 |                                                                                                     | 101    |              |          |   | 101    |         
|Restructuring accruals, long-term                                                                                                                                                                                   |                                                                                                                                                                                                 |                                                                                                     | 8,428  |              |          |   | 8,660  |         
|Common stock warrants                                                                                                                                                                                               |                                                                                                                                                                                                 |                                                                                                     | 8,000  |              |          |   | 21,800 |         
|                                                                                                                                                                                                                    |                                                                                                                                                                                                 |                                                                                                     |        |              |          |   |        |         
|                                                                                                                                                                                                                    |                                                                                                                                                                                                 | Total liabilities                                                                                   |        |              | 120,427  |   |        |          | 125,616 |  
|                                                                                                                                                                                                                    |                                                                                                                                                                                                 |                                                                                                     |        |              |          |   |        |         
|Commitments and contingencies (Notes 15 and
    17)                                                                                                                                                                 |                                                                                                                                                                                                 |                                                                                                     |        |              |          |   |        |         
|Mandatorily redeemable convertible preferred
    stock: 25,000,000 shares authorized; Series A, par
    value $.01; 3,000,000 shares issued and outstanding at
    July 2, 2004 and December 31, 2003, respectively |                                                                                                                                                                                                 |                                                                                                     | 78,325 |              |          |   | 73,580 |         
|                                                                                                                                                                                                                    |                                                                                                                                                                                                 |                                                                                                     |        |              |          |   |        |         
|Stockholders deficit:                                                                                                                                                                                              |                                                                                                                                                                                                 |                                                                                                     |        |              |          |   |        |         
|                                                                                                                                                                                                                    | Common stock, Class A, par value $.01;
    authorized 390,000,000 shares: 165,593,851 and
    165,037,194 shares issued and outstanding at July 2,
    2004 and December 31, 2003, respectively |                                                                                                     |        | 1,656        |          |   |        | 1,650    |        
|                                                                                                                                                                                                                    | Common stock, Class B, par value $.01;
    authorized 10,000,000 shares: no shares issued and
    outstanding at July 2, 2004 and December 31, 2003,
    respectively                           |                                                                                                     |        |             |          |   |        |         |        
|                                                                                                                                                                                                                    | Additional paid-in capital                                                                                                                                                                      |                                                                                                     |        | 339,439      |          |   |        | 339,311  |        
|                                                                                                                                                                                                                    | Treasury stock, at cost; 42,185,534 shares
    at July 2, 2004 and December 31, 2003                                                                                                            |                                                                                                     |        | (21,585      | )        |   |        | (21,585  | )      
|                                                                                                                                                                                                                    | Notes receivable from stockholders                                                                                                                                                              |                                                                                                     |        | (711         | )        |   |        | (711     | )      
|                                                                                                                                                                                                                    | Accumulated deficit                                                                                                                                                                             |                                                                                                     |        | (425,350     | )        |   |        | (397,753 | )      
|                                                                                                                                                                                                                    | Accumulated other comprehensive income                                                                                                                                                          |                                                                                                     |        | 306          |          |   |        |         |        
|                                                                                                                                                                                                                    |                                                                                                                                                                                                 |                                                                                                     |        |              |          |   |        |         
|                                                                                                                                                                                                                    |                                                                                                                                                                                                 | Total stockholders deficit                                                                         |        |              | (106,245 | ) |        |          | (79,088 | )
|                                                                                                                                                                                                                    |                                                                                                                                                                                                 |                                                                                                     |        |              |          |   |        |         
|                                                                                                                                                                                                                    |                                                                                                                                                                                                 | Total liabilities, mandatorily redeemable
    convertible preferred stock and stockholders deficit |        | $            | 92,507   |   |        | $        | 120,108 |  
|                                                                                                                                                                                                                    |                                                                                                                                                                                                 |                                                                                                     |        |              |          |   |        |         

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

2



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##### Table of Contents



PROXIM CORPORATION



CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS


|                                                                               |                                      |                                       |         |                  |        |         |         |          |        |   |         |        |        |   |         |        |        | 
|------------------------------------------------------------------------------ | ------------------------------------ | ------------------------------------- | ------- | ---------------- | ------ | ------- | ------- | -------- | ------ | - | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                                                                               |                                      |                                       |         |                 
|                                                                               |                                      | Three Months Ended                    |         | Six Months Ended
|                                                                               |                                      |                                       |         |                 
|                                                                               |                                      | July 2,                               |         | June 27,         |        | July 2, |         | June 27,
|                                                                               |                                      | 2004                                  |         | 2003             |        | 2004    |         | 2003    
|                                                                               |                                      |                                       |         |                  |        |         |         |         
|                                                                               |                                      |                                      
|                                                                               |                                      | (In thousands, except per share data)
|                                                                               |                                      | (Unaudited)                          
|Product revenue, net                                                           |                                      | $                                     | 31,417  |                  |        | $       | 34,805  |          |        | $ | 58,114  |        |        | $ | 68,834  |       
|License revenue                                                                |                                      |                                       |        |                  |        |         |        |          |        |   |        |        |        |   | 6,000   |       
|                                                                               |                                      |                                       |         |                  |        |         |         |          |        |   |         |        |        |   |         |       
|                                                                               |                                      | Total revenue, net                    |         |                  | 31,417 |         |         |          | 34,805 |   |         |        | 58,114 |   |         |        | 74,834 | 
|Cost of revenue                                                                |                                      |                                       | 20,140  |                  |        |         | 21,701  |          |        |   | 37,517  |        |        |   | 42,629  |       
|Royalty charges                                                                |                                      |                                       | 789     |                  |        |         |        |          |        |   | 1,617   |        |        |   |        |       
|Restructuring provision for excess and obsolete
    inventory                  |                                      |                                       |        |                  |        |         | 22,549  |          |        |   |        |        |        |   | 22,549  |       
|                                                                               |                                      |                                       |         |                  |        |         |         |          |        |   |         |        |        |   |         |       
|                                                                               |                                      | Gross profit (loss)                   |         |                  | 10,488 |         |         |          | (9,445 | ) |         |        | 18,980 |   |         |        | 9,656  | 
|Operating expenses:                                                            |                                      |                                       |         |                  |        |         |         |          |        |   |         |        |        |   |         |       
|                                                                               | Research and development             |                                       |         | 4,858            |        |         |         | 6,234    |        |   |         | 9,412  |        |   |         | 14,117 |       
|                                                                               | Selling, general and administrative  |                                       |         | 11,227           |        |         |         | 12,446   |        |   |         | 22,598 |        |   |         | 24,541 |       
|                                                                               | Legal expense for certain litigation |                                       |         | 200              |        |         |         | 1,000    |        |   |         | 945    |        |   |         | 4,000  |       
|                                                                               | Amortization of intangible assets    |                                       |         | 5,364            |        |         |         | 5,365    |        |   |         | 10,729 |        |   |         | 10,865 |       
|                                                                               | Restructuring charges (benefit)      |                                       |         | (138             | )      |         |         | 12,492   |        |   |         | 2,029  |        |   |         | 12,492 |       
|                                                                               |                                      |                                       |         |                  |        |         |         |          |        |   |         |        |        |   |         |       
|                                                                               |                                      | Total operating expenses              |         |                  | 21,511 |         |         |          | 37,537 |   |         |        | 45,713 |   |         |        | 66,015 | 
|                                                                               |                                      |                                       |         |                  |        |         |         |          |        |   |         |        |        |   |         |       
|Loss from operations                                                           |                                      |                                       | (11,023 | )                |        |         | (46,982 | )        |        |   | (26,733 | )      |        |   | (56,359 | )     
|Interest expense                                                               |                                      |                                       | (2,719  | )                |        |         | (192    | )        |        |   | (5,435  | )      |        |   | (93     | )     
|Other income (expense), net                                                    |                                      |                                       | 5,855   |                  |        |         |        |          |        |   | 7,713   |        |        |   |        |       
|                                                                               |                                      |                                       |         |                  |        |         |         |          |        |   |         |        |        |   |         |       
|Loss before income taxes                                                       |                                      |                                       | (7,887  | )                |        |         | (47,174 | )        |        |   | (24,455 | )      |        |   | (56,452 | )     
|Income tax provision (benefit)                                                 |                                      |                                       | 542     |                  |        |         |        |          |        |   | (203    | )      |        |   |        |       
|                                                                               |                                      |                                       |         |                  |        |         |         |          |        |   |         |        |        |   |         |       
|Net loss                                                                       |                                      |                                       | (8,429  | )                |        |         | (47,174 | )        |        |   | (24,252 | )      |        |   | (56,452 | )     
|Accretion of Series A Preferred Stock
    obligations                          |                                      |                                       | (1,687  | )                |        |         | (1,560  | )        |        |   | (3,345  | )      |        |   | (3,085  | )     
|                                                                               |                                      |                                       |         |                  |        |         |         |          |        |   |         |        |        |   |         |       
|Net loss attributable to common
    stockholders  basic and diluted           |                                      | $                                     | (10,116 | )                |        | $       | (48,734 | )        |        | $ | (27,597 | )      |        | $ | (59,537 | )     
|                                                                               |                                      |                                       |         |                  |        |         |         |          |        |   |         |        |        |   |         |       
|Net loss per share attributable to common
    stockholders  basic and diluted |                                      | $                                     | (0.08   | )                |        | $       | (0.40   | )        |        | $ | (0.22   | )      |        | $ | (0.49   | )     
|                                                                               |                                      |                                       |         |                  |        |         |         |          |        |   |         |        |        |   |         |       
|Shares used to compute net loss per
    share  basic and diluted              |                                      |                                       | 123,404 |                  |        |         | 121,714 |          |        |   | 123,293 |        |        |   | 120,994 |       
|                                                                               |                                      |                                       |         |                  |        |         |         |          |        |   |         |        |        |   |         |       

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

3



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##### Table of Contents



PROXIM CORPORATION



CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS


|                                                 |                                                                                 |                                                               |                                       |          |        |        |         |         |        |         |  
|------------------------------------------------ | ------------------------------------------------------------------------------- | ------------------------------------------------------------- | ------------------------------------- | -------- | ------ | ------ | ------- | ------- | ------ | ------- | -
|                                                 |                                                                                 |                                                              
|                                                 |                                                                                 | Six Month Ended                                              
|                                                 |                                                                                 |                                                              
|                                                 |                                                                                 | July 2,                                                       |                                       | June 27,
|                                                 |                                                                                 | 2004                                                          |                                       | 2003    
|                                                 |                                                                                 |                                                               |                                       |         
|                                                 |                                                                                 |                                                              
|                                                 |                                                                                 | (In thousands)                                               
|                                                 |                                                                                 |                                                              
|                                                 |                                                                                 | (Unaudited)                                                  
|Cash flows from operating activities:            |                                                                                 |                                                               |                                       |          |        |        |         |        
|                                                 | Net loss                                                                        |                                                               | $                                     | (24,252  | )      |        | $       | (56,452 | )     
|                                                 | Adjustments to reconcile net loss to net cash
    used in operating activities: |                                                               |                                       |          |        |        |         |         |       
|                                                 | Depreciation and amortization                                                   |                                                               |                                       | 11,870   |        |        |         | 12,819  |       
|                                                 | Amortization of warrants issued to customer                                     |                                                               |                                       | 348      |        |        |         |        |       
|                                                 | Provision for excess and obsolete inventory and
    lower of cost or market     |                                                               |                                       | 2,115    |        |        |         |         |       
|                                                 | Restructuring provision for excess and obsolete
    inventory                   |                                                               |                                       |         |        |        |         | 22,549  |       
|                                                 | Restructuring charges                                                           |                                                               |                                       | 2,029    |        |        |         | 12,492  |       
|                                                 | Loss on disposition of property and equipment                                   |                                                               |                                       | 350      |        |        |         |        |       
|                                                 | Amortization of debt discount on convertible
    notes and issuance costs       |                                                               |                                       | 5,737    |        |        |         |        |       
|                                                 | Deferred income taxes                                                           |                                                               |                                       | (203     | )      |        |         |         |       
|                                                 | Revaluation of common stock warrants                                            |                                                               |                                       | (13,800  | )      |        |         |        |       
|                                                 | Changes in assets and liabilities:                                              |                                                               |                                       |          |        |        |         |         |       
|                                                 |                                                                                 | Accounts receivable, net                                      |                                       |          | 4,827  |        |         |         | 3,084  |        
|                                                 |                                                                                 | Inventory                                                     |                                       |          | (232   | )      |         |         | (8,129 | )      
|                                                 |                                                                                 | Restricted cash and other assets, current and
    non-current |                                       |          | (1,262 | )      |         |         | 2,510  |        
|                                                 |                                                                                 | Accounts payable and other accrued liabilities                |                                       |          | 2,891  |        |         |         | (2,529 | )      
|                                                 |                                                                                 | Accrued royalties and interest                                |                                       |          | 1,832  |        |         |         |       |        
|                                                 |                                                                                 |                                                               |                                       |          |        |        |         |        
|                                                 |                                                                                 |                                                               | Net cash used in operating activities |          |        | (7,750 | )       |         |        | (13,656 | )
|                                                 |                                                                                 |                                                               |                                       |          |        |        |         |        
|Cash flows from investing activities:            |                                                                                 |                                                               |                                       |          |        |        |         |        
|                                                 | Purchase of property and equipment                                              |                                                               |                                       | (416     | )      |        |         | (2,567  | )     
|                                                 | Proceeds from repayment of loan to officer                                      |                                                               |                                       |         |        |        |         | 500     |       
|                                                 |                                                                                 |                                                               |                                       |          |        |        |         |        
|                                                 |                                                                                 | Net cash used in investing activities                         |                                       |          | (416   | )      |         |         | (2,067 | )      
|                                                 |                                                                                 |                                                               |                                       |          |        |        |         |        
|Cash flows from financing activities:            |                                                                                 |                                                               |                                       |          |        |        |         |        
|                                                 | Borrowings on short-term bank loan                                              |                                                               |                                       |         |        |        |         | 1,981   |       
|                                                 | Borrowings on capital lease obligations                                         |                                                               |                                       |         |        |        |         | 1,605   |       
|                                                 | Principal payments on capital lease obligations                                 |                                                               |                                       | (595     | )      |        |         | (302    | )     
|                                                 | Proceeds from repayments of notes receivable from
    stockholders              |                                                               |                                       |         |        |        |         | 187     |       
|                                                 | Issuance of common stock, net                                                   |                                                               |                                       | 446      |        |        |         | 237     |       
|                                                 |                                                                                 |                                                               |                                       |          |        |        |         |        
|                                                 |                                                                                 | Net cash provided by (used in) financing
    activities       |                                       |          | (149   | )      |         |         | 3,708  |        
|                                                 |                                                                                 |                                                               |                                       |          |        |        |         |        
|Net decrease in cash and cash equivalents        |                                                                                 |                                                               | (8,315                                | )        |        |        | (12,015 | )      
|Cash and cash equivalents at beginning of period |                                                                                 |                                                               | 19,756                                |          |        |        | 16,535  |        
|                                                 |                                                                                 |                                                               |                                       |          |        |        |         |        
|Cash and cash equivalents at end of period       |                                                                                 | $                                                             | 11,441                                |          |        | $      | 4,520   |        
|                                                 |                                                                                 |                                                               |                                       |          |        |        |         |        
|Supplemental disclosures:                        |                                                                                 |                                                               |                                       |          |        |        |         |        
|                                                 | Cash received (paid) during the period for:                                     |                                                               |                                       |          |        |        |         |         |       
|                                                 |                                                                                 | Income taxes                                                  |                                       | $        |       |        |         | $       | 1,655  |        
|                                                 |                                                                                 |                                                               |                                       |          |        |        |         |        
|                                                 |                                                                                 | Interest on capital lease obligations                         |                                       | $        | (18    | )      |         | $       | (28    | )      
|                                                 |                                                                                 |                                                               |                                       |          |        |        |         |        
|Non-cash transactions:                           |                                                                                 |                                                               |                                       |          |        |        |         |        
|                                                 | Inception of capital leases                                                     |                                                               | $                                     | 45       |        |        | $       | 824     |       
|                                                 |                                                                                 |                                                               |                                       |          |        |        |         |        
|                                                 | Accretion of Series A Preferred Stock
    redemption obligations                |                                                               | $                                     | 4,745    |        |        | $       | 4,550   |       
|                                                 |                                                                                 |                                                               |                                       |          |        |        |         |        

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

4



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##### Table of Contents



PROXIM CORPORATION



NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS


(Unaudited)




|         |            
|-------- | -----------
|Note 1  | The Company

Proxim Corporation (the Company) is
the company created by the merger of Proxim, Inc. and Western
Multiplex Corporation, or Western Multiplex. On March 26,
2002, Western Multiplex merged with Proxim, Inc. located in
Sunnyvale, California which designs, manufactures and markets
high performance wireless local area networking, or WLAN, and
building-to-building network products based on radio frequency,
or RF, technology and changed its name to Proxim Corporation. On
August 5, 2002, the Company completed the acquisition of
the 802.11 WLAN systems business of Agere Systems, Inc., or
Agere, including its ORiNOCO product line. In accordance with
accounting principles generally accepted in the United States of
America, the results of operations for the periods presented
include the results of the merged or acquired businesses
beginning from the respective dates of completion of the
business combinations.

Western Multiplex was founded in 1979 in
Sunnyvale, California, as a vendor of radio components and
related services. In 1992, Western Multiplex became a designer
and manufacturer of broadband wireless systems and launched its
Lynx broadband wireless systems. These point-to-point systems
are primarily used by wireless operators to connect their base
stations to other base stations and to existing wire line
networks. In 1999, Western Multiplex introduced its Tsunami
point-to-point broadband wireless systems, which primarily
enable service providers, businesses and other enterprises to
expand or establish private networks by bridging data and voice
network traffic among multiple facilities. Based on Western
Multiplexs core technologies and the technology acquired
through its purchase of WirelessHome Corporation, or
WirelessHome, in March 2001, Western Multiplex developed Tsunami
point-to-multipoint systems designed to enable service
providers, businesses and other enterprises to connect multiple
facilities within a geographic area to a central hub. Western
Multiplex began shipping its first generation of these products
at the end of the fourth quarter of 2001.



| |                  
| | -----------------
| | Subsequent Events



| |                       
| | ----------------------
| | Litigation with Symbol

On September 15, 2003, the Company announced
that a jury had rendered a verdict in the first phase of the
patent infringement suit with Symbol Technologies, Inc.
(Symbol). On Symbols claims of patent
infringement, the jury found that certain of the Companys
products infringe two of Symbols patents and assessed a 6%
royalty on the revenue of relevant products. On
November 24, 2003, the District Court conducted a one-day
bench trial on the Companys equitable defenses not
addressed by the jury.

On July 29, 2004, the Company announced that
the court has denied the Companys equitable defenses and
has determined that the jurys award of a 6% royalty on the
Companys sales of these products from 1995 through
September 2003, plus prejudgment interest, results in an award
of damages to Symbol of $25.9 million. The court entered
its judgment on this matter on August 4, 2004. The Company
is not presently enjoined from continued sales of these
products, and the court denied Symbols request that it
impose a court ordered royalty on future sales of these products
by the Company. On August 6, 2004, Symbol filed a motion
for entry of a permanent injunction against further manufacture
and sale of the Companys products found to infringe
Symbols patents. The Company intends to oppose this
motion. If the Company is enjoined from future sales of these
products and is not able to negotiate a license arrangement with
acceptable royalty rates, its revenue, results of operations and
financial condition would be materially adversely affected.

The Company has fully accrued for the awarded
amount in its financial statements since the date of the initial
jury award in September 2003. As of July 2, 2004, the
Company had recorded an accrual for estimated past royalties of
$22.9 million and interest of $3.0 million covering
the period from 1995 through September 2003 plus a total of
$2.8 million for estimated potential royalties and interest
covering the period from October 2003 to July 2, 2004. As
of July 2, 2004, the Companys accrual in the
aggregate for estimated potential

5



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##### Table of Contents



PROXIM CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS   (Continued)

royalties and interest was $28.7 million.
Depending upon the outcome of the litigation with Symbol, the
Company may be required to pay royalty charges and interest at
the time specified by the court. The Company will continue to
evaluate and review its estimate of royalties and interest
payable from time to time for any indications that could require
the Company to change its assumptions relating to the amount
already recorded.

To date, the Company has not incurred immediate
financial obligation to Symbol as a result of this decision and
the Company intends to file a motion to stay execution on the
judgment, pending completion of all related proceedings,
including post trial motions on this matter. On August 10,
2004, Symbol informed the Company that it will attempt to
execute on the judgment. The court could deny the Companys
motion to stay execution of the judgment or could require the
Company to post a bond to secure our post-trial motions.

Although the Company has recorded an accrual for
$28.7 million in connection with the Symbol litigation, the
Company does not have sufficient cash to pay or post a bond in
this amount. If the Company were required to make payments to
Symbol, post a bond to the court, and/or repay the Bridge Loans
(defined below) and amounts, if any, owed to Silicon Valley
Bank, either due to an event of default or otherwise, the
Company would be required to obtain immediate alternative
sources of financing. If the Company were not able to obtain an
alternative source of financing, the Company would have
insufficient cash to pay these obligations, be unable to meet
its ongoing operating obligations as they come due in the
ordinary course of business, and be required to seek protection
under applicable bankruptcy laws. There can be no assurance that
alternative sources of financing will be available to the
Company. The Company intends to vigorously defend itself in this
litigation and to consider all available options after the
conclusion of all matters before the court.

Additionally, any further adverse ruling or
judgment in this litigation that results in the obligation of
the Company and/or any of its subsidiaries under GAAP (generally
accepted accounting principles) to establish an additional
reserve in respect of such ruling or judgment in an amount
excess of $5 million, and any other ruling or judgment in
any other litigation that is material and adverse to the
Company, triggers an event of default under the Bridge Loan
(defined below) agreement with Warburg Pincus and BCP Capital,
L.P. and affiliates. Upon such occurrence, the Investors would
have the ability to require the Company to repay the Bridge
Loan. If the judgment entered on August 4, 2004 is not
vacated, discharged, stayed or bonded pending appeal within
thirty days thereof, the Company would be in default under the
terms of the Bridge Loan and the Investors would have the right
to require the Company to repay the Bridge Loan. In addition, an
attempt by Symbol to execute on a judgment, the court not
issuing a stay on execution of judgment by August 31, 2004,
restraining order, injunction or any material adverse
development in the litigation with Symbol would result in an
event of default under the secured credit facility with Silicon
Valley Bank. Upon such occurrence, Silicon Valley Bank would
have the right to require the Company to repay any outstanding
amounts under the credit facility and to prohibit the Company
from borrowing any additional amounts. The occurrence of an
event of default under the secured credit facility with Silicon
Valley Bank would trigger an event of default under the Bridge
Loan if outstanding amounts owed under the credit facility
exceeded $1 million. As of July 2, 2004 and
August 11, 2004, no borrowings were outstanding under the
credit facility.



| |                                          
| | -----------------------------------------
| | Capital Restructuring and Bridge
    Loan

On July 27, 2004, the Company entered into
an agreement with its strategic investors, Warburg Pincus
Private Equity VIII, L.P., BCP Capital, L.P. (formerly known as
Broadview Capital Partners, L.P.) and affiliates (collectively,
the Investors) to restructure their equity
instruments and debt holdings in the Company. Pursuant to the
terms of the securities purchase agreement, on July 30,
2004, the Investors exchanged the $49.0 million in
aggregate amount of secured convertible promissory notes,
including accrued but unpaid interest of $9.0 million, into
shares of Series B Preferred Stock, in accordance with the
existing terms and conditions of the secured convertible
promissory notes, as described below under Significant Events
and Liquidity. The exchange relieved the Company of the
requirement to repay the notes on their maturity date of
September 30, 2004. As a result of the exchange completed
on July 30, 2004, the carrying value of the

6



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##### Table of Contents



PROXIM CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS   (Continued)

convertible promissory notes of
$38.1 million, accrued and unpaid interest of
$8.3 million and unamortized deferred financing costs of
$872,000 were reclassified from current liabilities to long-term
liabilities in accordance with SFAS No. 6,
Classification of Short-Term Obligations Expected to be
Refinanced.

On July 30, 2004, the Company received
$10.0 million in cash proceeds from the Investors in
exchange for a new convertible bridge note (the Bridge
Loan) pursuant to the securities purchase agreement dated
July 27, 2004. The secured convertible bridge loan bears
interest at 15 percent per annum and is due on
June 30, 2005. In accordance with the terms of the Bridge
Loan, all principal and accrued interest will convert into
common stock and/or warrants to purchase common stock, at the
same price and upon the same terms and conditions offered to
other investors, if prior to June 30, 2005 the Company
closes a financing transaction with gross proceeds of
$20.0 million or more through a sale of its common stock
and/or warrants to purchase common stock. If such a financing
transaction does not occur, the Bridge Loan becomes due and
payable by its terms on June 30, 2005. If the
Companys stockholders do not approve the Exchange as
described below, the Investors will have the right to demand
immediate repayment of the Bridge Loan at any time after the
thirtieth day following the date that the stockholders fail to
approve the Exchange.

Subject to the approval of the Companys
stockholders, the Investors also agreed to surrender all of
their Series A Preferred Stock, all of their Series B
Preferred Stock and all of their warrants to purchase the
Companys common stock in exchange for an aggregate of
164 million shares of Class A common stock and
400,000 shares of the Companys newly issued
Series C Preferred Stock (the Exchange). If the
Companys stockholders approve the Exchange and
Class A common stock is issued to the Investors, Warburg
Pincus Private Equity VIII, L.P. will own
142,133,339 shares of Class A common stock, which
would represent approximately 49.4 percent of the
Companys outstanding common stock based on
123,510,674 shares outstanding as of August 4, 2004.
BCP Capital, LP. and affiliates will own 21,866,661 shares
of Class A common stock, which would represent
approximately 7.6 percent of the Companys outstanding
common stock based on 123,510,674 shares outstanding as of
August 4, 2004. If the Companys stockholders do not
approve the Exchange, the Investors will have the right to
demand immediate repayment of the Bridge Loan at any time after
the thirtieth day following the date that the Companys
stockholders fail to approve the Exchange.

At issuance, the Series C Preferred Stock to
be issued to the Investors will be a mandatorily redeemable and
nonvoting security and is not convertible into common stock or
any other equity security at any time. This new long-term equity
instrument will not be required to be repaid in cash until it is
due on July 30, 2012, except in the event of a change in
control or liquidation. Further, the Series C Preferred
Stock will have an initial liquidation preference of
$100 per share, or $40 million in aggregate. The
liquidation preference on the Series C Preferred Stock will
accrete at 8.75 percent per annum, compounded quarterly,
and will be required to be repaid by the Company at the fully
accreted value of approximately $80 million on
July 30, 2012. In addition, the Series C Preferred
Stock shall be automatically redeemed at its fully accreted
value in the event of an earlier change in control of the
Company.

The terms of the agreement also provide that the
Company may redeem the Series C Preferred Stock at any time
within the first three years after the date of issuance at its
then accreted liquidation preference if the market price of the
Companys common stock on the Nasdaq National Market
remains above $2.25 for a period of 45 consecutive trading days.
After the third anniversary of the date of issuance, the Company
may redeem the Series C Preferred Stock at any time at its
then accreted liquidation preference, if the market price of the
Companys common stock on the Nasdaq National Market has
remained above $2.00 for a period of 45 consecutive trading
days.

7



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##### Table of Contents



PROXIM CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS   (Continued)



| |                                     
| | ------------------------------------
| | Significant Events and
    Liquidity



| |                                          
| | -----------------------------------------
| | Amended Exchangeable Promissory
    Notes

On July 22, 2003, the Company announced that
the Investors had agreed to collectively invest
$30.0 million, and potentially up to $40.0 million, in
the Company. On July 30, 2003, these Investors collectively
invested $30.0 million, and the Company issued short-term
secured exchangeable promissory notes bearing interest at
25% per annum pursuant to that certain securities purchase
agreement dated July 22, 2003. On October 21, 2003,
the Company amended and restated its securities purchase
agreement (the Amended Agreement) with the Investors
and its $30.0 million short-term secured promissory notes
issued to these Investors on July 30, 2003. The amended and
restated secured exchangeable promissory notes (the
Amended Notes) continued to bear interest at
25% per annum, subject to increase on an event of default
or other events.

At the option of the Investors and subject to the
approval of the Companys stockholders, the Amended Notes
were exchangeable for shares of the Companys Series B
Preferred Stock with an aggregate initial liquidation preference
equal to the principal amount of the exchanged indebtedness,
plus accrued but unpaid interest, at the conversion price of
$100.00 per share. The liquidation preference accretes at
14% per annum, compounded quarterly, through the seventh
anniversary of the date on which the Company first issued shares
of the Series B Preferred Stock, or the Series B
Preferred Stock original issue date. Upon issuance, the
Series B Preferred Stock also are entitled to weighted
average conversion price adjustments for dilutive issuances and
subscription rights in certain equity financings.

Subject to the approval of its stockholders, the
Company agreed to issue to the Investors warrants to
purchase 18 million and 6 million shares of
common stock at an exercise price of $1.46 and $1.53 per
share, respectively (collectively, the Series B
Warrants). The Investors also agreed to make available to
the Company an additional $10.0 million, issuable in
exchange for senior secured exchangeable promissory notes (the
New Notes, and together with the Amended Notes, the
Notes), at the Companys election (the
Call Right).

At a special meeting of stockholders held on
December 12, 2003, the Companys stockholders approved
the Companys ability to issue to the Investors:
(i) shares of the Companys Series B Preferred
Stock upon exercise of each Investors right to exchange
the Notes, plus accrued but unpaid interest, as well as upon
each Investors exercise of the right to exchange any New
Notes that the Company may issue to the Investors, plus accrued
but unpaid interest; and (ii) the Series B Warrants.
Following the receipt of stockholder approval, the Company
issued the Series B Warrants to the Investors on
December 12, 2003. In accordance with the terms of the
Amended Agreement, the Company exercised its Call Right and on
December 19, 2003, the Company issued the New Notes to the
Investors in exchange for an additional investment of
$10 million.

As of July 2, 2004, the Notes, including
accrued and unpaid interest, were subject to repayment in the
event the Investors did not exchange the Notes for Series B
Preferred Stock. Had such an exchange not occurred, repayment
would have been required on September 30, 2004, the
maturity date of the Notes, or upon an event of default, as
defined, or a change in control, as defined, whichever had
occurred earlier.

As described above, on July 30, 2004, the
Investors exchanged the aggregate principal amount of the Notes
plus accrued but unpaid interest, for shares of Series B
Preferred Stock, in accordance with the existing terms and
conditions of the Notes. The exchange relieved the Company from
the requirement to repay the Notes on their maturity date of
September 30, 2004.



| |                
| | ---------------
| | Credit Facility

The Company amended and restated its secured
financing agreements with Silicon Valley Bank (the
Lender) in June and July 2003 and then further
amended these agreements in October 2003 and in

8



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##### Table of Contents



PROXIM CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS   (Continued)

July 2004. The financial covenant requiring
the Company to maintain cash and cash equivalents of an amount
not less than $8 million, as amended, was reduced to
$4 million. As amended, the events of default also include
attempt by Symbol to execute on a judgment, the court not
issuing a stay on execution of judgment by August 31, 2004,
restraining order, injunction, any material adverse development
in connection with the Companys litigation with Symbol, or
failure of the Company to advise the Lender of all material
developments in this litigation. See Note 16 for further
description of the amended credit facility.



| |          
| | ---------
| | Liquidity

If the remaining proceedings before the court in
the Companys litigation with Symbol are not decided in the
Companys favor, including its motion to the court to stay
Symbols execution on the judgment entered on
August 4, 2004, the Company would likely be required to
make significant payments to Symbol, including payments for
royalties related to past sales of products found to infringe on
two of Symbols patents and additional royalties in
connection with future sales of these products, or the Company
would be required to post a bond in order to proceed with the
post-trial motions or to appeal the courts decision.

If the Company were required to make payments to
Symbol, post a bond to the court, and/or repay the convertible
Bridge Loan and amounts, if any, which may be owed to Silicon
Valley Bank, either due to an event of default or otherwise, or
if it sustains continued significant negative cash flows from
its operations, it would be required to obtain immediate
alternative sources of financing. If the Company were not able
to obtain such alternative sources of financing, it would have
insufficient cash to pay these obligations, be unable to meet
its ongoing operating obligations as they come due in the
ordinary course of business, and would have to seek protection
under applicable bankruptcy laws. These matters raise
substantial doubt about the Companys ability to continue
as a going concern. These consolidated financial statements do
not include any adjustments that might result from this
uncertainty.

In addition, any judgment, restraining order,
injunction or any material adverse development in this
litigation triggers an event of default under the Silicon Valley
Bank credit facility. Upon such occurrence, Silicon Valley Bank
would have the right to require the Company to repay any
outstanding amounts under the credit facility and to prohibit
the Company from borrowing any additional amounts. As of
July 2, 2004 and August 11, 2004, no borrowings were
outstanding under the Companys credit facility.

The Companys revenue declined from
$68.8 million to $58.1 million from the six months
ended June 27, 2003 to the six months ended July 2,
2004 and the Company has incurred substantial losses and
negative cash flows from operations during the six months ended
July 2, 2004 and the years ended December 31, 2003,
2002 and 2001. If the Company were not able to close a financing
transaction by June 30, 2005 with gross proceeds of
$20.0 million or more through a sale of its common stock
and/or warrants to purchase common stock in accordance with the
securities purchase agreement dated July 27, 2004, the
Company would be required to repay the Bridge Loan. If the
Companys stockholders do not approve the Exchange, the
Investors will have the right to demand immediate repayment of
the Bridge Loan at any time after the thirtieth day following
the date that the Companys stockholders fail to approve
the Exchange.



| |                        
| | -----------------------
| | Risks and Uncertainties

The Company depends on single or limited source
suppliers for several key components used in the Companys
products. The Company depends on single sources for proprietary
application specific integrated circuits, or ASICs, and
assembled circuit boards for these products. Any disruptions in
the supply of these components or assemblies could delay or
decrease our revenues. In addition, even for components with
multiple sources, there have been, and may continue to be,
shortages due to capacity constraints caused by high demand. The
Company does not have any long-term arrangements with any
suppliers.

9



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##### Table of Contents



PROXIM CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS   (Continued)

The Company relies on contract and subcontract
manufacturers for turnkey manufacturing and circuit board
assemblies which subjects the Company to additional risks,
including a potential inability to obtain an adequate supply of
finished assemblies and assembled circuit boards and reduced
control over the price, timely delivery and quality of such
finished assemblies and assembled circuit boards. If the
Companys Sunnyvale facility were to become incapable of
operating, even temporarily, or were unable to operate at or
near the Companys current or full capacity for an extended
period, the Companys business and operating results could
be materially adversely affected.



| |                      
| | ---------------------
| | Basis of Presentation

The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of
America for interim financial information and with the
instructions to Form 10-Q and Article 10 of
Regulation S-X. The condensed consolidated balance sheet as
of July 2, 2004, the condensed consolidated statements of
operations for the three months and six months ended
July 2, 2004 and June 27, 2003 and the condensed
consolidated statements of cash flows for the six months ended
July 2, 2004 and June 27, 2003, are unaudited, but
include all adjustments (consisting of normal recurring
adjustments), which the Company considers necessary for a fair
presentation of the financial position, operating results and
cash flows for the periods presented.

The balance sheet at December 31, 2003 has
been derived from Proxim Corporations audited consolidated
financial statements as of that date. Certain information and
footnote information normally included in financial statements
prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or
omitted pursuant to the rules and regulations of the Securities
and Exchange Commission. Results for any interim period are not
necessarily indicative of results for any future interim period
or for the entire year. The accompanying condensed consolidated
financial statements should be read in conjunction with the
audited consolidated financial statements and notes thereto
included in the Companys Annual Report on Form 10-K
for the year ended December 31, 2003.



| |                 
| | ----------------
| | Use of Estimates

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



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

The condensed consolidated financial statements
include the financial statements of Proxim Corporation and all
of its subsidiaries. The financial condition and results of
operations for the three month and six months ended July 2,
2004 and June 27, 2003 include the results of acquired
subsidiaries from their effective dates. All significant
intercompany transactions and balances are eliminated in
consolidation.



|         |                                 
|-------- | --------------------------------
|Note 2  | Recent Accounting Pronouncements

In April 2004, the Emerging Issues Task Force
issued Statement No. 03-06, Participating Securities and
the Two-Class Method Under FASB Statement No. 128, Earnings
Per Share,(EITF 03-06). EITF 03-06
addresses a number of questions regarding the computation of
earnings per share by companies that have issued securities
other than common stock that contractually entitle the holder to
participate in dividends and earnings of the company when, and
if, it declares dividends on its common stock. EITF 03-06
also provides further guidance in applying the two-class method
of calculating earnings per share, clarifying what constitutes

10



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##### Table of Contents



PROXIM CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS   (Continued)

a participating security and how to apply the
two-class method of computing earnings per share once it is
determined that a security is participating, including how to
allocate undistributed earnings to such a security.
EITF 03-06 is effective for fiscal periods beginning after
March 31, 2004. The Company adopted this EITF during the
quarter ended July 2, 2004 and the adoption has to date not
had a material impact on its results of operations.

At its November 2003 meeting, the EITF reached a
consensus on disclosure guidance previously discussed under
EITF 03-01, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments. The
consensus provided for certain disclosure requirements that were
effective for fiscal years ending after December 15, 2003.

At its March 2004 meeting, the EITF reached a
consensus on recognition and measurement guidance previously
discussed under EITF 03-01. The consensus clarifies the
meaning of other-than-temporary impairment and its application
to investments classified as either available-for-sale or
held-to-maturity under SFAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities, and
investments accounted for under the cost method or the equity
method. The recognition and measurement guidance for which the
consensus was reached in the March 2004 meeting is to be applied
to other-than-temporary impairment evaluations in reporting
periods beginning after June 15, 2004. The Company is
currently evaluating the effect of adopting EITF 03-01 on
its results of operations.



|         |                  
|-------- | -----------------
|Note 3  | Intangible Assets

Acquired intangible assets, net of accumulated
amortization, consist of the following (in thousands):

|                                 |                              |         |   |              |  |  |   |        | 
|-------------------------------- | ---------------------------- | ------- | - | ------------ |  |  | - | ------ | 
|                                 |                              | July 2, |   | December 31,
|                                 |                              | 2004    |   | 2003        
|                                 |                              |         |   |             
|Acquired intangible assets, net: |                              |         |   |              |  |  |   |       
|                                 | Proxim, Inc.                 |         | $ | 14,681       |  |  | $ | 18,810 | 
|                                 | 802.11 WLAN systems business |         |   | 14,923       |  |  |   | 21,523 | 
|                                 |                              |         |   |              |  |  |   |       
|                                 | Total intangible assets, net |         | $ | 29,604       |  |  | $ | 40,333 | 
|                                 |                              |         |   |              |  |  |   |       

Acquired intangible assets by categories as of
July 2, 2004 and December 31, 2003 consist of the
following (in thousands):

|                               |                        |          |   |                          |  |              |   |        |  |  |   |        | 
|------------------------------ | ---------------------- | -------- | - | ------------------------ |  | ------------ | - | ------ |  |  | - | ------ | 
|                               |                        |          |   |                         
|                               |                        |          |   | Accumulated Amortization
|                               |                        | Gross    |   |                         
|                               |                        | Carrying |   | July 2,                  |  | December 31,
|                               |                        | Amounts  |   | 2004                     |  | 2003        
|                               |                        |          |   |                          |  |             
|Amortized intangible assets:   |                        |          |   |                          |  |              |   |        |  |  |   |       
|                               | Core Technology        |          | $ | 26,531                   |  |              | $ | 11,371 |  |  | $ | 8,718  | 
|                               | Developed Technology   |          |   | 29,036                   |  |              |   | 25,318 |  |  |   | 19,063 | 
|                               | Customer Relationships |          |   | 8,995                    |  |              |   | 5,747  |  |  |   | 4,247  | 
|                               | Patents                |          |   | 3,439                    |  |              |   | 1,870  |  |  |   | 1,549  | 
|                               |                        |          |   |                          |  |              |   |        |  |  |   |       
|                               | Total                  |          | $ | 68,001                   |  |              | $ | 44,306 |  |  | $ | 33,577 | 
|                               |                        |          |   |                          |  |              |   |        |  |  |   |       
|Unamortized intangible assets: |                        |          |   |                          |  |              |   |        |  |  |   |       
|                               | Tradename              |          | $ | 5,909                    |  |              |   |        |  |  |   |        | 
|                               |                        |          |   |                          |  |              |   |        |  |  |   |       

11



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##### Table of Contents



PROXIM CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS   (Continued)

Core technology, developed technology, customer
relationships and patents are being amortized on a straight-line
basis over the following estimated periods of benefit:

|                       |  |          
|---------------------- |  | ---------
|Core technology        |  | 5 years  
|Developed technology   |  | 2-3 years
|Customer relationships |  | 3 years  
|Patents                |  | 5 years  

The Company expects amortization expense of
intangible assets to be $7.2 million in the remaining
fiscal 2004, $8.7 million in fiscal 2005, $5.9 million
in fiscal 2006, and $1.9 million in fiscal 2007, at which
time intangible assets, other than tradename, will be fully
amortized assuming no future impairments of those intangible
assets or additions as a result of business combinations.



|         |                         
|-------- | ------------------------
|Note 4  | Balance Sheet Components

The following is a summary of certain of our
condensed consolidated balance sheets (in thousands):

|                             |                                                 |                                                                  |        |              |        |   |        |         |        |  
|---------------------------- | ----------------------------------------------- | ---------------------------------------------------------------- | ------ | ------------ | ------ | - | ------ | ------- | ------ | -
|                             |                                                 | July 2,                                                          |        | December 31,
|                             |                                                 | 2004                                                             |        | 2003        
|                             |                                                 |                                                                  |        |             
|Short-term investments:      |                                                 |                                                                  |        |              |        |   |        |        
|                             | Time deposits                                   |                                                                  | $      | 770          |        |   | $      | 1,254   |       
|                             | Restricted securities in a wireless company     |                                                                  |        | 2,510        |        |   |        |        |       
|                             |                                                 |                                                                  |        |              |        |   |        |        
|                             |                                                 |                                                                  | 3,280  |              |        |   | 1,254  |        
|                             | Less: long-term restricted portion              |                                                                  |        | (770         | )      |   |        | (1,254  | )     
|                             |                                                 |                                                                  |        |              |        |   |        |        
|                             | Current portion                                 |                                                                  | $      | 2,510        |        |   | $      |        |       
|                             |                                                 |                                                                  |        |              |        |   |        |        
|Accounts receivable, net:    |                                                 |                                                                  |        |              |        |   |        |        
|                             | Accounts receivable                             |                                                                  | $      | 25,398       |        |   | $      | 34,345  |       
|                             | Less: Deferred revenue                          |                                                                  |        | (6,654       | )      |   |        | (10,599 | )     
|                             |                                                 | Allowances for bad debts, sales returns and price
    protection |        |              | (9,610 | ) |        |         | (9,785 | )
|                             |                                                 |                                                                  |        |              |        |   |        |        
|                             |                                                 | $                                                                | 9,134  |              |        | $ | 13,961 |        
|                             |                                                 |                                                                  |        |              |        |   |        |        
|Inventory:                   |                                                 |                                                                  |        |              |        |   |        |        
|                             | Raw materials                                   |                                                                  | $      | 5,647        |        |   | $      | 4,238   |       
|                             | Work-in-process                                 |                                                                  |        | 1,594        |        |   |        | 1,282   |       
|                             | Finished goods                                  |                                                                  |        | 5,132        |        |   |        | 8,223   |       
|                             | Consignment inventories                         |                                                                  |        | 5,683        |        |   |        | 6,196   |       
|                             |                                                 |                                                                  |        |              |        |   |        |        
|                             |                                                 | $                                                                | 18,056 |              |        | $ | 19,939 |        
|                             |                                                 |                                                                  |        |              |        |   |        |        
|Property and equipment, net: |                                                 |                                                                  |        |              |        |   |        |        
|                             | Computer and test equipment                     |                                                                  | $      | 11,115       |        |   | $      | 11,427  |       
|                             | Furniture and fixtures                          |                                                                  |        | 196          |        |   |        | 194     |       
|                             | Leased assets                                   |                                                                  |        | 2,987        |        |   |        | 2,942   |       
|                             | Leasehold improvements                          |                                                                  |        | 438          |        |   |        | 438     |       
|                             |                                                 |                                                                  |        |              |        |   |        |        
|                             |                                                 |                                                                  | 14,736 |              |        |   | 15,001 |        
|                             | Less: accumulated depreciation and amortization |                                                                  |        | (8,363       | )      |   |        | (7,479  | )     
|                             |                                                 |                                                                  |        |              |        |   |        |        
|                             |                                                 | $                                                                | 6,373  |              |        | $ | 7,522  |        
|                             |                                                 |                                                                  |        |              |        |   |        |        

12



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##### Table of Contents



PROXIM CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS   (Continued)

|                           |                                                  |         |        |              |   |   |        |         |  
|-------------------------- | ------------------------------------------------ | ------- | ------ | ------------ | - | - | ------ | ------- | -
|                           |                                                  | July 2, |        | December 31,
|                           |                                                  | 2004    |        | 2003        
|                           |                                                  |         |        |             
|Intangible assets, net:    |                                                  |         |        |              |   |   |        |        
|                           | Core technology                                  |         | $      | 26,531       |   |   | $      | 26,531  |  
|                           | Developed technology                             |         |        | 29,036       |   |   |        | 29,036  |  
|                           | Customer relationships                           |         |        | 8,995        |   |   |        | 8,995   |  
|                           | Tradename                                        |         |        | 5,909        |   |   |        | 5,909   |  
|                           | Patents                                          |         |        | 3,439        |   |   |        | 3,439   |  
|                           |                                                  |         |        |              |   |   |        |        
|                           |                                                  |         | 73,910 |              |   |   | 73,910 |        
|                           | Less: Accumulated amortization                   |         |        | (44,306      | ) |   |        | (33,577 | )
|                           |                                                  |         |        |              |   |   |        |        
|                           |                                                  | $       | 29,604 |              |   | $ | 40,333 |        
|                           |                                                  |         |        |              |   |   |        |        
|Other accrued liabilities: |                                                  |         |        |              |   |   |        |        
|                           | Restructuring accruals, current portion          |         | $      | 4,028        |   |   | $      | 7,144   |  
|                           | Accrued interest on convertible promissory notes |         |        |             |   |   |        | 3,247   |  
|                           | Accrued unconditional project commitments        |         |        | 799          |   |   |        | 1,284   |  
|                           | Accrued compensation                             |         |        | 3,416        |   |   |        | 3,402   |  
|                           | Accrued warranty costs                           |         |        | 1,318        |   |   |        | 1,395   |  
|                           | Deferred revenue                                 |         |        | 5,127        |   |   |        |        |  
|                           | Other accrued liabilities                        |         |        | 3,623        |   |   |        | 4,332   |  
|                           |                                                  |         |        |              |   |   |        |        
|                           |                                                  | $       | 18,311 |              |   | $ | 20,804 |        
|                           |                                                  |         |        |              |   |   |        |        

The restricted securities, which are presented as
short-term investments and consist of common stock of a publicly
traded company, is accounted for as available-for-sale. The
Companys short-term investment is valued at market value
and the unrealized gain, net of tax, is recorded in
stockholders deficit as accumulated other comprehensive
income.

The following is a summary of the movements in
allowance for bad debt, sales returns and price protection and
product warranty costs during the six months ended July 2,
2004 and June 27, 2003 (in thousands):

|                                   |  |                     |       |                  |  |      |        |      |  |   |       |   |  |   |       |  
|---------------------------------- |  | ------------------- | ----- | ---------------- |  | ---- | ------ | ---- |  | - | ----- | - |  | - | ----- | -
|                                   |  |                     |       |                  |  |     
|                                   |  | Allowance for Bad   |       |                 
|                                   |  | Debt, Sales Returns |       | Product Warranty
|                                   |  | and Discounts       |       | Costs           
|                                   |  |                     |       |                 
|                                   |  | 2003                |       | 2004             |  | 2003 |        | 2004
|                                   |  |                     |       |                  |  |      |        |     
|Balance at beginning of period     |  | $                   | 7,500 |                  |  | $    | 9,785  |      |  | $ | 2,041 |   |  | $ | 1,395 |  
|Additional provision               |  |                     | 2,230 |                  |  |      | 8,688  |      |  |   |      |   |  |   | 115   |  
|Settlements made during the period |  |                     | (433  | )                |  |      | (8,863 | )    |  |   | (431  | ) |  |   | (192  | )
|                                   |  |                     |       |                  |  |      |        |      |  |   |       |   |  |   |       |  
|Balance at end of period           |  | $                   | 9,297 |                  |  | $    | 9,610  |      |  | $ | 1,610 |   |  | $ | 1,318 |  
|                                   |  |                     |       |                  |  |      |        |      |  |   |       |   |  |   |       |  

The following is a summary of the changes in the
reserve for excess and obsolete inventory and lower of cost or
market during the six months ended July 2, 2004
(in thousands):

|                                                                            |  |   |        |  
|--------------------------------------------------------------------------- |  | - | ------ | -
|Balance as of December 31, 2003                                             |  | $ | 5,072  |  
|Provision for excess and obsolete inventory and
    lower of cost or market |  |   | 2,115  |  
|Inventory scrapped                                                          |  |   | (1,563 | )
|                                                                            |  |   |        |  
|Balance as of July 2, 2004                                                  |  | $ | 5,624  |  
|                                                                            |  |   |        |  

13



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##### Table of Contents



PROXIM CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS   (Continued)

During the six months ended July 2, 2004,
the Company recorded a $2.1 million provision for excess
and obsolete inventory and lower of cost or market as part of
its ongoing review of its inventory reserve requirements. To
mitigate the component supply constraints that have existed in
the past, the Company had built inventory levels for certain
components with long lead times and had entered into longer term
commitments for certain components. The inventory charges were
due to a decrease in anticipated demand for certain of the
Companys products, notification from customers that they
would not be ordering as many products as they had previously
indicated they would, and continued increase in competition for
wireless networking products.

Due to these factors, inventory levels exceeded
the Companys requirements based on its current 12-month
sales forecasts. The additional excess and obsolete and lower of
cost or market inventory charges were calculated based on the
inventory levels in excess of the estimated 12-month sales
forecasts and anticipated reduced selling prices for certain
products. The Company does not anticipate that the excess and
obsolete inventory subject to this reserve will be saleable at a
later date based on its current 12-month sales forecast. The
Company uses a 12-month sales forecast, because the wireless
communications industry is characterized by rapid technological
changes such that if the Company has not sold a product after a
12-month period, it is unlikely that the product will be sold.

Property and equipment includes $3.0 million
of computer equipment under capital leases at July 2, 2004.
Accumulated amortization of assets under capital leases totaled
$525,000.



|         |                              
|-------- | -----------------------------
|Note 5  | Impairment of Loan to Officer

The Company had guaranteed up to $5 million
of obligations of an officer of the Company, with respect to a
margin loan with an investment bank that he established prior to
2001. On October 15, 2002, the investment bank called the
Companys guaranty of $5 million. The Company
continues to seek repayment from the former officer under a
Reimbursement and Security Agreement. In this regard, in January
2003, the former officer made a cash payment of
$0.5 million to the Company. The Company assessed the
recoverability of the remaining balance of the loan with respect
to the former officers current financial position and
recorded an impairment charge of $4.5 million in the fourth
quarter of 2002. This impairment charge does not constitute
forgiveness of the former officers indebtedness to the
Company. Future payments by the former officer under the
Reimbursement and Security Agreement will be recorded as income
in the period cash is received.



|         |                                                          
|-------- | ---------------------------------------------------------
|Note 6  | Revenue Information and Concentration of
    Credit Risks

The Companys products are grouped into two
product lines: WWAN and WLAN product lines. The WWAN product
line includes point-to-point Lynx and Tsunami products and
point-to-multipoint Tsunami products. The WLAN product line
includes ORiNOCO 802.11 access point and client card
products. Total revenue during the three months ended
March 28, 2003 also includes one-time license revenue of
$6.0 million related to the patent infringement legal
settlement agreement with Intersil (see Note 17). Revenue
information by product line is as follows (in thousands):

|                     |               |                    |        |                  |  |         |        |          |  |   |        |        |  |   |        |        | 
|-------------------- | ------------- | ------------------ | ------ | ---------------- |  | ------- | ------ | -------- |  | - | ------ | ------ |  | - | ------ | ------ | 
|                     |               |                    |        |                 
|                     |               | Three Months Ended |        | Six Months Ended
|                     |               |                    |        |                 
|                     |               | July 2,            |        | June 27,         |  | July 2, |        | June 27,
|Product Line         |               | 2004               |        | 2003             |  | 2004    |        | 2003    
|                     |               |                    |        |                  |  |         |        |         
|WWAN                 |               | $                  | 17,185 |                  |  | $       | 18,805 |          |  | $ | 30,259 |        |  | $ | 35,412 |       
|WLAN                 |               |                    | 14,232 |                  |  |         | 16,000 |          |  |   | 27,855 |        |  |   | 33,422 |       
|WLAN license revenue |               |                    |       |                  |  |         |       |          |  |   |       |        |  |   | 6,000  |       
|                     |               |                    |        |                  |  |         |        |          |  |   |        |        |  |   |        |       
|                     | Total revenue |                    | $      | 31,417           |  |         | $      | 34,805   |  |   | $      | 58,114 |  |   | $      | 74,834 | 
|                     |               |                    |        |                  |  |         |        |          |  |   |        |        |  |   |        |       

14



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##### Table of Contents



PROXIM CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS   (Continued)

The Company sells its products worldwide
primarily through independent distributors and value-added
resellers and, to a lesser extent, through its direct sales
force. It currently operates in two geographic regions: North
America and International. Revenue outside of North America is
primarily export sales denominated in United States dollars.
Disaggregated financial information regarding the Companys
revenue by geographic region is as follows (in thousands):

|                              |               |                    |        |                  |  |         |        |          |  |   |        |        |  |   |        |        | 
|----------------------------- | ------------- | ------------------ | ------ | ---------------- |  | ------- | ------ | -------- |  | - | ------ | ------ |  | - | ------ | ------ | 
|                              |               |                    |        |                 
|                              |               | Three Months Ended |        | Six Months Ended
|                              |               |                    |        |                 
|                              |               | July 2,            |        | June 27,         |  | July 2, |        | June 27,
|Geographic Region             |               | 2004               |        | 2003             |  | 2004    |        | 2003    
|                              |               |                    |        |                  |  |         |        |         
|North America product revenue |               | $                  | 20,647 |                  |  | $       | 20,353 |          |  | $ | 34,100 |        |  | $ | 43,475 |       
|North America license revenue |               |                    |       |                  |  |         |       |          |  |   |       |        |  |   | 6,000  |       
|International product revenue |               |                    | 10,770 |                  |  |         | 14,452 |          |  |   | 24,014 |        |  |   | 25,359 |       
|                              |               |                    |        |                  |  |         |        |          |  |   |        |        |  |   |        |       
|                              | Total revenue |                    | $      | 31,417           |  |         | $      | 34,805   |  |   | $      | 58,114 |  |   | $      | 74,834 | 
|                              |               |                    |        |                  |  |         |        |          |  |   |        |        |  |   |        |       

Three customers accounted for 15.8%, 13.8% and
12.7% of total revenue for the three months ended July 2,
2004, and one customer accounted for 13.6% of total revenue for
the three months ended June 27, 2003. Two customers
accounted for 15.1% and 13.2% of total revenue for the six
months ended July 2, 2004, and one customer accounted for
13.8% of total revenue for the six months ended June 27,
2003.



|         |                                                              
|-------- | -------------------------------------------------------------
|Note 7  | Restructuring Charges for Severance and Excess
    Facilities

During the six months ended July 2, 2004,
the Company recorded restructuring charges of $2.0 million,
consisting of $1.9 million of cash provisions and
$0.1 million of non-cash provisions for abandoned property
and equipment. The $1.9 million of cash provisions
consisted of $1.4 million of operating lease commitments,
less estimated future sublease receipts and exit costs related
to a portion of the Sunnyvale facility, which was closed in the
first quarter of 2004, and $0.5 million of severance
payments for five employees. The estimated future sublease
receipts are based on current comparable rates for leases in the
respective markets. If facility rental rates continue to
decrease in these markets, or if it takes longer than expected,
or if the Company is unable to sublease these facilities, the
actual costs to close these facilities could exceed the original
estimates, and additional restructuring charges totaling
$2.6 million could result.

The following table summarizes the restructuring
activities for the year ended December 31, 2003 and the six
months ended July 2, 2004 (in thousands):

|                                               |  |           |        |            |  |            |         |       |  |       |        |   |  |   |        |   |  |   |         |  
|---------------------------------------------- |  | --------- | ------ | ---------- |  | ---------- | ------- | ----- |  | ----- | ------ | - |  | - | ------ | - |  | - | ------- | -
|                                               |  |           |        |            |  | Asset Held |         |       |  |      
|                                               |  | Severance |        | Facilities |  | for Sale   |         | Other |  | Total
|                                               |  |           |        |            |  |            |         |       |  |      
|Balance as of December 31, 2002                |  | $         |       |            |  | $          | 30,450  |       |  | $     |       |   |  | $ |       |   |  | $ | 30,450  |  
|Provision charged to operations                |  |           | 9,071  |            |  |            | 12,743  |       |  |       | 6,925  |   |  |   | 3,904  |   |  |   | 32,643  |  
|Reversal of previously recorded provision      |  |           |       |            |  |            | (27,764 | )     |  |       |       |   |  |   |       |   |  |   | (27,764 | )
|Non-cash charges utilized                      |  |           |       |            |  |            |        |       |  |       |       |   |  |   | (3,304 | ) |  |   | (3,304  | )
|Cash payments                                  |  |           | (5,451 | )          |  |            | (3,845  | )     |  |       | (9,966 | ) |  |   |       |   |  |   | (19,262 | )
|Proceeds from sale of asset held for sale, net |  |           |       |            |  |            |        |       |  |       | 3,041  |   |  |   |       |   |  |   | 3,041   |  
|                                               |  |           |        |            |  |            |         |       |  |       |        |   |  |   |        |   |  |   |         |  
|Balance as of December 31, 2003                |  |           | 3,620  |            |  |            | 11,584  |       |  |       |       |   |  |   | 600    |   |  |   | 15,804  |  
|Provision charged to operations                |  |           | 463    |            |  |            | 1,447   |       |  |       |       |   |  |   | 119    |   |  |   | 2,029   |  
|Non-cash charges utilized                      |  |           |       |            |  |            |        |       |  |       |       |   |  |   | (119   | ) |  |   | (119    | )
|Cash payments                                  |  |           | (3,525 | )          |  |            | (1,733  | )     |  |       |       |   |  |   |       |   |  |   | (5,258  | )
|                                               |  |           |        |            |  |            |         |       |  |       |        |   |  |   |        |   |  |   |         |  
|Balance as of July 2, 2004                     |  | $         | 558    |            |  | $          | 11,298  |       |  | $     |       |   |  | $ | 600    |   |  | $ | 12,456  |  
|                                               |  |           |        |            |  |            |         |       |  |       |        |   |  |   |        |   |  |   |         |  

15



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##### Table of Contents



PROXIM CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS   (Continued)

The restructuring reserves were presented on the
balance sheet as follows (in thousands):

|          |                              |         |       |              |  |   |       |        | 
|--------- | ---------------------------- | ------- | ----- | ------------ |  | - | ----- | ------ | 
|          |                              | July 2, |       | December 31,
|          |                              | 2004    |       | 2003        
|          |                              |         |       |             
|Current   |                              | $       | 4,028 |              |  | $ | 7,144 |       
|Long-term |                              |         | 8,428 |              |  |   | 8,660 |       
|          |                              |         |       |              |  |   |       |       
|          | Total restructuring accruals |         | $     | 12,456       |  |   | $     | 15,804 | 
|          |                              |         |       |              |  |   |       |       



|         |                                                     
|-------- | ----------------------------------------------------
|Note 8  | Interest Expense and Other Income (Expense),
    Net

The following table summarizes the components of
interest expense (in thousands):

|                                      |  |                    |        |                  |  |         |      |          |  |   |        |   |  |   |     |  
|------------------------------------- |  | ------------------ | ------ | ---------------- |  | ------- | ---- | -------- |  | - | ------ | - |  | - | --- | -
|                                      |  |                    |        |                 
|                                      |  | Three Months Ended |        | Six Months Ended
|                                      |  |                    |        |                 
|                                      |  | July 2,            |        | June 27,         |  | July 2, |      | June 27,
|                                      |  | 2004               |        | 2003             |  | 2004    |      | 2003    
|                                      |  |                    |        |                  |  |         |      |         
|Interest expense on royalty charges   |  | $                  | (130   | )                |  | $       |     |          |  | $ | (215   | ) |  | $ |    |  
|Interest expense on convertible notes |  |                    | (2,493 | )                |  |         |     |          |  |   | (5,041 | ) |  |   |    |  
|Other                                 |  |                    | (96    | )                |  |         | (192 | )        |  |   | (179   | ) |  |   | (93 | )
|                                      |  |                    |        |                  |  |         |      |          |  |   |        |   |  |   |     |  
|                                      |  | $                  | (2,719 | )                |  | $       | (192 | )        |  | $ | (5,435 | ) |  | $ | (93 | )
|                                      |  |                    |        |                  |  |         |      |          |  |   |        |   |  |   |     |  

The following table summarizes the components of
other income (expense), net (in thousands):

|                                                 |  |                    |        |                  |  |         |   |          |  |   |        |   |  |   |   | 
|------------------------------------------------ |  | ------------------ | ------ | ---------------- |  | ------- | - | -------- |  | - | ------ | - |  | - | - | 
|                                                 |  |                    |        |                 
|                                                 |  | Three Months Ended |        | Six Months Ended
|                                                 |  |                    |        |                 
|                                                 |  | July 2,            |        | June 27,         |  | July 2, |   | June 27,
|                                                 |  | 2004               |        | 2003             |  | 2004    |   | 2003    
|                                                 |  |                    |        |                  |  |         |   |         
|Amortization of debt discount and issuance costs |  | $                  | (2,845 | )                |  | $       |  |          |  | $ | (5,737 | ) |  | $ |  | 
|Revaluation of common stock warrants             |  |                    | 8,700  |                  |  |         |  |          |  |   | 13,800 |   |  |   |  | 
|Loss on disposal of property and equipment       |  |                    |       |                  |  |         |  |          |  |   | (350   | ) |  |   |  | 
|                                                 |  |                    |        |                  |  |         |   |          |  |   |        |   |  |   |   | 
|                                                 |  | $                  | 5,855  |                  |  | $       |  |          |  | $ | 7,713  |   |  | $ |  | 
|                                                 |  |                    |        |                  |  |         |   |          |  |   |        |   |  |   |   | 



|         |             
|-------- | ------------
|Note 9  | Income Taxes

The income tax benefit recorded during the six
months ended July 2, 2004 represents the net reversal of
the valuation allowance of deferred tax assets to offset the
deferred tax liability arising from the revaluation of the
short-term investments.



|          |                                                       
|--------- | ------------------------------------------------------
|Note 10  | Loss Per Share Attributable to Common
    Stockholders

Basic and diluted net loss per share attributable
to common stockholders is presented in conformity with
SFAS No. 128, Earnings Per Share and
EITF 03-06, Participating Securities and the
Two-Class Method Under FASB Statement No. 128, Earnings Per
Share. The following is a reconciliation of the numerators

16



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##### Table of Contents



PROXIM CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS   (Continued)

and denominators of the basic and diluted net
loss per share computations for the three and six months ended
July 2, 2004 and June 27, 2003 (in thousands except
share data):

|                                                                                           |                                        |                    |         |                  |   |         |         |          |   |   |         |       |   |   |         |       |  
|------------------------------------------------------------------------------------------ | -------------------------------------- | ------------------ | ------- | ---------------- | - | ------- | ------- | -------- | - | - | ------- | ----- | - | - | ------- | ----- | -
|                                                                                           |                                        |                    |         |                 
|                                                                                           |                                        | Three Months Ended |         | Six Months Ended
|                                                                                           |                                        |                    |         |                 
|                                                                                           |                                        | July 2,            |         | June 27,         |   | July 2, |         | June 27,
|                                                                                           |                                        | 2004               |         | 2003             |   | 2004    |         | 2003    
|                                                                                           |                                        |                    |         |                  |   |         |         |         
|Net loss attributable to common stockholders                                               |                                        | $                  | (10,116 | )                |   | $       | (48,734 | )        |   | $ | (27,597 | )     |   | $ | (59,537 | )    
|Weighted average common shares outstanding                                                 |                                        |                    | 123,404 |                  |   |         | 121,714 |          |   |   | 123,293 |       |   |   | 120,994 |      
|                                                                                           |                                        |                    |         |                  |   |         |         |          |   |   |         |       |   |   |         |      
|                                                                                           | Net loss per share  basic and diluted |                    | $       | (0.08            | ) |         | $       | (0.40    | ) |   | $       | (0.22 | ) |   | $       | (0.49 | )
|                                                                                           |                                        |                    |         |                  |   |         |         |          |   |   |         |       |   |   |         |      
|Common stock equivalents not included in the
    calculation because they are antidilutive |                                        |                    | 115,409 |                  |   |         | 66,618  |          |   |   | 114,630 |       |   |   | 67,423  |      
|                                                                                           |                                        |                    |         |                  |   |         |         |          |   |   |         |       |   |   |         |      

For the three and six months ended July 2,
2004 and June 27, 2003, basic net loss per share was
computed using the weighted average number of shares outstanding
during the period. Diluted net loss per share was determined in
the same manner as basic earnings per share except that the
number of shares was increased assuming dilutive stock options
and warrants using the treasury stock method. For the three and
six months ended July 2, 2004 and June 27, 2003, the
incremental shares from the assumed exercise of stock options
and warrants, and the assumed conversion of Series A
Preferred Stock, were not included in computing diluted per
share amounts as the effect would be antidilutive.



|          |                   
|--------- | ------------------
|Note 11  | Comprehensive Loss

The total comprehensive loss for the three and
six months ended July 2, 2004 and June 27, 2003 is as
follows (in thousands):

|                                             |                          |                    |         |                  |   |         |         |          |   |   |         |         |   |   |         |         |  
|-------------------------------------------- | ------------------------ | ------------------ | ------- | ---------------- | - | ------- | ------- | -------- | - | - | ------- | ------- | - | - | ------- | ------- | -
|                                             |                          |                    |         |                 
|                                             |                          | Three Months Ended |         | Six Months Ended
|                                             |                          |                    |         |                 
|                                             |                          | July 2,            |         | June 27,         |   | July 2, |         | June 27,
|                                             |                          | 2004               |         | 2003             |   | 2004    |         | 2003    
|                                             |                          |                    |         |                  |   |         |         |         
|Net loss attributable to common stockholders |                          | $                  | (10,116 | )                |   | $       | (48,734 | )        |   | $ | (27,597 | )       |   | $ | (59,537 | )      
|Unrealized gain (loss) on investments        |                          |                    | (813    | )                |   |         | (84     | )        |   |   | 306     |         |   |   | 404     |        
|                                             |                          |                    |         |                  |   |         |         |          |   |   |         |         |   |   |         |        
|                                             | Total comprehensive loss |                    | $       | (10,929          | ) |         | $       | (48,818  | ) |   | $       | (27,291 | ) |   | $       | (59,133 | )
|                                             |                          |                    |         |                  |   |         |         |          |   |   |         |         |   |   |         |        



|          |                                                                                                 
|--------- | ------------------------------------------------------------------------------------------------
|Note 12  | Convertible Promissory Notes and Mandatorily
    Redeemable Convertible Series B Preferred Stock

As described in Note 1, on July 30,
2004, the Investors exchanged the aggregate principal amount of
the Notes, plus accrued but unpaid interest, for shares of
Series B Preferred Stock, in accordance with the existing
terms and conditions of the Notes. The exchange relieved the
Company from the requirement to repay the Notes on their
maturity date of September 30, 2004. Accordingly, the
carrying value of the convertible promissory notes of
$38.1 million, accrued and unpaid interest of
$8.3 million and unamortized deferred financing costs of
$872,000 were reclassified from current liabilities to long-term
liabilities in accordance with SFAS No. 6,
Classification of Short-Term Obligations Expected to be
Refinanced. Subject to the approval of the Companys
stockholders, the Investors also agreed to surrender all of
their Series A Preferred Stock, all of their Series B
Preferred Stock, and all of their warrants to purchase the
Companys common stock in exchange for an aggregate of
164 million shares of common stock and 400,000 shares
of the Companys newly issued Series C Preferred Stock.

17



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##### Table of Contents



PROXIM CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS   (Continued)

As of July 30, 2004, Series B Preferred
Stock consisted of the following:

|         |  |            |         |             |  |             |         |                 |  |   |            |  |  |  |            | 
|-------- |  | ---------- | ------- | ----------- |  | ----------- | ------- | --------------- |  | - | ---------- |  |  |  | ---------- | 
|         |  |            |         |             |  |             |         | Total Number of
|         |  |            |         |             |  |             |         | Shares of      
|         |  |            |         |             |  |             |         | Common Stock   
|         |  |            |         | Issued and  |  | Liquidation |         | Issuable Upon  
|         |  | Authorized |         | Outstanding |  | Preference  |         | Conversion     
|         |  |            |         |             |  |             |         |                
|Series B |  |            | 540,000 |             |  |             | 490,599 |                 |  | $ | 49,059,900 |  |  |  | 42,660,810 | 
|         |  |            |         |             |  |             |         |                 |  |   |            |  |  |  |            | 

On a fully accreted basis on July 30, 2011,
Series B Preferred Stock would consist of the following:

|         |  |             |             |                 |  |  |             | 
|-------- |  | ----------- | ----------- | --------------- |  |  | ----------- | 
|         |  |             |             | Total Number of
|         |  |             |             | Shares of      
|         |  |             |             | Common Stock   
|         |  | Liquidation |             | Issuable Upon  
|         |  | Preference  |             | Conversion     
|         |  |             |             |                
|Series B |  | $           | 128,545,376 |                 |  |  | 111,778,658 | 
|         |  |             |             |                 |  |  |             | 

As of July 2, 2004, the Company had
outstanding Notes with an aggregate principal amount of
$40.0 million and accrued interest of $8.3 million.
The New Notes of $10.0 million, which were issued on
December 19, 2003, rank senior to the Amended Notes of
$30.0 million originally issued on July 30, 2003. In
addition, in connection with the financing, the note holders
also received warrants to purchase common stock as described in
Note 14.

The holders of the Notes and the Series B
Preferred Stock had various rights and preferences as follows:

Voting

In addition to its rights as a holder of
Series A Preferred Stock, for so long as Warburg Pincus
owns at least 25% of its shares of Series B Preferred Stock
or the common stock issuable on conversion of its Series B
Preferred Stock and exercise of its warrants, Warburg Pincus
will have the right to nominate for election one member of the
Companys board of directors, who will sit on all major
board committees for so long as such committee membership does
not conflict with any applicable law or regulation or any
listing requirements of the Nasdaq National Market. The approval
of holders of a majority of the Series B Preferred Stock is
separately required to approve changes to the Companys
certificate of incorporation or bylaws that adversely affect
these holders rights, any other, sale or issuance of the
Companys equity or equity-linked securities ranking senior
to or equally with the Series B Preferred Stock, and any
repurchase or redemption of the Companys equity securities
(other than from an employee, director or consultant following
termination), or the declaration or payment of any dividend on
the Companys Common Stock.

Although the conversion of the Series B
Preferred Stock is subject to weighted-average anti-dilution
adjustments in the event of certain issuances of the
Companys common stock, or securities exercisable for or
exchangeable or convertible into our common stock, as described
below, the Series B Certificate of Designations limits the
voting rights of the Series B Preferred Stock, such that
the Series B Preferred Stock shall not vote at a higher
rate than if converted to common stock at $1.15, subject to
certain adjustments.

Redemption

In July 2011, the Company will be required to
redeem all outstanding shares of Series B Preferred Stock,
if any, for cash equal to their liquidation preference, which
bears interest at 14% per annum, compounded quarterly, for seven
years, plus accrued and unpaid dividends.

18



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##### Table of Contents



PROXIM CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS   (Continued)



| |          
| | ---------
| | Repayment

As of July 2, 2004, the Notes, including
accrued and unpaid interest, were subject to repayment in the
event the Investors did not exchange the Notes for Series B
Preferred Stock. In such an event, repayment would have been
required on September 30, 2004, the maturity date of the
Notes, or upon an event of default, as defined, or a change in
control, as defined, whichever occurred earlier.

At the option of the Investors and subject to the
approval of the Companys stockholders, the Notes were
exchangeable for shares of the Companys Series B
Preferred Stock with an aggregate initial liquidation preference
equal to the principal amount of the exchanged indebtedness,
plus accrued but unpaid interest, at the conversion price of
$100.00 per share. The liquidation preference of the
Series B Preferred Stock accretes at 14% per annum,
compounded quarterly, through the seventh anniversary of the
date on which the Company first issued shares of its
Series B Preferred Stock, or the Series B Preferred
Stock original issue date.



| |           
| | ----------
| | Conversion

At the option of the note holders, the
Series B Preferred Stock is exchangeable for shares of the
Companys common stock at the conversion price of
$1.15 per share, subject to antidilution adjustments. The
Company has the right to require conversion of the Series B
Preferred Stock after five years if the closing price of its
common stock exceed 300% of the conversion price for ninety
consecutive trading days. The Series B Preferred Stock is
convertible at the option of the holders at any time, in whole
or in part, into that number of shares of common stock equal to
the liquidation preference then in effect divided by the then
current conversion price.

In the event of a change in control of the
Company, the holders of the Series B Preferred Stock will
have the right to convert the Series B Preferred Stock into
common stock if upon such conversion the holders of
Series B Preferred Stock would receive liquid securities or
cash with a fair market value equal to or greater than 110% of
the liquidation preference then in effect. If the consideration
is less than 110% of the liquidation preference, the Company may
either modify the conversion price so that the consideration
will equal 110% of the liquidation preference then in effect or
offer to repurchase the Series B Preferred Stock for cash
at 101% of the liquidation preference then in effect. In
addition, in the event of a change of control that occurs prior
to the seventh anniversary of the issuance of the Series B
Preferred Stock, the liquidation preference will increase as
necessary to provide for seven years of accretion.



| |              
| | -------------
| | Anti-Dilution

The conversion price is subject to customary
weighted average anti-dilution adjustments and other customary
adjustments upon some transactions that affect the
Companys capital stock.



| |           
| | ----------
| | Put Rights

Had a change in control occurred while the Notes
were outstanding, 150% of the accrued value of the Notes with a
cap of $10.0 million on the accrued interest portion of the
Notes, would have been immediately due and payable.



| |         
| | --------
| | Interest

As of July 2, 2004, the Notes bore interest
at 25% per annum. Had the Notes remained outstanding after
their maturity date, the interest rate would have increased to
30% per annum.

As of July 2, 2004, the Company had reserved
540,000 shares of Series B Preferred Stock for the
conversion of the Notes.

19



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##### Table of Contents



PROXIM CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS   (Continued)

Pursuant to stockholder approval of the terms of
the Amended Agreement, including the Amended Notes and the New
Notes, on December 12, 2003 (see Note 1), the Company
issued to the Investors warrants as described in Note 14.



|          |                                                                
|--------- | ---------------------------------------------------------------
|Note 13  | Mandatorily Redeemable Convertible
    Series A Preferred Stock

As described in Note 1 under Subsequent
Events, on July 27, 2004, subject to the approval of the
Companys stockholders, the Investors agreed to surrender
all of their Series A Preferred Stock, all of their
Series B Preferred Stock, and all of their warrants to
purchase the Companys common stock in exchange for an
aggregate of 164 million shares of common stock and
400,000 shares of the Companys newly issued
Series C Preferred Stock.

As of July 2, 2004, Mandatorily Redeemable
Convertible Preferred Stock, Series A, consisted of the
following:

|         |  |            |           |             |  |             |           |                 |  |   |            |  |  |  |            | 
|-------- |  | ---------- | --------- | ----------- |  | ----------- | --------- | --------------- |  | - | ---------- |  |  |  | ---------- | 
|         |  |            |           |             |  |             |           | Total Number of
|         |  |            |           |             |  |             |           | Shares of      
|         |  |            |           |             |  |             |           | Common Stock   
|         |  |            |           | Issued and  |  | Liquidation |           | Issuable Upon  
|         |  | Authorized |           | Outstanding |  | Preference  |           | Conversion     
|         |  |            |           |             |  |             |           |                
|Series A |  |            | 3,000,000 |             |  |             | 3,000,000 |                 |  | $ | 84,365,000 |  |  |  | 41,695,179 | 
|         |  |            |           |             |  |             |           |                 |  |   |            |  |  |  |            | 

As described in Note 1, on July 30,
2004, the Investors exchanged the Notes for shares of the
Companys Series B Preferred Stock. Because this exchange
took place before the maturity date of the Notes, the conversion
price for the Series A Preferred Stock was adjusted
according to the terms of the Series A Preferred Stock to
approximately $2.07 to reflect the decrease in the dilutive
effect of the issuance of the Series B Preferred Stock to
the holders of the Series A Preferred Stock. Subsequent to
this adjustment, on a fully accreted basis as of August 5,
2005, the Series A Preferred Stock would consist of the
following:

|         |  |             |            |                 |  |  |            | 
|-------- |  | ----------- | ---------- | --------------- |  |  | ---------- | 
|         |  |             |            | Total Number of
|         |  |             |            | Shares of      
|         |  |             |            | Common Stock   
|         |  | Liquidation |            | Issuable Upon  
|         |  | Preference  |            | Conversion     
|         |  |             |            |                
|Series A |  | $           | 94,899,000 |                 |  |  | 45,889,229 | 
|         |  |             |            |                 |  |  |            | 

In August 2002, in connection with the
acquisition of the 802.11 WLAN systems business of Agere
Systems, Inc., Warburg Pincus Private Equity VIII, L.P.,
BCP Capital, L.P. and affiliated entities agreed to collectively
invest $75.0 million in the Company. These investors
received 1,640,000 shares of Series A Preferred Stock
in the amount of approximately $41.0 million, with a
conversion price of approximately $3.06 per share, and
warrants to purchase approximately 6.7 million shares of
our Common Stock valued at $12.3 million. The value of the
warrants was recorded as a reduction of the Series A
Preferred Stock carrying value and recorded as additional
paid-in capital. A deemed preferred stock dividend representing
the beneficial conversion feature of the Series A Preferred
Stock of $2.7 million was also recorded to increase the
loss attributable to holders of the Companys Common Stock.

Upon receipt of approval of the Companys
stockholders at a special meeting held on October 8, 2002,
the notes issued to these investors (Note 1) were
converted into 1,360,000 shares of Series A Preferred
Stock and the Company granted to these investors additional
warrants to purchase approximately 5.6 million shares of
the Companys common stock value at $1.7 million. In
total, the investors were granted warrants to acquire
12,271,345 shares of Common Stock for approximately
$3.06 per share value at $14.0 million. The
Series A Preferred Stock issued to the investors represents
approximately 15.2% of the Companys outstanding Common
Stock on an as-converted and as-exercised basis as of
July 2, 2004.

20



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##### Table of Contents



PROXIM CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS   (Continued)

The issuance of Series A Preferred Stock,
convertible notes and related warrants and the subsequent
conversion, accretion and interest accrual were recorded through
July 2, 2004 as follows (in thousands):

|                                                                     |  |             |         |           |  |            |         |             |  |   |        |   |  |   |         |  
|-------------------------------------------------------------------- |  | ----------- | ------- | --------- |  | ---------- | ------- | ----------- |  | - | ------ | - |  | - | ------- | -
|                                                                     |  |             |         |           |  | Additional |         |            
|                                                                     |  | Convertible |         | Preferred |  | Paid-In    |         | Accumulated
|                                                                     |  | Notes       |         | Stock     |  | Capital    |         | Deficit    
|                                                                     |  |             |         |           |  |            |         |            
|Issuance of Series A Preferred Stock                                 |  | $           |        |           |  | $          | 41,000  |             |  | $ |       |   |  | $ |        |  
|Issuance of convertible notes                                        |  |             | 34,000  |           |  |            |        |             |  |   |       |   |  |   |        |  
|Issuance of warrants                                                 |  |             |        |           |  |            | (13,993 | )           |  |   | 13,993 |   |  |   |        |  
|Conversion of convertible notes                                      |  |             | (34,000 | )         |  |            | 34,000  |             |  |   |       |   |  |   |        |  
|Deemed Preferred Stock dividend                                      |  |             |        |           |  |            |        |             |  |   | 2,740  |   |  |   | (2,740  | )
|Accretion of Preferred Stock redemption
    obligations              |  |             |        |           |  |            | 2,936   |             |  |   | (1,046 | ) |  |   | (1,890  | )
|Accrued interest on convertible notes payable in
    Preferred Stock |  |             |        |           |  |            | 469     |             |  |   |       |   |  |   |        |  
|                                                                     |  |             |         |           |  |            |         |             |  |   |        |   |  |   |         |  
|Balance as of December 31, 2002                                      |  |             |        |           |  |            | 64,412  |             |  |   | 15,687 |   |  |   | (4,630  | )
|Accretion of Preferred Stock redemption
    obligations              |  |             |        |           |  |            | 9,168   |             |  |   | (2,865 | ) |  |   | (6,303  | )
|                                                                     |  |             |         |           |  |            |         |             |  |   |        |   |  |   |         |  
|Balance as of December 31, 2003                                      |  | $           |        |           |  | $          | 73,580  |             |  | $ | 12,822 |   |  | $ | (10,933 | )
|Accretion of Preferred Stock redemption
    obligations              |  |             |        |           |  |            | 4,745   |             |  |   | (1,400 | ) |  |   | (3,345  | )
|                                                                     |  |             |         |           |  |            |         |             |  |   |        |   |  |   |         |  
|Balance as of July 2, 2004                                           |  | $           |        |           |  | $          | 78,325  |             |  | $ | 11,422 |   |  | $ | (14,278 | )
|                                                                     |  |             |         |           |  |            |         |             |  |   |        |   |  |   |         |  

The holders of Series A Preferred Stock have
various rights and preferences as follows:



| |       
| | ------
| | Voting

For so long as Warburg Pincus owns at least 25%
of its shares of Series A Preferred Stock or the Common
Stock issuable on conversion of its Series A Preferred
Stock and exercise of its warrants, Warburg Pincus will have the
right to nominate for election one member of the Companys
board of directors, who will sit on all major board committees
for so long as such committee membership does not conflict with
any applicable law or regulation or any listing requirements of
the Nasdaq National Market.

The approval of holders of a majority of the
Series A Preferred Stock is separately required to approve
changes to the Companys certificate of incorporation or
bylaws that adversely affect these holders rights, any
offer, sale or issuance of the Companys equity or
equity-linked securities ranking senior to or equally with the
Series A Preferred Stock, and any repurchase or redemption
of the Companys equity securities (other than from an
employee, director or consultant following termination), or the
declaration or payment of any dividend on the Companys
Common Stock.



| |           
| | ----------
| | Redemption

In August 2007, the Company will be required to
redeem all outstanding shares of Series A Preferred Stock,
if any, for cash equal to their liquidation preference, which
bears interest at 8% per annum, compounded semi-annually,
for three years, plus accrued and unpaid dividends.

21



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##### Table of Contents



PROXIM CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS   (Continued)



| |          
| | ---------
| | Dividends

From August 2005 through August 2007, outstanding
shares of Series A Preferred Stock will be entitled to
cumulative dividends equal to 8% of their liquidation preference
per year, payable, at the Companys election, in cash or
shares of the Companys Common Stock valued at the
then-market price;



| |            
| | -----------
| | Liquidation

Each share of Series A Preferred Stock has
an initial liquidation preference of $25.00 and the
liquidation preference bears interest at 8% per annum,
compounded semi-annually, for three years. The liquidation
preference is subject to adjustments in the event the Company
undertakes a business combination or other extraordinary
transaction, or the Company is liquidated or dissolved.



| |           
| | ----------
| | Conversion

In the event of a change in control of the
Company, it will have the right to convert the Series A
Preferred Stock into Common Stock if upon such conversion the
holders of Series A Preferred Stock would receive liquid
securities or cash with a fair market value equal to or greater
than 110% of the liquidation preference then in effect. If
the consideration is less than 110% of the liquidation
preference, the Company may either repurchase or modify the
conversion price so that the consideration would equal
110% of the liquidation preference then in effect or change
the Series A Preferred Stock for cash at 101% of the
liquidation preference then in effect. In addition, in the event
of a change in control that occurs prior to August 2005, the
liquidation preference will increase as necessary to provide for
three years of accretion.

Holders of Series A Preferred Stock have
rights to acquire additional shares of the Companys
capital stock or rights to purchase property in the event of
certain grants, issuance or sales.

The conversion price of the Series A
Preferred Stock, which initially was approximately
$3.06 per share, is subject to customary weighted average
anti-dilution adjustments and other customary adjustments, and
as of July 2, 2004 had been reduced to $2.049 per
share. As a result of transactions subsequent to July 2,
2004, the conversion price was further adjusted to approximately
$2.07.

In connection with the acquisition of the 802.11
WLAN systems business of Agere Systems, Inc., the Company also
issued warrants as described in Note 14.



|          |                      
|--------- | ---------------------
|Note 14  | Stockholders Deficit



| |                                      
| | -------------------------------------
| | Warrants to Purchase Common
    Stock

In connection with the acquisition of the 802.11
WLAN systems business of Agere Systems, Inc., the Company issued
12,271,345 warrants to Warburg Pincus Private Equity VIII, L.P.
and BCP Capital, L.P. and affiliated entities. Each new warrant
was convertible into one share of Class A common stock of
the Company at an exercise price of approximately $3.06 per
share. As a result of subsequent antidilution adjustments, these
warrants represented rights to purchase 18,301,612 shares of our
Class A common stock at an exercise price of approximately
$2.05 as of July 2, 2004 and 18,133,464 shares as of
August 4, 2004 at an exercise price of approximately $2.07
which accounts for full accretion of the Series A Preferred
Stock and Series B Preferred Stock. At issuance, the
Company estimated the fair value of the warrants using the
Black-Scholes option valuation model totaling
$14.0 million. The warrants will expire on August 5,
2007.

In connection with a three-year licensing and
distribution agreement entered into with Motorola, Inc. on
September 8, 2003, the Company issued to Motorola a fully
vested warrant to purchase 1,080,000 shares of the
Companys common stock at an exercise price of
$2.34 per share. This warrant will expire on
September 8, 2008. The Company has estimated the fair value
of the warrant using the Black-Scholes option valuation model at
$2.1 million. The fair value of the warrant is being
amortized on a straight-line basis over the three-

22



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##### Table of Contents



PROXIM CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS   (Continued)

year term of the commercial arrangement with
Motorola with quarterly charges against revenue of $174,000
effective beginning in the first quarter of 2004.

In connection with additional investments made by
Warburg Pincus Private Equity VIII, L.P., BCP Capital, L.P. and
affiliated entities during the year ended December 31,
2003, the Company issued to these investors warrants to
purchase 18.0 million and 6.0 million shares of
the Companys common stock at an exercise price of
$1.46 per share and $1.53 per share, respectively (see
Note 1). These warrants were valued by the Company with the
assistance of an independent valuation consulting firm at
$22.2 million at December 12, 2003 and
$21.8 million at December 31, 2003. The fair value of
the warrants are recorded as a long-term liability, as the
warrant holders are entitled to require the Company to purchase
the warrants for cash, as defined in the agreement, upon the
occurrence of a change in control event. The fair value of the
warrants will be subject to revaluation adjustments at the end
of each reporting period, until they are exercised or expired,
whichever is earlier. The resulting gain or loss will be
recorded as other income or expense in the corresponding
reporting period. These warrants will expire on
December 15, 2010.

As of July 2, 2004, the Company had issued
in the aggregate, warrants to
purchase 44,952,918 shares of the Companys
common stock, and 42,301,612 of these warrants were issued to
the Investors. As a result of antidilution adjustments
subsequent to July 2, 2004, these warrants currently
represent rights to purchase 44,784,770 shares of common stock,
42,133,464 of which are held by the Investors.

As described in Note 1 under Subsequent
Events, on July 27, 2004, subject to the approval of the
Companys stockholders, the Investors agreed to surrender
all of their Series A Preferred Stock, all of their
Series B Preferred Stock, and all of their warrants to
purchase the Companys common stock in exchange for an
aggregate of 164 million shares of common stock and
400,000 shares of the Companys newly issued
Series C Preferred Stock.



| |                                                               
| | --------------------------------------------------------------
| | Pro Forma Fair Value Disclosure Under
    SFAS No. 123 and 148

In accordance with SFAS No. 148,
Accounting for Stock-based Compensation, Transition and
Disclosure, the Company is required to disclose the
effects on reported net loss and basic and diluted net loss per
share as if the fair value based method had been applied to all
awards.

The weighted average estimated grant date fair
value, as defined by SFAS No. 123, for stock options
granted under its stock option plans during the six months ended
July 2, 2004 and June 27, 2003 was $0.84 and
$0.99 per share, respectively. The weighted average
estimated grant date fair value of stock purchase rights granted
pursuant to its employee stock purchase plan during the six
months ended July 2, 2004 and June 27, 2003 was $1.03
and $1.26 per share, respectively. The estimated grant date
fair value disclosed by the Company is calculated using the
Black-Scholes option pricing model. The Black-Scholes model, as
well as other currently accepted option valuation models, was
developed to estimate the fair value of freely tradable, fully
transferable options without vesting restrictions, which
significantly differ from its stock option and purchase awards.
These models also require highly subjective assumptions,
including future stock price volatility and expected time until
exercise, which greatly affect the calculated grant date fair
value.

Had the Company recorded compensation based on
the estimated grant date fair value, as defined by
SFAS No. 123, for awards granted under its stock
option plans and stock purchase plan, the net loss

23



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##### Table of Contents



PROXIM CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS   (Continued)

attributable to common stockholders and net loss
per share attributable to common stockholders would have been
(in thousands, except per share data):

|                                                                                       |  |                    |         |                  |  |         |         |          |  |   |         |   |  |   |         |  
|-------------------------------------------------------------------------------------- |  | ------------------ | ------- | ---------------- |  | ------- | ------- | -------- |  | - | ------- | - |  | - | ------- | -
|                                                                                       |  |                    |         |                 
|                                                                                       |  | Three Months Ended |         | Six Months Ended
|                                                                                       |  |                    |         |                 
|                                                                                       |  | July 2,            |         | June 27,         |  | July 2, |         | June 27,
|                                                                                       |  | 2004               |         | 2003             |  | 2004    |         | 2003    
|                                                                                       |  |                    |         |                  |  |         |         |         
|Net loss attributable to common stockholders as
    reported                           |  | $                  | (10,116 | )                |  | $       | (48,734 | )        |  | $ | (27,597 | ) |  | $ | (59,537 | )
|Less: stock-based employee compensation expense
    determined under fair value method |  |                    | (1,294  | )                |  |         | (1,159  | )        |  |   | (3,088  | ) |  |   | (5,713  | )
|                                                                                       |  |                    |         |                  |  |         |         |          |  |   |         |   |  |   |         |  
|Pro forma net loss attributable to common
    stockholders                             |  | $                  | (11,410 | )                |  | $       | (49,893 | )        |  | $ | (30,685 | ) |  | $ | (65,250 | )
|                                                                                       |  |                    |         |                  |  |         |         |          |  |   |         |   |  |   |         |  

|             |                                                                              |                    |   |                  |   |         |   |          |   |  |   |       |   |  |   |       |  
|------------ | ---------------------------------------------------------------------------- | ------------------ | - | ---------------- | - | ------- | - | -------- | - |  | - | ----- | - |  | - | ----- | -
|             |                                                                              |                    |   |                 
|             |                                                                              | Three Months Ended |   | Six Months Ended
|             |                                                                              |                    |   |                 
|             |                                                                              | July 2,            |   | June 27,         |   | July 2, |   | June 27,
|             |                                                                              | 2004               |   | 2003             |   | 2004    |   | 2003    
|             |                                                                              |                    |   |                  |   |         |   |         
|As reported: |                                                                              |                    |   |                  |   |         |   |          |   |  |   |       |   |  |   |      
|             | Basic and diluted net loss attributable to common
    stockholders per share |                    | $ | (0.08            | ) |         | $ | (0.40    | ) |  | $ | (0.22 | ) |  | $ | (0.49 | )
|             |                                                                              |                    |   |                  |   |         |   |          |   |  |   |       |   |  |   |      
|Pro forma:   |                                                                              |                    |   |                  |   |         |   |          |   |  |   |       |   |  |   |      
|             | Basic and diluted net loss attributable to common
    stockholders per share |                    | $ | (0.09            | ) |         | $ | (0.41    | ) |  | $ | (0.25 | ) |  | $ | (0.54 | )
|             |                                                                              |                    |   |                  |   |         |   |          |   |  |   |       |   |  |   |      

The pro forma effect on net loss and net loss per
share for the three and six months ended July 2, 2004 and
June 27, 2003 is not representative of the pro forma effect
on net loss in future years because it does not take into
consideration pro forma compensation expense related to grants
made prior to 1996.



|          |                              
|--------- | -----------------------------
|Note 15  | Commitments and Contingencies

The Company occupies its facilities under several
non-cancelable operating lease agreements expiring at various
dates through September 2009, and requiring payment of property
taxes, insurance, maintenance and utilities. Future minimum
lease payments under non-cancelable operating leases at
July 2, 2004 were as follows (in thousands):

|                                    |  |   |        | 
|----------------------------------- |  | - | ------ | 
|Six months ending December 31, 2004 |  | $ | 3,934  | 
|Year ending December 31:            |  |   |        | 
|2005                                |  |   | 7,740  | 
|2006                                |  |   | 6,708  | 
|2007                                |  |   | 6,371  | 
|2008                                |  |   | 6,435  | 
|Thereafter                          |  |   | 4,434  | 
|                                    |  |   |        | 
|Total minimum lease payments        |  | $ | 35,622 | 
|                                    |  |   |        | 

For the six months ended July 2, 2004 and
the years ended December 31, 2003 and 2002, the Company
recorded restructuring charges relating to the committed future
lease payments for closed facilities, net of estimated future
sublease receipts, which are included in the above disclosures.

24



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##### Table of Contents



PROXIM CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS   (Continued)



|          |                  
|--------- | -----------------
|Note 16  | Credit Facilities

In December 2002, the Company entered into a
secured credit facility with Silicon Valley Bank (the
Lender), and then subsequently amended the credit
facility in March 2003. On June 13, 2003, in order to
secure additional working capital, the Company entered into a
letter agreement (the Letter Agreement) and an
accounts receivable financing agreement, which effectively
amended and restated the existing credit facility in its
entirety. The Company subsequently amended the accounts
receivable financing agreement (as amended, the Amended A/
R Financing Agreement) on July 25, 2003,
October 31, 2003 and most recently on July 31, 2004.

Under the Amended A/ R Financing Agreement, the
Company may borrow up to $20.0 million in total. First, the
Company may borrow up to $10.0 million by financing a
portion of its eligible accounts receivable, primarily limited
to customers in the United States. Under this arrangement, the
Lender may agree to accept for collection through a lockbox
arrangement accounts receivable from the Company, and in return
the Company will receive advances from the Lender at a rate
equal to 80% of accounts receivable from account debtors who are
not distributors, and 50% of accounts receivable from account
debtors who are distributors, subject to borrowing restrictions
on most international accounts and at the discretion of the
Lender. After collection of a receivable, the Lender will refund
to the Company the difference between the amount collected and
the amount initially advanced to the Company, less a finance
charge applied against the average monthly balance of all
transferred but outstanding receivables at a rate per annum
equal to the Lenders prime rate plus 1.50 percentage
points, or 5.75%, whichever is greater. In addition to a
facility fee of $100,000, the Company must pay each month to the
Lender a handling fee equal to 0.25% of the average monthly
balance of transferred but outstanding receivables. The Company
must repay each advance upon the earliest to occur of
(i) the collection of the corresponding financed
receivable, (ii) the date on which the corresponding
financed receivable becomes an ineligible receivable pursuant to
the terms of the Amended A/ R Financing Agreement, or
(iii) July 30, 2005. Second, the Company may borrow up
to an additional $10 million, under which the Company is
required to maintain a compensating cash balance equal to such
borrowings.

Under the A/ R Financing Agreement, the Company
may receive temporary advances from the Lender in excess of the
availability otherwise applicable under the A/ R Financing
Agreement (Temporary Overadvances), in an amount
equal to $4.0 million for advances relating to letters of
credit and in an amount equal to $4.0 million to be used
for working capital purposes. The Company may receive Temporary
Overadvances under this arrangement through August 31,
2004. This Temporary Overadvances arrangement may be renewed
upon agreement by both the Company and the Lender. Borrowings
outstanding under Temporary Overadvances are subject to a
finance charge of 1.5% per week.

As of July 2, 2004 and August 11, 2004,
no borrowings were outstanding under the Amended A/ R Financing
Agreement.

Obligations under the amended A/R Financing
Agreement are secured by a security interest on all of the
assets of the Company, including intellectual property, and are
senior in lien priority and right of payment to the
Companys obligations totaling $40 million to the
funds affiliated with Warburg Pincus and BCP Capital, L.P.
under the secured promissory notes issued in July 2003 and
amended in October 2003. The amended A/R Financing
Agreement requires the consent of the Lender in order to incur
debt, grant liens and sell assets. The events of default under
the secured credit facility include the failure to pay amounts
when due, failure to observe or perform covenants, bankruptcy
and insolvency events, defaults under certain of the
Companys other obligations and the occurrence of a
material adverse change in the Companys business. Under
the Amended A/R Financing Agreement, the events of default also
include any judgment, attempt by Symbol to execute on a
judgment, the court not issuing a stay on execution of judgment
by August 31, 2004, restraining order, injunction or any
material adverse development in connection with the
Companys litigation with Symbol Technologies before the
U.S. District Court for the District of Delaware (see
Note 17).

25



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##### Table of Contents



PROXIM CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS   (Continued)

Under the Amended A/R Financing Agreement, the
financial covenants require the Company to maintain cash and
cash equivalents with the Lender and its affiliates in an amount
not less than $4.0 million. If the Company fails to meet
this requirement, the Company may still remain in compliance
with the financial covenants by maintaining a ratio of the total
of cash, cash equivalents and accounts receivable approved by
the Lender to the Companys current liabilities of at least
5.0 to 1. In addition, the Company is required to maintain
restricted cash balances to the extent that our outstanding
letters of credit exceed $4.0 million. The Company
currently maintains substantially all of its cash, cash
equivalents and investments at Silicon Valley Bank and its
affiliates. In the event of default under the Amended
A/R Financing Agreement, the Lender has the right to offset
such cash, cash equivalents and investments against the
Companys obligations owing to the Lender. As of
July 2, 2004, the Company complied with all of the
financial covenants under this agreement.

In the first quarter of 2003, the Company entered
into an equipment and software lease agreement. Under the
agreement, the Company may either lease or finance certain
equipment, software and related services through a direct
leasing or sales and leaseback arrangement with the lessor for
up to $3.0 million. The lease term covers a period of
30 months, and the annual implicit interest rate on the
lease is approximately 4%. During the second quarter of 2003,
the Company installed and placed into service certain equipment,
software and related services through both a direct leasing and
sales leaseback arrangement and through a direct leasing
arrangement during the third and fourth quarters of 2003 and
during the second quarter of 2004. As the present value of total
future minimum lease payments was greater than 90% of the fair
value of the leased assets, the Company accounted for both the
direct leasing and sales and leaseback transactions as capital
lease transactions. Net book value of the leased assets
capitalized in connection with this agreement as of July 2,
2004 was $2.5 million. Future minimum lease payments under
non-cancelable capital leases at July 2, 2004 were as
follows (in thousands):

|                                               |  |   |       | 
|---------------------------------------------- |  | - | ----- | 
|Six months ending December 31, 2004            |  | $ | 637   | 
|Year ending December 31:                       |  |   |       | 
|2005                                           |  |   | 920   | 
|2006                                           |  |   | 46    | 
|                                               |  |   |       | 
|Total minimum lease payments                   |  |   | 1,603 | 
|Less: amounts representing interest            |  |   | 43    | 
|                                               |  |   |       | 
|Present value of future minimum lease payments |  |   | 1,560 | 
|Less: current portion                          |  |   | 1,218 | 
|                                               |  |   |       | 
|Capital lease obligations, long-term portion   |  | $ | 342   | 
|                                               |  |   |       | 



|          |                  
|--------- | -----------------
|Note 17  | Legal Proceedings

Proxim, Inc.s involvement in patent
litigation has resulted in, and could in the future continue to
result in, substantial costs and diversion of management
resources of the Company. In addition, this litigation, if
determined adversely to the Company, could result in the payment
of substantial damages and/or royalties or prohibitions against
utilization of essential technologies, and could materially and
adversely affect the Companys business, financial
condition, operating results or cash flows.



| |                          
| | -------------------------
| | Symbol Technologies, Inc.

On December 4, 2001, Symbol filed suit in
the U.S. District Court for the District of Delaware
alleging that Proxim, Inc. infringed four Symbol patents related
to systems for packet data transmission. Symbol sought an award
for unspecified damages and a permanent injunction against
Proxim, Inc. based on alleged patent infringement counterclaims.
On December 18, 2001, Proxim, Inc. filed an answer and
counterclaims seeking declaratory judgments for
non-infringement, invalidity and unenforceability of the four
asserted

26



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##### Table of Contents



PROXIM CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS   (Continued)

Symbol patents, injunctive and monetary relief
for Symbols infringement of a Proxim, Inc. patent,
monetary relief for Symbols false patent marking, and
injunctive and monetary relief for Symbols unfair
competition under the Lanham Act, common law unfair competition
and tortious interference.

On September 15, 2003, the Company announced
that a jury had rendered a verdict in the first phase of the
patent infringement suit with Symbol Technologies, Inc.
(Symbol). On Symbols claims of patent
infringement, the jury found that certain of the Companys
products infringe two of Symbols patents and assessed a 6%
royalty on the revenue of relevant products. On
November 24, 2003, the District Court conducted a one-day
bench trial on the Companys equitable defenses not
addressed by the jury.

On July 29, 2004, the Company announced that
the court has denied the Companys equitable defenses and
has determined that the jurys award of a 6% royalty on the
Companys sales of these products from 1995 through
September 2003, plus prejudgment interest, results in an award
of damages to Symbol of $25.9 million. The court entered
its judgment on this matter on August 4, 2004. The Company
is not presently enjoined from continued sales of these
products, and the court denied Symbols request that it
impose a court ordered royalty on future sale of these products
by the Company. On August 6, 2004, Symbol filed a motion
for entry of a permanent injunction against further manufacture
and sale of the Companys products found to infringe
Symbols patents. The Company intends to oppose this
motion. If the Company is enjoined from future sales of these
products and is not able to negotiate a license arrangement with
acceptable royalty rates, its revenue, results of operations and
financial condition would be materially adversely affected.

The Company has fully accrued for the awarded
amount in its financial statements since the date of the initial
jury award in September 2003. As of July 2, 2004, the
Company had recorded an accrual for estimated past royalties of
$22.9 million and interest of $3.0 million covering
the period from 1995 through September 2003 plus a total of
$2.8 million for estimated potential royalties and interest
covering the period from October 2003 to July 2, 2004. As
of July 2, 2004, the Companys accrual in the
aggregate for estimated potential royalties and interest was
$28.7 million. Depending upon the ultimate outcome of the
litigation with Symbol, the Company may be required to pay
royalty charges and interest at the time specified by the court.
The Company will continue to evaluate and review its estimate of
royalties and interest payable from time to time for any
indications that could require the Company to change its
assumptions relating to the amount already recorded.

To date, the Company has not incurred immediate
financial obligation to Symbol as a result of this decision and
the Company intends to file a motion to stay execution on the
judgment, pending completion of all related proceedings,
including post trial motions on this matter. On August 10,
2004, Symbol informed the Company that it would attempt to
execute on the judgment. The court could deny our motion to stay
execution of the judgment or could require the Company to post a
bond to secure our post-trial motions.

Although the Company has recorded an accrual for
$28.7 million in connection with the Symbol litigation, the
Company does not have sufficient cash to pay or post a bond in
this amount. If the Company were required to make payments to
Symbol, post a bond to the court, and/or repay the Bridge Loans
(defined below) and amounts, if any, owed to Silicon Valley
Bank, either due to an event of default or otherwise, the
Company would be required to obtain immediate alternative
sources of financing. If the Company were not able to obtain an
alternative source of financing, the Company would have
insufficient cash to pay these obligations, be unable to meet
its ongoing operating obligations as they come due in the
ordinary course of business, and be required to seek protection
under applicable bankruptcy laws. There can be no assurance that
alternative sources of financing will be available to the
Company. The Company intends to vigorously defend itself in this
litigation and to consider all available options after the
conclusion of all matters before the court.

Additionally, any further adverse ruling or
judgment in this litigation that results in the obligation of
the Company and/or any of its subsidiaries under GAAP (generally
accepted accounting principles) to establish an additional
reserve in respect of such ruling or judgment in an amount
excess of $5 million, and any other

27



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##### Table of Contents



PROXIM CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS   (Continued)

ruling or judgment in any other litigation that
is material and adverse to the Company, triggers an event of
default under the Bridge Loan (defined below) issued to Warburg
Pincus and BCP Capital, L.P. and affiliates. Upon such
occurrence, the Investors would have the ability to require the
Company to repay the Bridge Loan. The courts rulings to
date have not triggered an event of default under the terms of
the Bridge Loan. If the judgment entered on August 4, 2004
is not vacated, discharged, stayed or bonded pending appeal
within thirty days thereof, the Company would be in default
under the Bridge Loan and the Investors would have the right to
require the Company to repay the Bridge Loan. In addition, an
attempt by Symbol to execute on a judgment, the court not
issuing a stay on execution of judgment by August 31, 2004,
restraining order, injunction or any material adverse
development in the litigation with Symbol would result in an
event of default under the secured credit facility with Silicon
Valley Bank. Upon such occurrence, Silicon Valley Bank would
have the right to require the Company to repay any outstanding
amounts under the credit facility and to prohibit the Company
from borrowing any additional amounts. The occurrence of an
event of default under the secured credit facility with Silicon
Valley Bank would trigger an event of default under the Bridge
Loan notes if outstanding amounts owed under the credit facility
exceeded $1 million. As of July 2, 2004 and
August 11, 2004, no borrowings were outstanding under the
credit facility.



| |                     
| | --------------------
| | Intersil Corporation

On March 17, 2003, the Company announced a
settlement with Intersil Corporation to resolve all pending
patent-related litigation between the two companies. Under the
terms of the agreement, Proxim, Inc. and Intersil have agreed to
dismiss all claims against each other, including lawsuits before
the International Trade Commission and Delaware and
Massachusetts Federal Courts. As part of the confidential
settlement agreement, the two companies entered into a patent
cross license agreement for their respective patent portfolios
and Intersil agreed to make a one-time payment of
$6.0 million to the Company. The two companies have also
entered into a product supply agreement defining the terms under
which the Company will be able to purchase 802.11 products
that utilize Intersils chipsets. During the first quarter
of 2003, the Company recorded $6 million as license revenue
and $3 million of legal expense as final settlement of
outstanding legal fees and expenses related to the terminated
patent litigation.



| |                              
| | -----------------------------
| | Top Global Technology Limited

On March 10, 2003, the Company was served
with a complaint filed on January 15, 2003, by Top Global
Technology Limited (Top Global), a distributor for
Agere Systems Singapore. The Companys demurrer to Top
Globals complaint was sustained in May 2003. Top Global
then filed and served an amended complaint on May 30, 2003.
Top Globals lawsuit was filed against Agere Systems, Inc.,
Agere Systems Singapore, and Agere Systems Asia Pacific
(collectively, Agere) and in the Superior Court for
the State of California, County of Santa Clara. Top Global
claims that it is entitled to return for a credit
$1.2 million of products that it purchased from Agere
Systems Singapore in June 2002 as a result of the Companys
decision to discontinue a product line that the Company
purchased from Agere in August 2002. The amended complaint asks
the court to determine whether Agere or the Company are
responsible for accepting the product return and issuing a
$1.2 million credit and also alleges breach of contract. We
answered the amended complaint and asserted several defenses to
Top Globals claims. In January 2004, the parties mediated
this dispute but were unable to reach a settlement. In March
2004, the Court dismissed the contract claims against Agere but
at the same time granted Top Globals motion for leave to
amend its complaint to allege a fraud claim against Agere. In
March 2004, the court dismissed the contract claims against
Agere but at the same time granted Top Globals motion for
leave to amend its complaint to allege a fraud claim against
Agere. Top Global subsequently amended its complaint to allege a
claim of fraud against Agere. The parties are currently
conducting discovery. A trial date has not been set.

28



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##### Table of Contents



PROXIM CORPORATION


NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS   (Continued)



| |                              
| | -----------------------------
| | Active Technology Corporation

On February 10, 2004, the Company received a
copy of a complaint filed on February 2, 2004 in Tokyo
District Court by Active Technology Corporation, a
Japanese-based distributor of the Companys products. The
complaint alleges, among other things, that the Company sold to
Active certain defective products, which Active in turn
subsequently sold to its customers. Active seeks damages of
559.2 million Japanese yen, which includes the purchase
price of the allegedly defective products and replacement costs
allegedly incurred by Active. Active seeks to offset the claim
of 559.2 million Japanese yen against outstanding accounts
payable by Active of 175.3 million Japanese yen to the
Company, resulting in a net claim against Proxim Corporation of
383.9 million Japanese yen. Translated into
U.S. dollars on August 4, 2004, Actives net
claim is approximately $3.4 million. Discovery has not yet
commenced, and a trial date has not been established. The
Company intends to defend itself vigorously against this lawsuit.



| |        
| | -------
| | General

The Company is a party to disputes, including
legal actions, with several of our suppliers and vendors. These
disputes relate primarily to excess materials and order
cancellation claims that resulted from the declines in demand
for the Companys products during 2001 and 2002 and the
commensurate reductions in manufacturing volumes. The Company
has recorded reserves related to these disputes to the extent
that management believes appropriate and intends to defend
ourselves vigorously against these claims.

The results of any litigation matters are
inherently uncertain. In the event of any adverse decision in
the described legal actions or disputes, or any other related
litigation with third parties that could arise in the future,
the Company could be required to pay damages and other expenses,
and, in the case of litigation related to patents or other
intellectual property rights, to cease the manufacture, use and
sale of infringing products, to expend significant resources to
develop non-infringing technology, or to obtain licenses to the
infringing technology. The Company cannot make any assurance
that these matters will not materially and adversely affect the
Companys business, financial condition, operating results
or cash flows.

29



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##### Table of Contents








|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 2. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

Except for any historical information
contained herein, the matters discussed in this Quarterly Report
on Form 10-Q contain certain forward-looking
statements within the meaning of the Private Securities
Litigation Reform Act of 1995 with respect to our financial
condition, results of operations, cash flows, revenues,
financing plans, business strategies and market acceptance of
its products. The words anticipate,
believe, estimate, expect,
plan, intend, and similar expressions,
are intended to identify these forward-looking statements. These
forward-looking statements are found at various places
throughout this Quarterly Report. We caution you not to place
undue reliance on these forward-looking statements, which speak
only as of the date they were made. We do not undertake any
obligation to publicly release any revisions to these
forward-looking statements to reflect events or circumstances
after the date of this Quarterly Report or to reflect the
occurrence of unanticipated events. Forward-looking statements
are subject to risks and uncertainties that could cause actual
results to differ materially from those reflected in the
forward-looking statements. Factors that might cause such a
difference include, but are not limited to those discussed below
under Risk Factors and elsewhere in this
Report.

The following discussion should be read
together with our financial statements, notes to those financial
statements included elsewhere in this Quarterly Report on
Form 10-Q, our financial statements, notes to those
financial statements and Managements Discussion and
Analysis of Financial Condition and Results of Operations in our
Annual Report on Form 10-K filed with the Securities and
Exchange Commission.

Overview

Proxim Corporation was formed in March 2002 as a
result of the merger between Western Multiplex Corporation and
Proxim, Inc. In August 2002, we acquired Agere Systems
802.11 wireless local area networking (WLAN) equipment
business, including its market-leading ORiNOCO 802.11b product
line. In accordance with accounting principles generally
accepted in the United States of America, the results of
operations for the periods presented include the results of the
merged or acquired businesses beginning on the respective dates
of completion of the business combinations. Prior to March 2002,
we operated as Western Multiplex Corporation, a designer and
manufacturer of broadband wireless systems.

Proxim Corporation is a leader in wireless
networking equipment for Wi-Fi and broadband wireless networks.
We provide wireless solutions for the mobile enterprise,
security and surveillance, last mile access, voice and data
backhaul, public hot spots, and metropolitan area networks. We
serve these markets by selling our systems to service providers,
businesses and other enterprises, primarily indirectly through
distributors, value-added resellers, products integrators and
original equipment manufacturers and to a lesser extent directly
through our sales force.

We generate revenue primarily from the sale of
our Lynx and Tsunami systems for our WWAN product line, and the
sale of 802.11 standards based products, acquired in the Proxim,
Inc. acquisition, and 802.11 products acquired from Agere, for
our WLAN product line. We also generate a small percentage of
our revenue from the sale of services and parts and rentals of
our systems. We sell worldwide to service providers, businesses
and other enterprises directly through our sales force and
indirectly through distributors, value-added resellers and
system integrators. Shipments to certain distributors are made
under terms allowing certain rights of return, protection
against subsequent price declines on our products held by our
distributors and co-op marketing programs.



| |          
| | ---------
| | Liquidity

We started 2003 with $16.5 million in cash
and cash equivalents, down $14.5 million from
$31.1 million at the beginning of 2002. The effects of an
ongoing operating loss and restructuring charges left us with
cash and cash equivalents of $4.5 million at the end of the
second quarter of 2003. To address the lack of sufficient
working capital and the ongoing negative cash flow, we focused
on raising additional financing and restructuring the operations
of the business. In a two-part transaction, we raised an
additional $40.0 million in 2003. Warburg Pincus Private
Equity VIII, L.P. and BCP Capital, L.P. (formerly known as
Broadview Capital Partners, L.P.) and affiliates
signed a securities purchase agreement in July, 2003, later
amended in

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October, 2003, pursuant to which we received
$30 million in exchange for issuing demand notes bearing
interest at 25% per annum and exchangeable for shares of
Series B Preferred Stock. (See Note 1 to the condensed
consolidated financial statements for a detailed description of
the Series B Financing). In December 2003, after
stockholder approval of our transactions with the investors, we
exercised our right to draw an additional $10 million from
the investors in exchange for additional notes, senior to but
otherwise having the same terms as the October notes. On
July 30, 2004, the Investors exchanged the aggregate
principal amount of the Notes, which includes accrued but unpaid
interest, for shares of Series B Preferred Stock, in
accordance with the existing terms and conditions of the Notes.
The exchange relieved us from the requirement to repay the Notes
on their maturity date of September 30, 2004. Subject to
the approval of our stockholders, the Investors also agreed to
surrender all of their Series A Preferred Stock, all of
their Series B Preferred Stock, and all of their warrants
to purchase our common stock in exchange for an aggregate of
164 million shares of common stock and 400,000 shares
of our newly issued Series C Preferred Stock. Furthermore,
on July 30, 2004, we received $10.0 million from the
Investors in exchange for a new convertible bridge note pursuant
to the securities purchase agreement dated July 27, 2004.
Please refer to Note 1 to the condensed consolidated
financial statements for a detailed description of our recent
transactions with these Investors.


If the remaining proceedings before the court in
our litigation with Symbol are not decided in our favor,
including our motion to the court to stay Symbols
execution of judgment, we would likely be required to make
significant payments to Symbol, including payments for royalties
related to past sales of products found to infringe on two of
Symbols patents and additional royalties in connection
with future sales of these products, or we would be required to
post a bond in order to proceed with the post-trial motions or
to appeal the courts decision.

If we were required to make payments to Symbol,
post a bond to the court, and/or repay the convertible bridge
loan and amounts, if any, which may be owed to Silicon Valley
Bank, either due to an event of default or otherwise, or if we
sustain continued significant negative cash flows from our
operations, we will be required to obtain immediate alternative
sources of financing. If we were not able to obtain such
alternative sources of financing, we would have insufficient
cash to pay these obligations, be unable to meet our ongoing
operating obligations as they come due in the ordinary course of
business, and would have to seek protection under applicable
bankruptcy laws. These matters raise substantial doubt about our
ability to continue as a going concern. In addition, any
judgment, restraining order, injunction or any material adverse
development in this litigation triggers an event of default
under the Silicon Valley Bank credit facility. Upon such
occurrence, Silicon Valley Bank would have the ability to
require us to repay any outstanding amounts under the credit
facility and to prohibit us from borrowing any additional
amounts. As of July 2, 2004 and August 11, 2004, no
borrowings were outstanding under our credit facility.

Our revenue declined from $68.8 million to
$58.1 million from the six months ended June 27, 2003
to the six months ended July 2, 2004, and we have incurred
substantial losses and negative cash flows from operations
during the six months ended July 2, 2004 and the years
ended December 31, 2003, 2002 and 2001. If we were not able
to close a financing transaction by June 30, 2005 with
gross proceeds of $20.0 million or more through a sale of
our common stock and/or warrants to purchase common stock in
accordance with our securities purchase agreement dated
July 27, 2004, we will be required to repay the Bridge
Loan. If our stockholders do not approve the Exchange, the
Investors will have the right to demand immediate repayment of
the Bridge Loan at any time after the thirtieth day following
the date that our stockholders fail to approve the Exchange.



| |                     
| | --------------------
| | Product Developments

Proxim, Inc. and Western Multiplex merged with
the vision of forming a company that has the ability to provide
wireless connectivity in any configuration regardless of whether
the radios were providing access indoors or outdoors, and
regardless of whether or not they were performing a bridging or
routing function. This seamless WWAN/ WLAN capability is the
backbone of our convergence strategy today. We subsequently
acquired the ORiNOCO business from Agere Systems to enhance our
position in the Enterprise Wireless LAN space.

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The resulting company had eight research and
development centers and a multitude of product platforms and
product variants. In order to realize the benefits of this
strategy of converging WLAN/ WWAN, in early 2003, we focused on
streamlining the product development and manufacturing
operations. In this respect, we consolidated all product
development activity in two locations; Sunnyvale, California and
Bangalore, India. Manufacturing operations were consolidated in
Sunnyvale, California and the number of contract manufacturers
was substantially reduced.

During the remainder of 2003, we completed the
rationalization of the combined portfolio of Western Multiplex,
ORiNOCO and Proxim. Central to that effort was the elimination
of redundancy between the original ORiNOCO and Proxim product
lines. Former Proxim products such as Harmony, Skyline, and
Symphony were discontinued, although much of the underlying
technology and networking principles were carried forward and
embodied in our new advanced technology including the ORiNOCO
Wireless Switching System. In parallel, we developed new
platforms on which to standardize the product development
efforts. These platforms will allow us to release enhanced
versions of our currently existing product portfolio in 2004 and
are providing improved product costs, industry leading
functionality, and, in some cases, pioneering new market
categories that we believe will enable Proxim to expand our
market presence. Our new platforms include the:



| |   |                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | GX broadband point to point platform on which we
    will continue to re-launch all of our Lynx and Tsunami wireless
    bridge products; and                                                                           
|
| |  | A WiFi platform on which our new ORiNOCO
    enterprise class access point products and Tsunami MP.11 point
    to multipoint products for wireless internet service providers
    and campus networking are based upon.

We have also recently announced the development
of the ORiNOCO Wireless Switching Solution. This product is the
cornerstone of a strategic relationship with Motorola and Avaya
where the three parties are working to create a converged WiFi/
Cellular solution.

In addition, we have recently announced a
collaboration with Intel Corporation to develop and deliver
WiMAX solutions for fixed and portable broadband wireless
access. The agreement includes the development of base station
and subscriber unit access points that deliver fast wireless
access for data, voice and video services. WiMAX, known also as
802.16, is an emerging technology that allows long-range
high-speed wireless Internet access, serving both dense
metropolitan areas and rural or suburban communities.

We intend to continue to further the WWAN/ WLAN
converged strategy. Augmenting this basic wireless connectivity
strategy we intend to continue to support standards based,
interoperable solutions wherever possible and practical. Today,
that means producing WiFi compliant solutions for the indoors
and in the future that will mean developing WiMAX compliant
solutions for the outdoors. We intend to closely watch
developments related to available spectrum, unlicensed or
licensed, and develop products in those bands that are demanded
by our customers and provide us with the most promising returns
on R&D investment.



| |                      
| | ---------------------
| | Financial Performance



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Our total revenue, net for the second quarter of
    2004 was $31.4 million, a 9.7% decrease over our total
    revenue, net for the second quarter of 2003. Factors
    contributing to the revenue decrease included the decline in the
    sale of our former Proxim 802.11a and Harmony products, the
    fact that the increase in sales in a new family of ORiNOCO
    access point products did not offset the expected decrease in
    sale of the family of products it is replacing and our sales
    order flow materializing later than expected in the second
    quarter of 2004.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our total revenue, net for the first half of 2004
    was $58.1 million, a 22.3% decrease over our total revenue,
    net for the first half of 2003. Factors contributing to the
    revenue decrease included the decline in the sale of our former
    Proxim 802.11a and Harmony products, the lower than
    expected units sold resulting from carrier consolidation and
    delayed deployments, product availability issues arising from
    the introduction of a new family of ORiNOCO access point
    products, and the fact that sales in the new product family did
    not offset the expected decrease in sales of the product family
    it is replacing. In

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| |                                                                                                                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | addition, revenue declined due to sales order
    flow materializing later than expected in the second quarter of
    2004, and patent license revenue of $6.0 million in the
    first quarter of 2003, resulting from the patent litigation
    settlement with Intersil, as described in Note 17 to the
    condensed consolidated financial statements.



| |   |                                                                                                                                                                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In our two geographical regions, North America
    and International, product revenue comprised 65.7% and 34.3%,
    respectively, of total revenue, net in the second quarter of
    2004 and 58.5% and 41.5%, respectively, of total revenue, net in
    second quarter of 2003.



| |                                                                                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In the first half of 2004, North America and
    International product revenue comprised 58.7% and 41.3%,
    respectively of total revenue, net. In the first half of 2003,
    North America product revenue, North America license revenue,
    and International revenue comprised of 58.1%, 8.0% and 33.9% of
    total revenue, net.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Net loss attributable to common stockholders in
    the second quarter of 2004 was $10.1 million versus
    $48.7 million in the second quarter of 2003. The decrease
    was primarily attributable to the increase in gross profit by
    $19.9 million, as described below, restructuring charges of
    $12.5 million recorded in the second quarter of 2003, a
    decrease in legal expense for certain litigation by
    $0.8 million, a decrease in combined research and
    development and selling, general and administrative expenses by
    $2.6 million, an increase in interest and other income
    (expense), net by $3.3 million, offset by an income tax
    provision of $0.5 million recorded in the second quarter of
    2004.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Net loss attributable to common stockholders in
    the first half of 2004 was $27.6 million versus
    $59.5 million in the first half of 2003. The decrease was
    primarily attributable to the increase in gross profit by
    $9.3 million, as described below, a decrease in
    restructuring charges by $10.5 million, a decrease in legal
    expense for certain litigation by $3.1 million, a decrease
    in combined research and development and selling, general and
    administrative expenses by $6.6 million, and an increase in
    interest and other income (expense), net by $2.4 million.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Gross profit or gross margin increased by
    $19.9 million from $(9.4) million or (27.1)% in the
    second quarter of 2003 to $10.5 million or 33.4% in the
    second quarter of 2004. Gross profit for the second quarter of
    2004 included a provision for excess and obsolete and lower of
    cost or market inventory of $1.8 million, which had a 5.8%
    impact on our gross margin, and royalty charges of
    $0.8 million, which had a 2.5% impact on our gross margin.
    Gross profit for the second quarter of 2003 included a
    restructuring provision for excess and obsolete inventory of
    $22.5 million, which had a 64.8% impact on our gross margin.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Gross profit or gross margin increased by
    $9.3 million from $9.7 million or 12.9% in the first
    half of 2003 to $18.9 million or 32.7% in the first half of
    2004. Gross profit for the first half of 2004 included a
    provision for excess and obsolete and lower of cost or market
    inventory of $2.1 million, which had a 3.6% impact on our
    gross margin, and royalty charges of $1.6 million, which
    had a 2.8% impact on our gross margin. Gross profit for the
    first half of 2003 included a restructuring provision for excess
    and obsolete inventory of $22.5 million, which had a 30.1%
    impact on our gross margin.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Combined research and development, selling,
    general and administrative expenses, improved from
    $18.7 million in the second quarter of 2003 to
    $16.1 million in the second quarter of 2004, partially
    attributable to our restructuring activities and cost reduction
    efforts implemented in 2003. Legal expenses for certain
    litigation, which represent legal fees associated with our
    litigation with Symbol Technologies, Inc., decreased from
    $1.0 million during the second quarter of 2003 to $200,000
    during the second quarter of 2004.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Combined research and development, selling,
    general and administrative expenses, improved from
    $38.7 million in the first half of 2003 to
    $32.0 million in the first half of 2004, partially
    attributable to our restructuring activities and cost reduction
    efforts implemented in 2003. Legal expenses for certain
    litigation decreased from $4.0 million during the first
    half of 2003 to $945,000 during the first half of 2004,
    primarily attributable to the $3.0 million of litigation
    fees associated with our patent lawsuit with Intersil during the
    first quarter of 2003.

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Critical Accounting Policies, Judgments and
Estimates

Our discussion and analysis of our financial
condition and results of operations are based upon our
consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial
statements requires us to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates,
including those related to customer programs and incentives,
product returns, bad debts, inventories, equity investments,
goodwill, intangible assets, income taxes, financing operations,
warranty obligations, excess component order cancellation costs,
restructuring, long-term service contracts, pensions and other
post-retirement benefits, and contingencies and litigation. We
base our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or
conditions.

We believe the following critical accounting
policies affect our more significant judgments and estimates
used in the preparation of our financial statements.



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

Product revenue is generally recognized upon
shipment when persuasive evidence of an arrangement exists, the
price is fixed or determinable, and collectibility is reasonably
assured. We grant certain distributors limited rights of return
and price protection on unsold products. A provision for
estimated future sales returns and warranty costs is recorded at
the time revenue is recognized. Under circumstances where future
returns cannot be reasonably estimated or where we are obligated
to directly bring about resale of the products, revenue is
deferred until shipment to end customers by the distributors.
Generally, we have no obligation to provide any modification or
customization upgrades, enhancements or other post-sale customer
support.

Revenue from services, such as pre-installation
diagnostic testing and product repair services, is recognized
over the period for which the services are performed, which is
typically less than one month. Revenue from enhanced service
contracts is recognized over the contract period, which ranges
from one to three years.



| |                                                           
| | ----------------------------------------------------------
| | Allowance for Doubtful Accounts, Returns
    and Discounts

We record estimated reductions to revenue for
sales returns, customer programs and incentive offerings
including special pricing agreements, price protection and
promotions. If market conditions were to decline, we may take
actions to increase customer incentive offerings, possibly
resulting in an incremental reduction of revenue at the time the
incentive is offered.

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



| |                   
| | ------------------
| | Warranty Provision

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

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##### Table of Contents





| |                         
| | ------------------------
| | Valuation of Inventories

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



| |                        
| | -----------------------
| | Valuation of Investment

We hold an investment in a publicly listed
company having operations and technology within our strategic
focus. We record an investment impairment charge when we believe
an investment has experienced a decline in value that is other
than temporary. Future adverse changes in market conditions or
poor operating results of underlying investments could result in
losses or an inability to recover the carrying value of the
investments that may not be reflected in an investments
current carrying value, thereby possibly requiring an impairment
charge in the future.



| |                                     
| | ------------------------------------
| | Valuation of Deferred Tax
    Assets

We record a valuation allowance to reduce our
deferred tax assets to the amount that is more likely than not
to be realized. While we have considered future taxable income
and ongoing prudent and feasible tax planning strategies in
assessing the need for the valuation allowance, in the event we
were to determine that we would be able to realize our deferred
tax assets in the future in excess of our recorded amount, an
adjustment to the deferred tax asset would increase income in
the period such determination was made. Likewise, should we
determine that we would not be able to realize all or part of
our net deferred tax asset in the future, an adjustment to the
deferred tax asset would be charged to income in the period such
determination was made.



| |                                                                         
| | ------------------------------------------------------------------------
| | Restructuring Costs and Impairment of
    Goodwill and Intangible Assets

In response to changes in industry and market
conditions, we may be required to strategically realign our
resources and consider restructuring, disposing of, or
otherwise, exiting businesses. Any decision to limit investment
in or to dispose of or otherwise exit businesses may result in
the recording of special charges, such as inventory and
technology related write-offs and workforce reduction costs,
charges relating to consolidation of excess facilities, or
claims from third parties who were resellers or users of
discontinued products. Estimates relating to the liabilities for
excess facilities are affected by changes in real estate market
conditions. Estimates with respect to the useful life or
ultimate recoverability of our carrying basis of assets,
including purchased intangible assets, could change as a result
of such assessments and decisions. Additionally, we are required
to perform goodwill impairment tests on an annual basis and
between annual tests in certain circumstances. There can be no
assurance that future goodwill impairment tests will not result
in a charge to earnings.



| |                                             
| | --------------------------------------------
| | Patent Litigation and Infringement
    Costs

We have been involved in litigation in the normal
course of business. The results of any litigation matter are
inherently uncertain. In the event of any adverse decision in
litigation with third parties that was pending as of
July 2, 2004 and those that could arise in the future with
respect to patents, other intellectual property rights relevant
to our products and defective products, we could be required to
pay damages and other expenses, to cease the manufacture, use
and sale of infringing products, to expand significant resources
to develop non-infringing technology, or to obtain licenses to
the infringing technology. These charges may occur in any
particular quarter resulting in variability in our operating
results.

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Results of Operations

The following table provides results of
operations data as a percentage of revenue for the periods
presented:

|                                                              |                                                          |                          |       |                  |      |         |        |          |       |   |       |      |      |  |       |      |      | 
|------------------------------------------------------------- | -------------------------------------------------------- | ------------------------ | ----- | ---------------- | ---- | ------- | ------ | -------- | ----- | - | ----- | ---- | ---- |  | ----- | ---- | ---- | 
|                                                              |                                                          |                          |       |                 
|                                                              |                                                          | Three Months Ended       |       | Six Months Ended
|                                                              |                                                          |                          |       |                 
|                                                              |                                                          | July 2,                  |       | June 27,         |      | July 2, |        | June 27,
|                                                              |                                                          | 2004                     |       | 2003             |      | 2004    |        | 2003    
|                                                              |                                                          |                          |       |                  |      |         |        |         
|Total revenue, net                                            |                                                          |                          | 100.0 | %                |      |         | 100.0  | %        |       |   | 100.0 | %    |      |  | 100.0 | %   
|Cost of revenue                                               |                                                          |                          | 64.1  |                  |      |         | 62.4   |          |       |   | 64.6  |      |      |  | 57.0  |     
|Royalty charges                                               |                                                          |                          | 2.5   |                  |      |         |       |          |       |   | 2.8   |      |      |  |      |     
|Restructuring provision for excess and obsolete
    inventory |                                                          |                          |      |                  |      |         | 64.8   |          |       |   |      |      |      |  | 30.1  |     
|                                                              |                                                          |                          |       |                  |      |         |        |          |       |   |       |      |      |  |       |     
|                                                              |                                                          | Gross profit (loss)      |       |                  | 33.4 |         |        |          | (27.1 | ) |       |      | 32.7 |  |       |      | 12.9 | 
|Operating expenses:                                           |                                                          |                          |       |                  |      |         |        |          |       |   |       |      |      |  |       |     
|                                                              | Research and development                                 |                          |       | 15.5             |      |         |        | 17.9     |       |   |       | 16.2 |      |  |       | 18.9 |     
|                                                              | Selling, general and administrative                      |                          |       | 35.7             |      |         |        | 35.8     |       |   |       | 38.9 |      |  |       | 32.8 |     
|                                                              | Legal expense for certain litigation                     |                          |       | 0.6              |      |         |        | 2.9      |       |   |       | 1.6  |      |  |       | 5.3  |     
|                                                              | Amortization of goodwill and other intangible
    assets |                          |       | 17.1             |      |         |        | 15.4     |       |   |       | 18.5 |      |  |       | 14.5 |     
|                                                              | Restructuring charges (benefit)                          |                          |       | (0.4             | )    |         |        | 35.9     |       |   |       | 3.5  |      |  |       | 16.7 |     
|                                                              |                                                          |                          |       |                  |      |         |        |          |       |   |       |      |      |  |       |     
|                                                              |                                                          | Total operating expenses |       |                  | 68.5 |         |        |          | 107.8 |   |       |      | 78.7 |  |       |      | 88.2 | 
|                                                              |                                                          |                          |       |                  |      |         |        |          |       |   |       |      |      |  |       |     
|Loss from operations                                          |                                                          |                          | (35.1 | )                |      |         | (135.0 | )        |       |   | (46.0 | )    |      |  | (75.3 | )   
|Interest expense                                              |                                                          |                          | (8.3  | )                |      |         |       |          |       |   | (9.0  | )    |      |  |      |     
|Other income (expense), net                                   |                                                          |                          | 18.3  |                  |      |         | (0.6   | )        |       |   | 13.0  |      |      |  | (0.1  | )   
|                                                              |                                                          |                          |       |                  |      |         |        |          |       |   |       |      |      |  |       |     
|Loss before income taxes                                      |                                                          |                          | (25.1 | )                |      |         | (135.5 | )        |       |   | (42.1 | )    |      |  | (75.4 | )   
|Income tax provision (benefit)                                |                                                          |                          | 1.7   |                  |      |         |       |          |       |   | (0.3  | )    |      |  |      |     
|                                                              |                                                          |                          |       |                  |      |         |        |          |       |   |       |      |      |  |       |     
|Net loss                                                      |                                                          |                          | (26.8 | )                |      |         | (135.5 | )        |       |   | (41.7 | )    |      |  | (75.4 | )   
|Accretion of Series A Preferred Stock
    obligations         |                                                          |                          | (5.4  | )                |      |         | (4.5   | )        |       |   | (5.8  | )    |      |  | (4.1  | )   
|                                                              |                                                          |                          |       |                  |      |         |        |          |       |   |       |      |      |  |       |     
|Net loss attributable to common stockholders                  |                                                          |                          | (32.2 | )%               |      |         | (140.0 | )%       |       |   | (47.5 | )%   |      |  | (79.6 | )%  
|                                                              |                                                          |                          |       |                  |      |         |        |          |       |   |       |      |      |  |       |     

Comparison of the Three and Six Months Ended
July 2, 2004 and June 27, 2003



| |                   
| | ------------------
| | Total Revenue, Net

Revenue consists of product revenues, reduced by
estimated sales returns and allowances for price protection.
Provisions for estimated sales returns and allowances, which are
based on historical trends, contractual terms and other
available information, are recorded at the time revenue is
recognized.

We classify our products into two product lines:
Wireless Wide Area Network, or WWAN, product line, and; Wireless
Local Area Network, or WLAN, product line. The WWAN product line
includes point-to-point Lynx and Tsunami products and
point-to-multipoint Tsunami products. The WLAN product line
includes ORiNOCO 802.11 access point and client card products.
Total revenue, net during the three months ended March 28,
2003 also includes license revenue of $6 million related to
the settlement agreement with Intersil during the first quarter
of 2003 (see Note 17 of the condensed consolidated
financial statements). Prior to the March 26, 2002 merger
with Proxim, Inc., we did not have a WLAN product line.
Historical WLAN revenue prior to March 26, 2002 of the
former Proxim, Inc. and prior to August 5, 2002 for the
ORiNOCO products acquired from Agere are not reported in the
table below.

36



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##### Table of Contents



Revenue information by product line is as follows
(in thousands):

|                     |               |                    |        |                  |  |         |        |          |  |   |        |        |  |   |        |        | 
|-------------------- | ------------- | ------------------ | ------ | ---------------- |  | ------- | ------ | -------- |  | - | ------ | ------ |  | - | ------ | ------ | 
|                     |               |                    |        |                 
|                     |               | Three Months Ended |        | Six Months Ended
|                     |               |                    |        |                 
|                     |               | July 2,            |        | June 27,         |  | July 2, |        | June 27,
|Product Line         |               | 2004               |        | 2003             |  | 2004    |        | 2003    
|                     |               |                    |        |                  |  |         |        |         
|WWAN                 |               | $                  | 17,185 |                  |  | $       | 18,805 |          |  | $ | 30,259 |        |  | $ | 35,412 |       
|WLAN                 |               |                    | 14,232 |                  |  |         | 16,000 |          |  |   | 27,855 |        |  |   | 33,422 |       
|WLAN license revenue |               |                    |       |                  |  |         |       |          |  |   |       |        |  |   | 6,000  |       
|                     |               |                    |        |                  |  |         |        |          |  |   |        |        |  |   |        |       
|                     | Total revenue |                    | $      | 31,417           |  |         | $      | 34,805   |  |   | $      | 58,114 |  |   | $      | 74,834 | 
|                     |               |                    |        |                  |  |         |        |          |  |   |        |        |  |   |        |       

We sell our products worldwide through a direct
sales force, independent distributors, and value-added
resellers. We currently operate in two geographic regions: North
America and International. Revenue outside of North America are
primarily export sales denominated in United States dollars.
Disaggregated financial information regarding our revenue by
geographic region is as follows (in thousands):

|                              |               |                    |        |                  |  |         |        |          |  |   |        |        |  |   |        |        | 
|----------------------------- | ------------- | ------------------ | ------ | ---------------- |  | ------- | ------ | -------- |  | - | ------ | ------ |  | - | ------ | ------ | 
|                              |               |                    |        |                 
|                              |               | Three Months Ended |        | Six Months Ended
|                              |               |                    |        |                 
|                              |               | July 2,            |        | June 27,         |  | July 2, |        | June 27,
|Geographic Region             |               | 2004               |        | 2003             |  | 2004    |        | 2003    
|                              |               |                    |        |                  |  |         |        |         
|North America product revenue |               | $                  | 20,647 |                  |  | $       | 20,353 |          |  | $ | 34,100 |        |  | $ | 43,475 |       
|North America license revenue |               |                    |       |                  |  |         |       |          |  |   |       |        |  |   | 6,000  |       
|International product revenue |               |                    | 10,770 |                  |  |         | 14,452 |          |  |   | 24,014 |        |  |   | 25,359 |       
|                              |               |                    |        |                  |  |         |        |          |  |   |        |        |  |   |        |       
|                              | Total revenue |                    | $      | 31,417           |  |         | $      | 34,805   |  |   | $      | 58,114 |  |   | $      | 74,834 | 
|                              |               |                    |        |                  |  |         |        |          |  |   |        |        |  |   |        |       

Three customers accounted for 15.8%, 13.8% and
12.7% of total revenue during the second quarter of 2004, and
one customer accounted for 13.6% of total revenue during the
second quarter of 2003. Two customers accounted for 15.1% and
13.2% of total revenue during the first half of 2004, and one
customer accounted for 13.8% of total revenue during the first
half of 2003.

Total revenue, net decreased 9.7% from
$34.8 million in the second quarter of 2003 to
$31.4 million in the second quarter of 2004. The decrease
was attributable to the decline in the sale of our former
Proxim 802.11a and Harmony products, the fact that the
increase in sales in a new family of ORiNOCO access point
products did not offset the expected decrease in sales of the
family of products it is replacing and our sales order flow
materializing later in the 2004 quarter.

Total revenue, net decreased 22.3% from
$74.8 million in the first half of 2003 to
$58.1 million in the first half of 2004. The decrease was
attributable to the decline in the sale of our former
Proxim 802.11a and Harmony products, lower than expected
carrier units sold resulting from carrier consolidation and
delayed deployments, decrease in international sales, product
availability issues arising from the introduction of a new
family of ORiNOCO access point products, and the fact that sales
in the new product family did not offset the expected decrease
in sales of the product family it is replacing. In addition,
revenue declined due to sales order flow materializing later in
the 2004 quarter, and in the 2003 quarter license revenue of
$6.0 million, resulting from the patent litigation
settlement with Intersil, as described in Note 17 to the
condensed consolidated financial statements.



| |                
| | ---------------
| | Cost of Revenue

Cost of revenue decreased 7.2% from
$21.7 million in the second quarter of 2003 to
$20.1 million in the second quarter of 2004. As a
percentage of total revenue, net, cost of revenue increased from
62.4% in the second quarter of 2003 to 64.1% in the second
quarter of 2004. The decrease in cost of revenue and the
increase in cost of revenue as a percentage of total revenue,
net was primarily attributable to a $1.8 million provision
for excess and obsolete inventory recorded in the second quarter
of 2004, partially offset by improved margin performance arising
from the sales increase in our next generation, higher margin
products.

Cost of revenue decreased 12.0% from
$42.6 million in the first half of 2003 to
$37.5 million in the second half of 2004. As a percentage
of total revenue, net, cost of revenue increased from 57.0% in
the second half of

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2003 to 64.6% in the second half of 2004.
Included in total revenue, net in the first quarter of 2003 was
the $6.0 million license revenue in connection with the
patent litigation settlement with Intersil. Excluding the
$6.0 million license revenue, cost of revenue as a
percentage of product revenue increased from 61.9% in the first
half of 2003 to 64.6% in the first half of 2004. This increase
as a percentage of product revenue was primarily attributable to
a $2.1 million provision for excess and obsolete inventory
and lower of cost or market recorded in the first half of 2004,
partially offset by improved margin performance arising from the
sales increase in our next generation, higher margin products.


During the first half of 2004, we recorded a
$2.1 million provision for excess and obsolete inventory as
part of our ongoing review of our inventory reserve
requirements. To mitigate the component supply constraints that
have existed in the past, we had built inventory levels for
certain components with long lead times and had entered into
longer term commitments for certain components. The inventory
charges were due to a sudden and significant decrease in
anticipated demand for certain of our products, notification
from customers that they would not be ordering as many products
as they had previously indicated they would, and continued
increase in competition for wireless networking products.

Due to these factors, inventory levels exceeded
our requirements based on our current 12-month sales forecasts.
The additional excess and obsolete and lower of cost or market
inventory charges were calculated based on the inventory levels
in excess of the estimated 12-month sales forecasts and
anticipated reduced selling prices for certain products. We do
not anticipate that the excess and obsolete inventory subject to
this reserve will be saleable at a later date based on our
current 12-month demand forecast. We use a 12-month sales
forecast, because the wireless communications industry is
characterized by rapid technological changes such that if we
have not sold a product after a 12-month period, it is unlikely
that the product will be sold.

The following is a summary of the changes in the
reserve for excess and obsolete inventory during the first half
of 2004 (in thousands):

|                                            |  |   |        |  
|------------------------------------------- |  | - | ------ | -
|Balance as of December 31, 2003             |  | $ | 5,072  |  
|Provision for excess and obsolete inventory |  |   | 2,115  |  
|Inventory scrapped                          |  |   | (1,563 | )
|                                            |  |   |        |  
|Balance as of July 2, 2004                  |  | $ | 5,624  |  
|                                            |  |   |        |  



| |                
| | ---------------
| | Royalty Charges

On September 15, 2003, we announced that a
jury had rendered a verdict in the first phase of our patent
infringement suit with Symbol. On Symbols claims of patent
infringement, the jury found that certain of our products
infringe two of Symbols patents and assessed a 6% royalty
on the revenue of relevant products. On November 24, 2003,
the District Court conducted a one-day bench trial on our
equitable defenses not addressed by the jury. On July 29,
2004, we announced that the court has denied our equitable
defenses and has determined that the jurys award of a 6%
royalty on our sales of these products from 1995 through
September 2003, plus prejudgment interest, results in an award
of damages to Symbol of $25.9 million. As of July 2,
2004, we had recorded an accrual for estimated past royalties of
$22.9 million and interest of $3.0 million covering
the period from 1995 through September 2003 plus a total of
$2.8 million for estimated potential royalties and interest
covering the period from October 2003 to July 2, 2004. As
of July 2, 2004, our accrual in the aggregate for estimated
potential royalties and interest was $28.7 million.

During the second quarter of 2004, we recorded an
accrual for estimated potential royalty charges of $789,000 and
$130,000 for interest. During the first half of 2004, we
recorded an accrual for estimated potential royalty charges of
$1.6 million and $215,000 for interest. See Note 17 of
the consolidated financial statements for a further description
of the Symbol litigation.



| |                                                              
| | -------------------------------------------------------------
| | Restructuring Provision for Excess and
    Obsolete Inventory

During the second quarter and first half of 2003,
we recorded a $22.5 million provision for excess and
obsolete inventory as part of our restructuring activities. To
mitigate the component supply constraints that

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have existed in the past, we had built inventory
levels for certain components with long lead times and had
entered into longer term commitments for certain components. The
excess inventory charges were due to the following factors:




| |   |                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | A sudden and significant decrease in demand for
    certain WWAN Lynx and Tsunami license-exempt point-to-point and
    WLAN 802.11a and Harmony products;
|
| |  | Notification from customers that they would not
    be ordering as many products as they had previously indicated
    they would;                         
|
| |  | Continued decline in the demand for fixed
    wireless solutions due to the worldwide slowdown in the telecom
    industry;                               
|
| |  | Continued increase in competition for wireless
    networking products, particularly related to home networking and
    enterprise LANs;                  
|
| |  | Managements strategy to discontinue
    products, and in certain cases replace these products with new
    or redesigned products.                       

Due to these factors, inventory levels exceeded
our requirements based on current 12-month sales forecasts. The
additional excess and obsolete inventory charge was calculated
based on the inventory levels in excess of the estimated
12-month demand for each specific product family.



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

Research and development expenses decreased 22.1%
from $6.2 million or 17.9% of total revenue, net in the
second quarter of 2003 to $4.9 million or 15.5% of total
revenue, net in the second quarter of 2004. The decrease in
research and development expense was primarily attributable to
the reduction in workforce implemented in 2003, resulting in
decreased personnel expenses. Severance pay associated with the
workforce reduction was included in the restructuring charges
recorded in 2003.

Research and development expenses decreased 33.3%
from $14.1 million or 18.9% of total revenue, net in the
first half of 2003 to $9.4 million or 16.2% of total
revenue, net in the first half of 2004. The decrease in research
and development expense was primarily attributable to the
reduction in workforce implemented in 2003, resulting in
decreased personnel expenses. Severance pay associated with the
workforce reduction was included in the restructuring charges
recorded in 2003.



| |                                                
| | -----------------------------------------------
| | Selling, General and Administrative
    Expense

Selling, general and administrative expenses
decreased 9.8% from $12.4 million or 35.8% of total
revenue, net in the second quarter of 2003 to $11.2 million
or 35.7% of total revenue, net in the second quarter of 2004.
The decrease in selling, general and administrative expenses
from the second quarter of 2003 to the second quarter of 2004
was primarily attributable to the workforce reduction
implemented in 2003, resulting in reduced personnel expenses.

In absolute dollars, selling, general and
administrative expenses decreased 7.9% from $24.5 million
or 32.8% of total revenue, net in the first half of 2003 to
$22.6 million or 38.9% of total revenue, net in the first
half of 2004. The decrease in selling, general and
administrative expenses on an absolute basis from the first half
of 2003 to the first half of 2004 was primarily attributable to
the workforce reduction implemented in 2003, resulting in
reduced personnel expenses. The increase as a percentage of
revenue in the first half of 2004 was attributable to the
decrease in revenue.



| |                                         
| | ----------------------------------------
| | Legal Expense for Certain
    Litigation

Legal expense for certain litigation decreased
$800,000 from $1.0 million in the second quarter of 2003 to
$200,000 in the second quarter of 2004. The decrease is
primarily attributable to the decrease in legal services
incurred during the respective periods in connection with our
litigation with Symbol. Please refer to Part II,
Item 1, Legal Proceedings for a description of our
litigation.

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Legal expense for certain litigation decreased
$3.1 million from $4.0 million in the first half of
2003 to $945,000 in the first half of 2004. The decrease is
primarily attributable to the $3.0 million of litigation
fees incurred in the first half of 2003 associated with our
patent lawsuit with Intersil. As described in Part II,
Item 1, Legal Proceedings, we settled our lawsuit with
Intersil and recorded license revenue of $6.0 million in
the first quarter of 2003.



| |                                      
| | -------------------------------------
| | Amortization of Intangible
    Assets

Amortization of intangible assets was
$5.4 million in the first quarter of 2004 and 2003.
Amortization of intangible assets was $10.9 million in the
second half of 2003 compared to $10.7 million in the second
half of 2004.



| |                                                              
| | -------------------------------------------------------------
| | Restructuring Charges for Severance and
    Excess Facilities

During the first half of 2004, we recorded
restructuring charges of $2.0 million, consisting of
$1.9 million of cash provisions and $0.1 million of
non-cash provisions for abandoned property and equipment. The
$1.9 million of cash provisions consisted of
$1.4 million of operating lease commitments, less estimated
future sublease receipts and exit costs related to a portion of
the Sunnyvale facility, which was closed in the first quarter of
2004, and $0.5 million of severance payments for five
employees. The estimated future sublease receipts are based on
current comparable rates for leases in the respective markets.
If facility rental rates continue to decrease in these markets
or if it takes longer than expected or if we are unable to
sublease these facilities, the actual costs for closures of
facilities could exceed the original estimates and additional
restructuring charges totaling $2.6 million could result.

The following table summarizes the restructuring
activities for the year ended December 31, 2003 and the six
months ended July 2, 2004 (in thousands):

|                                               |  |           |        |            |  |            |         |       |  |       |        |   |  |   |        |   |  |   |         |  
|---------------------------------------------- |  | --------- | ------ | ---------- |  | ---------- | ------- | ----- |  | ----- | ------ | - |  | - | ------ | - |  | - | ------- | -
|                                               |  |           |        |            |  | Asset Held |         |       |  |      
|                                               |  | Severance |        | Facilities |  | for Sale   |         | Other |  | Total
|                                               |  |           |        |            |  |            |         |       |  |      
|Balance as of December 31, 2002                |  | $         |       |            |  | $          | 30,450  |       |  | $     |       |   |  | $ |       |   |  | $ | 30,450  |  
|Provision charged to operations                |  |           | 9,071  |            |  |            | 12,743  |       |  |       | 6,925  |   |  |   | 3,904  |   |  |   | 32,643  |  
|Reversal of previously recorded provision      |  |           |       |            |  |            | (27,764 | )     |  |       |       |   |  |   |       |   |  |   | (27,764 | )
|Non-cash charges utilized                      |  |           |       |            |  |            |        |       |  |       |       |   |  |   | (3,304 | ) |  |   | (3,304  | )
|Cash payments                                  |  |           | (5,451 | )          |  |            | (3,845  | )     |  |       | (9,966 | ) |  |   |       |   |  |   | (19,262 | )
|Proceeds from sale of asset held for sale, net |  |           |       |            |  |            |        |       |  |       | 3,041  |   |  |   |       |   |  |   | 3,041   |  
|                                               |  |           |        |            |  |            |         |       |  |       |        |   |  |   |        |   |  |   |         |  
|Balance as of December 31, 2003                |  |           | 3,620  |            |  |            | 11,584  |       |  |       |       |   |  |   | 600    |   |  |   | 15,804  |  
|Provision charged to operations                |  |           | 463    |            |  |            | 1,447   |       |  |       |       |   |  |   | 119    |   |  |   | 2,029   |  
|Non-cash charges utilized                      |  |           |       |            |  |            |        |       |  |       |       |   |  |   | (119   | ) |  |   | (119    | )
|Cash payments                                  |  |           | (3,525 | )          |  |            | (1,733  | )     |  |       |       |   |  |   |       |   |  |   | (5,258  | )
|                                               |  |           |        |            |  |            |         |       |  |       |        |   |  |   |        |   |  |   |         |  
|Balance as of July 2, 2004                     |  | $         | 558    |            |  | $          | 11,298  |       |  | $     |       |   |  | $ | 600    |   |  | $ | 12,456  |  
|                                               |  |           |        |            |  |            |         |       |  |       |        |   |  |   |        |   |  |   |         |  

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| |                 
| | ----------------
| | Interest Expense

Interest expense increased from $192,000 to
$2.7 million from the second quarter of 2003 to the second
quarter of 2004. Interest expense increased from $93,000 to
$5.4 million from the first half of 2003 to the first half
of 2004. The following table summarizes interest expense (in
thousands):

|                                      |  |                    |        |                  |  |         |      |          |  |   |        |   |  |   |     |  
|------------------------------------- |  | ------------------ | ------ | ---------------- |  | ------- | ---- | -------- |  | - | ------ | - |  | - | --- | -
|                                      |  |                    |        |                 
|                                      |  | Three Months Ended |        | Six Months Ended
|                                      |  |                    |        |                 
|                                      |  | July 2,            |        | June 27,         |  | July 2, |      | June 27,
|                                      |  | 2004               |        | 2003             |  | 2004    |      | 2003    
|                                      |  |                    |        |                  |  |         |      |         
|Interest expense on royalty charges   |  | $                  | (130   | )                |  | $       |     |          |  | $ | (215   | ) |  | $ |    |  
|Interest expense on convertible notes |  |                    | (2,493 | )                |  |         |     |          |  |   | (5,041 | ) |  |   |    |  
|Other                                 |  |                    | (96    | )                |  |         | (192 | )        |  |   | (179   | ) |  |   | (93 | )
|                                      |  |                    |        |                  |  |         |      |          |  |   |        |   |  |   |     |  
|                                      |  | $                  | (2,719 | )                |  | $       | (192 | )        |  | $ | (5,435 | ) |  | $ | (93 | )
|                                      |  |                    |        |                  |  |         |      |          |  |   |        |   |  |   |     |  



| |                            
| | ---------------------------
| | Other Income (Expense), Net

Other income (expense), net was $5.9 million
and $7.7 million during the three and six months ended
July 2, 2004. The following table summarizes other income
(expense), net (in thousands):

|                                                 |  |                    |        |                  |  |         |   |          |  |   |        |   |  |   |   | 
|------------------------------------------------ |  | ------------------ | ------ | ---------------- |  | ------- | - | -------- |  | - | ------ | - |  | - | - | 
|                                                 |  |                    |        |                 
|                                                 |  | Three Months Ended |        | Six Months Ended
|                                                 |  |                    |        |                 
|                                                 |  | July 2,            |        | June 27,         |  | July 2, |   | June 27,
|                                                 |  | 2004               |        | 2003             |  | 2004    |   | 2003    
|                                                 |  |                    |        |                  |  |         |   |         
|Amortization of debt discount and issuance costs |  | $                  | (2,845 | )                |  | $       |  |          |  | $ | (5,737 | ) |  | $ |  | 
|Revaluation of common stock warrants             |  |                    | 8,700  |                  |  |         |  |          |  |   | 13,800 |   |  |   |  | 
|Loss on disposal of property and equipment       |  |                    |       |                  |  |         |  |          |  |   | (350   | ) |  |   |  | 
|                                                 |  |                    |        |                  |  |         |   |          |  |   |        |   |  |   |   | 
|                                                 |  | $                  | 5,855  |                  |  | $       |  |          |  | $ | 7,713  |   |  | $ |  | 
|                                                 |  |                    |        |                  |  |         |   |          |  |   |        |   |  |   |   | 



| |                                   
| | ----------------------------------
| | Income Tax Provision
    (Benefit)

The income tax benefit recorded during the six
months ended July 2, 2004 represents the net reversal of
the valuation allowance of deferred tax assets to offset the
deferred tax liability arising from the revaluation of the
short-term investments



| |                                                                 
| | ----------------------------------------------------------------
| | Accretion of Series A Preferred Stock
    Redemption Obligations

The accretion of Series A Preferred Stock
represents the quarterly adjustments to the carrying value of
the Series A Preferred Stock, on an effective-interest
basis, so that the carrying value will equal the redemption
amount at the earliest redemption date. The accretion was
recorded to increase the net loss attributable to common
stockholders.

Liquidity and Capital Resources



| |                        
| | -----------------------
| | Sources and Use of Cash

Cash and cash equivalents decreased by
$8.4 million from $19.8 million at December 31,
2003 to $11.4 million at July 2, 2004.

Net cash used in operating activities for the six
months ended July 2, 2004 was $7.7 million,
attributable to the net loss after the effect of non-cash
charges, an increase in inventory excluding the provision of
excess and obsolete inventory, and an increase in restricted
cash and other assets, current and non-current, partially offset
by a decrease in accounts receivable, net, an increase in
accounts payable and other accrued liabilities and accrued
royalties and interest. Net cash used in operating activities
for the six month ended June 27, 2003 was
$13.7 million and was attributable to the net loss after
the effect of non-cash charges, an increase in inventory
excluding the restructuring provision for excess and obsolete
inventory, and a decrease in accounts

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payable and other accrued liabilities, partially
offset by an decrease in accounts receivable, net and a decrease
in restricted cash and other assets, current and non-current.


Net cash used in investing activities for the six
months ended July 2, 2004 was $416,000 and represented
capital spending. Net cash used in investing activities for the
six months ended June 27, 2003 was $2.1 million and
was attributable to capital spending of $2.6 million,
offset by a $500,000 repayment of a portion of a loan to a
former officer. As discussed in Note 6 to the condensed
consolidated financial statements, we intend to continue to seek
repayment on the outstanding loan balance from this former
officer.

Net cash used in financing activities for the six
months ended July 2, 2004 was $149,000 and was attributable
to the issuance of common stock, net of $446,000, offset by
principal payments on capital lease obligations of $595,000. Net
cash provided by financing activities for the six months ended
June 27, 2003 was $3.7 million and was attributable to
borrowing on short-term bank loan of $2.0 million,
borrowings on capital lease obligations of $1.6 million,
proceeds from repayments of notes receivable from stockholders
of $187,000, and the issuance of common stock, net of $237,000,
offset by principal payments on capital lease obligations of
$302,000.



| |                        
| | -----------------------
| | Contractual Commitments

We occupy our facilities under several
non-cancelable operating lease agreements expiring at various
dates through September 2009, and require payment of property
taxes, insurance, maintenance and utilities. Future payments
under contractual obligations as of July 2, 2004 were as
follows (in thousands):

|                                       |  |                        |         |                          |  |      |        |      |  |      |       |      |  |            |       |  |  |   |         |  |  |   |       |  |  |   |       | 
|-------------------------------------- |  | ---------------------- | ------- | ------------------------ |  | ---- | ------ | ---- |  | ---- | ----- | ---- |  | ---------- | ----- |  |  | - | ------- |  |  | - | ----- |  |  | - | ----- | 
|                                       |  |                       
|                                       |  | Payments Due By Period
|                                       |  |                       
|                                       |  |                        |         |                          |  |     
|                                       |  | Total                  |         | Year Ending December 31, |  |     
|                                       |  | Amounts                |         |                          |  |     
|                                       |  | Committed              |         | 2004                     |  | 2005 |        | 2006 |  | 2007 |       | 2008 |  | Thereafter
|                                       |  |                        |         |                          |  |      |        |      |  |      |       |      |  |           
|Severance pay                          |  | $                      | 558     |                          |  | $    | 558    |      |  | $    |      |      |  | $          |      |  |  | $ |        |  |  | $ |      |  |  | $ |      | 
|Repayment of convertible notes         |  |                        | 50,753  |                          |  |      | 50,753 |      |  |      |      |      |  |            |      |  |  |   |        |  |  |   |      |  |  |   |      | 
|Operating leases                       |  |                        | 35,622  |                          |  |      | 3,934  |      |  |      | 7,740 |      |  |            | 6,708 |  |  |   | 6,371   |  |  |   | 6,435 |  |  |   | 4,434 | 
|Capital leases                         |  |                        | 1,603   |                          |  |      | 637    |      |  |      | 920   |      |  |            | 46    |  |  |   |        |  |  |   |      |  |  |   |      | 
|Project commitments                    |  |                        | 799     |                          |  |      | 799    |      |  |      |      |      |  |            |      |  |  |   |        |  |  |   |      |  |  |   |      | 
|Redemption of Series A Preferred Stock |  |                        | 106,899 |                          |  |      |       |      |  |      |      |      |  |            |      |  |  |   | 106,899 |  |  |   |      |  |  |   |      | 
|                                       |  |                        |         |                          |  |      |        |      |  |      |       |      |  |            |       |  |  |   |         |  |  |   |       |  |  |   |       | 
|                                       |  | $                      | 196,234 |                          |  | $    | 56,681 |      |  | $    | 8,660 |      |  | $          | 6,754 |  |  | $ | 113,270 |  |  | $ | 6,435 |  |  | $ | 4,434 | 
|                                       |  |                        |         |                          |  |      |        |      |  |      |       |      |  |            |       |  |  |   |         |  |  |   |       |  |  |   |       | 

As of July 2, 2004, we were required to
repay the convertible promissory notes in September 2004 if they
had not been exchanged for Series B Preferred Stock on
July 30, 2004.

We will also be required to redeem all
outstanding shares of Series A Preferred Stock for cash in
August 2007 if they have not been previously converted into
common stock.

For the six months ended July 2, 2004 and
the years ended December 31, 2003 and 2002, we recorded
restructuring charges of $19.5 million related to the
committed future lease payments for closed facilities, net of
estimated future sublease receipts and reversal of previously
recorded provision, which are included in the operating leases
caption above. As of July 2, 2004, we had unconditional
purchase order commitments of $799,000, which are included as
accrued liabilities.

As described in Note 1 under Subsequent
Events in the Notes to the Condensed Consolidated Financial
Statements, on July 30, 2004, the Investors exchanged the
aggregate principal amount of the Notes, which includes accrued
but unpaid interest, into shares of Series B Preferred
Stock, in accordance with the existing terms and conditions of
the Notes. The exchange relieved us from the requirement to
repay the Notes on their maturity date of September 30,
2004. Subject to the approval of the Companys
stockholders, the Investors also agreed to surrender all of
their Series A Preferred Stock, all of their Series B
Preferred Stock, and their warrants to purchase shares of the
Companys common stock in exchange for an aggregate of
164 million shares of common stock and 400,000 shares
of our newly issued Series C Preferred Stock. On
July 30, 2004,

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we received $10.0 million in cash proceeds
from the Investors in exchange for a new convertible bridge note
pursuant to the securities purchase agreement dated
July 27, 2004.




| |                  
| | -----------------
| | Credit Facilities

In December 2002, we entered into a secured
credit facility with Silicon Valley Bank (the
Lender), and then subsequently amended the credit
facility in March 2003. On June 13, 2003, in order to
secure additional working capital, we entered into a letter
agreement (the Letter Agreement) and an accounts
receivable financing agreement, which effectively amended and
restated the existing credit facility in its entirety. We
subsequently amended the accounts receivable financing agreement
(as amended, the Amended A/R Financing
Agreement) on July 25, 2003, October 31, 2003
and most recently on July 31, 2004. On July 25, 2003,
we amended the accounts receivable financing agreement.

Under the Amended A/R Financing Agreement,
we may borrow up to $20 million in total. First, we may
borrow up to $10.0 million by financing a portion of our
eligible accounts receivable, primarily to our customers in the
United States. Under this arrangement, we may accept for
collection through a lockbox arrangement accounts receivable
from us, and in return we will receive advances from the Lender
at a rate equal to 80% of accounts receivable from account
debtors who are not distributors, and 50% of accounts receivable
from account debtors who are distributors, subject to borrowing
restrictions on most international accounts and at the
discretion of the Lender. After collection of a receivable, the
Lender will refund to us the difference between the amount
collected and the amount initially advanced to us, less a
finance charge applied against the average monthly balance of
all transferred but outstanding receivables at a rate per annum
equal to the Lenders prime rate plus 1.50 percentage
points, or 5.75%, whichever is greater. In addition to a
facility fee of $100,000, we must pay each month to the Lender a
handling fee equal to 0.25% of the average monthly balance of
transferred but outstanding receivables. We must repay each
advance upon the earliest to occur of (i) the collection of
the corresponding financed receivable, (ii) the date on
which the corresponding financed receivable becomes an
ineligible receivable pursuant to the terms of the Amended
A/R Financing Agreement, or (iii) July 30, 2005.
Second, we may borrow up to an additional $10.0 million,
under which we are required to maintain a compensating cash
balance equal to such borrowings.

Under the A/R Financing Agreement, we
receive temporary advances from the Lender in excess of the
availability otherwise applicable under the A/R Financing
Agreement (Temporary Overadvances), in an amount
equal to $4.0 million for advances relating to letters of
credit and in an amount equal to $4.0 million to be used
for working capital purposes. We may receive Temporary
Overadvances under this arrangement through August 31,
2004. This Temporary Overadvances arrangement may be renewed
upon agreement by both the Company and the Lender. Borrowings
outstanding under Temporary Overadvances are subject to a
finance charge of 1.5% per week.

As of July 2, 2004, no borrowings were
outstanding under the Amended A/R Financing Agreement.

Obligations under the amended A/R Financing
Agreement are secured by a security interest on all of our
assets, including intellectual property, and are senior in lien
priority and right of payment to our obligations to the funds
affiliated with Warburg Pincus and BCP Capital, L.P. under the
secured promissory notes issued in July 2003 and amended in
October 2003 and the senior secured promissory notes issued in
December 2003. The amended A/R Financing Agreement requires
the consent of the Lender in order to incur debt, grant liens
and sell assets. The events of default under the secured credit
facility include the failure to pay amounts when due, failure to
observe or perform covenants, bankruptcy and insolvency events,
defaults under certain of our other obligations and the
occurrence of a material adverse change in our business. Under
the Amended A/R Financing Agreement, the events of default
also include any judgment, attempt by Symbol to execute on a
judgment, the court not issuing a stay on execution of judgment
by August 31, 2004, restraining order, injunction or any
material adverse development in connection with a lawsuit filed
by Symbol Technologies before the U.S. District Court for
the District of Delaware. Please refer to Part II,
Item 1, Legal Proceedings for a further description of the
litigation with Symbol Technologies.

Under the Amended A/R Financing Agreement,
the financial covenants require us to maintain cash and cash
equivalents with the Lender and its affiliates in an amount not
less than $4.0 million. If we fail to meet

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this requirement, we may still remain in
compliance with the financial covenants by maintaining a ratio
of the total of cash, cash equivalents and accounts receivable
approved by the Lender to our current liabilities of at least
5.0 to 1. In addition, we are required to maintain restricted
cash balances to the extent that our outstanding letters of
credit exceed $4.0 million. We currently maintain
substantially all of our cash, cash equivalents and investments
at Silicon Valley Bank and its affiliates. In the event of
default under the Amended A/R Financing Agreement, the Lender
has the right to offset such cash, cash equivalents and
investments against our obligations owing to the Lender. As of
July 2, 2004, we complied with all of the financial
covenants under this agreement.




| |                                   
| | ----------------------------------
| | Other Restructuring
    Activities

We have taken steps to reduce our expenses from
operations in order to begin generating cash flow from
operations. Restructuring charges related primarily to severance
payments.

Restructuring charges for the six months ended
July 2, 2004 were $2.0 million, consisting of
$1.9 million of cash provisions and $0.1 million of
non-cash provisions for abandoned property and equipment. The
$1.9 million of cash provisions consisted of
$1.4 million of operating lease commitments, less estimated
future sublease receipts and exit costs related to a portion of
the Sunnyvale facility, which was closed in the first quarter of
2004, and $0.5 million of severance payments for five
employees.



| |               
| | --------------
| | Debt Financing

In April 2003, our management and board of
directors recognized our need to secure additional funding to
support our growth objectives and strengthen our balance sheet
position. During 2003, Warburg Pincus Private Equity VIII,
L.P. and BCP Capital, L.P. and affiliates invested an aggregate
of $40 million in us in exchange for secured promissory
notes, exchangeable for shares of our Series B Preferred
Stock, and warrants to purchase an aggregate of 24 million
shares of our common stock. On July 30, 2004, the Investors
exchanged the aggregate principal amount of the Notes, which
includes accrued but unpaid interest, into shares of
Series B Preferred Stock, in accordance with the existing
terms and conditions of the Notes. The exchange relieves us from
the requirement to repay the Notes on their maturity date of
September 30, 2004. Subject to the approval of our
stockholders, the Investors also agreed to surrender all of
their Series A Preferred Stock, all of their Series B
Preferred Stock, all of their warrants to purchase our common
stock in exchange for an aggregate of 164 million shares of
common stock and 400,000 shares of our newly issued
Series C Preferred Stock. Furthermore, on July 30,
2004, we received $10.0 million from the Investors in
exchange for a new convertible bridge note pursuant to the
securities purchase agreement dated July 27, 2004. Please
refer to Note 1 to the condensed consolidated financial
statements for a detailed description of our recent transactions
with these Investors.



| |                                        
| | ---------------------------------------
| | Litigation with Symbol
    Technologies

On September 15, 2003, we announced that a
jury had rendered a verdict in the first phase of the patent
infringement suit with Symbol Technologies, Inc.
(Symbol). On Symbols claims of patent
infringement, the jury found that certain of our products
infringe two of Symbols patents and assessed a 6% royalty
on the revenue of relevant products. On November 24, 2003,
the District Court conducted a one-day bench trial on our
equitable defenses not addressed by the jury.

On July 29, 2004, we announced that the
court has denied our equitable defenses and has determined that
the jurys award of a 6% royalty on our sales of these
products from 1995 through September 2003, plus prejudgment
interest, results in an award of damages to Symbol of
$25.9 million. The court entered its judgment on this
matter on August 4, 2004. We are not presently enjoined
from continued sales of these products, and the court denied
Symbols request that it impose a court ordered royalty on
future sales of these products by us. On August 6, 2004,
Symbol filed a motion for entry of a permanent injunction
against further manufacture and sale of the Companys
products found to infringe Symbols patents. We intend to
oppose this motion. If we are enjoined from future sales of
these products and are not able to negotiate a license

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arrangement with acceptable royalty rates, our
revenue, results of operations and financial condition would be
materially adversely affected.


We have fully accrued for the amount awarded in
our financial statements since the date of the initial jury
award in September 2003. As of July 2, 2004, we had
recorded an accrual for estimated past royalties of
$22.9 million and interest of $3.0 million covering
the period from 1995 through September 2003 plus a total of
$2.8 million for estimated potential royalties and interest
covering the period from October 2003 to July 2, 2004. As
of July 2, 2004, our accrual in the aggregate for estimated
potential royalties and interest was $28.7 million.
Depending upon the ultimate outcome of the litigation with
Symbol, we may be required to pay royalty charges and interest
at the time specified by the court. We will continue to evaluate
and review our estimate of royalties and interest payable from
time to time for any indications that could require us to change
our assumptions relating to the amount already recorded.

To date, we have not incurred immediate financial
obligation to Symbol as a result of this decision and we intend
to file a motion to stay execution on the judgment, pending
completion of all related proceedings, including post trial
motions on this matter. On August 10, 2004, Symbol informed
us that it will attempt to execute on the judgement. If the
remaining proceedings before the court in our litigation with
Symbol are not decided in our favor, including our motion to the
court to stay Symbols execution of judgment, we would
likely be required to make significant payments to Symbol,
including payments for royalties related to past sales of
products found to infringe on two of Symbols patents and
additional royalties in connection with future sales of these
products, or we would be required to post a bond in order to
proceed with the post-trial motions or to appeal the
courts decision. The court could deny our motion to stay
execution of the judgment or could require us to post a bond to
secure our post-trial motions.

Although we have recorded an accrual for
$28.7 million in connection with the Symbol litigation, we
do not have sufficient cash to pay or post a bond in this
amount. If we were required to make payments to Symbol, post a
bond to the court, and/or repay the Bridge Loans (defined below)
and amounts, if any, owed to Silicon Valley Bank, either due to
an event of default or otherwise, we would be required to obtain
immediate alternative sources of financing. If we were not able
to obtain an alternative source of financing, we would have
insufficient cash to pay these obligations, be unable to meet
our ongoing operating obligations as they come due in the
ordinary course of business, and be required to seek protection
under applicable bankruptcy laws. There can be no assurance that
alternative sources of financing will be available to us. We
intend to vigorously defend ourself in this litigation and to
consider all available options after the conclusion of all
matters before the court.

Any additional adverse ruling or judgment in this
litigation that results in our obligation and/or any of our
subsidiaries under GAAP (generally accepted accounting
principles) to establish an additional reserve in respect of
such ruling or judgment in an amount excess of $5 million,
and any other ruling or judgment in any other litigation that is
material and adverse to the Company, triggers an event of
default under the Bridge Loan (defined below) issued to Warburg
Pincus and BCP Capital, L.P. and affiliates. Upon such
occurrence, the Investors would have the ability to require us
to repay the Bridge Loan. The courts rulings to date have
not triggered an event of default under the terms of the Bridge
Loan. If the judgment entered on August 4, 2004 is not
vacated, discharged, stayed or bonded pending appeal within
thirty days thereof, we would be in default under the Bridge
Loan and the Investors would have the right to require us to
repay the Bridge Loan. In addition, an attempt by Symbol to
execute on a judgment, the court not issuing a stay on execution
of judgment by August 31, 2004, restraining order,
injunction or any material adverse development in the litigation
with Symbol would result in an event of default under the
secured credit facility with Silicon Valley Bank. Upon such
occurrence, Silicon Valley Bank would have the right to require
us to repay any outstanding amounts under the credit facility
and to prohibit us from borrowing any additional amounts. The
occurrence of an event of default under the secured credit
facility with Silicon Valley Bank would trigger an event of
default under the Bridge Loan notes if outstanding amounts owed
under the credit facility exceeded $1 million. As of
July 2, 2004 and August 11, 2004, no borrowings were
outstanding under the credit facility.

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| |                                    
| | -----------------------------------
| | Additional Sources of
    Financing

Our revenue declined from $68.8 million to
$58.1 million from the six months ended June 27, 2003
to the six months ended July 2, 2004, and we have incurred
substantial losses and negative cash flows from operations
during the six months ended July 2, 2004 and the years
ended December 31, 2003, 2002 and 2001. If we were not able
to close a financing transaction by June 30, 2005 with
gross proceeds of $20.0 million or more through a sale of
our common stock and/or warrants to purchase common stock in
accordance with the securities purchase agreement date
July 27, 2004, Company will be required to repay the Bridge
Loan. If our stockholders do not approve the Exchange, the
Investors will have the right to demand immediate repayment of
the Bridge Loan at any time after the thirtieth day
following the date that our stockholders fail to approve the
Exchange. If we were required to make payments to Symbol, post a
bond to the court, and/or repay the convertible bridge loan and
amounts, if any, which may be owed to Silicon Valley Bank,
either due to an event of default or otherwise, or if we sustain
continued significant negative cash flows from our operations,
we will be required to obtain immediate alternative sources of
financing in excess of the additional financing required to
provide sufficient working capital for the business. If we were
not able to obtain such alternative sources of financing, we
would have insufficient cash to pay these obligations, be unable
to meet our ongoing operating obligations as they come due in
the ordinary course of business, and would have to seek
protection under applicable bankruptcy laws. These matters raise
substantial doubt about our ability to continue as a going
concern. These consolidated financial statements do not include
any adjustments that might result from this uncertainty.

Recent Accounting Pronouncements

In April 2004, the Emerging Issues Task Force
issued Statement No. 03-06, Participating Securities and
the Two-Class Method Under FASB Statement No. 128, Earnings
Per Share, (EITF 03-06). EITF 03-06
addresses a number of questions regarding the computation of
earnings per share by companies that have issued securities
other than common stock that contractually entitle the holder to
participate in dividends and earnings of the company when, and
if, it declares dividends on our common stock. The issue also
provides further guidance in applying the two-class method of
calculating earnings per share, clarifying what constitutes a
participating security and how to apply the two-class method of
computing earnings per share once it is determined that a
security is participating, including how to allocate
undistributed earnings to such a security. EITF 03-06 is
effective for fiscal periods beginning after March 31,
2004. We adopted this EITF during the quarter ended July 2,
2004 and the adoption has to date not had a material impact on
our results of operations.

At its November 2003 meeting, the EITF reached a
consensus on disclosure guidance previously discussed under
EITF 03-01, The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments. The
consensus provided for certain disclosure requirements that were
effective for fiscal years ending after December 15, 2003.

At its March 2004 meeting, the EITF reached a
consensus on recognition and measurement guidance previously
discussed under EITF 03-01. The consensus clarifies the
meaning of other-than-temporary impairment and its application
to investments classified as either available-for-sale or
held-to-maturity under SFAS No. 115, Accounting
for Certain Investments in Debt and Equity Securities, and
investments accounted for under the cost method or the equity
method. The recognition and measurement guidance for which the
consensus was reached in the March 2004 meeting is to be applied
to other-than-temporary impairment evaluations in reporting
periods beginning after June 15, 2004. We are currently
evaluating the effect of adopting EITF 03-01 on our results
of operations.

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RISK FACTORS

You should carefully consider the risks
described below before making an investment decision. The risks
and uncertainties described below are not the only ones facing
our company. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial may also impair
our business operations.

If any of the following risks actually occur,
our business, financial condition or results of operations could
be materially adversely affected. In such case, the trading
price of our common stock could decline and you could lose all
or part of your investment.

This Form 10-Q also contains
forward-looking statements that involve risks and uncertainties.
Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of
certain factors, including the risks faced by us described below
and elsewhere in this Form 10-Q.

We will need to obtain additional capital in
the future and may not be able to secure adequate funds on terms
acceptable to us or to our Investors.

If we are required to make payments in connection
with our pending litigation with Symbol, as described below,
post a bond to the court, and/or repay the convertible bridge
loan and amounts, if any, which may be owed to Silicon Valley
Bank, either due to an event of default or otherwise, or if we
sustain continued negative cash flows from our operations, we
will be required to obtain immediate alternative sources of
financing. If we were not able to obtain such alternative
sources of financing, we would have insufficient cash to pay
these obligations, be unable to meet our ongoing operating
obligations as they come due in the ordinary course of business,
and would have to seek protection under applicable bankruptcy
laws.

In addition, our revenue declined from
$68.8 million to $58.1 million from the six months
ended June 27, 2003 to the six months ended July 2,
2004, and we have incurred substantial losses and negative cash
flows from operations during the six months ended July 2,
2004 and the years ended December 31, 2003, 2002 and 2001.
If we were not able to close a financing transaction by
June 30, 2005 with gross proceeds of $20.0 million or
more through a sale of our common stock and/or warrants to
purchase common stock in accordance with the securities purchase
agreement dated July 27, 2004, we will be required to repay
the Bridge Loan. If our stockholders do not approve the
Exchange, the Investors will have the right to demand immediate
repayment of the Bridge Loan at any time after the
thirtieth day following the date that our stockholders fail
to approve the Exchange.

Our ability to raise funds may be adversely
affected by factors beyond our control, including market
uncertainty and conditions in the capital markets. In addition,
almost all of the shares of common stock we are authorized to
issue pursuant to our certificate of incorporation are either
outstanding or reserved for future issuance upon the exchange,
conversion or exercise of outstanding securities. We may need to
seek approval of our stockholders to amend our certificate of
incorporation to provide us with sufficient authorized shares
for any new equity or convertible debt financing. There can be
no assurance that any financing will be available on terms
acceptable to us, if at all, and any need to raise additional
capital through the issuance of equity or convertible debt
securities may result in additional, and perhaps significant
dilution. In the event that such additional financing is not
available, we may need to seek protection under applicable
bankruptcy laws.

On July 29, 2004, we announced that the
court has denied our equitable defenses and has determined that
the jurys award of a 6% royalty on our sales of these
products from 1995 through September 2003, plus prejudgment
interest, results in an award of damages to Symbol of
$25.9 million. We are not enjoined from continued sales of
these products, and the court denied Symbols request that
it impose a court ordered royalty on future sales of these
products by us. The court entered its judgment on this matter on
August 2, 2004. If we are enjoined from future sales of
these products and are not able to negotiate a license
arrangement with acceptable royalty rates, our revenue, results
of operations and financial condition would be materially
adversely affected.

To date, we have not incurred immediate financial
obligation to Symbol as a result of this decision and we intend
to file a motion to stay execution on the judgment, pending
completion of all related proceedings, including post trial
motions on this matter. On August 10, 2004, Symbol informed
us that it will attempt to

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execute on the judgment. If the remaining
proceedings before the court in our litigation with Symbol are
not decided in our favor, including our motion to the court to
stay Symbols execution of judgment, we would likely be
required to make significant payments to Symbol, including
payments for royalties related to past sales of products found
to infringe on two of Symbols patents and additional
royalties in connection with future sales of these products, or
we would be required to post a bond in order to proceed with the
post-trial motions or to appeal the courts decision. The
court could deny our motion to stay execution of the judgment or
could require us to post a bond to secure our post-trial motions.


Although we have recorded an accrual for
$28.7 million in connection with the Symbol litigation, we
do not have sufficient cash to pay or post a bond in this
amount. If we were required to make payments to Symbol, post a
bond to the court, and/or repay the Bridge Loans and amounts, if
any, owed to Silicon Valley Bank, either due to an event of
default or otherwise, we would be required to obtain immediate
alternative sources of financing. If we were not able to obtain
an alternative source of financing, we would have insufficient
cash to pay these obligations, be unable to meet our ongoing
operating obligations as they come due in the ordinary course of
business, and be required to seek protection under applicable
bankruptcy laws. There can be no assurance that alternative
sources of financing will be available to us.

Any additional adverse ruling or judgment in this
litigation that results in the obligation of Proxim and/or any
of our subsidiaries under GAAP (generally accepted accounting
principles) to establish an additional reserve in respect of
such ruling or judgment in an amount excess of $5 million,
and any other ruling or judgment in any other litigation that is
material and adverse to the Company, triggers an event of
default under the Bridge Loan notes issued to Warburg Pincus and
BCP Capital, L.P. and affiliates. Upon such occurrence, the
Investors would have the ability to require us to repay the
Bridge Loan. The courts rulings to date have not triggered
an event of default under the Bridge Loan notes. If the judgment
entered on August 4, 2004 is not vacated, discharged,
stayed or bonded pending appeal within thirty days thereof, we
would be in default under the Bridge Loan notes and the
Investors would have the ability to require us to repay the
Bridge Loan. In addition, an attempt by Symbol to execute on a
judgment, the court not issuing a stay on execution of judgment
by August 31, 2004, restraining order, injunction or any
material adverse development in the litigation with Symbol would
result in an event of default under the secured credit facility
with Silicon Valley Bank. Upon such occurrence, Silicon Valley
Bank would have the ability to require us to repay any
outstanding amounts under the credit facility and to prohibit us
from borrowing any additional amounts. The occurrence of an
event of default under the secured credit facility with Silicon
Valley Bank would trigger an event of default under the Bridge
Loan notes if outstanding amounts owed under the credit facility
exceeded $1 million. As of July 2, 2004 and
August 11, 2004, no borrowings were outstanding under the
credit facility.

We are not profitable and may not be
profitable in the future.

For the six months ended July 2, 2004 and
the year ended December 31, 2003 we had a net loss
attributable to holders of our common stock of
$27.6 million and $133.7 million, respectively. We
cannot assure you that our revenue will increase or continue at
current levels or growth rates or that we will achieve
profitability or generate cash from operations in future
periods. In view of the rapidly evolving nature of our business,
period-to-period comparisons of operating results are not
necessarily meaningful and you should not rely on them as
indicating what our future performance will be.

We expect that we will continue to incur
significant sales, marketing, product development and
administrative expenses. As a result, we will need to generate
increased revenue to achieve profitability and we cannot assure
you that we will achieve profitability in the future. Any
failure to significantly increase our revenue or control costs
as we implement our product and distribution strategies would
harm our ability to achieve profitability and the operating
results and financial condition of the business.

Our gross profit may decline in the
future.

Our gross profit is affected by both the average
selling prices of our systems and our cost of revenue.
Historically, decreases in our average selling prices have
generally been offset by reductions in our per unit product
cost. We cannot assure you, however, that we will achieve any
reductions in per unit product cost in

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the future or that any reductions will offset a
reduction in our average selling prices. Gross profit will be
affected by a variety of factors, including manufacturing
efficiencies, the degree to which our manufacturing is
outsourced, the location of manufacturing, cost reduced product
designs, future manufacturing licenses of our products, product
mix, competitive pricing pressures, the degree of customization
of individual products required by OEM customers and component
and assembly costs.


Should the outcome of our patent or other
litigation be unfavorable, we may be required to pay damages and
other expenses, or we could be enjoined from selling certain
products, which could materially and adversely affect our
business, financial condition and operating results.

Proxim, Inc.s involvement in patent
litigation has resulted in, and could in the future continue to
result in, substantial costs and diversion of management
resources of the Company. In addition, this litigation, if
determined adversely to us, could result in the payment of
substantial damages and/or royalties or prohibitions against
utilization of essential technologies, and could materially and
adversely affect our business, financial condition, operating
results or cash flows.

On December 4, 2001, Symbol filed suit in
the U.S. District Court for the District of Delaware
alleging that Proxim, Inc. infringed four Symbol patents related
to systems for packet data transmission. Symbol sought an award
for unspecified damages and a permanent injunction against
Proxim, Inc. based on alleged patent infringement counterclaims.
On December 18, 2001, Proxim, Inc. filed an answer and
counterclaims seeking declaratory judgments for
non-infringement, invalidity and unenforceability of the four
asserted Symbol patents, injunctive and monetary relief for
Symbols infringement of a Proxim, Inc. patent, monetary
relief for Symbols false patent marking, and injunctive
and monetary relief for Symbols unfair competition under
the Lanham Act, common law unfair competition and tortious
interference.

On September 15, 2003, we announced that a
jury had rendered a verdict in the first phase of the patent
infringement suit with Symbol. On Symbols claims of patent
infringement, the jury found that certain of our products
infringe two of Symbols patents and assessed a 6% royalty
on the revenue of relevant products. On November 24, 2003,
the District Court conducted a one-day bench trial on our
equitable defenses not addressed by the jury.

On July 29, 2004, we announced that the
court has denied our equitable defenses and has determined that
the jurys award of a 6% royalty on our sales of these
products from 1995 through September 2003, plus prejudgment
interest, results in an award of damages to Symbol of
$25.9 million. The court entered its judgment on this
matter on August 4, 2004. We are not presently enjoined
from continued sales of these products, and the court denied
Symbols request that it impose a court ordered royalty on
future sales of these products by us. On August 6, 2004,
Symbol filed a motion for entry of a permanent injunction
against further manufacture and sale of the Companys
products found to infringe Symbols patents. We intend to
oppose this motion.

We have fully accrued for the awarded amount in
our financial statements since the date of the initial jury
award in September 2003. As of July 2, 2004, we had
recorded an accrual for estimated past royalties of
$22.9 million and interest of $3.0 million covering
the period from 1995 through September 2003 plus a total of
$2.8 million for estimated potential royalties and interest
covering the period from October 2003 to July 2, 2004. As
of July 2, 2004, our accrual in the aggregate for estimated
past and potential royalties and interest was
$28.7 million. Depending upon the ultimate outcome of the
litigation with Symbol, we may be required to pay royalty
charges and interest at the time specified by the court. We will
continue to evaluate and review our estimate of royalties and
interest payable from time to time for any indications that
could require us to change our assumptions relating to the
amount already recorded.

To date, the Company has not incurred immediate
financial obligation to Symbol as a result of this decision and
the Company intends to file a motion to stay execution on the
judgment, pending completion of all related proceedings,
including post trial motions on this matter. On August 10,
2004, Symbol informed the Company that it would attempt to
execute on the judgment. The court could deny our motion to stay
execution of the judgment or could require the Company to post a
bond to secure our post-trial motions.

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Although we have recorded an accrual for
$28.7 million in connection with the Symbol litigation, we
do not have sufficient cash to pay or post a bond in this
amount. If we were required to make payments to Symbol, post a
bond to the court, and/or repay the Bridge Loans and amounts, if
any, owed to Silicon Valley Bank, either due to an event of
default or otherwise, we would be required to obtain immediate
alternative sources of financing. If we were not able to obtain
an alternative source of financing, we would have insufficient
cash to pay these obligations, be unable to meet its ongoing
operating obligations as they come due in the ordinary course of
business, and be required to seek protection under applicable
bankruptcy laws. There can be no assurance that alternative
sources of financing will be available to us. We intend to
vigorously defend ourselves in this litigation and to consider
all available options after the conclusion of all matters before
the court.

Any additional adverse ruling or judgment in this
litigation that results in the obligation of Proxim and/or any
of our subsidiaries under GAAP (generally accepted accounting
principles) to establish an additional reserve in respect of
such ruling or judgment in an amount excess of $5 million,
and any other ruling or judgment in any other litigation that is
material and adverse to the Company, triggers an event of
default under the Bridge Loan (defined below) issued to Warburg
Pincus and BCP Capital, L.P. and affiliates. Upon such
occurrence, the Investors would have the ability to require us
to repay the Bridge Loan. The courts rulings to date have
not triggered an event of default under the terms of the Bridge
Loan. If the judgment entered on August 4, 2004 is not
vacated, discharged, stayed or bonded pending appeal within
thirty days thereof, we would be in default under the Bridge
Loan and the Investors would have the right to require us to
repay the Bridge Loan. In addition, an attempt by Symbol to
execute on a judgment, the court not issuing a stay on execution
of judgment by August 31, 2004, restraining order,
injunction or any material adverse development in the litigation
with Symbol would result in an event of default under the
secured credit facility with Silicon Valley Bank. Upon such
occurrence, Silicon Valley Bank would have the right to require
us to repay any outstanding amounts under the credit facility
and to prohibit us from borrowing any additional amounts. The
occurrence of an event of default under the secured credit
facility with Silicon Valley Bank would trigger an event of
default under the Bridge Loan notes if outstanding amounts owed
under the credit facility exceeded $1 million. As of
July 2, 2004 and August 11, 2004, no borrowings were
outstanding under the credit facility.

On or about March 10, 2003, we were served
with a complaint filed on January 15, 2003, by Top Global
Technology Limited (Top Global), a distributor for
Agere Systems Singapore. Our demurrer to Top Globals
complaint was sustained in May 2003. Top Global then filed and
served an amended complaint on May 30, 2003. Top
Globals lawsuit was filed against Agere Systems, Inc.,
Agere Systems Singapore, and Agere Systems Asia Pacific
(collectively, Agere) and us in the Superior Court
for the State of California, County of Santa Clara. Top
Global claims that it is entitled to return for a credit
$1.2 million of products that it purchased from Agere
Systems Singapore in June 2002 as a result of our decision to
discontinue a product line that we purchased from Agere in
August 2002. The amended complaint asks the court to determine
whether Agere or we are responsible for accepting the product
return and issuing a $1.2 million credit and also alleges
breach of contract. We answered the amended complaint and
asserted several defenses to Top Globals claims. In
January 2004, the parties mediated this dispute but were unable
to reach a settlement. In March 2004, the Court dismissed the
contract claims against Agere but at the same time granted Top
Globals motion for leave to amend our complaint to allege
a fraud claim against Agere. Top Global subsequently amended its
complaint to allege a claim of fraud against Agere. The parties
are currently conducting discovery. A trial date has not been
set.

On February 10, 2004, we received a copy of
a complaint filed on February 2, 2004 in Tokyo District
Court by Active Technology Corporation, a Japanese-based
distributor of our products. The complaint alleges, among other
things, that we sold to Active certain defective products, which
Active in turn subsequently sold to our customers. Active seeks
damages of 559.2 million Japanese yen, which includes the
purchase price of the allegedly defective products and
replacement costs allegedly incurred by Active. Active seeks to
offset the claim of 559.2 million Japanese yen against
outstanding accounts payable by Active of 175.3 million
Japanese yen to us, resulting in a net claim against Proxim
Corporation of 383.9 million Japanese yen. Translated into
U.S. dollars on August 4, 2004, Actives net
claim is approximately $3.4 million. Discovery has not yet

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commenced, and a trial date has not been
established. We intend to defend ourselves vigorously against
this lawsuit.


We are party to disputes, including legal
actions, with several of our suppliers and vendors. These
disputes relate primarily to excess materials and order
cancellation claims that resulted from the declines in demand
for our products during 2001 and 2002 and the commensurate
reductions in manufacturing volumes. We have recorded reserves
related to these disputes to the extent that management believes
are appropriate. We intend to vigorously defend ourself in these
matters.

The results of any litigation matters are
inherently uncertain. In the event of any adverse decision in
the described legal actions or disputes, or any other related
litigation with third parties that could arise in the future, we
could be required to pay damages and other expenses, and, in the
case of litigation related to patents or other intellectual
property rights, to cease the manufacture, use and sale of
infringing products, to expend significant resources to develop
non-infringing technology, or to obtain licenses to the
infringing technology. We cannot make any assurance that these
matters will not materially and adversely affect our business,
financial condition, operating results or cash flows.

We may not be able to continue to meet the
listing criteria for the Nasdaq National Market, which would
adversely affect the ability of investors to trade our common
stock and could adversely affect our business and financial
condition.

We cannot assure you that we will be able to
maintain the listing of our common stock on the Nasdaq National
Market, or that we will be able to meet the listing criteria for
the Nasdaq SmallCap Market. In particular, from time to time in
recent periods, the bid price of our Common Stock has closed
below the $1.00 per share minimum required for continued
inclusion on the Nasdaq National Market pursuant to
Nasdaqs Marketplace Rules. If as a result of the
application of these listing requirements, our common stock is
delisted from The Nasdaq National Market, our common stock would
become more difficult to buy and sell. In addition, our common
stock could be subject to certain rules placing additional
requirements on brokers-dealers who sell or make a market in our
securities. Consequently, if we were removed from the Nasdaq
National Market, the ability or willingness of broker-dealers to
sell or make a market in our common stock might decline, which
would adversely affect the ability of investors to resell our
common stock. In addition, our ability to secure additional
capital in financing transactions with investors might be
impacted, which would adversely affect our business and
financial condition.

We may undertake to effect a reverse split of our
outstanding capital stock in order to increase the per-share
trading price to comply with the Nasdaqs Marketplace
Rules. However, we cannot assure you that we would receive the
vote of our stockholders required to effect the reverse stock
split or that, if consummated, the reverse stock split would
effectively increase or maintain our per share trading price
above the $1.00 per share minimum.

Several of our stockholders beneficially own a
significant percentage of our common stock, which will allow
them to significantly influence matters requiring shareholder
approval and could discourage potential acquisitions of our
company.

Warburg Pincus and entities affiliated with BCP
Capital hold outstanding shares of Series A Preferred Stock
convertible into an aggregate of 42,562,172 shares of
common stock as of August 4, 2004. Including additional
accretion at an annual rate of 8% through August 5, 2005,
the Series A Preferred Stock will be convertible into an
aggregate of 45,889,229 shares of common stock. The
Investors also hold 490,599 shares of our Series B
Preferred Stock, which is convertible into
42,727,171 shares of our common stock as of August 4,
2004. Including additional accretion at an annual rate of 14%
through the seventh anniversary of the date of issuance of the
Series B Preferred Stock, the Series B Preferred Stock
will be convertible into 111,778,658 shares of our common
stock. In addition, the Investors currently hold warrants to
purchase an aggregate of 18,133,464 shares of our common
stock at an exercise price of approximately $2.07 per
share, 18,000,000 shares of our common stock at an exercise
price of $1.46 per share and 6,000,000 shares of our
common stock at an exercise price of $1.53 per share.

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Assuming conversion of our Series A
Preferred Stock, our Series B Preferred Stock and the
warrants held by the Investors, the Investors would be expected
to represent approximately 48.2% of our outstanding capital
stock on an as-converted and as-exercised basis, based on shares
outstanding as of August 4, 2004, and excluding total
outstanding employee options and other warrants to purchase
approximately 28,605,483 shares and 2,651,306 shares,
respectively, of common stock.

On July 27, 2004, we entered into an
agreement with our Investors that, pending stockholder approval,
the Investors will surrender all of their Series A
Preferred Stock, all of their Series B Preferred Stock and
all of their common stock warrants in exchange for
164 million shares of our common stock and
400,000 shares of Series C Preferred Stock. If our
stockholders do not approve this exchange, our Series A
Preferred Stock, Series B Preferred Stock and the common
stock warrants held by the Investors will remain outstanding in
accordance with their terms. If our stockholders approve the
Exchange, the Investors together will own approximately 57.0% of
our outstanding capital stock, based on shares outstanding as of
August 4, 2004.

As a result of their ownership as outlined above,
the Investors are able to exert significant influence over
actions requiring the approval of our stockholders, including
many types of change of control transactions and any amendments
to our certificate of incorporation. The interests of the
Investors may be different than those of other stockholders of
our company. In addition, the significant ownership percentage
of the Investors could have the effect of delaying or preventing
a change in control of our company or otherwise discouraging a
potential acquirer from obtaining control of our company.

As holders of our Series A Preferred
Stock and Series B Preferred Stock, the Investors have
rights that are senior to those of our common stock.

Holders of our Series A Preferred Stock are
entitled to receive certain benefits not available to holders of
our common stock. In particular:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | from August 2005 through August 2007, shares of
    Series A Preferred Stock will be entitled to dividends
    equal to 8% of their liquidation preference per year, payable,
    at our election, in cash or shares of our common stock valued at
    the then-market price;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | each share of Series A Preferred Stock will
    have an initial liquidation preference of $25.00 and the
    liquidation preference will bear interest at 8%, compounded
    semi-annually, for three years. The liquidation preference is
    subject to adjustments in the event we undertake a business
    combination or other extraordinary transaction, or we are
    liquidated or dissolved;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | in August 2007, we will be required to redeem all
    outstanding shares of Series A Preferred Stock, if any, for
    cash equal to their liquidation preference plus accrued and
    unpaid dividends;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  | in the event of a change of control of our
    company, we will have the right to convert the Series A
    Preferred Stock into common stock if upon such conversion the
    holders of Series A Preferred Stock would receive liquid
    securities or cash with a fair market value equal to or greater
    than 110% of the liquidation preference then in effect. If the
    consideration is less than 110% of the liquidation preference,
    we may either modify the conversion price so that the
    consideration will equal 110% of the liquidation preference then
    in effect or repurchase the Series A Preferred Stock for
    cash at 101% of the liquidation preference then in effect. In
    addition, in the event of a change of control that occurs prior
    to August 2005, the liquidation preference will increase as
    necessary to provide for three years of accretion;
|
| |  | holders of Series A Preferred Stock have
    rights to acquire additional shares of our capital stock or
    rights to purchase property in the event of certain grants,
    issuance or sales;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | the conversion price of the Series A
    Preferred Stock, which initially was approximately
    $3.06 per share, and was reduced to approximately $2.07 in
    connection with the issuance of the Notes, the warrants held by
    the Investors and the issuance of the Series B Preferred
    Stock on July 30, 2004, is subject to additional customary
    weighted average anti-dilution adjustments and other customary
    adjustments; and                                                                                                                                                                                                                                                                                                                                                                                                                                                      

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the approval of holders of a majority of the
    Series A Preferred Stock is separately required to approve
    changes to our certificate of incorporation or bylaws that
    adversely affect these holders rights, any offer, sale or
    issuance of our equity or equity-linked securities ranking
    senior to or equally with the Series A Preferred Stock, and
    any repurchase or redemption of our equity securities (other
    than from an employee, director or consultant following
    termination), or the declaration or payment of any dividend on
    our common stock.

Holders of our Series B Preferred Stock are
entitled to receive certain benefits not available to holders of
our common stock. In particular:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | each share of Series B Preferred Stock will
    have an initial liquidation preference of $100.00 and the
    liquidation preference will bear interest at an annual rate of
    14%, compounded quarterly, for seven years from the date of
    issuance. The liquidation preference is subject to adjustments
    in the event we undertake a business combination or other
    extraordinary transaction, or we are liquidated or dissolved;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| |  | on the seventh anniversary of the issuance of the
    Series B Preferred Stock, we will be required to redeem all
    outstanding shares of Series B Preferred Stock, if any, for
    cash equal to their liquidation preference plus accrued and
    unpaid dividends;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | in the event of a change in control of our
    company, the holders of the Series B Preferred Stock will
    have the right to convert the Series B Preferred Stock into
    common stock if upon such conversion the holders of
    Series B Preferred Stock would receive liquid securities or
    cash with a fair market value equal to or greater than 110% of
    the liquidation preference then in effect. If the consideration
    is less than 110% of the liquidation preference, we may either
    modify the conversion price so that the consideration will equal
    110% of the liquidation preference then in effect or offer to
    repurchase the Series B Preferred Stock for cash at 101% of
    the liquidation preference then in effect. In addition, in the
    event of a change of control that occurs prior to the seventh
    anniversary of the issuance of the Series B Preferred
    Stock, the liquidation preference will increase as necessary to
    provide for seven years of accretion;
|
| |  | holders of Series B Preferred Stock will
    have rights to acquire additional shares of our capital stock or
    rights to purchase property in the event of certain grants,
    issuance or sales;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | the conversion price of the Series B
    Preferred Stock, which initially shall be approximately
    $1.15 per share, will be subject to customary weighted
    average anti-dilution adjustments and other customary
    adjustments; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  | the approval of holders of a majority of the
    Series B Preferred Stock is separately required to approve
    changes to our certificate of incorporation or bylaws that
    adversely affect these holders rights, any offer, sale or
    issuance of our equity or equity-linked securities ranking
    senior to or equally with the Series B Preferred Stock, any
    repurchase or redemption of our equity securities (other than
    from an employee, director or consultant following termination),
    or the declaration or payment of any dividend on our common
    stock.                                                                                                                                                                                                                                                                                                                                                                                                                                    

If our stockholders approve the Exchange and the
Investors exchange their Series A Preferred Stock,
Series B Preferred Stock and common stock warrants for
shares of our common stock and our Series C Preferred
Stock, Warburg Pincus has agreed that it will limit its voting
rights until July 22, 2008 to limit no more than 49% of our
issued and outstanding voting stock. In addition, if our
stockholders approve the Exchange, for so long as each of the
Investors owns at least 25% of the aggregate principal amount of
the common stock issuable to it in the Exchange , the Investors
each will have the right to appoint a member of our Board of
Directors. For so long as Warburg Pincus owns 50% of the common
stock issuable to it in the Exchange, it shall have the right to
appoint a second member of our Board of Directors. Independent
of its holdings, Warburg Pincus shall have the right to have one
observer attend meetings of the Board of Directors.

We are obligated to register the common stock
issuable upon conversion of the Series A preferred stock
and Series B Preferred Stock and upon exercise of all
warrants held by the Investors on a resale registration
statement with the Securities and Exchange Commission.

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We have a limited operating history with some
of our current product lines, which makes your evaluation of our
business difficult and will affect many aspects of our
business.

Our prospects must be considered in light of the
risks, expenses and difficulties frequently encountered by
companies in developing industries, particularly companies in
relatively new and rapidly evolving markets. These risks include:



| |   |                                                                        
| | - | -----------------------------------------------------------------------
| |  | an evolving and unpredictable business model;                          
|
| |  | uncertain acceptance of our new ORiNOCO, Lynx and
    Tsunami products;
|
| |  | litigation challenging our intellectual property;                      
|
| |  | competition; and                                                       
|
| |  | challenges in managing growth.                                         

We cannot assure you that we will succeed in
addressing these risks. If we fail to do so, our revenue and
operating results could be materially harmed.

We may experience fluctuations in operating
results and may not be able to adjust spending in time to
compensate for any unexpected revenue shortfall, which may cause
operating results to fall below expectations of securities
analysts and investors.

Our operating results may fluctuate significantly
in the future as a result of a variety of factors, many of which
will be outside our control. We may be unable to adjust spending
in a timely manner to compensate for any unexpected revenue
shortfall. Accordingly, any significant shortfall in revenues in
relation to planned expenditures could materially harm our
operating results and financial condition, and may cause our
operating results to fall below the expectations of securities
analysts and investors. If this happens, the trading price of
our common stock could decline significantly.

Factors that may harm operating results include:



| |   |                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the effectiveness of our distribution channels
    and the success in maintaining our current distribution channels;                                                                                                          
|
| |  | the effectiveness of developing new distribution
    channels;                                                                                                                                                                
|
| |  | our ability to effectively manage the development
    of new business segments and markets;                                                                                                                                   
|
| |  | seasonal factors that may affect capital spending
    by customers;                                                                                                                                                           
|
| |  | market adoption of radio frequency, or RF,
    standards-based products (such as those compliant with the
    IEEE 802.11b, IEEE 802.11a, IEEE 802.11g,
    IEEE 802.16 or IEEE. 802.20 specifications);                      
|
| |  | our ability to develop, introduce, ship and
    support new products and product enhancements;                                                                                                                                
|
| |  | the sell-through rate of our WLAN and WWAN
    products through commercial distribution channels;                                                                                                                             
|
| |  | market demand for our point-to-point Lynx and
    Tsunami systems;                                                                                                                                                            
|
| |  | market demand for our point-to-multipoint Tsunami
    systems;                                                                                                                                                                
|
| |  | our ability to effectively manage product
    transitions from one generation of product platforms to newer
    product platform designs, including inventories on hand, product
    certifications, and customer transitions;
|
| |  | the mix of products sold because our products
    generate different gross margins;                                                                                                                                           
|
| |  | a decrease in the average selling prices of our
    products;                                                                                                                                                                 
|
| |  | our ability to upgrade and develop our systems
    and infrastructure;                                                                                                                                                        

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| |   |                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------
| |  | difficulties in expanding and conducting
    international operations; and                               
|
| |  | general economic conditions and economic
    conditions specific to the wireless communications industry.

Shares eligible for future sale, including
shares owned by our principal stockholders, may cause the market
price of our common stock to drop significantly, even if our
business is doing well.

The potential for sales of substantial amounts of
our common stock into the public market may adversely affect the
market price of our common stock. Our Investors hold outstanding
shares of Series A preferred stock convertible into an
aggregate of 42,562,172 shares of common stock as of
August 4, 2004. Including additional accretion at an annual
rate of 8% through August 5, 2005, the Series A
Preferred Stock will be convertible into an aggregate of
45,889,229 shares of common stock. The Investors also hold
490,599 shares of our Series B Preferred Stock, which
is convertible into 42,727,171 shares of our common stock
as of August 4, 2004. Including additional accretion at an
annual rate of 14% through the seventh anniversary of the date
of issuance of the Series B Preferred Stock, the
Series B Preferred Stock will be convertible into
111,778,658 shares of our common stock. In addition, the
Investors currently hold warrants to purchase an aggregate of
18,133,464 shares of our common stock at an exercise price
of approximately $2.07 per share, 18,000,000 shares of
common stock at an exercise price of $1.46 per share and
6,000,000 shares of our common stock at an exercise price
of $1.53 per share.

Assuming conversion of Series A Preferred
Stock, our Series B Preferred Stock and the warrants held
by the Series A and Series B Preferred Stock
investors, would be expected to represent approximately 48.2% of
our outstanding capital stock on an as-converted and
as-exercised basis, based on shares outstanding as of
August 4, 2004, and excluding total outstanding employee
options and other warrants to purchase approximately
28,605,483 shares and 2,651,306 shares, respectively,
of common stock.

Upon the request of a majority-in-interest of the
Investors, the Company has agreed to use reasonable best
efforts, to prepare and file with the SEC within 180 days
after the closing of a Qualified Transaction or such other time
as shall be mutually agreed upon by the Company and the
Investors, a registration statement on Form S-3 covering
the securities held by each Investor in compliance with the
Securities Act. Upon the effectiveness of such registration
statement, the Investors will have the right to resell any
shares of common stock issued to them upon conversion of the
Series A Preferred Stock and Series B Preferred Stock
and upon exercise of all of the warrants issued in connection
with the Series A Preferred Stock and Series B
Preferred Stock.

We have entered into an agreement with our
Investors that, pending stockholder approval, the Investors will
surrender all of their Series A Preferred Stock, all of
their Series B Preferred Stock and all of their common
stock warrants in exchange for 164 million shares of our
common stock and 400,000 shares of Series C Preferred
Stock. If our stockholders do not approve the Exchange, our
Series A Preferred Stock, Series B Preferred Stock and
the common stock warrants held by the Investors will remain
outstanding in accordance with their terms. If our stockholders
approve the Exchange, the Investors together will own
approximately 57.0% of our outstanding capital stock, based on
shares outstanding as of August 4, 2004.

In addition to these securities, as of
August 4, 2004, options and warrants to acquire 28,605,483
and 2,651,306 shares, respectively, of our common stock
were outstanding. Also, as of August 4, 2004, approximately
an additional 13,451,677 shares of our common stock were
reserved for issuance to our employees under existing and/or
assumed stock option plans.

We may not be able to secure stockholders
approval of the Exchange and the Exchange might not be
consummated.

Our stockholders may not approve the Exchange and
the Exchange may not be consummated. If the Exchange is not
consummated, the Series A Preferred Stock, the
Series B Preferred Stock, and the common stock warrants
held by the Investors would remain outstanding according to
their terms. In addition, at any time after the thirtieth day
following a special meeting at which our stockholders fail to
approve the Exchange,

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the Investors may put the Bridge Loan to the
Company for payment in accordance with its terms. If this were
to occur, the Company might not be able to pay the amounts due
under the Bridge Loan and might be forced to seek other sources
of financing which may not be available on favorable terms or at
all. If financing is not available, the Company might be forced
to seek protection under applicable bankruptcy laws.


We may not be able to successfully market
additional common stock financing transactions and the Bridge
Loan might not convert into equity interest.

If we are unable to market and close a common
stock financing transaction with aggregate gross proceeds to the
Company of $20.0 million or more by June 30, 2005, the
Bridge Loan will not convert into common stock and will become
immediately due and payable in accordance with its terms. If our
stockholders do not approve the Exchange, the Investors will
have the right to demand immediate repayment of the Bridge Loan
at any time after the thirtieth day following the date that our
stockholders fail to approve the Exchange. If either of these
events were to occur, the we might not be able to pay the
amounts due under the Bridge Loan and might be forced to seek
other sources of financing which may not be available on
favorable terms or at all. If financing is not available, we
might be forced to seek protection under applicable bankruptcy
laws.

Possible third-party claims of infringement of
proprietary rights against us could have a material adverse
effect on our business, results of operation and financial
condition.

The communications industry and products based on
the 802.11 standards in particular are characterized by a
relatively high level of litigation based on allegations of
infringement of proprietary rights. There can be no assurance
that third parties will not assert infringement claims against
us, that any such assertion of infringement will not result in
litigation or that we would prevail in such litigation.
Furthermore, any such claims, with or without merit, could
result in substantial cost to our business and diversion of our
personnel, require us to develop new technology or enter into
royalty or licensing arrangements. Such royalty or licensing
agreements, if required, may not be available on terms
acceptable to us, or at all. In the event of a successful claim
of infringement or misappropriation against us, and our failure
or inability to develop non-infringing technology or to license
the infringed, misappropriated or similar technology at a
reasonable cost, our business, results of operations and
financial condition would be materially adversely affected. In
addition, we may be obligated to indemnify our customers against
claimed infringement of patents, trademarks, copyrights and
other proprietary rights of third parties. Any requirement to
indemnify our customers could have a material adverse effect on
our business, results of operations or financial condition.

Competition within the wireless networking
industry is intense and is expected to increase significantly.
Our failure to compete successfully could materially harm our
prospects and financial results.

The market for broadband wireless systems and
wireless local area networking and building-to-building markets
are extremely competitive and we expect that competition will
intensify in the future. Increased competition could adversely
affect our business and operating results through pricing
pressures, the loss of market share and other factors. The
principal competitive factors affecting wireless local area
networking and fixed wireless markets include the following:
data throughput; effective RF coverage area; interference
immunity; network security; network scalability; price;
integration with voice technology; wireless networking protocol
sophistication; ability to support industry standards; roaming
capability; power consumption; product miniaturization; product
reliability; ease of use; product costs; product features and
applications; product time to market; product certifications;
changes to government regulations with respect to each country
served and related to the use of radio spectrum; brand
recognition; OEM partnerships; marketing alliances;
manufacturing capabilities and experience; effective
distribution channels; and company reputation.

We could be at a disadvantage when compared to
our competitors, particularly Symbol, Cisco Systems, NetGear and
D-Link, that have broader distribution channels, greater brand
recognition, more extensive patent portfolios and, in
particular, more diversified product lines. In the broadband
wireless access market, we have several competitors, including
without limitation, Alvarion, Ceragon Networks, Stratex
Networks, and Harris Corporation.

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We face competition from numerous companies that
have developed competing products in both the commercial
wireless and home networking markets, including several
Asia-based companies offering low-price IEEE 802.11a/b/g
products. We are also facing future competition from companies
that offer products, which replace network adapters or offer
alternative communications solutions (such as the integrated
wireless functionality on the Intel Centrino computer chip), or
from large computer companies, PC peripheral companies, as well
as other large networking equipment companies that integrate
network adapters into their products. Furthermore, we could face
competition from certain of our OEM customers, which have, or
could acquire, wireless engineering and product development
capabilities, or might elect to offer competing technologies. We
can offer no assurance that we will be able to compete
successfully against these competitors or those competitive
pressures we face will not adversely affect our business or
operating results.

Many of our present and potential competitors
have substantially greater financial, marketing, technical and
other resources with which to pursue engineering, manufacturing,
marketing, and distribution of their products. These competitors
may succeed in establishing technology standards or strategic
alliances in the WLAN and building-to-building markets, obtain
more rapid market acceptance for their products, or otherwise
gain a competitive advantage. We can offer no assurance that we
will succeed in developing products or technologies that are
more effective than those developed by our competitors.
Furthermore, we compete with companies that have high volume
manufacturing and extensive marketing and distribution
capabilities, areas in which we have only limited experience. We
can offer no assurance that we will be able to compete
successfully against existing and new competitors as wireless
markets evolve and the level of competition increases.

Wireless networking markets are subject to
rapid technological change and to compete, we must continually
introduce new products that achieve broad market
acceptance.

We have expended substantial resources in
developing products that are designed to conform to the
IEEE 802.11 standards. There can be no assurance, however,
that the IEEE 802.11 compliant products will have an
ongoing meaningful commercial impact. Already, even within the
802.11 standard, there have been significant technological
changes. The IEEE approved the 2.4 Ghz WLAN standard
designated 802.11b. In 2000, the IEEE approved the 5 Ghz
WLAN standard designated 802.11a. In 2003, the IEEE approved a
new 2.4 Ghz WLAN standard designated 802.11g. IEEE is in
the process of establishing additional 802.11 standards,
including 802.11e related to quality of service for voice and
video transmission, 802.11i related to enhanced security, and
802.11h related to dynamic frequency selection and transmission
power control. Furthermore, IEEE has recently committed to
developing new wireless WAN standards under two separate
initiatives, 802.16 (WiMAX) and 802.20, standards which when
finalized will produce transmission distances measured in
kilometers.

While we have products based on the 802.11a,
802.11b and 802.11g standards, future standards developments may
make these technologies obsolete and require significant
additional investment by the company. As an example, in August
2000, the FCC adopted a rule change to Part 15. Based on
the rule change, we made significant investments in developing
higher-speed frequency hopping technology that allowed for wider
band hopping channels and increased the data rate from
1.6 Mbps to up to 10 Mbps based on the HomeRF 2.0
standard. However, widespread adoption of products based on the
IEEE 802.11 standard have lead us to discontinue these products.
There can be no assurance that a similar future change in
industry standards and market acceptance will not require us to
abandon our current product lines and invest significantly in
research and development of future standards based products.

Given the emerging nature of the WLAN market,
there can be no assurance that the products and technology, or
our other products or technology, will not be rendered obsolete
by alternative or competing technologies, including cellular.
Currently, cellular companies are developing 3rd generation
technologies designed to transmit data at up to 2 mbps. In
particular, Verizon has already announced an initiative based on
this technology known as EV-DO. Cellular technology today has an
inherent advantage of being more ubiquitous than WLAN hotspot
technology. There can be no assurance that the Companys
current product offerings will be competitive with cellular or
other WLAN technologies in the future.

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In addition, when we announce new products or
product enhancements that have the potential to replace or
shorten the life cycle of our existing products, customers may
defer purchasing our existing products. These actions could
materially adversely affect our operating results by
unexpectedly decreasing sales, increasing our inventory levels
of older products and exposing us to greater risk of product
obsolescence. As the market for our wireless networking products
is evolving, we believe our ability to compete successfully in
this market is dependent upon the continued compatibility and
interoperability of our products with products and architectures
offered by other vendors. To remain competitive, we need to
introduce products in a timely manner that incorporate or are
compatible with these new technologies as they emerge. If we are
unable to enter a particular market in a timely manner with
internally developed products, we may license technology from
other businesses or acquire other businesses as an alternative
to internal research and development. Our expenses for research
and development in the first half of 2004 decreased compared to
the first half of 2003, primarily due to reduced personnel
expenses as a result of the workforce reduction implemented in
2003. To the extent our revenues do not increase or we do not
raise additional financing for working capital purposes, we may
be required to further reduce our expenses for research and
development which could limit our ability to introduce new
products.

Our revenue may decline and our ability to
achieve profitability may be threatened if the demand for
wireless services in general and broadband wireless access
systems in particular does not continue to grow.

Our success is dependent on the continued trend
toward wireless telecommunications and data communications
services. If the rate of growth slows and service providers
reduce their capital investments in wireless infrastructure or
fail to expand into new geographic markets, our revenue may
decline. Unlike some competitors such as Cisco Systems
(including Linksys), NetGear and 3Com, our principal product
offerings rely on wireless technologies. Accordingly, we would
experience a greater impact from a decline in the demand for
wireless services than some of our most important competitors.
In addition, wireless access solutions are unproven in the
marketplace and some of the wireless technologies, such as our
Tsunami point-to-multipoint technology and 802.11 technologies
in which we have invested substantial capital, were only
commercially introduced in the last few years. In addition, we
are also investing in the development of products that comply
with the emerging 802.16 wireless access standard. If wireless
access technology turns out to be unsuitable for widespread
commercial deployment, it is unlikely we could generate enough
sales to achieve and sustain profitability. We have listed below
the factors that we believe are key to the success or failure of
broadband wireless access technology:



| |   |                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------
| |  | its reliability and security and the perception
    by end users of its reliability and security;                                            
|
| |  | its capacity to handle growing demands for faster
    transmission of increasing amounts of data, voice and video;                           
|
| |  | the availability of sufficient frequencies for
    network service providers to deploy products at commercially
    reasonable rates;        
|
| |  | its cost-effectiveness and performance compared
    to other forms of broadband access, whose prices and performance
    continue to improve;
|
| |  | its suitability for a sufficient number of
    geographic regions; and                                                                       
|
| |  | the availability of sufficient site locations for
    network service providers to install products at commercially
    reasonable rates.    

We have experienced the effects of many of the
factors listed above in interactions with customers selecting
wireless versus wire line technology. For example, because of
the frequency with which individuals using cellular phones
experience fading or a loss of signal, customers often hold the
perception that all broadband wireless technologies will have
the same reliability constraints even though the wireless
technology we use does not have the same problems as cellular
phones. In some geographic areas, because of adverse weather
conditions that affect wireless transmissions, but not wire line
technologies, we are not able to sell products as successfully
as competitors with wire line technology. In addition, future
legislation, legal

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decisions and regulation relating to the wireless
telecommunications industry may slow or delay the deployment of
wireless networks.


We may also lose customers to different types of
wireless technologies. Many of our products operate in the
unlicensed frequency bands, in compliance with various
governmental regulations. In addition, many of the emerging
wireless standards utilize these unlicensed frequency bands. The
proliferation and market acceptance of unlicensed wireless
products increases the probability of interference among
unlicensed devices. Increasing interference can adversely affect
the operation of our unlicensed products, resulting in customers
selecting alternative products that do not operate in these
unlicensed frequency bands. For example, we have only a limited
offering of products that operate in licensed radio spectrums.
Some customers, however, may want to operate in licensed radio
spectrums because they sometimes offer less interference than
license free radio spectrums or have other advantages.

We depend on international sales and our
ability to sustain or expand international sales is subject to
many risks, which could adversely affect our operating
results.

During the six months ended July 2, 2004 and
years ended December 31, 2003 and 2002, international sales
accounted for approximately 41%, 41% and 38% of our total sales,
respectively. We expect that our revenue from shipments to
international customers will vary as a percentage of total
revenue. There are certain risks inherent in doing business in
international markets, including the following:



| |   |                                                                                                                 
| | - | ----------------------------------------------------------------------------------------------------------------
| |  | uncertainty of product acceptance by customers in
    foreign countries;                                        
|
| |  | difficulty in assessing the ability to collect on
    orders to be shipped in an uncertain economic environment;
|
| |  | difficulty in collecting accounts receivable;                                                                   
|
| |  | export license and documentation requirements;                                                                  
|
| |  | unforeseen changes in regulatory requirements;                                                                  
|
| |  | difficulties in staffing and managing
    multinational operations;                                             
|
| |  | governmental restrictions on the repatriation of
    funds into the United States;                              
|
| |  | foreign currency fluctuations;                                                                                  
|
| |  | longer payment cycles for international
    distributors;                                                       
|
| |  | tariffs, duties, taxes and other trade barriers;                                                                
|
| |  | difficulties in finding foreign licensees or
    joint venture partners; and                                    
|
| |  | potential political and economic instability.                                                                   

There is a risk that such factors will harm our
ability to continue to successfully operate internationally and
our efforts to expand international operations. In this regard,
our revenue levels have been affected, in part, by reduced
ability to ship our products to international customers in cases
where collectibility, based on a number of factors, could not be
reasonably assured.

While we may extend limited credit terms,
fluctuations in currency exchange rates could cause our products
to become relatively more expensive to customers in a particular
country, leading to a reduction in sales or profitability in
that country. There can be no assurance that foreign markets
will continue to develop or that we will receive additional
orders to supply our products to foreign customers. Our business
and operating results could be materially adversely affected if
foreign markets do not continue to develop or if we do not
receive additional orders to supply our products for use by
foreign customers.

To successfully expand international sales, we
will need to recruit additional international sales and support
personnel and expand our relationships with international
distributors and value-added resellers. This expansion will
require significant management attention and financial
resources. We may incur these

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additional costs and add these management burdens
without successfully expanding sales. This failure would harm
our operating results.


Our business will depend on rapidly evolving
telecommunications and Internet industries.

Our future success is dependent upon the
continued growth of the data communications and wireless
industries, particularly with regard to Internet usage. The
global data communications and Internet industries are evolving
rapidly and it is difficult to predict potential growth rates or
future trends in technology development. We cannot assure you
that the deregulation, privatization and economic globalization
of the worldwide telecommunications market that has resulted in
increased competition and escalating demand for new technologies
and services will continue in a manner favorable to us or our
business strategies. In addition, there can be no assurance that
the growth in demand for wireless and Internet services, and the
resulting need for high speed or enhanced data communications
products and wireless systems, will continue at its current rate
or at all.

We may be dependent on and receive a
significant percentage of our revenue from a limited number of
OEM customers.

A limited number of OEM customers may contribute
a significant percentage of our revenue. We expect that sales to
a limited number of OEM customers will continue to account for a
significant portion of our revenue for the foreseeable future.
Sales of many of our wireless networking products depend upon
decisions of prospective OEM customers to develop and market
wireless solutions which incorporate our wireless technology.
OEM customers orders are affected by a variety of factors,
including the following:



| |   |                                                                  
| | - | -----------------------------------------------------------------
| |  | new product introductions;                                       
|
| |  | end user demand for OEM customers products;                     
|
| |  | joint development efforts;                                       
|
| |  | OEM customers product life cycles;                              
|
| |  | inventory levels;                                                
|
| |  | market and OEM customers adoption of new
    wireless standards;
|
| |  | manufacturing strategies;                                        
|
| |  | lengthy design-in cycles;                                        
|
| |  | pricing;                                                         
|
| |  | regulatory changes;                                              
|
| |  | contract awards; and                                             
|
| |  | competitive situations.                                          

The loss of one or more of, or a significant
reduction in orders from, our major OEM customers could
materially and adversely affect our operating results or stock
price. In addition, there can be no assurance that we will
become a qualified supplier for new OEM customers or that we
will remain a qualified supplier for existing OEM customers.

Our business derives a substantial portion of
its revenue from a limited number of distributors. Therefore, a
decrease or loss in business from any of them may cause a
significant delay or decline in our revenue and could harm our
reputation.

Our business has historically generated a
significant amount of revenue from a limited number of
distributors. The loss of business from any of these
distributors or the delay of significant orders from any of
them, even if only temporary, could significantly reduce our
revenue, delay recognition of revenue, harm our reputation or
reduce our ability to accurately predict cash flow. Two
distributors accounted for approximately

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15% and 13% of our total revenue for the six
months ended July 2, 2004, and one distributor accounted
for approximately 14% and 23% of our total revenue for the years
ended December 31, 2003 and 2002, respectively. We do not
have long-term contracts with any of these distributors. While
we expect to have a more diversified and expansive end customer
base, the future success of our business will depend
significantly on the timing and size of future purchase orders,
if any, from a limited number of distributors. Additionally, our
reliance on distributors limits our visibility to our end user
customers, which impacts our ability to accurately forecast our
revenues. Most of our expenses are fixed in the short term and
any shortfall in revenues in relation to planned expenditures
could materially harm our operating results and financial
condition.


We depend on limited suppliers for key
components that are difficult to manufacture, and because we may
not have long-term arrangements with these suppliers, we could
experience disruptions in supply that could decrease or delay
the recognition of revenues.

We depend on single or limited source suppliers
for several key components used in our products. Any disruptions
in the supply of these components or assemblies could delay or
decrease our revenues. In addition, even for components with
multiple sources, there have been, and may continue to be,
shortages due to capacity constraints caused by high demand. We
do not have any long-term arrangements with our suppliers and
could be at a disadvantage compared to other companies,
particularly larger companies that have contractual rights or
preferred purchasing arrangements. In addition, during periods
of capacity constraint, we are disadvantaged compared to better
capitalized companies, as suppliers have in the past and may in
the future choose not to do business with us, or may require
letters of credit guaranteeing our obligations, as a result of
our financial condition. If, for any reason, a supplier fails to
meet our quantity or quality requirements, or stops selling
components to us or our contract manufacturers at commercially
reasonable prices, we could experience significant production
delays and cost increases, as well as higher warranty expenses
and product reputation problems. Because the key components and
assemblies of our products are complex, difficult to manufacture
and require long lead times, we may have difficulty finding
alternative suppliers to produce our components and assemblies
on a timely basis. In the Wi-Fi market, the growth in
demand has created unexpected shortages and sudden increases in
lead times. We have experienced shortages of some of these
components in the past, which delayed related revenue, and we
may experience shortages in the future. In addition, because the
majority of our products have a short sales cycle of between
30 and 90 days, we may have difficulty in making
accurate and reliable forecasts of product needs. As a result,
we could experience shortages in supply, which could delay or
decrease revenue because our customers may cancel their orders
or choose a competitor for their future needs.

We have limited manufacturing capabilities and
we will need to increasingly depend on contract manufacturers
for our manufacturing requirements.

We have limited manufacturing capability in large
scale or foreign manufacturing. There can be no assurance that
we will be able to develop or contract for additional
manufacturing capacity on acceptable terms on a timely basis. In
addition, in order to compete successfully, we will need to
achieve significant product cost reductions. Although we intend
to achieve cost reductions through engineering improvements,
production economies, and manufacturing at lower cost locations
including outside the United States, there can be no assurance
that we will be able to do so. In order to remain competitive,
we must continue to introduce new products and processes into
our manufacturing environment, and there can be no assurance
that any such new products will not create obsolete inventories
related to older products. For example, as part of our ongoing
review of our inventory reserve requirements, we increased our
reserve for excess and obsolete inventory and lower of cost or
market by $2.1 million in the first half of 2004, primarily
related to legacy WWAN products. As part of our restructuring
charge in the second quarter of 2003, we increased our reserve
for excess and obsolete inventory by $22.5 million, also
primarily related to legacy WWAN products. As a part of our
restructuring charge in the first quarter of 2002, we increased
our reserve for obsolete and excess inventory, including
purchase commitments, totaling $12.7 million, of which
$7.7 million related to excess inventory and
$5.0 million related to purchase commitments, primarily
related to legacy WLAN products. These provisions related to a
decrease in demand for certain products as well as our strategy
to discontinue certain products in order to concentrate on
selling next generation products.

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We rely on contract and subcontract manufacturers
for turnkey manufacturing and circuit board assemblies which
subjects us to additional risks, including a potential inability
to obtain an adequate supply of finished assemblies and
assembled circuit boards and reduced control over the price,
timely delivery and quality of such finished assemblies and
assembled circuit boards. If our Sunnyvale facility were to
become incapable of operating, even temporarily, or were unable
to operate at or near our current or full capacity for an
extended period, our business and operating results could be
materially adversely affected.

Changes in our manufacturing operations to
incorporate new products and processes, or to manufacture at
lower cost locations outside the United States, could cause
disruptions, which, in turn, could adversely affect customer
relationships, cause a loss of market opportunities and
negatively affect our business and operating results. In
addition, our reliance on a limited number of manufacturers
involves a number of risks, including the risk that these
manufacturers may terminate their relationship with us, may
choose not to devote adequate capacity to produce our products
or may delay production of our products. If any of these risks
are realized, we could experience an interruption in supply,
which could have an adverse impact on the timing and amount our
revenues. There can be no assurance that we will be able to
effectively transition these products, which, in turn, could
adversely affect customer relationships, cause a loss of market
opportunities and negatively affect our business and operating
results.

Our reliance on contract manufacturers could
subject us to additional costs or delays in product shipments as
demand for our products increases or decreases. As demand for
wireless products increases, our contract manufacturers are
experiencing increasing lead times for many components
increasing the possibility that they will be unable to satisfy
our product requirements in a timely fashion. There can be no
assurance that we will effectively manage our contract
manufacturers or that these manufacturers will meet our future
requirements for timely delivery of products of sufficient
quality and quantity. The inability of our contract
manufacturers to provide us with adequate supplies or the loss
of a contract manufacturer would result in costs to acquire
additional manufacturing capacity and delays in shipments of our
products, materially adversely affecting our business and
operating results. In addition, cancellations in orders as a
result of decreases in demand for products may subject us to
claims for damages. In this regard, we are party to disputes,
including legal actions, with several of our suppliers and
vendors. These disputes relate primarily to excess materials and
order cancellation claims that resulted from declines in demand
for our products during 2001 and 2002 and the commensurate
reductions in manufacturing volumes.



| |                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------
| | We may be unable to achieve the manufacturing
    cost reductions and improvements required in order to achieve or
    maintain profitability.

In general, the average selling prices of our
products decline over time. If we do not reduce production costs
and other expenses, we may not be able to offset this continuing
decline and achieve or maintain profitability. We must also
develop and introduce on a timely basis new products and
features that can be sold at higher average selling prices or
produced at lower costs.



| |                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Failure to decrease the cost of our products
    or to effectively develop new systems would cause our gross
    profit and our revenue to decline or to increase more
    slowly.

We expect that average selling prices of our
products will continue to decrease because one of our strategies
is to increase the percentage of domestic and international
sales being made through distributors and value-added resellers,
and to OEM customers, which involve lower prices than our direct
sales. This risk from declining average selling prices may also
intensify because we expect that market conditions, particularly
falling prices for competing broadband solutions, will force us
to reduce prices over time. Under some circumstances, we may be
forced to reduce prices even if it causes us to decrease gross
profit or to take a loss on our products. We may also be unable
to reduce sufficiently the cost of our products to enable us to
compete with other broadband access technologies with lower
product costs. In order to remain competitive, we will need to
design our products so that they can be manufactured with
low-cost, automated manufacturing, assembly and testing
techniques. We cannot assure you that we will be successful in
designing our products to allow contract manufacturers to use
lower-cost, automated techniques. In addition, any redesign may
fail to

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result in sufficient cost reductions to allow us
to significantly reduce the price of our products or prevent our
gross profit from declining as prices decline.




| |                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Because many of our current and planned
    products are or will be highly complex, they may contain defects
    or errors that are detectable only after deployment in complex
    networks and which, if detected, could harm our reputation,
    result in costs to us in excess of our estimates, adversely
    affect our operating results, result in a decrease in revenue or
    result in difficulty collecting accounts receivable.

Many of our complex products can only be fully
tested when deployed in commercial networks. As a result, end
users may discover defects or errors or experience breakdowns in
their networks after the products have been deployed. The
occurrence of any defects or errors in these products, including
defects or errors in components supplied by our contract
manufacturers, could result in:



| |   |                                                                                
| | - | -------------------------------------------------------------------------------
| |  | failure to achieve market acceptance and loss of
    market share;             
|
| |  | cancellation of orders;                                                        
|
| |  | difficulty in collecting accounts receivable;                                  
|
| |  | increased service and warranty costs;                                          
|
| |  | diversion of resources, legal actions by
    customers and end users; and      
|
| |  | increased insurance costs and other losses to our
    business or to end-users.

If we experience warranty failure that indicate
either manufacturing or design deficiencies, we may be required
to recall units in the field and or stop producing and shipping
such products until the deficiency is identified and corrected.
In the event of such warranty failures, our business could be
adversely affected resulting in reduced revenue, increased costs
and decreased customer satisfaction. Because customers often
delay deployment of a full system until they have tested the
products and any defects have been corrected, we expect these
revisions to cause delays in orders by our customers for our
systems. Because our strategy is to introduce more complex
products in the future, this risk will intensify over time. End
users have discovered errors in our products. If the costs of
remediating problems experienced by our customers exceed our
warranty reserves, these costs may adversely affect our
operating results.



| |                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | To compete effectively, we will need to
    establish and expand new distribution channels for our
    point-to-point and point-to-multipoint products and 802.11 WLAN
    products.

We sell our products through domestic and
international distributors. In general, distributors,
value-added resellers and retailers offer products of several
different companies, including products that may compete with
our products. Accordingly, they may give higher priority to
products of other suppliers, thus reducing our efforts to sell
our products. In addition they often focus on specific markets
and we will need to add new distributors and value-added
resellers as we expand our sales to new markets. Agreements with
distributors and retailers are generally terminable at their
option. Any reduction in sales efforts or termination of a
relationship may materially and adversely affect our business
and operating results. Use of distributors and retailers also
entails the risk that they will build up inventories in
anticipation of substantial growth in sales. If such growth does
not occur as anticipated, they may substantially decrease the
amount of products ordered in subsequent quarters. Such
fluctuations could contribute to significant variations in our
future operating results.



| |                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Broadband wireless access solutions have some
    disadvantages and limitations as compared to other alternative
    broadband access solutions that may prevent widespread adoption,
    which could hurt our prospects.

Broadband wireless access solutions, including
point-to-point and point-to-multipoint systems, compete with
other high-speed access solutions such as digital subscriber
lines, cable modem technology, fiber optic cable and other
high-speed wire line and satellite technologies. If the market
for our Lynx and Tsunami point-to-point and Tsunami
point-to-multipoint solutions fails to develop or develops more
slowly than we expect due to this competition, our sales
opportunities will be harmed. Many of these alternative
technologies

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can take advantage of existing installed
infrastructure and are generally perceived to be reliable and
secure. As a result, they have already achieved significantly
greater market acceptance and penetration than point-to-point
and point-to-multipoint broadband wireless access technologies.
Moreover, current point-to-point and point-to-multipoint
broadband wireless access technologies have inherent technical
limitations that may inhibit their widespread adoption in many
areas, including the need for line-of-sight installation and, in
the case of operating frequencies above 11 GHz, reduced
communication distance in bad weather.


We expect point-to-point and point-to-multipoint
broadband wireless access technologies to face increasing
competitive pressures from both current and future alternative
technologies. In light of these factors, many service providers
may be reluctant to invest heavily in broadband wireless access
solutions.



| |                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Broadband wireless access products frequently
    require a direct line-of-sight, which may limit the ability of
    service providers to deploy them in a cost-effective manner and
    could harm our sales.

Because of line-of-sight limitations, service
providers often install broadband wireless access equipment on
the rooftops of buildings and on other tall structures. Before
undertaking these installations, service providers must
generally secure roof rights from the owners of each building or
other structure on which the equipment is to be installed. The
inability to easily and cost-effectively obtain roof rights may
deter customers from choosing to install broadband wireless
access equipment, which could have an adverse effect on our
sales.

We are exposed to increased costs and risks
associated with complying with increasing and new
regulation of corporate governance and disclosure
standards.

We are spending an increased amount of management
time and external resources to comply with changing laws,
regulations and standards relating to corporate governance and
public disclosure, including the Sarbanes-Oxley Act of 2002, new
SEC regulations and Nasdaq Stock Market rules. In particular,
Section 404 of the Sarbanes-Oxley Act of 2002 requires
managements annual review and evaluation of our internal
control systems, and attestations of the effectiveness of these
systems by our independent auditors. We are currently
documenting and testing our internal control systems and
procedures and considering improvements that may be necessary in
order for us to comply with the requirements of Section 404
by the end of 2004. This process has required us to hire
additional personnel and outside advisory services and has
resulted in additional accounting and legal expenses. In
addition, the evaluation and attestation processes required by
Section 404 are new and neither companies nor auditing
firms have significant experience in testing or complying with
these requirements. Accordingly, we may encounter problems or
delays in completing the review and evaluation, the
implementation of improvements and the receipt of a positive
attestation by our independent auditors. While we believe that
we currently have adequate internal controls over financial
reporting, in the event that our chief executive officer, chief
financial officer or independent auditors determine that our
controls over financial reporting are not effective as defined
under Section 404, investor perceptions of our company may
be adversely affected and could cause a decline in the market
price of our stock.



| |                                                                                       
| | --------------------------------------------------------------------------------------
| | Inability to attract and retain key personnel
    could hinder our ability to operate.

Our success depends to a large extent on the
continued services of Mr. Frank Plastina, our Chairman and
Chief Executive Officer, Mr. Kevin Duffy, our President and
Chief Operating Officer, Mr. Michael D. Angel, our
Executive Vice President and Chief Financial Officer, and other
members of our senior management team. We recently announced
that our board of directors has approved a plan for
Mr. Duffy to assume the role of Chief Executive Officer in
January 2005, which Mr. Plastina to serve as full time
Executive Chairman. The loss of the services of any of these
management members could harm our business because of the
crucial role each of them is expected to play in our operations
and strategic development. In order to be successful, we must
also retain and motivate key employees, including those in
managerial, technical, marketing and sales positions. In
particular, our product generation efforts depend on hiring and
retaining qualified engineers. Experienced management and
technical, sales, marketing and support personnel in the
wireless networking industry are in high demand and competition
for their talents is intense. This is particularly the case in
Silicon Valley, where our headquarters and a majority of our
operations are located.

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Uncertainties and heightened security
associated with the aftermath of war in Iraq and the ongoing war
on terrorism may continue to adversely affect domestic and
international demand for our products, result in a further
deterioration of global economic conditions, and increase
shipment times and costs for our products.

The economic uncertainty resulting from
hostilities in Iraq may continue to negatively impact consumer
and business confidence. In recent periods, general economic
conditions in the U.S. caused and may continue to cause
U.S. businesses to slow spending on products and to delay
sales cycles. Similarly, global economic conditions could cause
foreign businesses to slow or halt spending on our products. We
manufacture a substantial portion of our products outside the
U.S., and we may experience delays in the delivery of our
products or increased shipping costs as a result of increased
security measures. This economic uncertainty may make it more
difficult to continue to implement our business strategy and
could adversely impact future operating results.

Compliance with governmental regulations in
multiple jurisdictions where we sell our products is difficult
and costly.

In the United States, we are subject to various
Federal Communications Commission, or FCC, rules and
regulations. Current FCC regulations permit license-free
operation in certain FCC-certified bands in the radio spectrum.
Our wireless products are certified for unlicensed operation in
the 902-928 MHz, 2.4-2.4835 GHz, 5.15-5.35 GHz
and 5.725-5.825 GHz frequency bands, and we expect soon to
have certified products in the newly opened 5.470-5.725 GHz
band. Operation in these frequency bands is governed by rules
set forth in Part 15 of the FCC regulations. The
Part 15 rules are designed to minimize the probability of
interference to other users of the spectrum and, thus, accord
Part 15 systems unlicensed status in the frequency band. In
the event that there is interference caused by a Part 15
user, the FCC can require the Part 15 user to curtail
transmissions that create interference. In this regard, if users
of our products experience excessive interference from primary
users, market acceptance of our products could be adversely
affected, which could materially and adversely affect our
business and operating results. The FCC, however, has
established certain standards that create an irrefutable
presumption of noninterference for Part 15 users and we
believe that our products comply with such requirements. There
can be no assurance that the occurrence of regulatory changes,
including changes in the availability of spectrum, changes in
the allowed use spectrum, or modification to the standards
establishing an irrefutable presumption for unlicensed
Part 15 users, would not significantly affect our
operations by rendering current products obsolete, restricting
the applications and markets served by our products or
increasing the opportunity for additional competition.

Our products are also subject to regulatory
requirements in international markets and, therefore, we must
monitor the development of frequency regulations in certain
countries that represent potential markets for our products.
While there can be no assurance that we will be able to comply
with regulations in any particular country, we will design our
products to minimize the design modifications required to meet
various 2.4 GHz and 5 GHz international spread
spectrum regulations. In addition, we will seek to obtain
international certifications for our product line in countries
where there are substantial markets for wireless networking
systems. Changes in, or the failure by us to comply with,
applicable domestic and international regulations could
materially adversely affect our business and operating results.
In addition, with respect to those countries that do not follow
FCC regulations, we may need to modify our products to meet
local rules and regulations.

Regulatory changes by the FCC or by regulatory
agencies outside the United States, including changes in the
availability of spectrum, could significantly affect our
operations by restricting our development efforts, rendering
current products obsolete or increasing the opportunity for
additional competition. Several changes by the FCC were approved
within the last eight years including changes in the allocation
and use of available frequency spectrum, as well as the granting
of an interim waiver. These approved changes could create
opportunities for other wireless networking products and
services. There can be no assurance that new regulations will
not be promulgated, that could materially and adversely affect
our business and operating results. It is possible that the
United States and other jurisdictions will adopt new laws and
regulations

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affecting the pricing, characteristics and
quality of broadband wireless systems and products. Increased
government regulations could:




| |   |                                                                                  
| | - | ---------------------------------------------------------------------------------
| |  | decrease the growth of the broadband wireless
    industry;                      
|
| |  | hinder our ability to conduct business both
    domestically and internationally;
|
| |  | reduce our revenues;                                                             
|
| |  | increase the costs and pricing of our products;                                  
|
| |  | increase our operating expenses; and                                             
|
| |  | expose us to significant liabilities.                                            

Any of these events or circumstances could
seriously harm our business and results of operations.

Our operating results have been, and could
further be, adversely affected as a result of purchase
accounting treatment and the impact of amortization and
impairment of intangible assets relating to the merger and the
Agere asset purchase.

In accordance with generally accepted accounting
principles, we accounted for our merger with Proxim, Inc. using
the purchase method of accounting. Under the purchase method of
accounting, we have recorded the market value of our Common
Stock issued in connection with the merger, the fair value of
the options to purchase Proxim, Inc. Common Stock that became
options to purchase Proxim Corporation Common Stock and the
amount of direct transaction costs as the cost of combining with
Proxim, Inc. We have allocated the cost of the individual assets
acquired and liabilities assumed, including various identifiable
intangible assets (such as acquired technology and acquired
trademarks and trade names) and in-process research and
development, based on their respective fair values at the date
of the completion of the merger. Intangible assets are required
to be amortized prospectively over their estimated useful lives.
The purchase price was allocated to deferred compensation, based
on the portion of the intrinsic value of the unvested Proxim,
Inc. options we have assumed to the extent that service is
required after completion of the merger in order to vest. Any
excess of the purchase price over those fair market values will
be accounted for as goodwill. We are not required to amortize
goodwill against income but goodwill and other non-amortizable
intangible assets will be subject to periodic reviews for
impairment.

In this regard, due to the decline in forecasted
revenue in future periods, we took a charge of
$129.1 million related to the impairment of goodwill in
accordance with SFAS No. 142 in the fourth quarter of
2002. The impairment charged was measured as the amount that the
carrying amount exceeded our estimated fair value. If we are
required to recognize additional impairment charges, the charge
will negatively impact reported earnings in the period of the
charge.

Changes in stock option accounting rules may
adversely impact our reported operating results prepared in
accordance with generally accepted accounting principles, our
stock price and our competitiveness in the employee
marketplace.

Technology companies like ours have a history of
using broad based employee stock option programs to hire,
incentivize and retain our workforce in a competitive
marketplace. Statement of Financial Accounting Standards
No. 123, Accounting for Stock-Based
Compensation (SFAS 123) allows companies
the choice of either using a fair value method of accounting for
options, which would result in expense recognition for all
options granted, or using an intrinsic value method, as
prescribed by Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees
(APB 25), with a pro forma disclosure of the impact on net
income (loss) of using the fair value option expense recognition
method. We have elected to apply APB 25 and accordingly we
generally do not recognize any expense with respect to employee
stock options as long as such options are granted at exercise
prices equal to the fair value of our common stock on the date
of grant.

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During March 2004 the FASB issued a proposed
Statement, Share-Based Payment, an amendment of FASB
Statements No. 123 and 95. The proposed statement
eliminates the treatment for share-based transactions using
APB 25 and generally would require share-based payments to
employees be accounted for using a fair-value-based method and
recognized as expenses in our statements of operations. The
proposed standard would require the modified prospective method
be used, which would require that the fair value of new awards
granted from the beginning of the year of adoption plus unvested
awards at the date of adoption be expensed over the vesting
term. In addition, the proposed statement encourages companies
to use the binomial approach to value stock options,
as opposed to the Black-Scholes option pricing model that we
currently use for the fair value of our options under
SFAS 123 disclosure provisions.

The effective date the proposed standard is
recommending is for fiscal years beginning after
December 15, 2004. Should this proposed statement be
finalized, it will have a significant impact on our consolidated
statement of operations as we will be required to expense the
fair value of our stock options rather than disclosing the
impact on our consolidated result of operations within our
footnotes in accordance with the disclosure provisions of
SFAS 123 (see Note 14 of the notes to condensed
consolidated financial statements). This will result in lower
reported earnings per share which could negatively impact our
future stock price. In addition, should the proposal be
finalized, this could impact our ability to utilize broad based
employee stock plans to reward employees and could result in a
competitive disadvantage to us in the employee marketplace.

The price of our common stock may be subject
to wide fluctuation, and you may lose all or part of your
investment in our common stock.

The trading prices of our common stock have been
subject to wide fluctuations, and such trend is likely to
continue with respect to the trading price of our common stock.
The trading price of our common stock may fluctuate in response
to a number of events and factors, including:



| |   |                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------
| |  | quarterly variations in revenues and operating
    results;                                                                                
|
| |  | announcements of innovations and new products;                                                                                             
|
| |  | strategic developments or business combinations
    by us or our competitors;                                                              
|
| |  | changes in our expected operating expense levels;                                                                                          
|
| |  | changes in financial estimates including the
    Companys ability to meet its future revenue and operating
    profit or loss projections;
|
| |  | recommendations of financial and industry
    analysts;                                                                                    
|
| |  | the operating and securities price performance of
    comparable companies; and                                                            
|
| |  | news reports relating to trends in the wireless
    communications industry.                                                               

The Company has not met its revenue and/or
operating profit or loss projections from time to time in the
past, most recently in the quarters ended April 2, 2004 and
July 2, 2004. In addition, the stock market in general, and
the market prices for wireless-related companies in particular,
have experienced extreme volatility that often has been
unrelated to the operating performance of these companies. These
broad market and industry fluctuations may influence the trading
price of our common stock. These trading price fluctuations may
make it more difficult to use our common stock as currency to
make acquisitions that might otherwise be advantageous, or to
use stock options as a means to attract and retain employees.
Accordingly, you may lose all or part of your investment in our
common stock.

Provisions of our certificate of
incorporation, bylaws and Delaware law could deter takeover
attempts.

Some provisions in our certificate of
incorporation and bylaws could delay, prevent or make more
difficult a merger, tender offer, proxy contest or change of
control of our company despite the possibility that such
transactions may be viewed to be in the best interest of our
stockholders since such transactions could result in

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a higher stock price than the then-market price
of our common stock. Among other things, our certificate of
incorporation and bylaws:




| |   |                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------
| |  | authorize our board of directors to issue
    preferred stock with the terms of each series to be fixed by the
    board of directors;              
|
| |  | divide our board of directors into three classes
    so that only approximately one-third of the total number of
    directors is elected each year;
|
| |  | permit directors to be removed only for
    cause; and                                                                                              
|
| |  | specify advance notice requirements for
    stockholder proposals and director nominations.                                                         

In addition, with some exceptions, the Delaware
General Corporation Law will restrict or delay mergers and other
business combinations between us and any stockholder that
acquires 15% or more of our voting stock.






|        |                                                               
|------- | --------------------------------------------------------------
|Item 3. | Quantitative and Qualitative Disclosures
    About Market Risk

The following discussion about our market risk
disclosures involves forward-looking statements. Actual results
could differ materially from those projected in the
forward-looking statements.

Interest Rate Sensitivity

We currently do not maintain investments that are
subject to interest rate risk.

Exchange Rate Risk

We currently have operations in the United States
and several countries in South America, Europe and Asia. The
functional currency of all our operations is the
U.S. dollar. Though some expenses are incurred in local
currencies by our overseas operations, substantially all of our
transactions are made in U.S. dollars; hence, we have
minimal exposure to foreign currency rate fluctuations relating
to our transactions.

While we expect our international revenues to
continue to be denominated predominately in U.S. dollars,
an increasing portion of our international revenues may be
denominated in foreign currencies in the future. As a result,
our operating results may become subject to significant
fluctuations based upon changes in exchange rates of certain
currencies in relation to the U.S. dollar. We will analyze
our exposure to currency fluctuations and may engage in
financial hedging techniques in the future to attempt to
minimize the effect of these potential fluctuations; however,
exchange rate fluctuations may adversely affect our financial
results in the future.

Investment Risk

We are exposed to market risk as it relates to
changes in the fair value of our investments. We have invested
in an equity instrument in a private company, which completed
our initial public offering in February 2004. This equity
investment, in a technology company, is subject to significant
fluctuations in fair value due to the volatility of the stock
market and the industries in which these companies participate.
As of July 2, 2004, we had $306,000 of unrealized gain, net
of tax on this investment recorded as a component of
stockholders deficit. Our objective in managing our
exposure to stock market fluctuations is to minimize the impact
of stock market declines to our earnings and cash flows. There
are, however, a number of factors beyond our control.

Continued market volatility, as well as mergers
and acquisitions, have the potential to have a material impact
on our results of operations in future periods.






|        |                        
|------- | -----------------------
|Item 4. | Controls and Procedures

Evaluation of disclosure controls and
procedures.Our Chief Executive
Officer and our Chief Financial Officer, after evaluating the
effectiveness of our disclosure controls and
procedures (as defined in the Securities Exchange Act of
1934, as amended (the Exchange Act)
Rules 13a-15(e) or 15d-15(e)) as of

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the end of the period covered by this quarterly
report, have concluded that our disclosure controls and
procedures are effective based on their evaluation of these
controls and procedures required by paragraph (b) of
Exchange Act Rules 13a-15 or 15d-15.


Changes in internal control over financial
reporting.There were no changes in
our internal control over financial reporting identified in
connection with the evaluation required by
paragraph (d) of Exchange Act Rules 13a-15 or
15d-15 that occurred during our last fiscal quarter that have
materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.




PART II. OTHER INFORMATION






|        |                  
|------- | -----------------
|Item 1. | Legal Proceedings

Proxim, Inc.s involvement in patent
litigation has resulted in, and could in the future continue to
result in, substantial costs and diversion of management
resources of the Company. In addition, this litigation, if
determined adversely to us, could result in the payment of
substantial damages and/or royalties or prohibitions against
utilization of essential technologies, and could materially and
adversely affect our business, financial condition, operating
results or cash flows.

Symbol Technologies, Inc.

On December 4, 2001, Symbol filed suit in
the U.S. District Court for the District of Delaware
alleging that Proxim, Inc. infringed four Symbol patents related
to systems for packet data transmission. Symbol sought an award
for unspecified damages and a permanent injunction against
Proxim, Inc. based on alleged patent infringement counterclaims.
On December 18, 2001, Proxim, Inc. filed an answer and
counterclaims seeking declaratory judgments for
non-infringement, invalidity and unenforceability of the four
asserted Symbol patents, injunctive and monetary relief for
Symbols infringement of a Proxim, Inc. patent, monetary
relief for Symbols false patent marking, and injunctive
and monetary relief for Symbols unfair competition under
the Lanham Act, common law unfair competition and tortious
interference.

On September 15, 2003, we announced that a
jury had rendered a verdict in the first phase of the patent
infringement suit with Symbol. On Symbols claims of patent
infringement, the jury found that certain of our products
infringe two of Symbols patents and assessed a 6% royalty
on the revenue of relevant products. On November 24, 2003,
the District Court conducted a one-day bench trial on our
equitable defenses not addressed by the jury.

On July 29, 2004, we announced that the
court has denied our equitable defenses and has determined that
the jurys award of a 6% royalty on our sales of these
products from 1995 through September 2003, plus prejudgment
interest, results in an award of damages to Symbol of
$25.9 million. The court entered its judgment on this
matter on August 4, 2004. We are not presently enjoined
from continued sales of these products, and the court denied
Symbols request that it impose a court ordered royalty on
future sales of these products by us. On August 6, 2004,
Symbol filed a motion for entry of a permanent injunction
against further manufacture and sale of our products found to
infringe Symbols patents. We intend to oppose this motion.
If we are enjoined from future sales of these products and are
not able to negotiate a license arrangement with acceptable
royalty rates, our revenue, results of operations and financial
condition would be materially adversely affected.

We have fully accrued for the awarded amount in
our financial statements since the date of the initial jury
award in September 2003. As of July 2, 2004, we had
recorded an accrual for estimated past royalties of
$22.9 million and interest of $3.0 million covering
the period from 1995 through September 2003 plus a total of
$2.8 million for estimated potential royalties and interest
covering the period from October 2003 to July 2, 2004. As
of July 2, 2004, our accrual in the aggregate for estimated
past and potential royalties and interest was
$28.7 million. Depending upon the ultimate outcome of the
litigation with Symbol, we may be required to pay royalty
charges and interest at the time specified by the court. We will
continue to evaluate and review our

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estimate of royalties and interest payable from
time to time for any indications that could require us to change
our assumptions relating to the amount already recorded.


To date, we have not incurred immediate financial
obligation to Symbol as a result of this decision and we intend
to file a motion to stay execution on the judgment, pending
completion of all related proceedings, including post trial
motions on this matter. On August 10, 2004, Symbol informed
us that it would attempt to execute on the judgment. The court
could deny our motion to stay execution of the judgment or could
require us to post a bond to secure our post-trial motions.

Although we have recorded an accrual for
$28.7 million in connection with the Symbol litigation, we
do not have sufficient cash to pay or post a bond in this
amount. If we were required to make payments to Symbol, post a
bond to the court, and/or repay the Bridge Loans and amounts, if
any, owed to Silicon Valley Bank, either due to an event of
default or otherwise, we would be required to obtain immediate
alternative sources of financing. If we were not able to obtain
an alternative source of financing, we would have insufficient
cash to pay these obligations, be unable to meet its ongoing
operating obligations as they come due in the ordinary course of
business, and be required to seek protection under applicable
bankruptcy laws. There can be no assurance that alternative
sources of financing will be available to us. We intend to
vigorously defend ourselves in this litigation and to consider
all available options after the conclusion of all matters before
the court.

In addition, any further adverse ruling or
judgment in this litigation that results in our obligation
and/or any of our subsidiaries under GAAP (generally accepted
accounting principles) to establish an additional reserve in
respect of such ruling or judgment in an amount excess of
$5 million, and any other ruling or judgment in any other
litigation that is material and adverse to the Company, triggers
an event of default under the Bridge Loan issued to Warburg
Pincus and BCP Capital, L.P. and affiliates. Upon such
occurrence, the Investors would have the ability to require us
to repay the Bridge Loan. The courts rulings to date have
not triggered an event of default under the terms of the Bridge
Loan. If the judgment entered on August 4, 2004 is not
vacated, discharged, stayed or bonded pending appeal within
thirty days thereof, we would be in default under the Bridge
Loan and the Investors would have the right to require us to
repay the Bridge Loan. In addition, an attempt by Symbol to
execute on a judgment, the court not issuing a stay on execution
of judgment by August 31, 2004, restraining order,
injunction or any material adverse development in the litigation
with Symbol would result in an event of default under the
secured credit facility with Silicon Valley Bank. Upon such
occurrence, Silicon Valley Bank would have the right to require
us to repay any outstanding amounts under the credit facility
and to prohibit us from borrowing any additional amounts. The
occurrence of an event of default under the secured credit
facility with Silicon Valley Bank would trigger an event of
default under the Bridge Loan if outstanding amounts owed under
the credit facility exceeded $1 million. As of July 2,
2004 and August 11, 2004, no borrowings were outstanding
under the credit facility.

Top Global Technology Limited

On or about March 10, 2003, we were served
with a complaint filed on January 15, 2003, by Top Global
Technology Limited (Top Global), a distributor for
Agere Systems Singapore. Our demurrer to Top Globals
complaint was sustained in May 2003. Top Global then filed and
served an amended complaint on May 30, 2003. Top
Globals lawsuit was filed against Agere Systems, Inc.,
Agere Systems Singapore, and Agere Systems Asia Pacific
(collectively, Agere) and us in the Superior Court
for the State of California, County of Santa Clara. Top
Global claims that it is entitled to return for a credit
$1.2 million of products that it purchased from Agere
Systems Singapore in June 2002 as a result of our decision to
discontinue a product line that we purchased from Agere in
August 2002. The amended complaint asks the court to determine
whether Agere or we are responsible for accepting the product
return and issuing a $1.2 million credit and also alleges
breach of contract. We answered the amended complaint and
asserted several defenses to Top Globals claims. In
January 2004, the parties mediated this dispute but were unable
to reach a settlement. In March 2004, the Court dismissed the
contract claims against Agere but at the same time granted Top
Globals motion for leave to amend our complaint to allege
a fraud claim against Agere. Top Global subsequently amended its
complaint to allege a claim of fraud against Agere. The parties
are currently conducting discovery. A trial date has not been
set.

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Active Technology Corporation

On February 10, 2004, we received a copy of
a complaint filed on February 2, 2004 in Tokyo District
Court by Active Technology Corporation, a Japanese-based
distributor of our products. The complaint alleges, among other
things, that we sold to Active certain defective products, which
Active in turn subsequently sold to our customers. Active seeks
damages of 559.2 million Japanese yen, which includes the
purchase price of the allegedly defective products and
replacement costs allegedly incurred by Active. Active seeks to
offset the claim of 559.2 million Japanese yen against
outstanding accounts payable by Active of 175.3 million
Japanese yen to us, resulting in a net claim against Proxim
Corporation of 383.9 million Japanese yen. Translated into
U.S. dollars on August 4, 2004, Actives net
claim is approximately $3.4 million. Discovery has not yet
commenced, and a trial date has not been established. We intend
to defend ourselves vigorously against this lawsuit.

General

We are party to disputes, including legal
actions, with several of our suppliers and vendors. These
disputes relate primarily to excess materials and order
cancellation claims that resulted from the declines in demand
for our products during 2001 and 2002 and the commensurate
reductions in manufacturing volumes. We have recorded reserves
related to these disputes to the extent that management believes
are appropriate. We intend to vigorously defend ourselves in
these matters.

The results of any litigation matters are
inherently uncertain. In the event of any adverse decision in
the described legal actions or disputes, or any other related
litigation with third parties that could arise in the future, we
could be required to pay damages and other expenses, and, in the
case of litigation related to patents or other intellectual
property rights, to cease the manufacture, use and sale of
infringing products, to expend significant resources to develop
non-infringing technology, or to obtain licenses to the
infringing technology. We cannot make any assurance that these
matters will not materially and adversely affect our business,
financial condition, operating results or cash flows.






|        |                                     
|------- | ------------------------------------
|Item 6. | Exhibits and Reports on
    Form 8-K

A. Exhibits

|        |    |             |  |                                                                                                                                                                                                                               
|------- | -- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 2  | .1*         |  | Securities Purchase Agreement, dated as of
    July 27, 2004, by and among Proxim Corporation, Warburg
    Pincus Private Equity VIII, L.P., BCP Capital, L.P., BCP
    Capital QPF, L.P. and BCP Capital Affiliates Fund LLC.
|        | 10 | .68         |  | Amendment to Overadvance LC Rider, dated as of
    July 31, 2004, between the Registrant and Silicon Valley
    Bank.                                                                                                         
|        | 31 | .1          |  | Section 302 Certification of Principal
    Executive Officer                                                                                                                                                                  
|        | 31 | .2          |  | Section 302 Certification of Principal
    Financial Officer                                                                                                                                                                  
|        | 32 | .1          |  | Section 906 Certification of Principal
    Executive Officer                                                                                                                                                                  
|        | 32 | .2          |  | Section 906 Certification of Principal
    Financial Officer                                                                                                                                                                  



---



|  |                                                                                                                                            
|- | -------------------------------------------------------------------------------------------------------------------------------------------
|* | Incorporated by reference to Exhibit 2.1 to
    the Registrants Current Report on Form 8-K filed with
    the Commission on July 30, 2004.

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B. Reports on Form 8-K

|               |  |                                                                                                                                                                                                     
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Date           |  | Item Reported                                                                                                                                                                                       
|               |  |                                                                                                                                                                                                     
|April 7, 2004  |  | On April 7, 2004, the Registrant issued a
    press release announcing preliminary financial results for the
    fiscal quarter ended April 2, 2004 and furnished its press
    release on Form 8-K.
|April 14, 2004 |  | On April 12, 2004, the Registrant issued a
    press release announcing certain changes to its management. On
    April 14, 2004, the Registrant furnished its press release
    on Form 8-K.       
|April 27, 2004 |  | On April 27, 2004, the Registrant issued a
    press release announcing financial results for the fiscal
    quarter ended April 2, 2004 and furnished its press release
    on Form 8-K.           

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SIGNATURES

Pursuant to the requirements of the Securities
Exchange Act of 1934, the Company has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.



| |                   
| | ------------------
| | PROXIM CORPORATION



| |     |                     
| | --- | --------------------
| | By: | /s/ MICHAEL D. ANGEL

| |                                                 
| | ------------------------------------------------
| |                                                 
| | Michael D. Angel                                
| | Executive Vice President and                    
| | Chief Financial Officer                         
| | (Principal Financial and Accounting
    Officer)

Date: August 11, 2004

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EXHIBIT INDEX

|        |    |             |  |                                                                                                                                                                                                                               
|------- | -- | ----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |    |            
|Number  |    | Description
|        |    |            
|        | 2  | .1*         |  | Securities Purchase Agreement, dated as of
    July 27, 2004, by and among Proxim Corporation, Warburg
    Pincus Private Equity VIII, L.P., BCP Capital, L.P., BCP
    Capital QPF, L.P. and BCP Capital Affiliates Fund LLC.
|        | 10 | .68         |  | Amendment to Overadvance LC Rider, dated as of
    July 31, 2004, between the Registrant and Silicon Valley
    Bank.                                                                                                         
|        | 31 | .1          |  | Section 302 Certification of Principal
    Executive Officer                                                                                                                                                                  
|        | 31 | .2          |  | Section 302 Certification of Principal
    Financial Officer                                                                                                                                                                  
|        | 32 | .1          |  | Section 906 Certification of Principal
    Executive Officer                                                                                                                                                                  
|        | 32 | .2          |  | Section 906 Certification of Principal
    Financial Officer                                                                                                                                                                  



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|  |                                                                                                                                            
|- | -------------------------------------------------------------------------------------------------------------------------------------------
|* | Incorporated by reference to Exhibit 2.1 to
    the Registrants Current Report on Form 8-K filed with
    the Commission on July 30, 2004.