**UNITED
STATES**
 **SECURITIES
AND EXCHANGE COMMISSION**
 **Washington,
D.C. 20549**
  **FORM
10-K**
  **(Mark
one)**
  [X] **Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934**
  **For
the fiscal year ended December 31, 2004**
 **OR**
  [ ] **Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934**
  **For
the transition period _________________to_________________**
  **Commission
file number 000-31031**
  **AIRSPAN
NETWORKS INC.**
 **(Exact
name of registrant as specified in its charter)**
 
 Washington
    75-2743995*(State
      or other jurisdiction of*
      *incorporation
      or organization)*
    *(I.R.S.
      Employer*
      *Identification
      No.)***777
      Yamato Road, suite 105**
      **Boca
      Raton, FL**
      **(561)
      893-8670**
    **33431***(Address
      of principal executive offices)*
    *(Zip
      Code)*
  **Registrant’s
telephone number, including area code: (561) 893-8670**
  Securities
registered pursuant to Section 12(b) of the Act:
  **NONE**
  Securities
registered pursuant to Section 12(g) of the Act:
  **Common
Stock, $0.0003 par value**
  Indicate
by a check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X];  No [
]
  Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
Form 10-K [ ]
  Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Act). Yes [X] No [
]
  Aggregate
market value of voting and non-voting common equity held by non-affiliates of
the registrant as of July 4, 2004: $141,159,336
  Number of
shares outstanding of the registrant’s class of common stock as of March 7,
2005: 37,997,253
  **DOCUMENTS
INCORPORATED BY REFERENCE:**
  Portions
of registrant’s definitive Proxy Statement for its 2005 Annual Meeting of
Shareholders are incorporated herein by reference into Part III.
  
 **AIRSPAN
NETWORKS INC**
  **FORM
10-K**
  **For
the Year Ended**
  **December
31, 2003**
  **TABLE
OF CONTENTS**
 **ITEM**
    
    
    **Page
      No.****PART
      I**1
    
    Business
    12
    
    Properties
    243
    
    Legal
      Proceedings
    244
    
    Submission
      of Matters to a Vote of Security Holders
    25**PART
      II**5
    
    Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
    266
    
    Selected
      Financial Data
    287
    
    Management’s
      Discussion and Analysis of Financial Condition and Results of Operations
    297A
    
    Quantitative
      and Qualitative Disclosures about Market Risk
    398
    
    Financial
      Statements and Supplementary Data
    409
    
    Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
    409A
    
    Controls
      and Procedures
    419B
    
    Other
      Information
    42**PART
      III**10
    
    Directors
      and Executive Officers of the Registrant
    4311
    
    Executive
      Compensation
    4312
    
    Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
    4313
    
    Certain
      Relationships and Related Transactions
    4314
    
    Principal
      Accounting Fees and Services
    43**PART
      IV**15
    
    Exhibits,
      Financial Statement Schedules
    44**SIGNATURES**
  **CAUTIONARY
STATEMENTS RELEVANT TO FORWARD-LOOKING INFORMATION**
 **FOR
THE PURPOSE OF THE SAFE HARBOR PROVISIONS OF THE**
 **PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995**
  Some of
the discussion under the captions “Risk Factors”, “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and “Business” and
elsewhere in this Form 10-K may include certain “forward-looking statements”
within the meaning of Section 27A of the Securities Act of 1933, as amended and
Section 21E of the Securities Exchange Act of 1934, as amended, including,
without limitation, statements with respect to anticipated future operations and
financial performance, growth and acquisition opportunity and other similar
forecasts and statements of expectation. These statements involve known and
unknown risks and uncertainties, such as our plans, objectives, expectations and
intentions, and other factors that may cause our, or our industry’s, actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance or
achievements expressed or implied by the forward-looking statements. These
factors are listed under “Risk Factors” and elsewhere in this Form 10-K.
  In some
cases, you can identify forward-looking statements by terminology such as
“expects”, “anticipates”, “intends”, “may”, “should”, “plans”, “believes”,
“seeks”, “estimates” or other comparable terminology.
  Although
we believe that the expectations reflected in these forward-looking statements
are reasonable, we do not guarantee future results, levels of activity,
performance or achievements. Our actual results and the timing of certain events
could differ materially from those anticipated in these forward-looking
statements. We disclaim any obligation to update or review any forward-looking
statements based on the occurrence of future events, the receipt of new
information or otherwise.
  
  **PART
I**
  **ITEM
1. BUSINESS**
  **Business
Overview**
  We are a
global supplier of Broadband Wireless Access (“BWA”) equipment that allows
communications service providers (often referred to as “local exchange
carriers,” or simply telephone companies), internet service providers (often
referred to as “ISPs”) and other telecommunications users, such as utilities and
enterprises, to cost effectively deliver high-speed data and voice services
using radio frequencies rather than wires. We call this transmission method
“Broadband Wireless”. The primary market for our systems has historically been a
subset of the fixed and broadband wireless access systems market, which is the
fixed point-to-multipoint market in radio frequencies below 6.0GHz. On March 10,
2005, we announced the introduction of products that also provide BWA to nomadic
and portable applications.
  Each of
our wireless access systems utilizes digital wireless techniques, which provide
wide area coverage, security and resistance to fading. Our systems can be
deployed rapidly and cost effectively, providing an attractive alternative or
complement to traditional copper wire, cable, or fiber-optic communications
access networks. Our products also include software tools that optimize
geographic coverage of our systems and provide ongoing network management. To
facilitate the deployment and operation of our systems, we also offer network
installation, training and support services. A more complete description of our
various wireless access systems is provided below. Our BWA systems (the “Airspan
BWA Solutions”) have been installed by more than 300 network operators in more
than 90 countries and are being tested by numerous other service providers.
  Our
initial products were developed and sold originally to provide wireless voice
connections between network operators and their end customers. Product
enhancements introduced in 1998 enabled us to offer both voice and data
connectivity over a single wireless link. We have continued to develop the
capabilities and features of the original products, and today we sell them as
the AS4000 and AS4020 products, in systems capable of delivering high-capacity
broadband data with carrier-quality voice connections to operators globally.
  In
October 2002, we strengthened our position in the BWA equipment market with the
acquisition of the WipLL (Wireless Internet Protocol in the Local Loop) business
from Marconi (“Marconi WipLL”) pursuant to a stock purchase agreement, and
renamed the business Airspan Networks (Israel) Limited (“Airspan Israel”). The
products and services produced by Airspan Israel enable operators in licensed
and unlicensed wireless bands to offer high-speed, low cost, wireless broadband
connections for data and voice over IP. We acquired all of the issued and
outstanding capital stock and debt of Marconi WipLL in exchange for $3 million
of cash.
  In
October 2003, we began marketing our AS4030 and AS3030 product range of Airspan
branded high-end point-to-multipoint and point-to-point products suitable for
operators wishing to deliver service offerings to medium and large businesses
and multi-tenant dwellings that require considerable bandwidth for their end
users. These products, based on 802.16 Orthogonal Frequency Division
Multiplexing (“OFDM”) technology, can also be used for a wide range of backhaul
applications, for example connecting remote base stations to a central
office.
  In
December, 2003, we acquired the fixed wireless access business of Nortel
Networks known as “Proximity” in accordance with the terms and conditions of a
contemporaneously executed and delivered Purchase and Sale Agreement. The
Proximity products enable operators to provide carrier class circuit switched
voice and data services, based on a Time Division Multiple Access (“TDMA”)
technology. We acquired inventory relating to the Proximity business as well as
existing assets associated with the manufacture, development and support of the
Proximity product line. We also assumed the product supply obligations
associated with customer contracts and certain other liabilities and obligations
along with the workforce of 26 persons directly employed in the Proximity
business. The final purchase price was $13.1 million.
  On
December 28, 2004 we signed a letter of intent to acquire ArelNet Limited (TASE:
ARNT), an Israeli company providing Voice over IP (“VoIP”) network
infrastructure equipment and solutions, including soft switches and gateways
supporting major VoIP standards. In accordance with the letter of intent, we
expect to acquire all of the outstanding securities of ArelNet for an aggregate
purchase price of $8.7 million, of which $4.0 million would be paid in cash and
$4.7 million in shares of Airspan.
  On March
9, 2005 we announced the introduction of a new product line known as “AS.MAX”.
AS.MAX is a full portfolio of WiMAX systems, Base Stations and Customer Premise
Equipment (“CPEs”), based on the 802.16 standard. The AS.MAX product range is
designed to serve both:
  ·
    our
      traditional fixed point-to-multipoint BWA market;
and
  1
  ·
    new
      markets, such as the BWA market for nomadic and portable
      applications.
  Our
corporate headquarters are located in Boca Raton, Florida. Our primary
operations, manufacturing and product development centers are located in
Uxbridge, U.K., and Airport City, Israel. Our telephone number in Boca Raton is
(561) 893-8670. Further contact details and the location of all Airspan’s
worldwide offices may be found at www.airspan.com .
  A copy of
our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and amendments to these reports pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”) are available, free of charge, on our Web site, www.airspan.com , as soon
as reasonably practicable after such material is electronically filed with the
Securities and Exchange Commission (SEC).  The
information found on our website is not part of this or any other report we file
with or furnish to the SEC.
  **Industry
Overview**
  *The
Global Need for Broadband Access*
  We
believe there has been continued growth in the number of end users of broadband
wireless access equipment throughout the world for the last five years. Although
the aggregate number of users increased during that period, such growth was not
matched every year by an increase in purchases of BWA equipment by network
operators. The high-growth in spending on telecommunications and broadband
infrastructure in the late 1990s was followed by declines in such spending at
the start of this decade, and it is only in the past twelve months that we
believe we have seen evidence of renewed growth in spending on new wireless
broadband infrastructure. The market for BWA equipment is expected to grow from
$0.5 billion in 2004 to $3 billion in 2009 with 50% of the market in 2009 to be
derived from WiMAX certified product (source: Skylight Research). We anticipate
that as the Internet continues to gain acceptance as a global communications
tool, end-users worldwide will increasingly demand reliable broadband access in
addition to traditional voice services to take advantage of communications over
the Internet.
  We
believe that much of the growth in the number of broadband end-users has been
generated in developing countries with a historically limited supply and
penetration of telecom services, including broadband access. Although mobile
operators are often selected to satisfy the demand for basic telephony in low
teledensity regions, we believe BWA systems are often selected in many areas to
provide the broadband access solution due to a superior set of features such as
higher data speeds and availability of frequencies not serviced by traditional
cellular networks.
  *Global
Deregulation and the Need for Reliable, Cost-Effective and Rapid Network
Deployments*
  The
worldwide deregulation of the telecommunications industry created the
opportunity for many new competitors, including Competitive Local Exchange
Carriers (“CLECs”) and Internet Service Providers (“ISPs”), to provide local
access connections that were historically only offered by a single incumbent
provider, an Incumbent Local Exchange Carrier (“ILEC”). Even though some of the
CLECs and ISPs that grew out of deregulation have failed, those that have
survived are now striving to differentiate their service offerings on the basis
of their range of services, quality and reliability, customer service,
provisioning and pricing.
  CLECs and
ISPs have expanded their focus beyond large business customers to serving small
and medium-sized businesses, high-end residential and small-office/home-office
customers as well as providing services outside of the major urban areas. To
serve these markets, CLECs and ISPs require more cost-effective network
deployment solutions to compensate for lower average customer spending on
communications services and larger coverage area requirements. We believe
wireless broadband can provide these solutions.
  Enterprises
have found that it may be more cost effective or secure to use private BWA
networks for their own corporate communications networks than to rely on public
networks; and utilities have been able to create additional sources of revenue
using BWA equipment linked to their existing transmission and access networks.
  Many
countries have existing networks that are unable to provide reliable data, voice
and fax services while many others lack the network infrastructure to make basic
telephone services broadly available. Both ILECs and CLECs in these markets need
cost-effective, rapidly deployable alternatives to traditional copper based
networks. Again, we believe that BWA solutions can provide these alternatives.
  *The
Access Network*
  While the
communications transport network and Internet backbone are capable of
transporting data at extremely high speeds, data can only be delivered from
those parts of the network through the access portion to the end user as fast as
the end-user’s connection to the network will permit. Many traditional access
connections that use copper wires are inadequate to address the rapidly
expanding bandwidth requirements. To address these requirements a number of
alternative solutions have emerged. We have identified below the solutions that
are perceived to have, for a variety of technological and economic reasons,
competed most directly with BWA solutions we offer.
  2
 • *Wired
Digital Subscriber Line.*  Digital
subscriber line (“DSL”) technology improves the data transmission rate of
existing copper networks. DSL transmission rates and service availability,
however, are limited in all networks and countries by both the quality of the
available copper, which for many providers is a large percentage of their copper
network and by the maximum transmission distance (5.5 kilometers from the
subscriber to the service provider’s switching equipment in many instances) of
wired DSL technology. In many instances, a substantial portion of an operator’s
copper network is unsuitable for DSL transmission.
  • *Cable
Networks.*  Two-way
cable modems using coaxial cable enable data services to be delivered over a
network originally designed to provide television service to residential
subscribers. Coaxial cable has greater transmission capacity than copper wires,
but is often costly to upgrade for two-way data services. The data rate
available to each subscriber on a cable link decreases as the number of
subscribers using the link increases. Cable coverage, which is not available in
many countries, may limit the growth of this segment.
  • *Fiber
Networks.* Fiber
technology allows an operator to deliver video, voice and data capabilities over
an optical fiber medium that can deliver very high capacity to end users. Fiber
access, however, has a very high cost of deployment in residential
networks.
  • *Cellular
Networks.* Mobile
wireless networks (“Cellular networks”) are now capable of delivering both voice
and limited broadband data connectivity to fixed, nomadic, portable and mobile
applications. Cellular networks may provide a competitive solution in markets
where the operator is seeking to only product low-quality voice and limited data
rates at a low cost.
  • *Broadband Wireless
Access.*  Broadband
wireless access systems enable high-speed access to data and telephone networks
without requiring a cabled connection, such as copper wire or fiber, between the
subscriber and the base station. A fixed wireless system can be more rapidly and
cheaply deployed than wire or cable. To provide high quality service, it is
necessary to plan the deployment of radio equipment to maximize coverage and
availability, and the technology employed must resist fading. In addition, fixed
wireless services work best in those regions where a suitable frequency band is
available.
  The
introduction of WiMAX-compliant products will create additional deployment
opportunities for Broadband Wireless systems. With WiMAX, Broadband Wireless
access will be deliverable to nomadic, portable and, when the WiMAX 802.16e
standard has been developed, to mobile applications, in addition to our
traditional fixed applications.
  For a
variety of technological and economic reasons, we do not believe that satellite
technologies have presented the most direct competitive challenge to the fixed
wireless access systems offered by us. Cellular networks are now capable of
delivering both voice and limited broadband data connectivity that can compete
in our market where the customer driver is for low cost, low quality voice and
limited data rates.
  *Increased
Availability of Licensed, Unlicensed (or License Exempt) Spectrum*
  Government
competition policy and other political pressures to make broadband available in
underserved areas has led to the creation of new licensed spectrum, especially
in 3.5GHz, in many areas. During 2004, 3.5GHz spectrum was licensed for the
first time in a number of countries with additional licenses given in China.
Further, plans are underway for the allocation of additional spectrum at 3.5GHz
in Hong Kong and other frequencies are being allocated in a number of other
countries. Other frequencies are also being licensed in the sub 6GHz spectrum
particularly 700MHz in the USA and within the 2GHz band in India. Additional
spectrum for unlicensed applications was added in many areas during 2004. Most
notably, additional parts of the 5GHz band have been made available to network
operators for broadband wireless applications.
  The
greater availability of license-exempt spectrum has been of particular benefit
to many smaller carriers and ISPs, where a significant market has developed
around the deployment of broadband in rural communities using license-exempt
wireless access systems. We believe the increased availability of licensed and
unlicensed spectrum may increase the demand for BWA solutions, including our
WipLL products, by various small carriers and ISPs.
  *WiFi
Networks and Nomadic Broadband Access*
  We
believe that there has been a significant growth in the numbers of applications
and service providers utilizing WiFi technology under the IEEE (“Institute of
Electrical and Electronics Engineers”) 802.11 standards to provide wireless
broadband access. With rapidly falling WiFi technology prices, large chip
vendors have started to integrate WiFi capabilities into chip sets used in
laptop computers, personal digital assistants and other WiFi-enabled products,
giving their users Broadband Access in areas (“WiFi Hotspots”) where a service
provider or end user has installed a WiFi transceiver *and* the WiFi
transceiver is connected to a broadband access network. Under the 802.11
standards, WiFi-enabled products must be within approximately 200 meters of a
WiFi transceiver to operate as designed. It is our hope that WiFi systems will
generate a greater level of demand for our BWA equipment, which in turn will be
used to provide the required connectivity between the WiFi transceiver and the
backbone and transport networks. To facilitate this connectivity, we have
incorporated a WiFi access point into a variant of our AS4020 subscriber
terminals and plan to continue to offer other products, including our WIMAX
products, which support WiFi tranceivers.
  3
 *The
Development of WiMAX Standards*
  In 2001,
a small group of BWA system and component manufactures, including Intel
Corporation and us, formed the WiMAX Forum. The goal of the Forum was to create
global standards to ensure true interoperability between BWA systems. The
founding members believed that interoperability was essential to the future
growth of the broadband wireless market. Since its establishment, the Forum
members, working together with the IEEE, have established the first two of the
WiMAX standards on which fixed BWA systems will operate, the IEEE 802.16a and
the IEEE 802.16-2004 (formerly the 802.16d) standards. These standards fully
support all broadband wireless applications and provide a framework for the
evolution of our products to higher performance and lower cost.
  During
2004, participation in the Forum grew significantly. At the beginning of the
year the organization had approximately 60 members, growing to approximately 220
by the end of 2004. During the year the Forum also changed its focus from purely
fixed broadband wireless applications to a wider range of deployment scenarios,
including networks that will support nomadic, portable and eventually mobile
users.
  We
anticipate that standardization in the BWA industry will increase the
availability of low-cost components for inclusion in BWA equipment, including
our Customer Premises Equipment (“CPE”). As a result, assuming no other economic
factors change, we anticipate the cost of BWA equipment to decrease over time
and the aggregate number of BWA solutions sold per annum to
increase.
  We have
developed and continue to develop some of our products in accordance with
existing, emerging and anticipated wireless-industry standards. In particular,
we develop products and product features that are designed to conform to the
IEEE 802.16-2004 and the IEEE 802.16e standards. See “Risk Factors- If we are
not able to implement a program to conform our products to industry
standards...”
  *The
Need for Fixed Wireless Access and Broadband Wireless Solutions*
  The
limitations and high costs of other existing access solutions have led many
network operators to consider deployment of fixed wireless access networks.
Fixed and BWA technology permits fast, flexible and cost-effective network
rollouts. Many varieties of wireless access systems exist, some offering only
basic voice telephony services, others delivering only IP data and data-derived
services. Airspan’s technologies provide a platform for delivery of *either
or both* high
quality voice *and* high-speed data.
  Each type
of wireless system operates within assigned frequency bands that can be
segmented by the bandwidth of data that can be carried, the effective range of a
single cell and the cost of deployment. Currently available wireless
technologies include cellular, fixed point-to-multipoint wireless, fixed
point-to-nomadic and portable wireless applications, cordless, wireless local
area networks (“Wireless LANs”, networks that cover a building or a small
geographic area), radio systems using frequencies between 10GHz and 100GHz, or
millimeter wave, as well as various “next generation” mobile wireless
technologies.
  Each of
these technologies is best suited to specific applications. Systems based on
millimeter wave technologies (“LMDS Systems”), for example, provide high
bandwidth services. However the LMDS Systems have high costs that make them
suitable only for large users of data, have significant range limitations,
require line-of-sight to provide services and are adversely affected by weather
conditions. These systems are generally targeted at large business customers in
major cities.
  Lower
frequency cordless and mobile cellular technologies have been widely deployed to
deliver wireless voice and limited data services. Cellular technologies
typically have a wider geographic range than our system and provide various
forms of nomadic, portable and mobile connectivity. Systems with lower
frequencies of operation are able to propagate further, while cordless
technologies have a more limited geographic range than our system. The lower
bandwidth of cordless and cellular technologies today makes them unsuitable for
delivering reliable, high-speed Internet access on a broad scale. The deployment
of third generation mobile wireless systems in the future may, however, narrow
the gap in data transmission rates between mobile technologies and our BWA
systems.
  4
 Wireless
LANs have greater bandwidth than our systems, but like cordless technologies,
have been generally more expensive to deploy in large geographic areas because
of their limited geographic range. Again, future developments of LAN products
using the IEEE802.16 standard and/or WiMAX may narrow the gap in range in the
future. Wireless LAN technologies are not currently optimized, however, for
delivery of high-quality voice services.
  Our
systems are designed to provide a range of communications services in the 700MHz
to 6.0GHz frequency bands, in both licensed and unlicensed spectrum allocations.
The performance characteristics of these frequency bands make them ideal for
broader market applications for service providers. These bands are less
sensitive to line-of-sight obstructions and weather conditions than the
millimeter wave technologies described above, even though they offer lower
capacity for data transmission. The availability of our technology at attractive
prices in these frequencies makes it easier for operators and ISPs to develop
viable business cases for their services. We therefore believe that our products
are often more suitable than mobile, cordless or Wireless LAN technologies for
enabling network operators and ISPs to provide fixed, high-speed data and voice
services using both licensed and unlicensed radio frequencies.
  We
believe our systems deliver these services reliably and cost effectively and
provide the following benefits:
  *Data
and Voice Services.*  Our
AS4000, Proximity and AS4020 Wireless DSL solutions provide network operators
with combined and simultaneous optimized delivery of *both* high-speed packet data *and* wire-quality voice services. Our WipLL Solution gives network operators and ISPs
a relatively low cost data and voice-over-Internet-Protocol (“VoIP”) solution.
Our Airspan branded AS4030 solution provides high-speed data rates that can be
used for cellular backhaul or, corporate or public sector high-speed Internet
access. Collectively, we refer to these solutions as the Airspan BWA Solutions.
Our systems flexibly allocate the available bandwidth to the services required,
thereby permitting the radio resources and spectrum to be used most efficiently.
Our systems are designed as modular solutions to enable deployments to be
expanded as our technologies and customers’ needs evolve. We provide a single
subscriber unit that delivers the voice or data connection, or a combination of
both, to a subscriber, thus eliminating a need for multiple access devices in
customer premises. During 2005 we will supplement this capability with our
AS.MAX product line that will support both voice and data applications using
Voice-over-IP technology.
  *Quality
of Service and Reliability.*  Our
AS4000 and AS4020 solutions are based on DS-CDMA technology (defined below),
which allows network operators to offer high-quality data and voice services
with the same level of reliability that traditional telephone networks provide.
Our field proven Proximity solution is based on a TDMA (defined below)
technology that also provides high quality data and voice services to network
operators at levels of reliability that are better than many wireline based
networks. Our WipLL Solution is based on FH-CDMA technology (defined below),
which allows operators and ISPs to offer a high-quality data and voice services
using the VoIP solution. The Airspan branded AS.MAX product line is based on the
802.16 standard and will initially use 256 OFDM (defined below) technology to
provide excellent non line of sight characteristics. These solutions provide
wide-area coverage, security and resistance to fading. In addition, our systems
allow alternative service providers to bypass the incumbent’s network, enabling
them to monitor on a real time basis an end-user’s network access connection.
Our products are successfully deployed and operated in a wide range of demanding
environments throughout the world.
  *Rapid,
Cost-Effective Deployment.*  Our
wireless solutions are generally less expensive to deploy than fiber or copper
wire networks or other high-speed fixed wireless networks. Our systems’ wide
area coverage requires fewer base stations, allowing faster deployment with
lower initial capital outlays. A single AS4020 or Proximity base station can
cover up to 70 square miles in an urban setting and as much as 700 square miles
in a rural setting, on a near line of sight basis. A single WipLL solution base
station can cover up to 175 square miles. The AS.MAX Product line supports
similar near line-of-sight distances, but also supports non line-of-sight
operation over 50 square miles. Network operators and ISPs can quickly begin
generating new subscriber revenues due to the reduced time for up-front planning
and the relative ease and speed of installation of our base stations. Our
systems allow our customers to rapidly add new subscribers, who can be brought
online in hours once the basic infrastructure is in place. Network operators and
ISPs have the advantage of a lower up-front infrastructure cost, adding extra
network equipment to increase capacity only when they have demand from their
customers.
  *Flexibility
and Expandability.*  Our
systems can be easily and quickly configured to meet specific customer
requirements for capacity and frequency allocations. The modular design of our
systems permits customization and expansion as customer requirements increase.
The point-to-multipoint design of the Airspan BWA Solutions also facilitates
expansion by permitting multiple subscribers to be connected to a single base
station. In addition, multiple types of service, including data and voice, can
be delivered over a single radio channel enabling network operators and ISPs to
differentiate and customize their service offerings. Our products use technology
that allocates bandwidth upon subscriber demand and allows a single Base Station
to accommodate from 100 to 3,000 subscribers, depending upon the solution
deployed.
  5
 *Comprehensive
Implementation and Support Solutions.*  We offer
our customers a range of software tools that provide system-wide analysis for
optimizing geographic coverage and identifying and solving potential sources of
interference. Our software tools also can be used to provide service
qualification and initiate service activation for new customers. The tools also
provide alarm, maintenance and testing functions. In addition, to facilitate
deployment and operation of our systems, we offer network installation, training
and support services. The network operator is generally responsible for site
preparation and installation of the subscriber terminals. We have developed a
worldwide network of regional offices and subcontractors that allows us to
provide local technical and operational support for our customers wherever our
products are deployed. We also operate a 24-hour technical help line providing
additional support and troubleshooting for all our customers.
  **Our
Strategy**
  Our goal
is to be the world’s leading provider of broadband wireless access systems to
local exchange carriers, other network operators and enterprises seeking to use
fixed broadband wireless access systems for their communications. Key elements
of our strategy include the following:
  *Capitalize
on existing deployments of our systems to attract new
customers.*  Our
numerous installations with operators and enterprises worldwide serve both as
proof that our technology concept works and as a reference point when we sell to
others. We intend to continue to leverage our existing relationships with
customers to attempt to become their primary provider of broadband fixed
wireless access systems. We are particularly focused on expanding our existing
customer relationships to our customers’ subsidiaries and affiliates worldwide.
  *Maintain
our technology position.*  We
believe that we have established a strong technology position in the market for
fixed wireless access solutions, and we seek to maintain this position by
continuing to make substantial investments in research and development and by
strategic acquisitions. Our research and development efforts are particularly
focused on increasing the speed and capacity of data transmission and
operational coverage area, while reducing the cost of our infrastructure
equipment. We are also focused on reducing the installation time and costs of
our subscriber terminals. We are actively involved in the development of
standards through our membership in or participation with leading standards
organizations such as the IEEE’s 802.16 group, the WiMAX Forum and ETSI
(European Telecommunications Standards Institute). We believe our leadership
role in WiMAX may give us a lead in the development and sale of WiMAX
Certified TM compliant products. We also expect to continue to seek to acquire new
businesses, products and technologies to accelerate the development of our
products and our time-to-market with new advanced products.
  *Target
key growth market opportunities globally.*  Our
broadband wireless solutions find their strongest competitive advantage in areas
where there is a growing demand for high-speed data or for combined high-speed
data and voice services, and where cost considerations make traditional
solutions impracticable. As a result, in a developed market like the United
States, we focus on service providers that are targeting small and medium sized
businesses, small office/home office users and high-end consumers as well as end
users in suburban and rural areas. We believe our WipLL product is especially
attractive to service providers in such markets. Additionally in the United
States we have sold our AS4000 and AS4020 solutions to customers who have had a
federally imposed requirement to use the PCS wireless spectrum they have
acquired by auction or risk losing that spectrum. In the developing world, we
believe our opportunities are generally much broader due to the general
inadequacy of the existing communications infrastructure. In these markets,
wireless solutions can be the basis for a new national telecommunications
infrastructure.
  *Develop
and expand our strategic relationships.*  We intend
to develop and expand our strategic relationships with large communications
equipment manufacturers to help us market our products to network operators
deploying large-scale turnkey networks. These relationships facilitate broader
deployments of our systems worldwide, through stronger sales presence and
additional integration services and support capabilities provided by those
manufacturers. We also intend to form strategic relationships with
communications companies situated within certain countries where there are
competitive advantages to having a local presence.
  *Expand
sales, marketing and customer support presence in key markets.*  We are
constantly in the process of seeking key areas of marketing opportunities.
Accordingly, we often refocus our direct sales, marketing and customer support
presence in key markets to drive additional deployments and increase awareness
of our products among network operators. We intend to continue to hire sales and
marketing personnel in new sales and customer-support offices in key strategic
markets globally where we have perceived strong demand for our product. We also
intend to continue to develop a network of resellers and distributors of the
WipLL product line for the enterprise and ISP markets.
  6
 *Expand
the product range that we have to offer.*  We are
seeking to continue to expand our range and effectiveness of offered BWA
solutions through both internal growth and acquisition.
  **Products**
  *General*
  We supply
BWA systems that connect residential and business customers to a communications
or Internet service provider’s network, or that connect various subscriber
terminals in an enterprise network.
  Below is
a diagram of our wireless systems that illustrates the relationship between
subscriber terminal equipment, base station equipment and a communication
service provider’s network
  
  The
service provider installs base stations at various locations within its
geographical area of operation that are linked to the rest of the
telecommunications network at the central office (“CO site”). Voice traffic is
routed to the public switched telecommunications network (“PSTN”) via a switch
whilst data traffic can be connected directly to the Internet or to leased line
data networks, typically via a router. Each base station in turn transmits and
receives voice and high-speed data and Internet traffic via a wireless link from
subscriber terminals located at residential and business premises.
  Our
products consist of the following broadband access platforms operating in
licensed and unlicensed frequencies between 700 MHz and 6.0GHz:
  *Broadband
Access Platforms*
  *•AS4000 and AS4020
Solution* .  Our
AS4000 and AS4020 Solution is a multi-service platform supporting carrier-class
voice, IP data, leased line services and Integrated Services Digital Network
(“ISDN”) solutions. The product range includes a wide variety of Subscriber
Terminal (“ST”) types to deliver flexible combinations of voice and data
services to end-users at speeds of up to 2 Mbit/s.
  7
 • *Proximity
Solution.*  Our
Proximity Solution is a low cost, multi-service platform supporting
carrier-class voice, modem and packet data. The product range includes a variety
of ST types to deliver combinations of voice and data services at speeds up to
100 Kbit/s to end-users and base stations with variable capacities.
  • *WipLL
Solution.*  Our WipLL
Solution is a low cost, high-performance IP data platform, supporting high-speed
data, high-speed Internet access, VoIP services and multimedia services in a
multitude of frequencies at speeds of up to 1.5 Mbit/s. The product range
includes a variety of ST types, including an indoor model with built-in antenna,
which does not require line of site to a base station receiver and which can be
installed by the end user.
  • *AS4030
Solution.*  Our
Airspan branded AS4030 Solution is an IEEE 802.16a compliant high performance,
high end product operating in the 3.5GHz frequency band, suitable for the
transmission of data at speeds up to 36 Mbit/s and, accordingly, compatible for
use with applications requiring E1 or T1 circuits. The solution has been
designed to handle backhaul and high-speed Internet connections for corporate
customers, schools and hospitals.
  • *AS3030
Solution.*  Our
Airspan branded AS3030 Solution is a proprietary high performance, high end
product operating in the 5.4GHz and 5.8GHz frequency bands, suitable for the
transmission of data at speeds up to 50 Mbit/s and, accordingly, compatible for
use with applications requiring E1 or T1 circuits. This solution, like the
AS4030 solution, has been designed to handle backhaul and high-speed Internet
connections for corporate customers, schools and hospitals.
  • *AS.MAX
Solutions.*  Our
AS.MAX product line of WiMAX solutions will deliver high performance at low cost
and can support IP services, such as voice and video, at speeds up to 10 Mbit/s.
The AS.MAX solution has been designed to deliver robust, high quality IP service
to residential and enterprise users in the developed and developing world. The
AS.MAX product line includes new CPE types that allow the end-user to
self-install the CPE.
  *Network
Management Systems*
  Our
product platforms are supported by network management systems (“NMS”) that
perform configuration, alarm, test and performance management activities that
help ensure that the services provided over a network are uninterrupted and of
high quality. All of our NMS systems are flexible and can be expanded to suit a
range of different networks. They permit network operators to remotely manage a
geographically dispersed set of network elements. They also all feature
intuitive graphical user interfaces, and allow remote software upgrades for all
deployed equipment. Our NMS systems are marketed under the names AS8100
(Sitespan), AS8200 (Netspan), AS8300 (AirspanAccess) REM (Remote Element
Manager) and WipManage.
  *Installation
tools*
  Our
installation tools are designed to assist our customers with installation or
troubleshooting of customer premises equipment installations in an efficient and
effective manner. Our installation tools include the following:
 
 • *AS7020
(STMon)* — a
PC-based software application for AS4000 and AS4020 subscriber installations
  • *AS7010
(STMeter)* — a
self-contained handheld tool for AS4000 and AS4020 subscriber installations
  • *WipConfig* — a PC
or PDA-based software application for WipLL subscriber installations
  • *Proximity
RIS* — a
handheld tool for Proximity subscriber installations
  *Radio
Planning*
  Our
planning and configuration tool, the AS9000 (“AS9000”), is a sophisticated
software solution that enables operators to plan and deploy our wireless
systems. This product is based on third-party software customized for use with
our systems. The main task of the planning tool is to find the optimal location
and configuration for base station deployment. The system provides a powerful
prediction engine that can generate coverage maps for multiple scenarios until
the best-case scenario is found. From these data detailed predictions of service
availability can be made allowing service providers to accurately target
markets.
  Once the
locations of the base stations have been determined, AS9000 can be used to
compare the way the radio signals fade as they spread out from a base station
transmitter and the extent of coverage. The four key aspects of the predictive
tool are the terrain (altitude) databases, clutter (natural terrain features and
man-made obstructions) information, antenna information and system
configuration, which are used to predict transmission coverage.
  *New
Products and Enhancements*
  During
2004 we introduced a number of new products and product enhancements.
  8
 
  ·
    The
      addition of a number of additional frequency variants in the WipLL product
      line, including 700 MHz and 1.5 GHz.
  ·
    An
      enhancement to the AS4020 high-speed data and voice platform to provide
      increased capacity.
  ·
    Improvements
      to the Netspan NMS enabling the use of distributed
  servers.
  ·
    The
      development of a higher performance, lower cost integrated Subscriber
      Terminal for the AS 4000 and AS4020 platforms
  We are
seeking to introduce further new products in 2005, including:
  ·
    New,
      Customer Premise Equipment for our Proximity product line which supports
      both voice and packet data more
efficiently.
  ·
    A
      new WiMAX product line, called AS.MAX consisting of four types of Base
      Stations and two types of Customer Premise
Equipment.
  o
    Base
      Stations:
  §
    HiperMAX
      - a high-end product enabling indoor coverage,
  §
    MacroMAX
      - a mid-range product for indoor and outdoor coverage,
  §
    MicroMAX
      - a low-end range product for low density outdoor deployments and in-fill
      applications,
  §
    PrimeMAX
      - an update of our AS4030 product for Backhaul
  Applications
  o
    Customer
      Premise Equipment:
  §
    EasyST
      - an indoor, self-install WiMAX CPE,
  §
    ProST
      - a professionally installed outdoor CPE
  ·
    Netspan
      NMS to manage all AS.MAX products using the 802.16
MIB.
  **Technology**
  As of
March 1, 2005, we had 75 people engaged in research and development located in
Uxbridge (UK) and Airport City (Israel). Our technologies have been under
continuous development since 1992, deliver high performance and are resilient in
a very wide range of deployment conditions.
  *Frequency
Choice*
  We
recognized early that no single fixed wireless spectrum would be made available
for access services around the world. Consequently, our solutions are designed
to easily change radio frequency subsystems to match a customer’s specific
spectrum allocation. We believe our wireless solutions provide our customers
with the widest choice of radio subsystems in the industry within the 700MHz to
6.0GHz bands, encompassing both licensed and unlicensed spectrum.
  *Technology
- Existing Product lines*
  Our
AS4000 and AS4020 products are based on well-established Direct Sequence Code
Division Multiple Access (“DS-CDMA”) technology that allows multiple users to
simultaneously share a single radio channel while providing a high degree of
security between channels and other users.
  Our WipLL
product line utilizes Frequency Hopping Code Division Multiple Access
(“FH-CDMA”), which also provides a high level of immunity to interference and a
robust performance.
  Our
Proximity product line employs a Time Division Multiple Access (“TDMA”)
technology that provides a high link budget and robust reliability.
  Our
Airspan branded AS4030 utilizes 256-FFT (“Fast Fourier Transforms”) Orthogonal
Frequency Division Multiplexing (“OFDM”) air interface technology in accordance
with the IEEE 802.16a standard. Our AS3030 products utilize a proprietary,
64-FFT OFDM technology. OFDM is an air interface technology enabling non line of
sight operation as well as high data capacity and robust reliability.
  9
 *Technology
- New Product lines*
  We are
investing in the development of a line of products known as AS.MAX for the
WiMAX/IEEE 802.16 market. AS.MAX products will be based on an air interface that
employs OFDM and Orthogonal Frequency Division Multiple Access (“OFDMA”). This
interface has characteristics that permits broadband wireless signals to
penetrate objects more effectively than the interfaces used in our earlier
products, and thereby creates significant opportunity for the installation of
CPE in non-line of sight (“NLOS”) environments. AS.MAX products are expected to
comply with the IEEE’s 802.16.
  Standard.
Through our leadership in the WiMAX Forum, we participate in the development of
the IEEE 802.16 standards and WiMAX Forum technical activities. As a part of our
development of the AS.MAX portfolio, we are working closely with key technology
partners. These include:
  ·
    Intel
      - ASICs (“Application Specific Integrated Circuit”) for CPE
      equipment
  ·
    Picochip
      - High performance parallel processors for Software Defined Radio
      basestations
  We are
also investing in the development of technologies and techniques that will
provide further performance benefits. These include the development of
multi-channel radio transceivers and smart antenna technology.
  *Intellectual
Property*
  During
the development of our CDMA-based systems (AS4000, AS4020 and WipLL) we
generated a significant patent portfolio. As of March 1, 2005, our development
efforts have resulted in 46 separate U.S. patents granted (together with various
foreign counterparts), with a further 6 pending U.S. applications. We do not
license CDMA technology from or pay royalties to any other companies that have
developed CDMA-based wireless technologies. To improve system performance and
reduce costs, we have developed software and custom integrated circuits that
incorporate much of our IP, and which are the key elements of our wireless
solutions.
  In
connection with our acquisition of the Proximity business from Nortel, Nortel
assigned to us all of its rights, title and interest in the Proximity trademarks
and service marks and certain of its copyrights used exclusively with the
Proximity products. In addition, Nortel has granted us a non-exclusive,
world-wide license to use its U.S. patents that relate to the Proximity products
for the term of the patents. Nortel has also granted us a non-exclusive
word-wide license to use certain of its copyrights, which were not assigned to
us and its trade secrets relating to the Proximity Products. The copyright and
trade secrets licenses are perpetual.
  We market
the AS4030 and AS3030 products under the Airspan trade name pursuant to a
manufacturing and license agreement with a third party.
  *Extensive
testing and integration facilities*
  The
performance and coverage area of a BWA system is dependent on a number of
factors including: the strength of the radio signal transmitted, the sensitivity
of the radio receiving apparatus, the radio frequency used and the clutter
(natural terrain features and man-made obstructions). The ability of an operator
to use a BWA system is predominantly dependent on the environment in which the
BWA system is deployed and base stations and customer premise equipment are
installed. Our process of radio planning considers these important factors to
maximize performance, coverage and availability.
  We
continue to operate live multi-cell test networks that provide always-on
high-speed Internet access and voice services to a number of volunteer
end-users. The AS4020 test network operates in and around the town of Stratford
upon-Avon, U.K., and the WipLL network operates in the vicinity of Airport City,
Israel. In addition to providing valuable long-term system reliability,
availability and other performance data, these unique facilities permit us to
empirically investigate radio transmission and reception and interference
behavior for existing and emerging products.
  *Research
and development expenditures*
  We incur
Research and Development expenditures in an effort to reduce manufacturing
costs, develop new products or product enhancements and to maintain the
functionality of existing products as integrated components are required to be
replaced. During the years ended December 31, 2004, 2003, and 2002, we spent
$18.8 million, $14.4 million and $13.6 million, respectively, on research and
development of our products.
  10
 **Customers**
  We
believe our existing and target customers are principally comprised of network
operators, looking to provide their customers with fixed, nomadic and portable
access solutions, as well as backhaul and bridging solutions that can be
generally described as follows:
  •CLECs and ILECs that
operate in areas of relatively low tele-density or in areas where the
installation of copper lines or coaxial cables is cost prohibitive, or where
their existing copper lines cannot effectively deliver broadband data
connectivity;
  •mobile carriers that use
their excess or under-utilized spectrum to offer broadband access services to
their customers;
  •cable TV operators, who
use BWA systems to extend the reach of their networks, and/or who offer
telephone services in addition to their basic TV services;
  •ISPs that operate in
areas where other carriers cannot offer broadband access services; and
  •enterprises that operate
private, closed loop networks.
  We began
shipping our products in 1996. By the end of December 2004, we had shipped to
over 300 customers in more than 90 countries. With the addition of the Proximity
product line our customer base expanded and our customers include large fixed
wireless access carriers including Axtel S.A. de C.V., Mexico (“Axtel”). Axtel
is the world’s largest broadband fixed wireless operator whose network is not
based on mobile technology.
  We
currently derive, and expect to continue to derive, a substantial percentage of
our net sales from fewer than ten customers. In fiscal 2004 Axtel S.A. de C.V.,
Mexico (“Axtel”) accounted for approximately 70% of our annual revenue and was
the only customer that individually accounted for more than 10% of our annual
revenue. In fiscal 2004 82% of our revenue was derived from our top ten
customers. It is possible that in fiscal 2005 one customer, Axtel, could account
for greater than 50% of our projected annual revenue. Our business relationship
with Axtel is summarized below.
  Our
contracts with our customers typically provide for delivery of product and
services, including installation and commissioning, training and maintenance. In
addition, we generally also agree to provide warranty for the equipment and
software for a limited period of time.
  Our
contracts are generally non-exclusive and may contain provisions allowing our
customers to terminate the agreement without significant penalties. Our
contracts also may specify the achievement of shipment, delivery and service
commitments. We are generally able to meet these commitments or negotiate
extensions with our customers.
  Our
largest customer is Axtel. As a result of the acquisition of the Proximity
business from Nortel Networks, Airspan has assumed the right and obligation to
supply products and services to Axtel pursuant to agreements (the “Axtel
Agreement”) signed between Nortel Networks and Axtel. The Axtel Agreement was
amended in April, 2004 and December, 2004. Pursuant to our existing agreements
with Axtel, Axtel has committed to purchase a minimum of $38 million of product
from us during the period from January 1, 2005 until December 2006.
  The Axtel
Agreement contains terms and conditions typical for supply and support
agreements of this type, including the requirements for minimum annual
non-cancelable orders to be placed by Axtel, for Axtel to make certain cash
down-payments with orders placed and for lead times for delivery of products. We
have agreed to provide technical assistance and support services related to the
products used in Axtel’s network, including emergency recovery and remote
technical assistance, as well as other services at agreed upon prices. The Axtel
Agreement gives Axtel a non-exclusive and perpetual license to use the Proximity
software, subject to certain events of default, and a one-year, limited warranty
with respect to the delivered products. The Axtel agreements may be terminated
by either party in the event of the other party’s failure to cure a breach of
any term or condition of the agreement. The Axtel agreements state that either
party may terminate the agreement in the event the other party encounters
various forms of financial difficulty, insolvency or bankruptcy and where the
other party has materially failed to perform any term under the Agreement that
has not been cured within 30 days of notification.
  **Sales,
Marketing and Customer Service**
  We sell
our systems and solutions through our direct sales force, independent agents,
resellers and original equipment manufacturer (“OEM”) partners. Our direct sales
force targets network operators, ISPs and enterprises in both developed and
developing markets. Currently we have direct sales offices in the U.S., U.K.,
Australia, China, Czech Republic, Indonesia, Japan, New Zealand, the
Philippines, Poland, Russia, South Africa and Sri Lanka. In markets where we do
not have a direct sales presence, we also sell through independent agents,
resellers and system integrators who target network operators and other
customers. In certain countries we also sell to OEMs who may sell our products
under their names.
  11
 Our
marketing efforts are focused on network operators and ISPs that provide voice
and data or data-only communications services to their customers, and on
enterprises. Through our marketing activities we provide technical and strategic
sales support including in-depth product presentations, network design and
analysis, bid preparation, contract negotiation and support, technical manuals,
sales tools, pricing, marketing communications, marketing research, trademark
administration and other support functions.
  A high
level of ongoing service and support is critical to our objective of developing
long-term customer relationships. To facilitate the deployment of our systems,
we offer our customers a wide range of implementation and support services
including spectrum planning and optimization, installation, commissioning,
post-sales support, training, helpline and a variety of other support services.
  Our
subcontractors, who have the expertise and ability to professionally install our
products, perform most major installations. This enables us to efficiently
manage fluctuations in volume of installation work.
  As of
March 1, 2005, we had 68 employees dedicated to sales, marketing and customer
service.
  **Manufacturing**
  We
subcontract all of our manufacturing to subcontractors, who provide full service
manufacturing solutions, including assembly, systems integration and test
procedures. Except as noted below, our finished products are shipped directly
from the manufacturing subcontractor to customers.
  We
currently outsource the manufacturing of our AS4000, AS4020 and Proximity
products directly to a global subcontract manufacturer, Solectron Corporation
(“Solectron”). In addition to providing full service manufacturing solutions,
Solectron provides a range of manufacturing services including prototyping, and
new product introduction
  Solectron
manufactures our AS4000 and AS4020 subscriber and base station products and
Proximity base station products in Scotland. Solectron Milpitas USA manufactures
our Proximity base station circuit boards and Solectron Guadalajara Mexico
manufactures our Proximity subscriber terminals. Finished AS4000, AS4020 and
Proximity products are stored, prior to dispatch to end customers, at
third-party logistics companies based in the UK.
  Manufacture
of our WipLL products is outsourced to an Israeli manufacturing subcontractor
named Racamtech Limited, which is part of the CAM Group (“CAM”), based in
Israel.
  A third
party based in Canada manufactures our Airspan branded AS3030 and AS4030
products pursuant to a three year contract ending September, 2006, which is
cancelable upon twelve months notice.
  Our
agreements with our manufacturing subcontractors are all non-exclusive and may,
except as noted above, be terminated by either party with six months notice
without significant penalty. Other than agreeing to purchase the materials we
request in the forecasts we regularly provide, we do not have any agreements
with our manufacturing subcontractors to purchase any minimum volumes. Our
manufacturing support activities consist primarily of prototype development, new
product introduction, materials planning and procurement and quality control.
  Some of
the key components of our products are purchased from single vendors for which
alternative sources are generally not readily available in the short to medium
term. If these vendors fail to supply us with components because they do not
have them in stock when we need them, if they reduce or eliminate their
manufacturing capacity for these components or if they enter into exclusive
relationships with other parties which prevents them from selling to us, we
could experience and have experienced significant delays in shipping our
products while we seek other sources. During the third quarter of 2004, as a
result of a temporary shortage of components, we experienced temporary
difficulty manufacturing enough Proximity products to meet existing orders in a
timely manner. See “Risk Factors — Our dependence on key suppliers and contract
manufacturers.”
  Our
operation and manufacturing strategies enable us to configure our products to
meet a wide variety of customer requirements and facilitate technology transfer
between our research and development group and our contract manufacturers. We
are ISO 9001 certified.
  **Competition**
  We
compete in a relatively new, rapidly evolving and highly competitive and
fragmented market. We compete with companies that are producing access systems
for fixed wireless networks, cellular networks, wired DSL networks, cable
networks and occasionally fiber optic cable and satellite networks.
  We
believe the primary competitive challenges our business faces
include:
  •competing with
established, traditional wired network equipment providers and their wired
solutions, and
  12
 •convincing service
providers that our solutions are superior to competing wireless
solutions.
  We face,
or believe that we will face, competition from various other providers of
wireless communications products and services and, while we believe our industry
to be competitive, we do not believe there is a single dominant
competitor. Competitors
vary in size and scope, in terms of products and services offered. With respect
to the broadband fixed wireless solutions we offer to serve in licensed and
unlicensed frequencies, we believe we compete directly with Motorola, Siemens,
Alvarion, Proxim, SR Telecom, and with a number of smaller privately-held
companies. We also believe we compete indirectly with a number of large
telecommunication equipment suppliers such as Harris and Alcatel.
  We
believe we encounter, any may increasingly encounter, competition from competing
wireless technologies such as cellular technology. Cellular networks are not
capable of delivering both voice and limited broadband data connectivity to
fixed, mobile, nomadic and portable applications. In addition, our technology
competes with other high-speed solutions, such as wired DSL, cable networks, and
occasionally fiber optic cable and satellite technologies. The performance and
coverage area of our wireless systems are dependent on some factors that are
outside of our control, including features of the environment in which the
systems are deployed such as the amount of clutter (natural terrain features and
man-made obstructions) and the radio frequency available. Any inability to
overcome these obstacles may make our technology less competitive in comparison
with other technologies and make other technologies less expensive or more
suitable. Our business may also compete in the future with products and services
based on other wireless technologies and other technologies that have yet to be
developed.
  Many of
our competitors are substantially larger than we are and have significantly
greater financial, sales and marketing, technical, manufacturing and other
resources and more established distribution channels. These competitors may be
able to respond more rapidly to new or emerging technologies and changes in
customer requirements or to devote greater resources to the development,
promotion, sale and financing of their products than we can. Furthermore, some
of our competitors may make strategic acquisitions or establish cooperative
relationships among themselves. See “Risk Factors — Competition from alternative
communications systems.”
  **Employees**
  As of
March 1, 2005, we had a total of 221 full-time employees, including contract
personnel, of which 104 were based in the UK and 49 were based in Israel. Our
employees are not presently represented by a labor union. We have not
experienced any work stoppages and consider our relations with our employees to
be good.
  **Executive
Officers and Directors**
  The
names, ages and positions of our executive officers and directors as of March 1,
2005 are listed below along with their business experience during the past five
years.
 
 **Name**
    **Age**
    
    **Title**Matthew
      J. Desch
    47
    
    Chairman
      of the Board of DirectorsEric
      D. Stonestrom
    43
    
    President
      and Chief Executive Officer, DirectorJonathan
      Paget
    58
    
    Executive
      Vice President and Chief Operating OfficerPeter
      Aronstam
    52
    
    Senior
      Vice President and Chief Financial OfficerHenrik
      Smith-Petersen
    41
    
    President,
      Asia PacificDavid
      Brant
    41
    
    Vice
      President, Finance and ControllerH.
      Berry Cash
    64
    
    DirectorRandall
      E. Curran
    50
    
    DirectorMichael
      T. Flynn
    56
    
    DirectorGuillermo
      Heredia
    63
    
    DirectorThomas
      S. Huseby
    57
    
    DirectorDavid
      A. Twyver
    58
    
    Director
 
 **Matthew
J. Desch** became
Chairman of the Board of Directors of Airspan on July 1, 2000. Mr. Desch has
been serving as the Chief Executive Officer of Telcordia Technologies, a private
communications software and services supplier since July 2002. Since November
2003, Mr. Desch has served as a member of the Board of Directors of SAIC, Inc.,
a publicly-traded research and engineering firm. Telcordia is a supplier of
operations support systems and services for service providers around the world.
Since January 2003, Mr. Desch has served as a member of the Compensation
Committee and a member of the Board of Directors of Flarion, Inc. Flarion is a
privately held company that manufactures mobile wireless broadband access
equipment. From 1987 through May 2000, Mr. Desch served in a variety of
management positions with Nortel Networks, a global supplier of networking
solutions and services that support voice, data, and video transmission over
wireless and wireline technologies. From 1996 through May 2000, he served as
Executive Vice President and President of Nortel's Wireless Networks division,
responsible for Nortel's global wireless infrastructure business. Mr. Desch also
has a B.S. from Ohio State University and an M.B.A. from the University of
Chicago.
  13
 **Eric
D. Stonestrom** joined
Airspan at its inception in January 1998 as Executive Vice President and Chief
Operating Officer. In May 1998, he was named President and Chief Executive
Officer as well as a member of the Board of Directors. From 1995 to January
1998, Mr. Stonestrom was employed by DSC Communications Corporation as a Vice
President of operating divisions, including the Airspan product line. From 1984
until 1995, Mr. Stonestrom worked at Bell Laboratories and AT&T in a variety
of positions. He received B.S., M.S. and M. Eng. degrees in 1982, 1983 and 1984,
respectively, from the College of Engineering at the University of California at
Berkeley.
  **Jonathan
Paget** joined
Airspan in April 1999 as Vice President, Product Operations. In June 2000, Mr.
Paget was named Executive Vice President and Chief Operating Officer. Prior to
joining Airspan, from 1997 to October 1998, he served as Group Chief Executive
of Telspec Plc, a company specializing in the development, manufacture and sale
of advanced wireline telecommunications equipment. From 1992 to 1996, Mr. Paget
served as Vice President and General Manager of the European Radio Networks
Solutions Group of Motorola, a provider of trunked radio systems. He holds a
Masters Degree in Engineering Science from Cambridge University.
  **Peter
Aronstam** joined
Airspan in March 2001 as Senior Vice President and Chief Financial Officer. From
1983 to 2001, Mr. Aronstam served in a variety of positions at Nortel Networks
Limited, the last as Vice President, Customer Financing of Nortel’s Caribbean
and Latin America region. From 1978 to 1980, he worked at Bank of Montreal in
its international banking division and from 1981 to 1983 at Bank of America in
its Canadian corporate banking group. He received B.Com., LLB and PhD. degrees
in 1971, 1973 and 1978, respectively, from the University of the Witwatersrand
in Johannesburg, South Africa.
  **Henrik
Smith-Petersen** joined
Airspan in February 1998 as Senior Director in Sales. He became Regional Vice
President for Asia Pacific and later President, Asia Pacific in February 2001.
Prior to joining Airspan, he was with DSC Communications Corporation, a United
States based telecommunications company, from July 1997, as Director of Business
Development. While with DSC he gained extensive experience developing new
business and partnerships worldwide in the wireless telecommunication market.
Before joining DSC, he worked for four years for AT&T’s Network Systems
Group in Italy, where he developed AT&T’s operation systems business and
later became Key Account Manager for Italtel, AT&T’s local partner in Milan,
developing the Telecom Italia business. He received his B.Sc. in Business
Economics degree from Copenhagen School of Economics in Denmark in 1990, and a
M.B.A. from SDA BOCCONI University in Milan in 1992.
  **David
Brant** joined
Airspan at its inception in January 1998 as Finance Director and in July 2000
was named Vice President, Finance and Controller. From 1990 to January 1998, Mr.
Brant was employed by DSC Communications Corporation, a United States based
telecommunications company in various financial roles, the last post as Director
of European Accounting. He received a B.A. in Mathematical Economics in 1984
from Essex University and is a Fellow of the Association of Chartered Certified
Accountants.
  **H.
Berry Cash** has
served as a director of Airspan since January 1998. He has been a general
partner with InterWest Partners, a venture capital fund focused on technology
and healthcare, since 1986. Mr. Cash currently serves as a member of the Board
of Directors, a member of the Compensation Committee, and a member of the Audit
Committee of i2 Technologies, Inc., a public company which is a provider of
software and services that help customers achieve measurable value through
improvements in coordination and collaboration and Staktek Holdings, Inc., a
public company providing high-density packaged memory stacking solutions for
systems and applications. Mr. Cash is also a member of the Board of Directors
and a member of the Compensation Committee for the following public companies:
Silicon Laboratories, Inc., a developer of mixed-signal integrated circuits for
products such as cell phones, set-top boxes, and computer modems, CIENA Company,
a provider of next generation intelligent optical networking equipment. and
First Acceptance Corporation, a public company which provides non-standard
automobile insurance. Mr. Cash received a B.S. in Electrical Engineering from
Texas A&M University and a M.B.A. from Western Michigan University.
 
 **Randall
E. Curran** joined
the Board of Directors of the Company in October 2004. In February 2005, Mr.
Curran was appointed Chief Executive Officer of ITC^DeltaCom, Inc., a provider
of full-service, integrated telecommunications and technology solutions to
customers in the southeastern United States. From August 2004 to February 2005,
Mr. Curran was a Senior Managing Director in the Interim Management Practice of
FTI Consulting, Inc., a publicly-traded company which provides
corporate finance/restructuring, forensic and litigation consulting, and
economic consulting. At FTI Consulting, Inc., Mr. Curran specialized
in the telecommunications sector. From September 2000 until November 2003, Mr.
Curran held the position of Chairman and Chief Executive Officer of ICG
Communications, Inc., a publicly-traded facilities-based communications provider
of Internet and voice communication services. From 1987 through June 2000, he
held several positions, including the position of Chairman, President, Chief
Executive Officer, Chief Operating officer, and Chief Financial Officer, of
Thermadyne Holdings Corporation, a leading welding equipment manufacturer which
was traded on NASDAQ until its sale in 1998. Mr. Curran served as Vice President
of Finance from 1983 until 1986 at Clarke Industries, a division of Cooper
Industries, a manufacturer of floor maintenance equipment. From 1981 to 1983 he
served as Director of Finance at McGraw-Edison Co., a manufacturer of electrical
products. Mr. Curran was a Senior Auditor of Arthur Andersen & Co. in the
Manufacturing Audit Division from 1976 until 1981. Mr. Curran earned his B.A.
degree in Economics from DePauw University in 1976 and an M.B.A. from Loyola
University of Chicago in 1982.
 14
  **Michael
T. Flynn** has
served as a director of Airspan since July 2001. From June 1994 until March 31,
2004, Mr. Flynn served as an officer of ALLTEL Corporation, a publicly-traded
integrated telecommunications provider of wireless, local telephone,
long-distance, competitive local exchange, Internet and high-speed data
services. From May 2003 until March 31, 2004, he held the position of Assistant
to the Chief Executive Officer. From April 1997 to May 2003, Mr. Flynn served as
Group President of Communications at ALLTEL. From June 1994 to April 1997, Mr.
Flynn was President of the Telephone Group of ALLTEL. Since January 2004, Mr.
Flynn has served on the Board of Directors, the Audit Committee and the
Compensation Committee of WebEx Communications, a publicly-traded company
providing real time worldwide media access and conferencing services. He also
serves as a member of the Board of Directors of Bay Packets, a privately held
provider of next generation telecommunications application services, and Calix,
a privately held leading provider of integrated voice, data and video loop and
transport access technology. Mr. Flynn earned his B.S. degree in Industrial
Engineering from Texas A&M University in 1970. He attended the Dartmouth
Institute in 1986 and the Harvard Advanced Management Program in
1988.
  **Guillermo
Heredia** joined
the Board of Directors of Airspan in January 2001. Since September 1999, Mr.
Heredia has served as the managing partner of Consultores en Inversiones
Aeronauticas, a provider of consulting services to airline operators and
investors. Mr. Heredia has served in the senior management of three major
Mexican corporations: as President and Chief Operating Officer of Aeromexico
from 1989 to 1992, as President and Chief Operating Officer of Grupo Iusacell,
Mexico’s number two wireless carrier from 1992 to 1994, and as President and
Chief Executive Officer of Previnter, a joint venture of AIG, Bank Boston and
Bank of Nova Scotia from 1995 to 1999. Mr. Heredia currently serves as a member
of the Board of Directors for W L Comunicaciones, a private telecommunications
company involved in developing a wide band fiber optic network in Mexico City
and throughout Mexico and for Jalisco Tequilana Internacional, a private
distiller and distributor of Tequila. Mr. Heredia holds a degree in Mechanical
Engineering from the Universidad de las Americas and in Business Administration
from Universidad Iberoamericana.
  **Thomas
S. Huseby** has
served as a Director of Airspan since January 1998, serving as Chairman of the
Board from January 1998 until July 2000. Mr. Huseby also served as the Chief
Executive Officer of Airspan from January 1998 until May 1998. Since August
1997, Mr. Huseby has served as the Managing Partner of SeaPoint Ventures, a
venture capital fund focused on communications infrastructure. Prior to his
employment with SeaPoint Ventures, from 1994 to 1997, Mr. Huseby was the
Chairman and Chief Executive Officer of Metawave Communications, a previously
public corporation which manufactured cellular infrastructure equipment.
Previously he was President and Chief Executive Officer of Innova Corporation, a
previously public manufacturer of millimeter wave radios. Mr.
Huseby currently serves as a member of the Board and member of the Compensation
Committee of Entomo, Inc., a private corporation pioneering in Closed Loop
Integrated Communications Services (a fee-based service that facilitates
business-to-business communications), Qpass, Inc., a private corporation which
offers software that facilitates the sale of digital content for wireless
carriers, Wireless Services Company, a private corporation which provides
services for wireless networks, SNAPin Software, Inc., a privately held company
that develops
handset-based wireless customer care and diagnostic products for mobile network
operators , Telecom
Transport Management, Inc., a privately held company providing comprehensive
backhaul transport solutions for wireless carriers in the United States and
Vayusa, Inc., a privately held company that provides loyalty and payment
merchant services utilizing mobile networks. Mr.
Huseby holds a B.A. in Economics from Columbia College, a B.S.I.E. from the
Columbia School of Engineering and a M.B.A. from Stanford University.
  **David
A. Twyver** joined
the Board of Directors of Airspan in May 1999. Mr. Twyver served as Chairman of
the Board of Directors of Ensemble Communications Inc., a supplier of LMDS
wireless equipment from January 2002 until December 2003 and as a director until
April 2004. He served as the President and Chief Executive Officer of Ensemble
from January 2000 until September, 2002. Mr. Twyver served as a director of
Metawave Communications, Inc, a manufacturer of cellular infrastructure
equipment, from March 1998 until February 2003 and as a member of Metawave
Communications, Inc.’s Audit Committee from June 2000 until February 2003. From
1996 to 1997, Mr. Twyver served as Chief Executive Officer of Teledesic
Corporation, a satellite telecommunications company. From 1974 to 1996, Mr.
Twyver served in several management positions at Nortel Networks Limited, a
leading global supplier of data and telephone network solutions and services,
most recently as president of Nortel Wireless Networks from 1993 to 1996. He
received his B.S. in Mathematics and Physics from the University of
Saskatchewan.
 15
   **RISK
FACTORS**
  *In
addition to other information in this Form 10-K, the following risk factors
should be carefully considered in evaluating the Company and its business.*
  **If
we continue to incur substantial losses and negative operating cash flows, we
may not succeed in achieving or maintaining profitability in the future.**
  We have
incurred net losses since we became an independent company, and as of December
31, 2004 we had an accumulated deficit of $177 million. We anticipate that we
will continue to experience negative cash flows over the next 12 months. Our
operating losses have been due in part to the commitment of significant
resources to our research and development and sales and marketing organizations.
We expect to continue to devote resources to these areas and, as a result, we
will need to continue increasing our quarterly revenues to achieve and maintain
profitability. We cannot be certain that we will achieve sufficient revenues for
profitability. If we do achieve profitability, we cannot be certain that we can
sustain or increase profitability on a quarterly or annual basis in the future.
  **The
reduction in expenditures by communications service providers has had, and could
continue to have a negative impact on our results of operations.**
  We
believe telecommunications carriers and service providers continue to spend less
annually on capital investments and network expansions than they did at the end
of the prior decade. Many new and small service providers and wireless companies
have failed, and existing service providers have been reducing or delaying
expenditures on new equipment and applications. We believe it is possible that
this reduced level of spending could continue for the foreseeable future. A
further global long-term decline in capital expenditures may reduce our sales,
increase the need for inventory write-offs and could result in downward pressure
on the price of our products, all of which would have a material adverse effect
on our results of operations and stock price.
  **Since
a significant percentage of our expenses are fixed and do not vary with
revenues, our quarterly operating results are volatile and difficult to predict,
and our stock price could decline.**
  We
believe that period-to-period comparisons of our operating results are not
necessarily meaningful. Since our customers are not typically required to
purchase a specific number of our products in any given quarter, we may not be
able to accurately forecast our quarterly revenues. Revenues are further
affected if major deployments of our products do not occur in any particular
quarter as we anticipate and/or our customers delay shipments or payments due to
their inability to obtain licenses or for other reasons. As a result, our
quarterly operating results have fluctuated in the past and will likely vary in
the future. This could cause the market price of our common stock to decline.
Other factors that may affect our quarterly operating results and our stock
price include the loss of a major customer, our ability to react quickly to new
competing technologies, products and services which may cause us to lose our
customers, or if our suppliers and manufacturers are not able to fulfill our
orders as a result of a shortage of key components that leads to a delay in
shipping our products. We incur expenses in significant part based on our
expectations of future revenue, and we expect our operating expense, in
particular salaries and lease payments, to be relatively fixed in the short run.
Accordingly, any unanticipated decline in revenue for a particular quarter could
have an immediate negative effect on results for that quarter, possibly
resulting in a change in financial estimates or investment recommendations by
securities analysts, which could result in a fall in our stock price. You should
not rely on the results of any one quarter as an indication of future
performance.
  **Competition
from alternative communications systems, as well as larger, better-capitalized
or emerging competitors for our products, could result in price reductions,
reduced gross margins and loss of or inhibit growth of market share.**
  We
compete in a relatively new, rapidly evolving and highly competitive and
fragmented market. We compete with companies that are producing fixed wireless
communications systems, wired DSL, cable networks and occasionally fiber optic
cable and satellite technologies and other new entrants to this industry, as
well as traditional communications companies.
  Competitors
vary in size and scope, in terms of products and services offered. With respect
to the fixed broadband wireless solutions we offer to serve in licensed and
unlicensed frequencies, we believe we compete directly with Siemens Motorola,
Alvarion, Proxim, SR Telecom, with a number of smaller privately-held companies
and with the divisions of a number of institutional telecommunication equipment
companies. We also believe we compete indirectly with a number of large
telecommunication equipment suppliers such as Alcatel and Harris.
  16
 We
believe we encounter, and may increasingly encounter, competition from competing
wireless technologies such as cellular technology. Cellular networks are now
capable of delivering both voice and limited broadband data connectivity to
fixed, mobile, nomadic and portable applications. These technologies such as
1XRTT, a single carrier (1x) technology has the capability of transmitting data
at ISDN like speeds, up to 144 Kbps. It is our further understanding that one
technology provides for multiple voice channels and medium rate data services at
maximum transmission rates of 200 Kbps on the uplink and 2.4 Mbps on the down
link. In addition, our technology competes with other high-speed solutions, such
as wired DSL, cable networks, and occasionally fiber optic cable and satellite
technologies. The performance and coverage area of our wireless systems are
dependent on certain factors that are outside of our control, including features
of the environment in which the systems are deployed, such as the amount of
clutter (natural terrain features and man-made obstructions) and the radio
frequency available. Any inability to overcome these obstacles may make our
technology less competitive in comparison with other technologies and make other
technologies less expensive or more suitable. Our business may also compete in
the future with products and services based on other wireless technologies and
other technologies that have yet to be developed.
  Many of
our competitors are substantially larger than we are and have significantly
greater financial, sales and marketing, technical, manufacturing and other
resources and more established distribution channels. These competitors may be
able to respond more rapidly to new or emerging technologies and changes in
customer requirements, or to devote greater resources to the development,
promotion, sale and financing of their products than we can. Furthermore, some
of our competitors have made or may make strategic acquisitions or establish
cooperative relationships among themselves or with third parties to increase
their ability to gain customer market share rapidly. These competitors may enter
our existing or future markets with systems that may be less expensive, provide
higher performance or contain additional features.
  We expect
our competitors to continue to improve the performance of their current products
and to introduce new products or new technologies that may supplant or provide
lower-cost alternatives to our systems. This or other factors may result in
changes in the market valuations of our competitors, which have been volatile
recently, and could cause our stock price to fall. To remain competitive, we
must continue to invest significant resources in research and development, sales
and marketing and customer support. We cannot be certain that we will have
sufficient resources to make these investments or that we will be able to make
the technological advances necessary to remain competitive.
  **If
our stock price falls below $1.00 per share, our common stock may be de-listed
from the Nasdaq National Market.**
  The
National Association of Securities Dealers, Inc. has established certain
standards for the continued listing of a security on the Nasdaq National Market.
These standards require, among other things, that the minimum bid price for a
listed security be at least $1.00 per share. Under Nasdaq’s listing maintenance
standards, if the closing bid price of our common stock remains below $1.00 per
share for 30 consecutive trading days, Nasdaq will issue a deficiency notice to
us. If the closing bid price subsequently does not reach $1.00 per share or
higher for a minimum of ten consecutive trading days during the 180 calendar
days following the issuance of the deficiency notice from Nasdaq, Nasdaq may
de-list our common stock from trading on the Nasdaq National Market.
  If our
common stock is to be de-listed from the Nasdaq National Market, we may apply to
have our common stock listed on the Nasdaq SmallCap Market. In the event that
such application is accepted, of which there can be no assurance, we anticipate
the change in listings may result in a reduction in some or all of the
following, each of which could have a material adverse effect on our investors:
  •the liquidity of our
common stock;
  •the market price of our
common stock;
  •the number of
institutional investors that will consider investing in our common stock;
  •the number of investors
in general that will consider investing in our common stock;
  •the number of market
makers in our common stock;
  •the availability of
information concerning the trading prices and volume of our common stock;
  •the number of
broker-dealers willing to execute trades in shares of our common stock;
and
  •our ability to obtain
financing for the continuation of our operations.
  17
  Should
our application to the Nasdaq SmallCap Market be rejected or if we fail to
continue to satisfy the Nasdaq SmallCap Market’s continued listing requirements,
our common stock could be delisted entirely or relegated to trading on the
over-the-counter-market.
  **Our
customer contracts vary widely in terms and duration, with a many of our
customers executing only short-term purchase orders, and allow our customers to
terminate without significant penalties.**
  Our
contracts and purchase orders are separately negotiated with each of our
customers and the terms vary widely. A majority of our customers may only
execute short-term purchase orders for a single or a few systems at one time
instead of long-term contracts for large-scale deployment of our systems. These
contracts and purchase orders do not ensure that they will purchase any
additional products beyond that specifically listed in the order.
  Moreover,
since we believe that these purchase orders may represent the early portion of
longer-term customer programs, we expend significant financial, personnel and
operational resources to fulfill these orders. If our customers fail to purchase
additional products to fulfill their programs as we hope, we may be unable to
recover the costs we incur and our business could suffer.
  In
addition, our general framework contracts are generally non-exclusive and
contain provisions allowing our customers to terminate the agreement without
significant penalties. Our contracts also may specify the achievement of
shipment, delivery and installation commitments. If we fail to meet these
commitments or negotiate extensions in a timely manner, our customers may choose
to terminate their contracts with us or impose monetary penalties.
  **Changes
in telecommunications regulation or delays in receiving licenses could adversely
affect many of our customers and may lead to lower sales.**
  Many of
our customers are subject to extensive regulation as communications service
providers. Changes in legislation or regulation that adversely affect those
existing and potential customers could lead them to delay, reduce or cancel
expenditures on communications access systems, which actions would harm our
business. In the past, we have suffered the postponement of anticipated customer
orders because of regulatory issues. The resolution of those issues can be
lengthy and the outcome can be unpredictable. We have also received orders in
the past from customers that were contingent upon their receipt of licenses from
regulators, the timing of which were uncertain. The receipt of licenses by our
customers may occur a year or more after they initially seek those licenses, or
even after they place orders with us.
  At
present there are few laws or regulations that specifically address our business
of providing communications access equipment. However, future regulation may
include access or settlement charges or tariffs that could impose economic
burdens on our customers and us. We are unable to predict the impact, if any,
that future legislation, judicial decisions or regulations will have on our
business.
  **Our
sales cycle is typically long and unpredictable, making it difficult to
accurately predict inventory requirements, forecast revenues and control
expenses.**
  Typically
our sales cycle can range from one month to two years and varies by customer.
The length of the sales cycle with a particular customer may be influenced by a
number of factors, including:
  •the particular
communications market that the customer serves;
  •the testing requirements
imposed by the customer on our systems;
  •the customer’s experience
with sophisticated communications equipment including fixed wireless technology;
and
  •the cost of purchasing
our systems, including the cost of converting to our products from
previously-installed equipment, which may be significant.
  Before we
receive orders, our customers typically test and evaluate our products for a
period that can range from a month to more than a year. In addition, the
emerging and evolving nature of the communication access market may cause
prospective customers to delay their purchase decisions as they evaluate new
and/or competing technologies or, wait for new products or technologies to come
to market. As the average order size for our products increases, our customers’
processes for approving purchases may become more complex, leading to a longer
sales cycle. We expect that our sales cycle will continue to be long and
unpredictable. Accordingly, it is difficult for us to anticipate the quarter in
which particular sales may occur, to determine product shipment schedules and to
provide our manufacturers and suppliers with accurate lead-time to ensure that
they have sufficient inventory on hand to meet our orders. In addition, our
sales cycle impairs our ability to forecast revenues and control expenses.
  18
 **Our
sales in Asia, Latin America and Africa may be difficult and costly as a result
of the political, economic and regulatory risks in those regions.**
  Sales to
customers based outside the U.S. have historically accounted for a substantial
majority of our revenues. In 2004, our international sales (sales to customers
located outside the U.S. which includes a small percentage of U.S. customers
where the final destination of the equipment is outside of the U.S.) accounted
for 97% of our total revenue, with sales to customers in Latin America,
particularly Mexico, accounting for 74% of total revenue, and sales to customers
in Europe, Asia and Africa accounting for 12%, 9% and 2%, respectively, of total
revenue. As a result of our acquisition of the Proximity business the sales to
customers in Latin America materially increased in fiscal 2004 over fiscal 2003
primarily as a result of sales to Axtel. Sales in Asia, Latin America and Africa
in particular expose us to risks associated with international operations
including:
  •  
longer payment cycles and customers seeking extended payment terms, particularly
since our customers in Asia and Latin America have difficulty borrowing money or
receiving lines of credit, especially if there is political and economic turmoil
in their countries;
  •  
tariffs, duties, price controls or other restrictions on foreign currencies or
trade barriers imposed by foreign countries may have made or may make our
systems expensive and uncompetitive for local operators;
  •  
import or export licensing or product-certification requirements;
  •  
unexpected changes in regulatory requirements and delays in receiving licenses
to operate;
  •  
political and economic instability, including the impact of economic recessions;
  •  
our reluctance to staff and manage foreign operations as a result of political
unrest even though we have business opportunities in a country; and
  •  
limited ability to enforce agreements in regions where the judicial systems may
be less developed.
  **Our
operations in Israel may be disrupted by political and military tensions in
Israel and the Middle East.**
  We
conduct various activities related to the WipLL product in Israel, including:
research and development; design; raw material procurement; and manufacturing
through a manufacturing subcontractor based in Israel. Our operations could be
negatively affected by the political and military tensions in Israel and the
Middle East. Israel has been involved in a number of armed conflicts with its
neighbors since 1948 and a state of hostility, varying in degree and intensity,
has led to security and economic problems in Israel. Since September 2000, a
continuous armed conflict with the Palestinian Authority has been taking place.
While these conflicts have had no material adverse effect on our operations in
the past, conditions in Israel could, in the future, disrupt our development,
manufacture or distribution of WipLL products.
  **We
may not be able to expand our sales and distribution capabilities, including
establishing relationships with distributors and major system integrators and
telecommunications equipment OEMs, which would harm our ability to generate
revenue.**
  We
believe that our future success, particularly with respect to WiMAX, will depend
upon our ability to expand our direct and indirect sales operations, including
establishing relationships with distributors and major system integrators and
telecommunications equipment OEMs. While we have been at times successful in
signing country-specific OEM agreements with major suppliers such as Siemens and
L.M. Ericsson, we cannot be certain that we will be successful in maintaining or
expanding these agreements.
  **We
are dependent on our lines of fixed wireless communications systems and our
future revenue depends on their commercial success and our ability to adapt to
evolving industry standards and new technologies.**
  The
market for communications systems has been characterized by rapid technological
developments and evolving industry standards. Our ability to increase revenue in
the future depends on the commercial success of our lines of fixed wireless
communications systems and our ability to adapt to and to successfully introduce
new standards and technologies, to meet customer preferences in a timely and
cost-effective manner. To date we have been marketing AS4000, AS4020, WipLL and
Proximity products. all of which are based on proprietary technologies we own.
Along with software tools, network management systems and planning and
configuration tools, these are the only products we have shipped to customers,
and we expect that revenue from these products will account for a significant
proportion of our revenue for the next 12 to 24 months. However, with the
expected introduction of our new WiMAX Certified TM AS.MAX
product line in 2005, we expect to begin generating a portion of our revenues
from the new products commencing in the second half of fiscal 2005. In the
course of enhancing our existing products and developing the AS.MAX product
line, we have made assumptions about potential demand for both new and existing
products. If our assumptions are incorrect or new industry standards emerge,
both our existing products and the AS.MAX product range may not sell as
expected. For instance, if the IEEE 802.16 does become the principal standard
for the BWA industry, our existing products, other than our ASMAX products,
could be rendered obsolete in the near future. We cannot assure you that we will
be successful in developing and introducing the new AS.MAX product range or
enhancements to existing products or new products to meet evolving standards in
the future.
  19
 **Our
dependence on key suppliers and contract manufacturers may result in product
delivery delays if they do not have components in stock or terminate their
non-exclusive arrangements with us.**
  Some of
the key components of our products are purchased from single vendors, including
printed circuit board assemblies application specific integrated circuits and
radio frequency filters, for which alternative sources are generally not readily
available in the short to medium term. If our vendors fail to supply us with
components because they do not have them in stock when we need them, if the
supply of the components in the market is limited, or if our vendors reduce or
eliminate their manufacturing capacity for these components or enter into
exclusive relationships with other parties which prevent them from selling to
us, we could experience significant delays in shipping our products while we
seek other supply sources, which may result in our customers claiming damages
for delays. At times we have been forced to purchase these components from
distributors instead of from the manufacturers, which has significantly
increased our costs. During the third quarter of 2004, as a result of a
temporary shortage of components, we experienced temporary difficulty
manufacturing enough Proximity products to meet existing orders in a timely
manner. We do not have long-term contracts with all of our suppliers. Instead,
we execute purchase orders approximately three to six months in advance of when
we believe we may need the components. These purchase orders are non-exclusive,
and we are generally not required to purchase any minimum volume of components
from any of these suppliers. In those instances in which we do not have a
long-term contract with a supplier, the supplier may terminate our relationship
upon six months’ prior notice.
  In
addition, we generally outsource our manufacturing processes to subcontractors,
primarily Solectron Corporation for our AS4000, AS4020 and Proximity products
and Racamtech Limited for our WipLL products, who rely on our forecasts of
future orders to make purchasing and manufacturing decisions. We provide them
with forecasts on a regular basis. If a forecast turns out to be inaccurate, it
may lead either to excess inventory that would increase our costs or a shortage
of components that would delay shipments of our systems. Our contracts with our
major manufacturing subcontractors are non-exclusive and most contracts may be
terminated with six months notice by either party without significant penalty.
Other than agreeing to purchase the materials we request in the forecasts, we do
not have any agreements with them to purchase any minimum volume.
  **We
currently depend on a few key customers for substantially all of our sales. A
loss of one or more of those customers could cause a significant decrease in our
net revenue.**
  We
currently derive, and expect to continue to derive, a substantial percentage of
our net sales from fewer than ten customers. In fiscal 2004, 82% of our revenue
was derived from our top ten customers. In fiscal 2004, Axtel accounted for
approximately 70% of our annual revenue and was the only customer that
individually accounted for more than 10% of our annual revenue. It is possible
that in fiscal 2005 one customer, Axtel, may account for greater than 50% of our
projected annual revenue. We believe that there are certain economies of scale
inherent in our industry. Accordingly, the loss of Axtel as a customer or the
loss of any large percentage of our supply contracts could negatively impact our
gross profit margins, our profitability and efforts to preserve cash resources.
  Axtel has
the right to terminate the Axtel supply agreement if we fail to comply with the
terms and conditions of the agreement and such breach is not cured. For
instance, if we fail to meet delivery schedules or if we fail to deliver
products and services that meet the contract specifications, Axtel may claim we
breached the agreement. Even if such failures are solely attributable to the
acts or failures to act of third parties, Axtel may have the right to terminate
the agreement. Additionally, Axtel itself has a limited operating history having
only commenced operations in 1999, and is subject to its own competitive
pressures and operating constraints in the Mexican economy. If Axtel should fail
for any reason, or fail to have access to debt and equity markets for liquidity,
it may not be able to honor its purchase commitments under our supply agreement.
  The
amount of revenue we derive from a specific customer is likely to vary from
period to period, and a major customer in one period may not produce significant
additional revenue in a subsequent period. We anticipate that our operating
results will continue to depend on sales to a small number of key customers in
the foreseeable future. In general, our contracts with our customers involve
major deployments that require several months to fulfill, so our results may
depend on the same major customers for consecutive quarters. Once a contract is
fulfilled, we cannot assure you that the customer will continue to purchase
upgrades or services from us, or possibly new products. It is necessary
therefore for us to continually seek new customers in order to increase our
revenue. To the extent that any major customer terminates its relationship with
us, our revenues could decline significantly.
  20
 **If
we lose Eric Stonestrom or any of our other executive officers, we may encounter
difficulty replacing their expertise, which could impair our ability to
implement our business plan successfully.**
  We
believe that our ability to implement our business strategy and our future
success depends on the continued employment of our senior management team, in
particular our president and chief executive officer, Eric Stonestrom. Our
senior management team, who have extensive experience in our industry and are
vital to maintaining some of our major customer relationships, may be difficult
to replace. The loss of the technical knowledge and management and industry
expertise of these key employees could make it difficult for us to execute our
business plan effectively, could result in delays in new products being
developed, lost customers and diversion of resources while we seek replacements.
  **If
we are not able to implement a program to reduce costs over time, introduce new
products or increase sales volume to respond to declines in the average selling
prices of our products, our gross margin may decline.**
  We expect
the average selling prices of our products to decline due to a number of
factors, including competitive pricing pressures, rapid technological change,
industry standardization and volume sales discounts. Accordingly, to maintain or
increase our gross margin, we must develop and introduce new products or product
enhancements with higher gross margins and implement cost reductions. If our
average selling prices continue to decline and we are not able to maintain or
increase our gross margin, our results of operations could be harmed.
  **If
we are not able to implement a program to conform our products to industry
standards or to successfully market and sell our standards-based products, our
revenues may decline**
  We have
developed and continue to develop certain of our products in accordance with
existing, emerging and anticipated wireless-industry standards. In particular,
we develop products and product features that are designed to conform to IEEE
802.16-2004 and IEEE 802.16e standards. If our products fail to comply with
these standards, we may not be able to sell them. Industry standards are subject
to change from time to time by their regulatory bodies. If, as a result of any
changes, the products we have developed fail to meet industry standards, as
revised, we may not be able to sell such products.
  Our
future success depends in part on the successful adoption by our customers of
products that meet these industry standards. If the wireless broadband market
does not adopt these standards or if our customers are unable to successfully
deploy products based on these standards, we will not be successful selling
these products.
  In
developing products that conform to defined wireless-industry standards, we
recognize that, by diminishing product differentiation, standardization may
lower the barriers to entry by other manufacturers in the markets in which we
seek to sell our products. If companies with greater resources than us choose to
manufacture any standards-based products to compete with us, this may cause
competition to be based on criteria such as the relative size, resources,
marketing skills and financial incentives provided by our competitors, where we
may be weaker than if competition is based on product differentiation
alone.
  **We
may not have adequate protection for our intellectual property, which may make
it easier for others to misappropriate our technology and enable our competitors
to sell competing products at lower prices and harm our business.**
  Our
success depends in part on proprietary technology. We rely on a combination of
patent, copyright, trademark and trade secret laws and contractual restrictions
on disclosure to protect our intellectual property rights. Despite our efforts
to protect our proprietary rights, we cannot be certain that the steps we have
taken will prevent misappropriation of our technology, and we may not be able to
detect unauthorized use or take appropriate steps to enforce our intellectual
property rights. The laws of some foreign countries, particularly in Asia, do
not protect our proprietary rights to the same extent as the laws of the U.S.
and the U.K., and we may encounter substantial infringement problems in those
countries. In addition, we do not file for patent protection in every country
where we conduct business. In instances where we have licensed intellectual
property from third parties, we may have limited rights to institute actions
against third parties for infringement of the licensed intellectual property or
to defend any suit that challenges the validity of the licensed intellectual
property. If we fail to adequately protect our intellectual property rights, or
fail to do so under applicable law, it would be easier for our competitors to
copy our products and sell competing products at lower prices, which would harm
our business.
  21
 **Our
products may infringe on the intellectual property rights of third parties,
which may result in lawsuits that could be costly to defend and prohibit us from
selling our products.**
  Third
parties could assert exclusive patent, copyright, trademark and other
intellectual property infringement claims against the technologies that are
important to us. If any inquiry from a third party relating to patents or
trademarks leads to a proceeding against us and we are unable to defend
ourselves successfully, our ability to sell our products may be adversely
affected and our business would be harmed. In addition, third parties may assert
claims, or initiate litigation against us, or our manufacturers, suppliers or
customers with respect to existing or future products, trademarks or other
proprietary rights. There is a substantial risk of litigation regarding
intellectual property rights in our industry. Any claims against us, or
customers that we indemnify against intellectual property claims, with or
without merit, may:
  •  
be time-consuming, costly to defend and harm our reputation;
  •  
divert management’s attention and resources;
  •  
cause delays in the delivery of our products;
  •  
require the payment of monetary damages;
  •  
result in an injunction, which would prohibit us from using these technologies
and require us to stop shipping our systems until they could be redesigned, if
possible; and
  •  
require us to enter into license or royalty agreements, which may not be
available on acceptable terms or require payment of substantial sums.
  **Since
we incur most of our expenses and a portion of our cost of goods sold in foreign
currencies, fluctuations in the values of foreign currencies could have a
negative impact on our profitability.**
  Although
96% of our sales in 2004 and a majority of our cost of goods sold were
denominated in U.S. dollars, we incur most of our operating expenses in British
pounds and, to a lesser extent, Israeli shekels for the WipLL business. We
expect these percentages to fluctuate over time. Fluctuations in the value of
foreign currencies could have a negative impact on the profitability of our
global operations and our business and our currency hedging activities may not
limit these risks. The value of foreign currencies may also make our products
more expensive than local products.
  **A
material defect in our products that either delays the commencement of services
or affects customer networks could seriously harm our credibility and our
business, and we may not have sufficient insurance to cover any potential
liability.**
  Fixed
wireless devices are highly complex and frequently contain undetected software
or hardware errors when first introduced or as new versions are released. We
have detected and are likely to continue to detect errors and product defects in
connection with new product releases and product upgrades. In the past, some of
our products have contained defects that delayed the commencement of service by
our customers.
  If our
hardware or software contains undetected errors, we could experience:
  •  
delayed or lost revenues and reduced market share due to adverse customer
reactions;
  •  
higher costs and expenses due to the need to provide additional products and
services to a customer at a reduced charge or at no charge;
  •  
claims for substantial damages against us, regardless of our responsibility for
any failure, which may lead to increased insurance costs;
  •  
negative publicity regarding us and our products, which could adversely affect
our ability to attract new customers; and
  •  
diversion of management and development time and resources.
  Our
general liability insurance coverage may not continue to be available on
reasonable terms or in sufficient amounts to cover one or more large claims or
our insurer may disclaim coverage as to any future claim. The successful
assertion of any large claim against us could adversely affect our business.
  22
 **Our
failure to manage future acquisitions and joint ventures effectively may divert
management attention from our core business and cause us to incur additional
debt, liabilities, or costs.**
  Our
strategy of expanding our business through, among other things, acquisitions of
other businesses and technologies and joint ventures presents special risks. We
expect to continue to expand our business in certain areas through the
acquisition of businesses, technologies, products, and/or services from other
businesses that may complement our product and service offerings. We also may
consider joint ventures and other collaborative projects. However, we may not be
able to:
  •  
identify appropriate acquisition or joint venture candidates;
  •  
successfully negotiate, finance, or integrate any businesses, products, or
technologies that we acquire; and/or
  •  
successfully manage any joint venture or collaboration.
  Furthermore,
the integration of any acquisition or joint venture may divert management
attention in connection with both negotiating the acquisitions and integrating
the acquired assets. In addition, any acquisition may strain managerial and
operational resources as management tries to oversee larger operations. We also
face exposure to unforeseen liabilities of acquired companies and run the
increased risk of costly and time-consuming litigation, including stockholder
lawsuits. Moreover, in connection with any acquisition or joint venture, we may
issue securities that are superior to the right of holders of our common stock,
or which may have a dilutive effect on the common stockholders and/or we may
incur additional debt. If we fail to manage these acquisitions or joint ventures
effectively, we may incur debts or other liabilities or costs that could harm
our operating results or conditions.
  23
  **ITEM
2. PROPERTIES**
  Our
corporate headquarters are located in Boca Raton, Florida. This office consists
of approximately 4,300 square feet and the lease on this property expires in
2006.
  Our
primary location of operations, manufacturing and product development is in
Uxbridge, UK. In Uxbridge, we lease three facilities of approximately 25,000,
17,000 and 12,000 square feet. These leases expire in 2006, 2010 and 2010,
respectively. Additionally we have an operation in Israel where we lease one
facility of approximately 11,000 square feet. The lease for the Israeli facility
expires in October 2008.
 
 **ITEM
3. LEGAL PROCEEDINGS**
  On and
after July 23, 2001, three Class Action Complaints were filed in the United
States District Court for the Southern District of New York naming as defendants
Airspan, and Eric D. Stonestrom (our President and Chief Executive Officer),
Joseph J. Caffarelli (our former Senior Vice President and Chief Financial
Officer), Matthew Desch (our Chairman) and Jonathan Paget (our Executive Vice
President and Chief Operating Officer) (the “Individual Defendants”) together
with certain underwriters of our July 2000 initial public offering. A
Consolidated Amended Complaint, which is now the operative complaint, was filed
on April 19, 2002. The complaint alleges violations of Sections 11 and 15 of the
Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934 for issuing a Registration Statement and Prospectus that contained
materially false and misleading information and failed to disclose material
information. In particular, Plaintiffs allege that the underwriter-defendants
agreed to allocate stock in our initial public offering to certain investors in
exchange for excessive and undisclosed commissions and agreements by those
investors to make additional purchases of stock in the aftermarket at
pre-determined prices. The action seeks damages in an unspecified amount.
  This
action is being coordinated with approximately three hundred other nearly
identical actions filed against other companies. On July 15, 2002, we moved to
dismiss all claims against us and the Individual Defendants. On October 9, 2002,
the Court dismissed the Individual Defendants from the case without prejudice
based upon Stipulations of Dismissal filed by the plaintiffs and the Individual
Defendants. This dismissal disposed of the Section 15 and 20(a) control person
claims without prejudice, since these claims were asserted only against the
Individual Defendants. On February 19, 2003, the Court dismissed the Section
10(b) claim against us, but allowed the Section 11 claim to proceed. On October
13, 2004, the Court certified a class in six of the approximately 300 other
nearly identical actions. In her Opinion, Judge Scheindlin noted that the
decision is intended to provide strong guidance to all parties regarding class
certification in the remaining cases. Judge Scheindlin determined that the class
period for Section 11 claims is the period between the IPO and the date that
unregistered shares entered the market. Judge Scheindlin also ruled that a
proper class representative of a Section 11 class must (1) have purchased shares
during the appropriate class period; and (2) have either sold the shares at a
price below the offering price or held the shares until the time of suit. In two
of the six cases, the class representatives did not meet the above criteria and
therefore, the Section 11 cases were not certified. Plaintiffs have not yet
moved to certify a class in the Airspan case.
  We have
approved a settlement agreement and related agreements which set forth the terms
of a settlement between Airspan, the Individual Defendants, the plaintiff class
and the vast majority of the other approximately 300 issuer defendants and the
Individual Defendants currently or formerly associated with those companies.
Among other provisions, the settlement provides for a release of Airspan and the
individual defendants for the conduct alleged in the action to be wrongful. We
would agree to undertake certain responsibilities, including agreeing to assign
away, not assert, or release certain potential claims we may have against our
underwriters. The settlement agreement also provides a guaranteed recovery of $1
billion to plaintiffs for the cases relating to all of the approximately 300
issuers. To the extent that the underwriter defendants settle all of the cases
for at least $1 billion, no payment will be required under the issuers’
settlement agreement. To the extent that the underwriter defendants settle for
less than $1 billion, the issuers are required to contribute the difference.
  It is
anticipated that any potential financial obligation of Airspan to plaintiffs
pursuant to the terms of the settlement agreement and related agreements will be
covered by existing insurance. We currently are not aware of any material
limitations on the expected recovery of any potential financial obligation to
plaintiffs from its insurance carriers. Our carriers are solvent, and we are not
aware of any uncertainties as to the legal sufficiency of an insurance claim
with respect to any recovery by plaintiffs. Therefore, we do not expect that the
settlement will involve any payment by us. If material limitations on the
expected recovery of any potential financial obligation to the plaintiffs from
our insurance carriers should arise, our maximum financial obligation to
plaintiffs pursuant to the settlement agreement is less than $3.4 million.
  24
 On
February 15, 2005, the court granted preliminary approval of the settlement
agreement, subject to certain modifications consistent with its opinion. Judge
Scheindlin ruled that the issuer defendants and the plaintiffs must submit a
revised settlement agreement which provides for a mutual bar of all contribution
claims by the settling and non-settling parties and does not bar the parties
from pursuing other claims. A conference has been scheduled with Judge
Scheindlin for March 18, 2005 to discuss the status of the revised settlement
agreement. The underwriter defendants will have an opportunity to object to the
revised settlement agreement. There is no assurance that the parties to the
settlement will be able to agree to a revised settlement agreement consistent
with the court’s opinion, or that the court will grant final approval to the
settlement to the extent the parties reach agreement. If the settlement
agreement is not approved and we are found liable, we are unable to estimate or
predict the potential damages that might be awarded.
  Except as
set forth above, we are not currently subject to any other material legal
proceedings. We may from time to time become a party to various other legal
proceedings arising in the ordinary course of our business.
  **ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**
  None
  25
   **PART
II**
  **ITEM
5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES**
  Our
common stock is traded on the Nasdaq National Market under the symbol “AIRN”.
The price range per share, reflected in the table below, is the highest and
lowest sale price for our stock as reported by the Nasdaq National Market during
each quarter of the last two fiscal years.
 
 **High**
    
    **Low**2004
      Fourth Quarter
    
    $
    6.69
    
    $
    4.232004
      Third Quarter
    
    
    6.00
    
    
    3.392004
      Second Quarter
    
    
    6.84
    
    
    4.552004
      First Quarter
    
    
    6.11
    
    
    3.362003
      Fourth Quarter
    
    
    3.55
    
    
    2.052003
      Third Quarter
    
    
    2.82
    
    
    1.522003
      Second Quarter
    
    
    2.05
    
    
    0.782003
      First Quarter
    
    
    1.16
    
    
    0.72
  At
February 22, 2005 the price per share of our common stock was $4.60 and, based
upon the number of record holders, we believe we had approximately 7,878
beneficial shareholders.
  **DIVIDENDS**
  We have
never paid any dividends on our common stock and we do not anticipate paying
cash dividends on our common stock in the foreseeable future. Pursuant to
Washington law, we are prohibited from paying dividends or otherwise
distributing funds to our shareholders, except out of legally available funds.
The declaration and payment of dividends on our common stock and the amount
thereof will be dependent upon our results of operations, financial condition,
cash requirements, future prospects and other factors deemed relevant by the
Board of Directors. No assurance can be given that we will pay any dividends on
our common stock in the future.
  **Securities
Authorized for Issuance Under Equity Compensation Plans as of December 31, 2004**
  The
following table sets forth information as of December 31, 2004 with respect to
compensation plans under which our equity securities are authorized for
issuance.
 
 **Number
      of securities****to
      be issued upon****exercise
      of outstanding****options,
      warrants****and
      rights**
    
    **Weighted-average****exercise
      price of****outstanding****options,
      warrants****and
      rights**
    
    **Number
      of securities****remaining
      available****for
      issuance under****equity
      compensation****plans**Equity
      compensation plans approved by security holders(1)
    
    
    4,239,389
    
    $
    3.4316
    
    
    4,362,194Equity
      compensation plans not approved by security holders(2)
    
    
    755,231
    
    $
    3.0124
    
    
    —**Total**
    
    
    4,994,620
    
    $
    3.3682
    
    
    4,362,194
  (1)  In 1998
and 2000, the Company’s shareholders approved the 1998 Employee Stock Option
Plan and the 2000 Employee Stock Purchase Plan, respectively. In 2004, the
Company’s shareholders approved the Omnibus Equity Compensation Plan.
  (2)  Issued
pursuant to the Company’s 2001 Supplemental Stock Option Plan (the “2001 Plan”)
and the Company’s 2003 Supplemental Stock Option Plan (the “2003 Plan”).
  *The
2001 Supplemental Stock Option Plan*
  The 2001
Plan provides for the grant to our non-officer employees and consultants of
non-statutory stock options. The 2001 Plan provides for the grant of options for
up to 901,465 shares of common stock, all of which options have been granted as
of the date hereof. The Compensation Committee administers the 2001 Plan. The
Compensation Committee determines the terms of options granted under the 2001
Plan, including the number of shares subject to the option, exercise price,
term, and exercisability. The exercise price may be equal to, more than or less
than 100% of fair market value on the date the option is granted, as determined
by the Compensation Committee. The Compensation Committee has the authority to
amend or terminate the 2001 Plan, provided that shareholder approval shall be
required if such approval is necessary to comply with any tax or regulatory
requirement. If not terminated earlier, the 2001 Plan will terminate February 7,
2011.
  26
 *The
2003 Supplemental Stock Option Plan*
  The 2003
Plan provides for the grant to our non-officer employees, new hires, and
consultants of non-statutory stock options. The 2003 Plan provides for the grant
of options for up to 241,500 shares of common stock, all of which options have
been granted as of the date hereof. The Compensation Committee administers the
2003 Plan. The Compensation Committee determines the terms of options granted
under the 2003 Plan, including the number of shares subject to the option,
exercise price, term, and exercisability. The exercise price may be equal to,
more than or less than 100% of fair market value on the date the option is
granted, as determined by the Compensation Committee. The Compensation Committee
has the authority to amend or terminate the 2003 Plan, provided that shareholder
approval shall be required if such approval is necessary to comply with any tax
or regulatory requirement. If not terminated earlier, the 2003 Plan will
terminate September 1, 2013.
  **RELATED
SHAREHOLDER MATTERS**
  **Issuer
Purchase of Equity Securities**
  On
November 12, 2002, Airspan announced that its Board of Directors has authorized
the repurchase of up to four million shares of its common stock. Repurchases may
be made from time to time on the open market at prevailing market prices or in
negotiated transactions off the market, subject to market conditions and at the
discretion of management. Airspan is under no obligation to purchase any or all
of the shares under this repurchase program and may terminate the program at any
time.
  Airspan
did not repurchase any shares of common stock in 2004. The total number of
shares repurchased was 834,560 and the Board terminated the repurchase plan and
authorized the Company to sell the shares. On November 10, 2004 Airspan sold all
834,560 shares realizing net proceeds of $4.4 million.
  **Recent
Sales of Unregistered Securities**
  Effective
as of September 10, 2004, the Company entered into a Preferred Stock Purchase
Agreement with Oak Investment Partners XI Limited Partnership (“Oak”) pursuant
to which the Company sold 73,000 shares of Series A Preferred Stock to Oak for
$29,200,000. These shares of Series A Preferred Stock are initially convertible
into 7.3 million shares of Common Stock. The transaction, approved by the
Company’s Board of Directors on September 9, 2004 and September 12, 2004 and by
the Company’s Audit Committee on September 9, 2004, is closed on September 13,
2004. The shares of Series A Preferred Stock were issued pursuant to the
exemption from registration provided by Section 4(2) of the Securities Act of
1933, as amended.
  27
  **ITEM
6. SELECTED FINANCIAL DATA**
  The
following selected financial data should be read together with our consolidated
financial statements and related notes and “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” included elsewhere in this
report. The consolidated statement of operations data and balance sheet data for
the years ended December 31, 2000, 2001, 2002, 2003 and 2004 are derived from
our audited consolidated financial statements, which have been audited by Ernst
& Young LLP, independent registered public accounting firm.
  
 **Year
      ended****December
      31,****2000**
    
    **Year
      ended****December
      31,****2001**
    
    **Year
      ended****December
      31,****2002
      (2)**
    
    **Year
      ended****December
      31,****2003
      (3)**
    
    **Year
      ended****December
      31,****2004****(in
      thousands, except for share data)****Consolidated
      Statement of****Operations
      Data:**Revenue
    
    $
    30,279
    
    $
    37,422
    
    $
    25,930
    
    $
    30,651
    
    $
    94,647Cost
      of revenue includinginventory
      provision
    
    
    18,782
    
    
    24,708
    
    
    21,242
    
    
    27,691
    
    
    67,243Gross
      profit
    
    
    11,497
    
    
    12,714
    
    
    4,688
    
    
    2,960
    
    
    27,404Research
      and development
    
    
    16,746
    
    
    14,667
    
    
    13,642
    
    
    14,395
    
    
    18,794Sales
      and marketing includingbad
      debts
    
    
    14,358
    
    
    16,711
    
    
    13,821
    
    
    11,335
    
    
    11,562General
      and administrative
    
    
    9,368
    
    
    10,735
    
    
    8,969
    
    
    8,741
    
    
    11,042Amortization
      of intangibles
    
    
    595
    
    
    425
    
    
    44
    
    
    172
    
    
    723Restructuring
      provisions
    
    
    —
    
    
    1,235
    
    
    1,420
    
    
    750
    
    
    413Total
      operating expenses
    
    
    41,067
    
    
    43,773
    
    
    37,896
    
    
    35,393
    
    
    42,534Loss
      from operations
    
    
    (29,570
    )
    
    (31,059
    )
    
    (33,208
    )
    
    (32,433
    )
    
    (15,130
    )Interest
      and other income, net
    
    
    3,928
    
    
    2,726
    
    
    2,208
    
    
    2,983
    
    
    3,217Income
      taxes (charge) / credit
    
    
    5
    
    
    3,018
    
    
    2,862
    
    
    (5
    )
    
    1,938Loss
      before extraordinary items
    
    
    (25,637
    )
    
    (25,315
    )
    
    (28,138
    )
    
    (29,455
    )
    
    (9,975
    )Extraordinary
      itemGain
      on extinguishment of debt
    
    
    —
    
    
    9,244
    
    
    —
    
    
    —
    
    
    —Income
      tax charge on gain
    
    
    —
    
    
    (2,773
    )
    
    —
    
    
    —
    
    
    —Net
      loss
    
    $
    (25,637
    )
    $
    (18,844
    )
    $
    (28,138
    )
    $
    (29,455
    )
    $
    (9,975
    )Net
      loss per share — basic and diluted
    
    $
    (1.44
    )
    $
    (0.54
    )
    $
    (0.80
    )
    $
    (0.84
    )
    $
    (0.27
    )Shares
      used to compute net loss per share — basic and diluted
    
    
    17,797,899
    
    
    34,810,311
    
    
    35,258,645
    
    
    35,073,315
    
    
    36,441,932Pro
      forma net loss per share — basic and diluted (1)
    
    $
    (0.82
    )
    $
    (0.54
    )
    $
    (0.80
    )
    $
    (0.84
    )
    $
    (0.27
    )Shares
      used to compute pro forma net loss per share — basic and diluted
    
    
    31,163,574
    
    
    34,810,311
    
    
    35,258,645
    
    
    35,073,315
    
    
    36,441,932
 
 **December
      31,****2000**
    
    **December
      31,****2001**
    
    **December
      31,****2002**
    
    **December
      31,****2003**
    
    **December
      31,****2004****(in
      thousands)****Consolidated
      Balance Sheet Data:**Cash,
      cash equivalents and short term investments
    
    $
    115,340
    
    $
    70,260
    
    $
    53,241
    
    $
    33,926
    
    $
    66,296Working
      capital
    
    
    131,100
    
    
    98,680
    
    
    71,647
    
    
    36,603
    
    
    65,476Total
      assets
    
    
    157,334
    
    
    119,694
    
    
    97,861
    
    
    83,272
    
    
    115,198Long
      term debt
    
    
    15,754
    
    
    1,250
    
    
    —
    
    
    —
    
    
    —Stockholders’
      equity
    
    
    123,655
    
    
    105,253
    
    
    78,100
    
    
    49,013
    
    
    73,165
  (1)  Pro forma
basic and diluted per share calculations reflect the pro forma conversion of all
outstanding preferred stock in 2000, at the date of issuance of common stock.
  (2)  On
October 4, 2002 we acquired Airspan Israel and, accordingly, the Consolidated
Statement of Operations for the year ended December 31, 2002 includes the
results of operations of Airspan Israel from that date up to December 31, 2004
and the Consolidated Balance Sheets of December 31, 2002, 2003 and 2004 includes
the consolidated accounts of Airspan Israel.
  28
 (3)  On
December 23, 2003 we acquired the fixed wireless access business of Nortel
Networks (“Proximity”) and, accordingly, the Consolidated Statement of
Operations for the year ended December 31, 2003 and 2004 includes the results of
operations of Proximity from that date up to December 31, 2004 and the
Consolidated Balance Sheets of December 31, 2003 and 2004 includes the assets
and liabilities related to Proximity.
  **ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS**
  *The
following discussion and analysis should be read in conjunction with our
consolidated financial statements and the related notes included elsewhere in
this report.*
  **Overview**
  We are a
global supplier of Broadband Wireless Access (“BWA”) equipment that allows
communications service providers (often referred to as “local exchange
carriers,” or simply telephone companies), internet service providers (often
referred to as “ISPs”) and other telecommunications users, such as utilities and
enterprises, to cost effectively deliver high-speed data and voice services
using radio frequencies rather than wires. We call this transmission method
“Broadband Wireless”. The primary market for our systems has historically been a
subset of the fixed and broadband wireless access systems market, which is the
point-to-multipoint market in radio frequencies below 6.0GHz. On March 10, 2005,
we announced the introduction of products that also provide BWA to nomadic and
portable applications.
  Each of
our wireless access systems utilizes digital wireless techniques, which provide
wide area coverage, security and resistance to fading. Our systems can be
deployed rapidly and cost effectively, providing an attractive alternative or
complement to traditional copper wire, cable, or fiber-optic communications
access networks. Our products also include software tools that optimize
geographic coverage of our systems and provide ongoing network management. To
facilitate the deployment and operation of our systems, we also offer network
installation, training and support services. A more complete description of our
various wireless access systems is provided below. Our BWA systems (the “Airspan
BWA Solutions”) have been installed by more than 300 network operators in more
than 90 countries and are being tested by numerous other service providers.
  Our
initial products were developed and sold originally to provide wireless voice
connections between network operators and their end customers. Product
enhancements introduced in 1998 enabled us to offer both voice and data
connectivity over a single wireless link. We have continued to develop the
capabilities and features of the original products, and today we sell them as
the AS4000 and AS4020 products, in systems capable of delivering high-capacity
broadband data with carrier-quality voice connections to operators globally.
  In
October 2002, we strengthened our position in the BWA equipment market with the
acquisition of the WipLL (Wireless Internet Protocol in the Local Loop) business
from Marconi (“Marconi WipLL”) pursuant to a stock purchase agreement, and
renamed the business Airspan Networks (Israel) Limited (“Airspan Israel”). The
products and services produced by Airspan Israel enable operators in licensed
and unlicensed wireless bands to offer high-speed, low cost, wireless broadband
connections for data and voice over IP. We acquired all of the issued and
outstanding capital stock and debt of Marconi WipLL in exchange for $3 million
of cash.
  In
October 2003, we began marketing our AS4030 and AS3030 product range of Airspan
branded high-end point-to-multipoint and point-to-point products suitable for
operators wishing to deliver service offerings to medium and large businesses
and multi-tenant dwellings that require considerable bandwidth for their end
users. These products, based on 802.16 Orthogonal Frequency Division
Multiplexing (“OFDM”) technology, can also be used for a wide range of backhaul
applications, for example connecting remote base stations to a central
office.
  In
December, 2003, we acquired the fixed wireless access business of Nortel
Networks known as “Proximity” in accordance with the terms and conditions of a
contemporaneously executed and delivered Purchase and Sale Agreement. The
acquired Proximity products and enable operators to provide carrier class
circuit switched voice and data services, based on a Time Division Multiple
Access (“TDMA”) technology. We acquired inventory relating to the Proximity
business as well as existing assets associated with the manufacture, development
and support of the Proximity product line. We also assumed the product supply
obligations associated with customer contracts and certain other liabilities and
obligations along with the workforce of 26 persons directly employed in the
Proximity business. The final purchase price was $13.1 million.
  29
 On
December 28, 2004 we signed a letter of intent to acquire ArelNet Limited (TASE:
ARNT), an Israeli company providing Voice over IP (“VoIP”) network
infrastructure equipment and solutions, including soft switches and gateways
supporting major VoIP standards. In accordance with the letter of intent, we
expect to acquire all of the outstanding securities of ArelNet for an aggregate
purchase price of $8.7 million, of which $4.0 million would be paid in cash and
$4.7 million in shares of Airspan.
  On March
9, 2005 we announced the introduction of a new product line known as “AS.MAX”.
AS.MAX is a full portfolio of WiMAX systems, Base Stations and Customer Premise
Equipment (“CPE”), all based on the IEEE 802.16 standard. The AS.MAX product
range is designed to serve both:
  ·
    our
      traditional fixed point-to-multipoint BWA market;
and
  ·
    new
      markets such as the BWA market for nomadic and portable
      applications.
  We intend
to continue our strategy of expanding our business through, among other things,
acquisitions of other businesses and technologies and joint ventures. See “Risk
Factors — Our failure to manage future acquisitions.”
  Our
corporate headquarters are located in Boca Raton, Florida. Our primary
operations, manufacturing and product development centers are located in
Uxbridge, U.K. and Airport City, Israel.
  We
generated revenue of $25.9 million in 2002, $30.7 million in 2003 and $94.6
million in 2004. We have incurred net losses of $28.1 million, $29.5 million and
$10.0 million in 2002, 2003 and 2004, respectively. Since becoming an
independent company, we have generated significant net losses and negative cash
flow and expect to continue to do so in 2005. We had an accumulated deficit of
$177.1 million as of December 31, 2004.
  We
generate revenue from sales of our systems (including both hardware and
software) and from services related to implementation and support activities.
Revenue from services has always been under 10% of our total revenue. See
“Management’s Discussion and Analysis - Critical Accounting Policies” for a
discussion of our revenue recognition policies.
  Our
proprietary software is integral to our products and is not sold separately.
Customer service contracts are generally of a short-term nature, for days and
weeks rather than months and are sold separately from sales of our systems.
Service revenue does not currently constitute a material portion of our
revenue.
  We sell
our products primarily through our direct sales force and, to a lesser extent,
through distribution channels. We have direct sales offices in the U.S., U.K.,
Australia, Brazil, China, Czech Republic, Germany, Indonesia, New Zealand, the
Philippines, Poland, Russia, South Africa and Sri Lanka. We also sell through
independent agents and resellers in markets where we do not have a direct sales
presence and to original equipment manufacturers, or OEMs, who may sell our
products under their name. Our sales cycle is typically long and unpredictable
and typically varies from one month to two years, often involving extensive
testing and evaluation by prospective customers, which makes it difficult for us
to anticipate the quarter in which particular sales may occur.
  In 2004,
our non-U.S. sales accounted for 97% of our total revenue and our top ten
customers accounted for 82% of our revenue. In 2003, our non-U.S. sales
accounted for 97% of our total revenue and our top ten customers accounted for
61% of our revenue. In 2002, our non-U.S. sales accounted for 89% of our total
revenue and our top ten customers accounted for 72% of our revenue.
  We
currently derive, and expect to continue to derive, a substantial percentage of
our revenue from fewer than ten customers. In the year ended 2004 Axtel in
Mexico represented 70% of our revenue. In the year ended December 31, 2003
Broadcast Communications Ltd in New Zealand represented 18% of our revenue. In
the year ended December 31, 2002, Siemens Telecommunications (Pty) Ltd. in South
Africa and SpeedNet Inc. in Japan represented 32% and 10% respectively, of our
revenue. We anticipate that our dependence on our ten largest customers will
continue in 2005, primarily due to our projected sales of Proximity solutions to
Axtel.
  The
following table identifies the percentage of our revenue by geographic region in
the periods identified.
 
 **Percentage
      of Revenue****Geographic
      Area**
    
    **Year
      ended****December
      31,****2002**
    
    **Year
      ended****December
      31,****2003**
    
    **Year
      ended****December
      31,****2004**United
      States
    
    
    11.3%
    
    
    3.1%
    
    
    3.2%Asia
      Pacific
    
    
    22.0
    
    
    35.9
    
    
    8.5Europe
    
    
    11.1
    
    
    19.2
    
    
    11.8Africa
      and Middle East
    
    
    49.0
    
    
    27.1
    
    
    2.0South
      and Central America and Caribbean
    
    
    6.6
    
    
    14.7
    
    
    74.5
  30
 While we
expect that sales to Axtel will still comprise a large percentage of our
revenues for 2005, we anticipate that the percentage of our sales to Central
America will decrease in 2005.
  Cost of
revenue consists of component and material costs, direct labor costs, warranty
costs, royalties, overhead related to manufacture of our products and customer
support costs. Our gross margin is affected by changes in our product mix
because our gross margin on base stations and related equipment is higher than
the gross margin on subscriber terminals. In addition, our gross margin is
affected by changes in the average selling price of our systems, volume
discounts granted to significant customers and the proportion of total revenue
of sales of software, which typically carries a higher gross margin than
hardware. We expect the average selling prices of our products to decline and we
intend to continue to implement product cost reductions and develop and
introduce new products or product enhancements in an effort to maintain or
increase our gross margins. Further, we expect to derive an increasing
proportion of our revenue from the sale of our integrated systems through
distribution channels. Revenue derived from these sales channels typically
carries a lower gross margin than direct sales.
  Research
and development expenses consist primarily of salaries and related costs for
personnel and expenses for design, development and testing facilities and
equipment. These expenses also include costs associated with product development
efforts, including consulting fees and prototyping costs from initial product
concept to manufacture and production. We expect to continue to make substantial
investments in research and development.
  Sales and
marketing expenses consist of salaries and related costs for personnel, sales
commissions, consulting fees and expenses for advertising, travel, technical
assistance, trade shows, and promotional and demonstration materials. We expect
to continue to incur substantial expenditures related to sales and marketing
activities including costs associated with the recruitment of additional sales
and marketing personnel and for the expansion of our distribution channels.
  General
and administrative expenses consist of salaries and related expenses for
personnel, professional and consulting fees and other related expenses and
facilities costs.
  We
outsource all of our manufacturing processes.
  **Critical
Accounting Policies and Estimates**
  Management’s
Discussion and Analysis of Financial Condition and Results of Operations
discusses our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. On an
on-going basis, we evaluate our estimates and judgments, including those related
to revenue recognition; reserves for doubtful debt, excess or obsolete
inventory; warranty costs; restructuring costs; the valuation goodwill; and
legal proceedings.
  We base
our estimates and judgments on historical experience and on various other
factors that we believe 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 and
may change as future events occur.
  We
believe the following critical accounting policies are dependant on significant
judgments and estimates used in the preparation of our consolidated financial
statements.
  *Revenue
recognition*
  We
recognize revenue when all of the following conditions are met:
  •  
an arrangement exists with the customer,
  •  
delivery has occurred or services have been rendered,
  •  
the price for the product or service is fixed or determinable, and
  •  
collection of the receivable is reasonably assured.
  31
 *Product
Revenue* : Revenue
from product sales, including sales to distributors and resellers, is generally
recognized at the time the product is shipped to the customer. Revenue is
deferred when customer acceptance is required, rights of return exist, or other
significant obligations remain that are essential to the functionality of the
delivered products. Revenue is recognized when these conditions have been
satisfied. The estimated cost of any post-sale obligations, including basic
product warranties, is accrued at the time revenue is recognized based on
historical experience.
  Service
Revenue: Revenue from time-and-material service contracts is recognized once the
services have been performed. Revenue from service contracts that relate to a
period of cover is recognized ratably over the given contract period. Revenue is
recognized on fixed-price service contracts using the percentage of completion
method unless it is not possible to make reasonable estimates under that method,
in which case revenue is recognized on a completed contract basis.
  Revenue
Arrangements that include Multiple Deliveries: In certain cases, we enter into
agreements with customers whereby we are obligated to deliver multiple products
and/or multiple services (multiple deliveries). In these transactions, we
allocate the total revenue to be earned under the arrangement among the various
elements based on their relative fair value. Revenue for these transactions is
recognized on each element when the revenue recognition criteria have been met
for that element. Revenue is recognized for delivered products and services only
if: (i) the above Product Revenue or Service Revenue criteria are met; (ii)
undelivered products or services are not essential to the functionality of the
delivered elements, (iii) payment for the delivered products or services is not
contingent upon delivery of the remaining products or services; and (iv) the
fair value for each of the undelivered elements is known.
  Under our
revenue recognition policy we are required to assess the credit worthiness of
our customers. We use our own judgment in assessing their credit worthiness, and
the criteria by which each judgment is made may change in future periods and
therefore may change future revenue recognition.
  *Accounts
Receivable*
  We are
required to assess the collectibility of our accounts receivable balances. A
considerable amount of judgment is required in assessing the ultimate
realization of these receivables including, but not limited to, the current
credit-worthiness of each customer. Significant changes in required reserves
have been recorded in recent periods to reflect our current judgment, and
changes may occur in the future due to the market environment. Should we
consider it necessary to increase the level of reserves required for a
particular customer or customers then additional charges will be recorded in the
future.
  *Inventory*
  We value
inventory at the lower of cost or market value. As a result, we exercise
judgment as to the level of provisions required for excess and obsolete
inventory. These judgments are based on our assumptions about future demand and
market conditions. During recent periods we have made provisions against
inventory reflecting the decline in our expectations of the demand for certain
of our products. Should we decide in the future that actual market conditions
have become less favorable, or our assumptions change due to changing market
conditions, additional inventory provisions may be required.
  *Warranty
costs*
  Typically
our products are covered by a warranty for periods ranging from one to two
years. We accrue a warranty reserve for estimated costs to provide warranty
services. Our estimate of costs required to fulfill our warranty obligations is
based on historical experience and expectation of future conditions. To the
extent we experience increased warranty claim activity, increased costs or our
assessment of future conditions change, our warranty accrual will increase,
which will result in decreased gross profit.
  *Restructuring*
  During
2002, 2003 and 2004 we recorded restructuring charges arising from our
cost-reduction programs and established reserves which include estimates
pertaining to employee termination costs, the loss on subletting excess
facilities, and the write down of assets to be disposed of as part of the
restructuring. When providing for restructuring charges we make estimates as to
the expected costs to be incurred, particularly with respect to the costs of
excess facilities. Estimates of future income from sub-letting excess facilities
are made that offset expected future costs. Although we do not anticipate
significant changes, the actual costs may differ from the amount of the
reserves.
  32
 *Purchase
accounting*
  In
connection with acquisitions, we assess the fair value of assets acquired and
liabilities assumed. Items such as accounts receivable, fixed assets, intangible
assets and accrued liabilities require a high degree of judgment involving
assumptions and estimates including future cash flows and discount rates. In
certain situations, where we deem necessary, we may use third parties to assist
us with such valuations. We used the purchase method of accounting for our
acquisitions of the Marconi WipLL business in 2002 and for the Proximity
business in 2003. During 2004, we made adjustments to the fair value of the
acquired assets and liabilities of the Proximity business. See note 2 to the
Financial Statements.
  *Tax
and deferred taxes*
  Research
and development tax credits: During 2004 we recorded a tax credit relating to
research and development expenditure in the United Kingdom. See note 3 to the
Financial Statements. The Inland Revenue has the right to audit claims made for
research and development tax credits and, until the authorities have approved
the claims, there is potential uncertainty as to whether the final claim will be
accepted.
  Deferred
taxes: We record a valuation allowance to reduce our deferred tax assets. As at
December 31, 2004, we recorded a 100% valuation allowance, effectively writing
down our deferred tax assets to zero. We consider our future taxable income and
prudent tax planning strategies to determine whether our valuation allowance is
appropriate. The main factors we consider are our cumulative losses in recent
years, our net loss for the current period and our future earnings potential
determined through the use of internal forecasts. Should we decide in the future
that a lower valuation allowance is required, an adjustment to the deferred tax
asset would result in income being recorded in the period that that
determination was made.
  Other
taxes: We are subject to local taxes in each country that we have a permanent
establishment or other taxable presence. We make estimates of our potential
liability to tax in these jurisdictions, which estimates are subject to
examination by the local tax authorities.
  *Derivative
instruments*
  We are
subject to fluctuations in the exchange rates of certain currencies to the US
dollar, particularly UK pounds sterling and new Israeli shekels. From time to
time, we have entered into forward exchange contracts to cash flow hedge a
portion of our sterling operating expenses, primarily salary and facility lease
expenses. We make assumptions with respect to the timing of entering into these
contracts and the number of periods that we hedge and consider the value of our
sterling obligations and the forecasted exchange rate. Should the actual
exchange rate be more favorable than the hedged rate at the time of execution of
the contract, we would incur a loss on that particular contract. (See ITEM 7A
Quantitative and qualitative disclosures about market risk) In 2004, we recorded
a gain of $2.2 million related to forward exchange contracts. In 2005, we do not
expect to record a significant gain in respect of forward exchange
contracts.
  *Valuation
of Goodwill and other Intangible Assets*
  On
January 1, 2002, FAS 142, “Goodwill and Other Intangible Assets”, was
implemented and as a result, we ceased to amortize our goodwill. We were
required to perform an initial impairment review of goodwill and other
intangible assets in 2002 and an annual impairment review thereafter. We
performed our annual impairment test during the fourth quarter of 2004. The
carrying value of goodwill and other intangible assets was compared to its
implied fair value by using the expected present value of future cash flows. For
the 2004 review a weighted average cost of capital, equivalent to triple C junk
bonds, of 14.8% and an effective tax rate of 30% was used. The result of this
review was that no impairment of goodwill or other intangible assets was
recorded during the year ended December 31, 2004. In the impairment review, we
make various assumptions regarding estimated future cash flows and other factors
to determine the fair value of goodwill and other intangible assets. If these
estimates or related assumptions change in the future, we may be required to
record an impairment charge that would adversely affect our results.
  *Legal
Proceedings*
  We are
subject to class action complaints related to alleged false and misleading
information in our Registration Statement and Prospectus (See Item 3. Legal
Proceedings), and may also face litigation for labor and other matters. We are
required to assess the likelihood of adverse judgments or outcomes to these
matters as well as potential ranges of probable losses. A determination of the
amount of reserves required, if any, for these contingencies are made after
careful analysis of each individual issue. The required reserves may change in
the future due to changes in circumstances within each case.
  33
 **Results
of Operations**
  The
following table provides operating data as a percentage of revenue for the
periods presented.
  **Year
      ended****December
      31,****2002**
    
    **Year
      ended****December
      31,****2003**
    
    **Year
      ended****December
      31,****2004**Revenue
    
    
    100.0
    %
    
    100.0
    %
    
    100.0
    %Cost
      of revenue
    
    
    74.2
    
    
    74.9
    
    
    69.8Inventory
      provision
    
    
    7.7
    
    
    15.5
    
    
    1.2Gross
      profit
    
    
    18.1
    
    
    9.7
    
    
    29.0Operating
      expenses:Research
      and development
    
    
    52.6
    
    
    47.0
    
    
    19.9Sales
      and marketing
    
    
    39.1
    
    
    33.9
    
    
    11.6Bad
      debt expense
    
    
    14.2
    
    
    3.1
    
    
    0.6General
      and administrative
    
    
    34.6
    
    
    28.5
    
    
    11.7Amortization
      of intangibles
    
    
    0.2
    
    
    0.6
    
    
    0.8Restructuring
      provision
    
    
    5.5
    
    
    2.4
    
    
    0.4Total
      operating expenses
    
    
    146.1
    
    
    115.5
    
    
    45.0Loss
      from operations
    
    
    (128.1
    )
    
    (105.8
    )
    
    (16.0
    )Interest
      and other income, net
    
    
    8.5
    
    
    9.8
    
    
    3.5Income
      taxes
    
    
    11.0
    
    
    0.0
    
    
    2.0Net
      loss
    
    
    (108.5
    )%
    
    (96.1
    )%
    
    (10.5
    )%
  **Restructuring**
  In the
third quarter of 2002, a restructuring program was initiated to reduce operating
expenses. A charge of $278 thousand was recorded in the quarter. Included in
this charge were costs related to the write off of tradeshow equipment and
severance payments. The total number of employees terminated as part of this
restructuring program was 19 and all severance payments were made by the end of
the second quarter of 2003.
  In the
fourth quarter of 2002 we decided to completely outsource all of our
manufacturing. As a result, we recorded a $975 thousand restructuring charge for
the closure of our Riverside, Uxbridge facility in 2003. The entire amount of
this cost relates to the closure of this facility. A further $368 thousand was
recognized as a restructuring charge in the fourth quarter of 2003, when the
Company reassessed its ability to sublease the Riverside facility. All cash
outflows arising from this will be made by the end of 2006.
  In the
second quarter of 2003, an additional restructuring program was initiated to
further lower operating expenses. The total cost incurred as part of this
restructuring program was $298 thousand arising from costs associated with
facility closures and severance. The costs incurred during the year ended
December 31, 2003 for this restructuring program related to termination costs
for 30 employees. All of these employees had left the Company by December 31,
2003.
  During
the first quarter of 2004 we revised our original restructuring programs and
initiated a new program to further reduce operating expenses. This program was
completed by the end of the third quarter of 2004. The total cost incurred for
this restructuring program was $413 thousand related to termination costs for 21
employees. All of these employees had left the Company by December 31,
2004.
  In
conjunction with the purchase of the Proximity business, we implemented our plan
to relocate the Proximity business from Maidenhead, England and Sunrise, Florida
to our facilities in Uxbridge, England and Boca Raton, Florida. We recorded
acquisition-related restructuring charges of $520 thousand in the fourth quarter
of 2003, in connection with the relocation of the Proximity business. The
estimated relocation costs were reduced during the year 2004 to $181 thousand.
The adjustment formed part of the revised fair value adjustments of the
Proximity acquisition. This relocation plan was completed by December 31,
2004.
  34
   We
recorded significant acquisition-related restructuring charges in connection
with the relocation of the Proximity business.
 
 **All
      figures in US$ thousands**
    
    **Accrued
      at****acquisition**
    
    **Paid
      in 2004**
    
    **Revision
      to preliminary fair value adjustments**
    
    **Accrued
      at****December
      31,****2004**Office
      closure — other associated costs
    
    $
    520
    
    $
    (181
    )
    $
    (339
    )
    $
    —
  The
restructuring charges and their utilization are summarized as follows:
 
 **All
      figures in US$ thousands**
    
    **Balance
      at****beginning
      of****period**
    
    **Restructuring****charge**
    
    **Accrued
      on****acquisition**
    
    **Utilized**
    
    **Balance
      at end****of
      period**Year
      ended December 31, 2004One-time
      termination benefits
    
    $
    —
    
    $
    413
    
    
    —
    
    $
    (413
    )
    $
    —Contract
      termination costs
    
    
    947
    
    
    —
    
    
    —
    
    
    (348
    )
    
    599Other
      associated costs
    
    
    592
    
    
    —
    
    $
    (339
    )
    
    (192
    )
    
    61$
    1,539
    
    $
    413
    
    $
    (339
    )
    $
    (953
    )
    $
    660Year
      ended December 31, 2003One-time
      termination benefits
    
    $
    79
    
    $
    342
    
    
    —
    
    $
    (421
    )
    $
    —Contract
      termination costs
    
    
    825
    
    
    397
    
    
    —
    
    
    (275
    )
    
    947Other
      associated costs
    
    
    150
    
    
    11
    
    $
    520
    
    
    (89
    )
    
    592$
    1,054
    
    $
    750
    
    $
    520
    
    $
    (785
    )
    $
    1,539Year
      ended December 31, 2002Facility
      related
    
    $
    307
    
    $
    1,142
    
    
    —
    
    $
    (474
    )
    $
    975Severance
      and other
    
    
    234
    
    
    278
    
    
    —
    
    
    (433
    )
    
    79$
    541
    
    $
    1,420
    
    
    —
    
    $
    (907
    )
    $
    1,054
  Included
in the 2002 restructuring charge was $100 thousand for the write down of certain
fixed assets used at tradeshows and the Riverside facility. All charges, other
than the fixed asset write-downs, have or will result in direct cash
outlays.
  **Comparison
of the Year Ended December 31, 2003 to the Year Ended December 31,
2004**
  *Revenue*
  Revenue
increased 209% from $30.6 million for the year ended December 31, 2003 to $94.6
million for the year ended December 31, 2004. The $64.0 million increase in
revenue is primarily attributable to sales of Proximity products to Axtel,
representing 70% of our revenue for 2004.
  We
project that a significant amount of our revenues in 2005 will come from a
limited number of customers. See “Risk Factors — We currently depend on a few
key customers.”
  *Cost
of Revenue and Inventory Provision*
  Cost of
revenue increased 188% from $22.9 million in the year ended December 31, 2003 to
$66.1 million in the year ended December 31, 2003. This increase was due
primarily to the increase in revenue. As a percentage of revenue, our cost of
revenue was 74.9% in 2003 and 69.8% in 2004.
  During
both 2003 and 2004, we wrote down amounts of inventory to reflect our view of
the demand for our AS4000 inventory. In 2003, we made inventory provisions in
the aggregate amount of $4.7 million to reflect our view that, with the full
introduction of the new AS4020 product line in that year, demand for AS4000
equipment had lessened. In the third quarter of 2004, we provided for an
additional $1.1 million provision related to excess AS4000 inventory, reflecting
our revised estimates of the demand for this product.
  35
 Gross
margin increased to 29% in 2004 from 10% for the year of 2003. The increase in
gross margin in 2004 relative to 2003 was primarily due to smaller inventory
provisions in 2004, the allocation of certain relatively fixed period costs over
a significantly larger revenue base in 2004 and the increased sale of higher
margin products in 2004.
  *Research
and Development Expenses*
  Research
and development expenses increased 31% from $14.4 million in the year ended
December 31, 2003 to $18.8 million in the year ended December 31, 2004. The
increase was primarily due to the additional research and development expenses
we incurred in connection with the acquisition of the Proximity business in the
fourth quarter of 2003 and expenses associated with the development of our new
WiMAX portfolio. In 2005, we expect to continue to invest heavily in
WiMAX-related research and development projects and, in connection with our
proposed acquisition of ArelNet, we expect to incur additional costs related to
the development of VOIP products.
  *Sales
and Marketing Expenses*
  Sales and
marketing expenses increased 6% from $10.4 million in the year ended December
31, 2003 to $11.0 million in the year ended December 31, 2004. The increase in
sales and marketing expenses is primarily attributable to the increase in
revenue relating to the acquisition of the Proximity business.
  *Bad
Debt Expense*
  In 2003,
we wrote down receivables by $0.9 million due to our concerns with customers in
Asia. During 2004, we wrote down receivables by $0.5 million due to our concerns
with customers in Asia and Africa.
  *General
and Administrative Expenses*
  General
and administrative expenses increased 26% from $8.7 million in the year ended
December 31, 2003 to $11.0 million in the year ended December 31, 2004. The
increase in general and administrative expenses was primarily the result of
costs incurred in preparing to meet the requirements of Section 404 of the
Sarbanes Oxley Act.
  *Amortization
of Intangibles*
  Amortization
of intangibles expense increased 320% from $0.2 million in the year ended
December 31, 2003 to $0.7 million in the year ended December 31, 2004. The
increase arose from the amortization of intangibles identified after our
acquisition of the Proximity business in the fourth quarter of
2003.
  *Restructuring
Provision*
  During
both 2003 and 2004, we implemented expense reduction programs. During 2003, we
made restructuring provisions totaling $0.8 million to cover employee
termination costs and a revision of our estimates of costs associated with the
closure of our Riverside facility in 2002. During 2004, we charged $0.4 million
to restructuring expense related to additional employee termination costs. For
more information regarding our restructuring programs, see the section above
entitled “Restructuring”.
  *Interest
and Other Income Net*
  Interest
and other income net, which increased 8% from $3.0 million for the year ended
December 31, 2003 to $3.2 million in the year ended December 31, 2004, consisted
of gains and losses on foreign currency cash balances and foreign exchange
hedging contracts and interest earned on cash deposits with financial
institutions.
  *Income
Taxes*
  An income
tax credit of $1.9 million was recorded in the year ended December 31, 2004. We
received a $2.1 million tax credit related to the benefit granted to us by the
U.K. tax authorities, which we received in lieu of carrying forward tax
losses related to research and development costs. We surrendered approximately
$9 million of carry forward tax losses in the United Kingdom as a
result. The tax credit was partially offset by tax charges relating to a foreign
branch of Airspan Communications Limited, UK (“ACL”) and certain franchise taxes
relating to the US operations of Airspan. No income tax benefit has been
recorded for the tax losses generated because we have incurred operating losses
since inception. The 2003 tax charge of $5 thousand relates to a foreign branch
of the ACL.
  36
 *Net
Loss*
  For the
reasons described above, our net loss before taxes decreased 60% from $29.5
million in 2003 to $11.9 million in 2004 and our net loss decreased by 66% from
$29.5 million in 2003 to $10.0 million in 2004.
  **Comparison
of the Year Ended December 31, 2002 to the Year Ended December 31,
2003**
  *Revenue* **
  Revenue
increased 18% from $25.9 million for the year ended December 31, 2002 to $30.7
million for the year ended December 31, 2003. The $4.7 million increase in
revenue is attributable to an increase in revenues in the first half of 2003
relative to the first half of 2002. Revenue growth was principally driven by
growth in Asia Pacific, primarily by sales to Broadcast Communications in New
Zealand, and in Europe, partly as a result of sales by Airspan Israel, which we
acquired in October 2002.
  *Cost
of Revenue and Inventory Provision*
  Cost of
revenue increased 19% from $19.2 million in the year ended December 31, 2002 to
$22.9 million in the year ended December 31, 2003. The increase was due
primarily to the increase in revenue. As a percentage of revenue, our cost of
revenue was 74.2% in 2002 and 74.9% in 2003.
  During
both 2002 and 2003 we wrote down material amounts of inventory. As a result of
the depressed revenue for the first six months of 2002, we reassessed the levels
of excess and obsolete inventory and decided to write down inventory by $2.0
million in the second quarter of 2002. During the second quarter of 2003 we took
a $4.4 million inventory provision to reflect our view that, with the full
introduction of the new AS4020 product line in the quarter, demand for AS4000
equipment had lessened.
  Gross
margin declined to 10% in 2003 from 18% for the year of 2002. The decline in
gross margin was a function of lower average selling prices, a change in product
mix and an increase in inventory provisions.
  *Research
and Development Expenses*
  Research
and development expenses increased 6% from $13.6 million in the year ended
December 31, 2002 to $14.4 million in the year ended December 31, 2003. The
increase was due to the additional research and development expense of the
Airspan Israel business purchased in the fourth quarter of 2002.
 
 *Sales
and Marketing Expenses*
  Sales and
marketing expenses increased 2% from $10.1 million in the year ended December
31, 2002 to $10.4 million in the year ended December 31, 2003. The increase in
sales and marketing expenses is primarily attributable to the increase in
revenue partially offset by our 2003 expense reduction programs. We have been
able to sell the Airspan Israel products through our existing sales network. We
anticipate that the sales and marketing expenses associated with the Proximity
business will increase the absolute level of Sales and marketing expenses in
2004 by approximately $1 million. In 2002 we wrote down receivables by $3.7
million due to our concerns with customers in Asia and Eastern Europe. During
2003 we wrote down receivables by $0.9 million due to our concerns with
customers in Asia.
  *General
and Administrative Expenses*
  General
and administrative expenses decreased 3% from $9.0 million in the year ended
December 31, 2002 to $8.7 million in the year ended December 31, 2003. The
decrease in general and administrative expenses was primarily the result of the
full year effect of our cost reduction programs, including reductions in
personnel and our relocation from our original headquarters in Sunrise Florida
to smaller offices in Boca Raton.
  *Amortization
of Intangibles*
  Amortization
of intangibles expense increased 291% from $44 thousand in the year ended
December 31, 2002 to $172 thousand in the year ended December 31, 2003. The
increase arose from the amortization of intangibles identified after our fourth
quarter acquisition of Airspan Israel.
 
 37
 *Restructuring
Provision*
  During
both 2002 and 2003 we implemented expense reduction programs. During 2002, we
made restructuring provisions totaling $1.4 million to cover employee
termination costs and facility closure costs. As part of this $1.4 million we
recorded a $1.0 million restructuring charge for the closure of our Riverside,
Uxbridge facility. The closure of this facility was a direct result of the
decision to fully outsource all of our AS4000 and AS4020 product manufacturing.
During 2003 we charged $0.8 million to restructuring expense related to further
employee termination costs and an increase in the estimated closure costs of the
Riverside facility. For more information regarding restructuring, see the
section above entitled “Restructuring”.
  *Interest
and Other Income Net*
  Interest
and other income, which increased 30% from $2.4 million for the year ended
December 31, 2002 to $3.0 million in the year ended December 31, 2003, consisted
of gains and losses on foreign currency cash balances and foreign exchange
hedging contracts and interest earned on cash deposits with financial
institutions. The increase in foreign currency exchange gains were partially
offset by lower interest income from lower cash balances and lower interest
rates in 2003. Amounts from interest income were partially offset by interest
expense of $161 thousand in the year ended December 31, 2002 and $38 thousand in
the year ended December 31, 2003. Interest expense decreased in 2003 as a result
of the repayment of debt.
  *Income
Taxes*
  An income
tax provision of $5 thousand recorded in the year ended 31 December 2003 relates
to a foreign branch of the United Kingdom company but no income tax benefit
has been recoded for the tax losses generated because overall operating losses
have been experienced since inception. The 2002 tax credit relates to the
receipt of $2.9 million from the U.K. tax authorities in lieu of carrying
forward tax losses related to research and development costs. The company
surrendered $12 million of carry forward tax losses in the United Kingdom. as a
result.
  *Net
Loss*
  For the
reasons described above, our net loss before taxes decreased 5% from $31.0
million in 2002 to $29.5 million in 2003 and our net loss increased by 5% from
$28.1 million in 2002 to $29.5 million in 2003.
  **Liquidity
and Capital Resources**
  As of
December 31, 2004, we had cash and cash equivalents totaling $66.3 million and
$1.7 million of restricted cash. Of this restricted cash $1.5 million is
held as collateral for performance guarantees on one customer contract and with
landlords and $0.2 million is for payments made by employees under our Employee
Share Purchase Plan. We do not have a line of credit or similar borrowing
facility, nor do we have any material capital commitments.
  Since
inception, we have financed our operations through private sales of convertible
preferred stock, which have totaled $146.5 million (net of transaction expenses)
and an initial public offering of common stock, which we completed on July 25,
2000. In the initial public offering, we issued 6,325,000 shares of common stock
for approximately $86 million in cash (net of underwriting discounts, commission
and other expenses). In our most recent private sale of convertible preferred
stock, which we closed in September 2004, we raised $29.2 million through the
issuance of Series A preferred stock to Oak Investment Partners XI, Limited
Partnership. In November 2004, we also raised $4.4 million through the sale of
treasury stock that was acquired through a share buy back program completed in
2002. We have used the proceeds of the sale of all securities for working
capital and other general corporate purposes.
  At
December 31, 2004 and 2003, we had no outstanding debt.
  Until we
are able to generate cash from operations, if ever, we intend to use our
existing cash resources to finance our operations. We believe we have sufficient
cash resources to finance our operations for at least the next twelve months.
  For the
year ended December 31, 2004, we used $0.9 million cash in operating activities
compared with $17.7 million for the year ended December 31, 2003. The difference
between our net loss of $10.0 million and the $0.9 million cash used in
operating activities principally arose from decreasing inventory of $10.1
million and an increase in accounts payable of $16.9 million partially offset by
an increase in receivables of $8.7 million and a decrease in customer advances
of $10.3 million. During 2003 we reduced our inventory by $8.0 million and our
receivables by $1.8 million.
  38
 The cash
used in investing activities for the year ended December 31, 2004 all related to
capital equipment purchases of $2.2 million. The net cash provided in investing
activities for the year ended December 31, 2003 of $5.1 million arose from the
sale of investment securities of $5.1 million along with net cash proceeds from
acquisitions of $1.8 million, partially offset by capital equipment purchases of
$1.8 million.
  Our
financing cash flow for the year ended December 31, 2004 of 35.4 million was
dominated by the issuance of $29.1 million of preferred stock. Additional to
this we raised $4.4 million through the sale of our treasury stock and another
$2.0 million from the exercise of stock options and stock issued under out
Employee Share Purchase Plan. Our financing cash flow for the year ended
December 31, 2003 was a net outflow of $1.7 million. The outflow arose from a
repayment of long term debt of $2.4 million and a $0.4 million purchase of
treasury stock partially offset by a $0.6 million decrease in restricted cash
and net proceeds from issuance of common stock of $0.4 million. Restricted cash
increases whenever the Company issues a guarantee secured by cash collateral and
decreases whenever such a guarantee is cancelled or expires according to its
terms.
  *Contractual
Obligations*
  The
impact that our contractual obligations as of December 31, 2004 are expected to
have on our liquidity and cash flow in future periods is as
follows:
  
 **Payments
      due by period****All
      figures in US$ thousands**
    
    **Total**
    
    **2005**
    
    **2006
      - 2007**
    
    **2008
      - 2009**
    
    **2010
      &****thereafter**Contractual
      obligationsOperating
      lease obligations
    
    $
    6,497
    
    $
    1,781
    
    $
    2,580
    
    $
    1,950
    
    $
    186Purchase
      obligations (1)
    
    
    21,178
    
    
    21,178
    
    
    —
    
    
    —
    
    
    —$
    27,675
    
    $
    22,959
    
    $
    2,580
    
    $
    1,950
    
    $
    186
  (1)  As of
December 31, 2004, the Company had commitments with its main sub contract
manufacturers under various purchase order and forecast arrangements, to a value
of $21,147 thousand and with other suppliers for capital equipment, to a value
of $31 thousand.
  The
Company has bank guarantees with its landlords and a customer totaling $1,502
thousand at December 31, 2004. The guarantees secure payment or performance
obligations of the Company under contracts. The Company has pledged cash to the
banks as collateral for the guarantees in the same amounts as the guarantees.
This pledged cash has been classified as restricted cash.
  We have
no material commitments other than operating leases, supplier purchase
commitments and forward exchange contracts mentioned herein. See “ITEM 7A” and
“Note 10 of the Notes to the Financial Statements”.
  **ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**
  *Interest
Rate Risk*
  The
Company’s earnings are affected by changes in interest rates. As of December 31,
2003 and 2004, we had cash and cash equivalents plus restricted cash of
$35.5 million and $68.0 million, respectively. Substantially all of these
amounts consisted of highly liquid investments with purchase to maturity terms
of less than 90 days. These investments are exposed to interest rate risk, but a
hypothetical increase or decrease in market interest rates by two percentage
points from December 31, 2004 rates would cause the fair market value of these
short-term investments to change by an insignificant amount. Due to the short
duration of these investments, a short-term increase in interest rates would not
have a material effect on our financial condition or results of operations.
Declines in interest rates over time would, however, reduce our interest income.
Due to the uncertainty of the specific actions that would be taken to mitigate
this, and their possible effects, the sensitivity analysis does not take into
account any such action.
  *Foreign
Currency Exchange Rate Risk*
  For the
year ended December 31, 2004, 96.1% of our sales were denominated in U.S.
dollars and the remaining 3.9% were predominantly denominated in euro.
Comparatively for the year ended December 31, 2003, 96.8% of our sales were
denominated in U.S. dollars and the remaining 3.2% were denominated
predominantly in euro. Our total euro-denominated sales for the year ended
December 31, 2004 were € 2.2 million (U.S.$2.7 million), which were recorded at
an average exchange rate of $1U.S. = €
0.8043 compared to total euro-denominated sales for the year ended December 31,
2003 of € 0.8 million (U.S.$0.9 million) which were recorded at an average
exchange rate of $1U.S. = € 0.8892. If the average exchange rates used had been
higher or lower during 2004 by 10% they would have decreased or increased the
total non-US dollar-denominated sales value by $0.3 million. We expect the
proportions of sales in euro to fluctuate over time. The Company’s sensitivity
analysis for changes in foreign currency exchange rates does not factor in
changes in sales volumes.
  Since May
2000, we have from time to time entered into fair value currency hedging
contracts that lock in minimum exchange rates for payments due to us under some
of our sales contracts where those payments are to be made in currencies other
than U.S. dollars. We do not enter into any currency hedging activities for
speculative purposes. There was no impact from such contracts during 2003 on
earnings, nor were there any fair value hedges outstanding at December 31, 2004.
We will continue to monitor our foreign currency exposures and may modify our
hedging strategies, as we deem appropriate.
  39
 We have
also entered into cash flow currency hedges. Our operating results are affected
by moves in foreign currency exchange rates, particularly the rate between U.S.
dollars and U.K. pounds sterling and the U.S. dollar and the Israeli shekel.
This is because most of our operating expenses, which may fluctuate over time,
are incurred in pounds sterling and Israeli shekels.
  To manage
our pound foreign currency risk we have, at various times in 2002 and 2003 and
2004, forecast our likely net spending in non U.S. dollars until March, 2005
and, based on these forecasts, we have entered into forward exchange contracts
to cover a percentage of the projected exposure.
  We have
entered into the following forward exchange contracts:
  •  
In May 2002, we entered into a forward exchange contract to purchase 7.5 million
pounds sterling at an average exchange rate of $1U.S. = 0.6927 pounds sterling
in six equal amounts, from January 2003 to June 2003. At December 31, 2003 and
2004 there were no contracts outstanding.
  •  
In November 2002, we entered into a forward exchange contract to purchase 6.0
million pounds sterling at an average exchange rate of $1U.S. = 0.6421 pounds
sterling in six equal amounts, from July 2003 to December 2003. At December 31,
2003 and 2004 there were no contracts outstanding.
  •  
In May 2003, we entered into a forward exchange contract to purchase 4.5 million
pounds sterling at an average exchange rate of $1U.S. = 0.6326 pounds sterling
in six equal amounts, from January 2004 to June 2004. At December 31, 2003 these
were outstanding at an average exchange rate of $1U.S. = 0.6326 pounds sterling.
At December 31, 2004 there were no contracts outstanding.
  •  
In September 2003, we entered into a forward exchange contract to purchase 3.6
million pounds sterling at an average exchange rate of $1U.S. = 0.6489 pounds
sterling in six equal amounts, from July 2004 to December 2004. At December 31,
2003 these were outstanding at an average exchange rate of $1U.S. = 0.6489
pounds sterling. At December 31, 2004 there were no contracts
outstanding.
  •  
In September 2004, we entered into a forward exchange contract to purchase 2.5
million pounds sterling at an average exchange rate of $1U.S. = 0.5706 pounds
sterling in three amounts, from January 2005 to March 2005. At December 31, 2004
these were all outstanding.
  The total
forward purchases of pounds sterling for the year ended December 31, 2004, was
8.1 million pounds sterling, and we paid expenses in local currency of
approximately 15.5 million pounds sterling over the same period. The
effectiveness of the contracts as a hedge was therefore 100%. If the expenses in
pounds sterling had not been hedged and the average exchange rates had been
higher or lower by 10%, the pound-sterling denominated operating expenses would
have decreased or increased by $3.1 million.
  During
the year ended December 31, 2004 we paid expenses in Israeli Shekels of 25.6
million Israeli Shekels. None of these expenses have been hedged. If the average
exchange rates had been higher or lower by 10%, the Israeli Shekel operating
expenses would have decreased or increased by $0.6 million for the year ended
December 31, 2004.
  For the
years ended December 31, 2004 and 2003 we incurred the majority of our cost of
revenue in U.S. dollars.
  *Equity
Price Risk*
  We do not
own any equity investments, other than in our subsidiaries. As a result, we do
not currently have any direct equity price risk.
  *Commodity
Price Risk* **
  We do not
enter into contracts for the purchase or sale of commodities. As a result, we do
not currently have any direct commodity price risk.
  **ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**
  Financial
Statements and Supplementary Data are included on pages F-1 to F-28.
  **ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE**
  None
  40
  **ITEM
9A. CONTROLS AND PROCEDURES**
  *Evaluation
of Disclosure Controls and Procedures*
  As of the
end of the period covered by this annual report, an evaluation was performed
under the supervision and with the participation of Airspan’s management,
including the Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of Airspan’s disclosure controls and
procedures (as defined in Section 13a-15(e) and 15d-15(3) of the Securities
Exchange Act of 1934, as amended). Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that as of such date, our
disclosure controls and procedures are (1) designed to ensure that material
information relating to Airspan, including our consolidated subsidiaries, is
made known to them by others within those entities, particularly in the period
in which this report was being prepared and (2) effective, in that they provide
reasonable assurance that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and
forms.
 
 *Management's
Annual Report on Internal Control over Financial Reporting*
  Our
management is responsible for establishing and maintaining adequate internal
control over the group’s financial reporting as defined in Rules 13a-15(f) and
15d-15(f) under the Securities Act of 1934, as amended. Our internal control
over financial reporting is designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles.
  There are
inherent limitations in the effectiveness of any internal control, including the
possibility of human error and the circumvention or overriding of controls.
Accordingly, even effective internal controls can provide only reasonable
assurances with respect to financial statement preparation. Further because of
changes in conditions, the effectiveness of internal controls may vary over time
such that the degree of compliance with the policies or procedures may
deteriorate.
  Management
assessed the effectiveness of our internal control over financial reporting as
of December 31, 2004. In making this assessment, management used the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (“COSO”) in Internal Control-Integrated Framework.
  Based on
our assessment of those criteria, management has concluded that as of December
31, 2004, our internal control over financial reporting is
effective.
 
 Our independent registered public accounting firm,
Ernst & Young LLP, has audited the financial statements included in this
Annual Report on Form 10-K and have audited our management's assessment of our
internal control over financial reporting as stated in their report which
appears immediately below.


*Attestation
Report of the Independent Registered Public Accounting
Firm*




**REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**





The Board
of Directors and Stockholders of Airspan Networks Inc.




We have
audited management’s assessment, included in the accompanying Management’s
Annual Report on Internal Control over Financial Reporting, that Airspan
Networks Inc. maintained effective internal control over financial reporting as
of December 31, 2004 based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (the COSO criteria). Airspan Networks Inc.’s
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management’s assessment and an opinion on the effectiveness of the company’s
internal control over financial reporting based on our audit.




We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management’s assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.




41


A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.




Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.




In our
opinion, management’s assessment that Airspan Networks Inc. maintained effective
internal control over financial reporting as of December 31, 2004, is fairly
stated, in all material respects, based on the COSO criteria. Also, in our
opinion, Airspan Networks Inc. maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2004, based on the
COSO criteria.




We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Airspan
Networks Inc. and its subsidiaries as of December 31, 2004 and 2003, and the
related consolidated statements of operations, stockholders’ equity and cash
flows for each of the three years in the period ended December 31, 2004 and our
report dated March 16, 2005 expressed an unqualified opinion
thereon.





****/s/ ERNST& YOUNG
      LLPLondon,
      England
      March
      16, 2005


*Changes
in Internal Control over Financial Reporting*




There
have been no changes in our internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act) that
occurred during our last fiscal quarter that has materially affected or is
reasonably likely to materially affect our internal control over financial
reporting.




**ITEM
9B. OTHER INFORMATION**




None.





42




**PART
III**




**ITEM
10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT**




The
information regarding the names, ages and business experience of our executive
officers and directors required by this Item is furnished in Part I of this
Annual Report on Form 10-K under the caption “Executive Officers of the
Registrant”. All other information required by this Item is incorporated by
reference to our definitive proxy statement to be filed within 120 days after
the end of our fiscal year ended December 31, 2004.




**ITEM
11. EXECUTIVE COMPENSATION**




The
information required by this Item is incorporated by reference to our definitive
proxy statement to be filed within 120 days after the end of our fiscal year
ended December 31, 2004.




**ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS**




The
information required by this Item and Item 403 of Regulation S-K is incorporated
by reference to our definitive proxy statement to be filed within 120 days after
the end of our fiscal year ended December 31, 2004. The information required by
this Item and Item 201(d) of Regulation S-K is furnished in Item 5 of this
Annual Report on Form 10-K under the caption “Securities Authorized for Issuance
under Equity Compensation Plans.”




**ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**




The
information required by this Item is incorporated by reference to our definitive
proxy statement to be filed within 120 days after the end of our fiscal year
ended December 31, 2004.




**ITEM
14. PRINCIPAL ACCOUNTING FEES AND SERVICES**




The
information required by this Item is incorporated by reference to our definitive
proxy statement to be filed within 120 days after the end of our fiscal year
ended December 31, 2004.





43






**PART
IV**




**ITEM
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES**




(a) The
following documents are filed as part of this report:




(1) Financial
Statements




**Page**Report
      of Independent Registered Public Accounting Firm
    F-1Consolidated
      Balance Sheets as of December 31, 2003 and 2004
    F-2Consolidated
      Statements of Operations for the years ended December 31, 2002, 2003 and
      2004
    F-3Consolidated
      Statements of Changes in Stockholders’ Equity for the years endedDecember
      31, 2002, 2003 and 2004
    F-4Consolidated
      Statements of Cash Flows for the years ended December 2002, 2003 and 2004
    F-5Notes
      to the Financial Statements
    F-6




(2) Financial
Statement Schedules




Schedule
      II — Valuation and Qualifying Accounts for the year ended December 31,
      2002, 2003 and 2004
    II-1




(3) Exhibits




44





**AIRSPAN
NETWORKS INC.** **EXHIBIT
INDEX** **Year
Ended December 31, 2004**


3.1
    
    Amended
      and Restated Articles of Incorporation of Airspan(1)3.2
    
    Articles
      of Amendment to the Articles of Incorporation (2)3.3
    
    Amended
      and Restated Bylaws of Airspan (3)4.1
    
    Form
      of Airspan’s common stock certificate (4)10.1
    
    1998
      Stock Option and Restricted Stock Plan (4)10.2
    
    2000
      Employee Stock Purchase Plan, as amended(2)10.3
    
    Employment
      Agreement with Eric Stonestrom (4),
      (5)10.4
    
    Employment
      Agreement with Jonathan Paget (4),
      (5)10.5
    
    Employment
      Agreement with Peter Aronstam, as amended (5), (6),
      (7)10.6
    
    2001
      Supplemental Stock Option Plan (6)10.7
    
    Employment
      Agreement with Henrik Smith-Petersen (5),
      (7)10.8
    
    Employment
      Agreement with David Brant (5),
      (7)10.9
    
    2003
      Supplemental Stock Option Plan (3)10.10
    
    Airspan
      Omnibus Equity Compensation Plan(1)10.11
    
    Purchase
      and License Agreement, dated as of December 28, 2004, by and among Airspan
      Communications Limited and Axtel, S.A. de C.V.*(11)10.12
    
    Technical
      Assistance Support Services Agreement for FWA Equipment, dated as of
      February 14, 2003, by and between Nortel Networks UK Limited and Axtel,
      S.A. de C.V. (8)**10.13
    
    Preferred
      Stock Purchase Agreement, dated as of September 10, 2004 among Airspan
      Networks, Inc. and Oak Investment Partners XI, Limited Partnership
      (9)10.14
    
    Amendment
      to Preferred Stock Purchase Agreement (10)10.15
    
    Amendment
      Agreement No. 3 to FWA TASS dated as of December 28, 2004 between Airspan
      Communications Limited and Axtel, S.A. de C.V.*(11)21
    
    Subsidiaries
      of registrant *23.1
    
    Consent
      of Ernst & Young LLP, IndependentRegistered
      Public Accounting Firm*31.1
    
    Certification
      of the Chief Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002*31.2
    
    Certification
      of the Chief Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002*32.1
    
    Certification
      of the Chief Executive Officer pursuant to section 906 of the
      Sarbanes-Oxley Act of 2002***32.2
    
    Certification
      of the Chief Financial Officer pursuant to section 906 of the
      Sarbanes-Oxley Act of 2002***


*
    Filed
      herewith
 
 45
 
 **
    Confidential
      treatment has been granted with respect to certain portions of this
      exhibit. Omitted portions have been filed separately with the Securities
      and Exchange Commission.***
    Furnished
      herewith


1
    
    Incorporated
      by reference to Airspan’s Form 10-Q
      for the quarter ended April 4, 2004.2
    
    Incorporated
      by reference to the Company’s report on Form 8-K filed on September 15,
      2004.3
    
    Incorporated
      by reference to Company’s report on Form 8-K/A filed in February 22, 2005.4
    
    Incorporated
      by Reference to Airspan’s Registration Statement on Form S-1 (333-34514)
      filed July 18, 20005
    
    Management
      Agreement or Compensatory Plan or Arrangement6
    
    Incorporated
      by Reference to Airspan’s Form 10-K for the year ended December 31,20007
    
    Incorporated
      by Reference to Airspan’s Form 10-K for the year ended December 31,20028.
    
    Incorporated
      by reference by the Company’s report on Form 8-K/A filed on July 6, 2004.9
    
    Incorporated
      by reference to the Company’s report on Form 8-K filed on September 13,
      2004.10
    
    Incorporated
      by reference to the Company’s report on Form 8-K filed on September 27,
      2004.11
    
    Portions
      of this document have been omitted and were filed separately with the SEC
      on March 16, 2005 pursuant to a request for confidential
      treatment.





46







**SIGNATURES**




Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, Airspan has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized, in Boca Raton, Florida, on the 16th day
of March 2005.




Airspan Networks Inc****By:
    /s/ Eric D.
    StonestromEric D. Stonestrom,President and Chief Executive
      Officer





The
undersigned directors and officers of Airspan hereby constitute and appoint Eric
D. Stonestrom and Peter Aronstam and each of them with full power to act without
the other and with full power and substitution and resubstitution, our true and
lawful attorneys-in-fact with full power to execute in our name and behalf in
the capacities indicated below this Annual Report on Form 10-K and any and all
amendments thereto and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission
and hereby ratify and confirm all that such attorneys-in-fact, or any of them,
or their substitutes shall lawfully do or cause to be done by virtue hereof.




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





**Signature**
    
    **Title**
    
    **Dated**/s/
      Eric D. Stonestrom
    
    Chief
      Executive Officer,
    
    March
      16, 2005Eric
      D. Stonestrom
    
    Director
      (Principal Executive Officer)/s/
      Matthew J. Desch
    
    Chairman
      of the Board of Directors
    
    March
      16, 2005Matthew
      J. Desch/s/
      Peter Aronstam
    
    Senior
      Vice President, Finance;
    
    March
      16, 2005Peter
      Aronstam
    
    Chief
      Financial Officer (Principal
      Financial
      and Accounting Officer)/s/
      H. Berry Cash
    
    Director
    
    March
      16, 2005H.
      Berry Cash/s/
      Randall E. Curran
    
    Director
    
    March
      16, 2005Randall
      E. Curran/s/
      Michael T. Flynn
    
    Director
    
    March
      16, 2005Michael
      T. Flynn/s/
      Guillermo Heredia
    
    Director
    
    March
      16, 2005Guillermo
      Heredia/s/
      Thomas S. Huseby
    
    Director
    
    March
      16, 2005Thomas
      S. Huseby/s/
      David Twyver
    
    Director
    
    March
      16, 2005David
      Twyver





47




**REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**




To the
Stockholders and Board of Directors of Airspan Networks Inc.




We have
audited the accompanying consolidated balance sheets of Airspan Networks Inc.
and its subsidiaries as of December
31, 2004 and
2003 , and the
related consolidated statements of operations, changes in stockholders’ equity
and cash flows for each of the three years in the period ended December
31, 2004. Our
audits also included the financial statement schedule listed in the Index at
Item 15(a). These consolidated financial statements and schedule are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements and schedule based on our
audits.




We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free from material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.




In our
opinion, the consolidated financial statements referred to above present fairly
in all material respects, the consolidated financial position of Airspan
Networks Inc. and its subsidiaries as of December
31, 2004 and
2003, and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December
31, 2004, in
conformity with U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.




We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2004, based on criteria
established in Internal Control - Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission and our report dated
March 16, 2005 expressed an unqualified opinion thereon.


****/s/ ERNST& YOUNG
      LLPLondon,
      England
      March
      16, 2005





F-1







**AIRSPAN
NETWORKS INC.**


**CONSOLIDATED
BALANCE SHEETS**


**(in
thousands, except for share data)**





**December
      31,****2003**
    
    **December
      31,****2004****ASSETS****Current
      assets**Cash
      and cash equivalents
    
    $
    33,926
    
    $
    66,296Restricted
      cash
    
    
    1,588
    
    
    1,687Accounts
      receivable, less allowance for doubtful accounts of $5,207 in 2003 and
      $2,814 in 2004
    
    
    12,509
    
    
    20,947Unbilled
      accounts receivable
    
    
    54
    
    
    43Inventory
    
    
    18,215
    
    
    12,834Prepaid
      expenses and other current assets
    
    
    4,570
    
    
    5,702Total
      current assets
    
    
    70,862
    
    
    107,509Property,
      plant and equipment, net
    
    
    3,736
    
    
    3,707Goodwill
    
    
    3,136
    
    
    789Intangible
      assets, net
    
    
    4,554
    
    
    1,672Long
      term accounts receivable
    
    
    —
    
    
    305Other
      non current assets
    
    
    984
    
    
    1,216Total
      assets
    
    $
    83,272
    
    $
    115,198**LIABILITIES
      AND STOCKHOLDERS’ EQUITY****Current
      liabilities**Accounts
      payable
    
    $
    7,751
    
    $
    24,615Accrued
      taxes
    
    
    449
    
    
    653Deferred
      revenue
    
    
    989
    
    
    627Customer
      advances
    
    
    15,070
    
    
    4,789Other
      accrued expenses
    
    
    10,000
    
    
    11,349Total
      current liabilities
    
    
    34,259
    
    
    42,033**Commitments
      (see note 10)**
    
    
    —
    
    
    —**Stockholders’
      equity**Preferred
      stock.
      $0.0001 par value; nil shares authorized at December 31, 2003 and 74,200
      authorized at December 31, 2004: nil issued at December 31, 2003 and
      73,000 issued at December 31, 2004
    
    
    —
    
    
    —Common
      stock,
      $0.0003 par value; 50,000,000 shares authorized at December 31 2003 and
      100,000,000 authorized at December 31 2004: 36,314,410 issued at December
      31, 2003 and 37,644,627 issued at December 31, 2004
    
    
    11
    
    
    11Note
      receivable — stockholder
    
    
    (130
    )
    
    (87
    )Additional
      paid in capital
    
    
    215,209
    
    
    249,917Treasury
      Stock; 834,560 shares held at December 31, 2003
    
    
    (797
    )
    
    —Accumulated
      other comprehensive income
    
    
    1,839
    
    
    418Accumulated
      deficit
    
    
    (167,119
    )
    
    (177,094
    )Total
      stockholders’ equity
    
    
    49,013
    
    
    73,165Total
      liabilities and stockholders’ equity
    
    $
    83,272
    
    $
    115,198





The
accompanying notes are an integral part of these financial statements





F-2







**AIRSPAN
NETWORKS INC.**


**CONSOLIDATED
STATEMENTS OF OPERATIONS**


**(in
thousands, except for share and per share data)**







**Year
      ended****December
      31,****2002**
    
    **Year
      ended****December
      31,****2003**
    
    **Year
      ended****December
      31,****2004**Revenue
    
    $
    25,930
    
    $
    30,651
    
    $
    94,647Cost
      of revenue
    
    
    (19,241
    )
    
    (22,945
    )
    
    (66,144
    )Inventory
      provision
    
    
    (2,001
    )
    
    (4,746
    )
    
    (1,099
    )Gross
      profit
    
    
    4,688
    
    
    2,960
    
    
    27,404Operating
      expenses:Research
      and development
    
    
    13,642
    
    
    14,395
    
    
    18,794Sales
      and marketing
    
    
    10,141
    
    
    10,389
    
    
    11,013Bad
      debt expense
    
    
    3,680
    
    
    946
    
    
    549General
      and administrative
    
    
    8,969
    
    
    8,741
    
    
    11,042Amortization
      of intangibles
    
    
    44
    
    
    172
    
    
    723Restructuring
      provision
    
    
    1,420
    
    
    750
    
    
    413Total
      operating expenses
    
    
    37,896
    
    
    35,393
    
    
    42,534Loss
      from operations
    
    
    (33,208
    )
    
    (32,433
    )
    
    (15,130
    )Interest
      expense
    
    
    (161
    )
    
    (38
    )
    
    —Interest
      and other income
    
    
    2,369
    
    
    3,021
    
    
    3,217Loss
      before income taxes
    
    
    (31,000
    )
    
    (29,450
    )
    
    (11,913
    )Income
      tax credits/ (expenses)
    
    
    2,862
    
    
    (5
    )
    
    1,938Net
      loss
    
    $
    (28,138
    )
    $
    (29,455
    )
    $
    (9,975
    )Net
      loss per share — basic and dilutedNet
      loss per share
    
    $
    (0.80
    )
    $
    (0.84
    )
    $
    (0.27
    )Weighted
      average shares outstanding — basic and diluted
    
    
    35,258,645
    
    
    35,073,315
    
    
    36,441,932





The
accompanying notes are an integral part of these financial statements





F-3







**AIRSPAN
NETWORKS INC.**


**CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY**


**(in
thousands, except for share data)**


**Preferred
      Stock**
    
    
    
    
    
    **Common
      Stock****Shares**
    
    
    **Par
      value**
    
    
    **Shares**
    
    
    **Par****value**
    
    
    **Additional****paid
      in****capital**
    
    
    **Treasury****stock**
    
    
    **Note****receivable****stockholder**
    
    
    **Accumulated****other****comprehensive****income**
    
    
    **Accumulated****deficit**
    
    
    **Total**At
      January 1, 2002
    
    
    
    
    
    
    
    
    35,120,199
    
    $
    10
    
    $
    214,491
    
    
    —
    
    $
    (180
    )
    $
    458
    
    $
    (109,526
    )
    $
    105,253Comprehensive
      Loss:Net
      loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    (28,138
    )
    
    (28,138
    )Other
      Comprehensive Income:Movement
      in the fair value of cash flow hedgesUnrealized
      gains on foreign currency cash flow hedges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    —
    
    
    —
    
    
    —
    
    
    2,041
    
    
    —Less:
      reclassification of adjustment for gains realized in net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    —
    
    
    —
    
    
    —
    
    
    (937
    )
    
    —1,104
    
    
    
    
    
    1,104Comprehensive
      loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    (27,034
    )Decrease
      in notes receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50
    
    
    —
    
    
    —
    
    
    50Issuance
      of common stock under the employee share purchase plan
    
    
    
    
    
    
    
    
    274,411
    
    
    —
    
    
    193
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    193Exercise
      of stock options
    
    
    
    
    
    
    
    
    143,872
    
    
    —
    
    
    43
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    43Purchase
      of own shares
    
    
    
    
    
    
    
    
    (412,486
    )
    
    —
    
    
    —
    
    $
    (405
    )
    
    
    
    
    
    
    
    
    
    
    (405
    )At
      December 31, 2002
    
    
    
    
    
    
    
    
    35,125,996
    
    $
    10
    
    $
    214,727
    
    $
    (405
    )
    $
    (130
    )
    $
    1,562
    
    $
    (137,664
    )
    $
    78,100Comprehensive
      Loss:Net
      loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    (29,455
    )
    
    (29,455
    )Other
      Comprehensive Income:Movement
      in the fair value of cash flow hedgesUnrealized
      gains on foreign currency cash flow hedges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    —
    
    
    —
    
    
    —
    
    
    1,952
    
    
    —Less:
      reclassification of adjustment for gains realized in net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    —
    
    
    —
    
    
    —
    
    
    (1,675
    )
    
    —277
    
    
    
    
    
    277Comprehensive
      loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    (29,178
    )Issuance
      of common stock under the employee share purchase plan
    
    
    
    
    
    
    
    
    531,164
    
    
    1
    
    
    369
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    370Exercise
      of stock options
    
    
    
    
    
    
    
    
    244,765
    
    
    —
    
    
    112
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    112Purchase
      of own shares
    
    
    
    
    
    
    
    
    (422,074
    )
    
    —
    
    
    —
    
    
    (392
    )
    
    —
    
    
    —
    
    
    —
    
    
    (392
    )At
      December 31, 2003
    
    
    —
    
    
    —
    
    
    35,479,851
    
    $
    11
    
    $
    215,209
    
    $
    (797
    )
    $
    (130
    )
    $
    1,839
    
    $
    (167,119
    )
    $
    49,013Comprehensive
      Loss:Net
      loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    (9,975
    )
    
    (9,975
    )Other
      Comprehensive Income:Movement
      in the fair value of cash flow hedgesUnrealized
      gains on foreign currency cash flow hedges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    —
    
    
    —
    
    
    —
    
    
    590
    
    
    —Less:
      reclassification of adjustment for gains realized in net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    —
    
    
    —
    
    
    —
    
    
    (2,011
    )
    
    —(1,421
    )
    
    
    
    
    (1,421
    )Comprehensive
      loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    (11,396
    )Decrease
      in notes receivable
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43
    
    
    
    
    
    
    
    
    43Issuance
      of Series A Preferred shares
    
    
    73,000
    
    
    —
    
    
    
    
    
    
    
    
    29,132
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29,132Issuance
      of common stock under the employee share purchase plan
    
    
    
    
    
    
    
    
    211,754
    
    
    —
    
    
    373
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    373Exercise
      of stock options
    
    
    
    
    
    
    
    
    1,118,462
    
    
    —
    
    
    1,577
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    1,577Sale
      of own shares
    
    
    
    
    
    
    
    
    834,560
    
    
    —
    
    
    3,626
    
    
    797
    
    
    —
    
    
    —
    
    
    —
    
    
    4,423At
      December 31, 2004
    
    
    73,000
    
    
    **—**
    
    
    37,644,627
    
    $
    11
    
    $
    249,917
    
    
    —
    
    $
    (87
    )
    $
    418
    
    $
    (177,094
    )
    $
    73,165





The
accompanying notes are an integral part of these financial statements





F-4







**AIRSPAN
NETWORKS INC.**


**CONSOLIDATED
STATEMENTS OF CASH FLOWS** **(in
thousands)**





**Year
      ended****December
      31,****2002**
    
    **Year
      ended****December
      31,****2003**
    
    **Year
      ended****December
      31,****2004****CASH
      FLOWS FROM OPERATING ACTIVITIES**Net
      loss
    
    $
    (28,138
    )
    $
    (29,455
    )
    $
    (9,975
    )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
    
    
    3,314
    
    
    2,701
    
    
    2,546Gain
      on settlement of long-term debt
    
    
    —
    
    
    (125
    )
    
    —Loss
      on sale of property, plant and equipment
    
    
    137
    
    
    —
    
    
    136Changes
      in operating assets and liabilities:Decrease/(increase)
      in receivables
    
    
    9,840
    
    
    1,819
    
    
    (8,743
    )(Increase)/decrease
      in inventories
    
    
    (2,039
    )
    
    7,962
    
    
    10,077Decrease/(increase)
      in other current assets
    
    
    2,635
    
    
    112
    
    
    (2,541
    )Increase/(decrease)
      in accounts payable
    
    
    1,088
    
    
    (16
    )
    
    16,864Increase/(decrease)
      in deferred revenue
    
    
    132
    
    
    101
    
    
    (362
    )Decrease
      in customer advances
    
    
    —
    
    
    —
    
    
    (10,280
    )Increase/(decrease)
      in other accrued expenses
    
    
    108
    
    
    (674
    )
    
    1,583Increase
      in non current assets
    
    
    —
    
    
    (78
    )
    
    (233
    )Net
      cash used in operating activities
    
    
    (12,923
    )
    
    (17,653
    )
    
    (928
    )**CASH
      FLOWS FROM INVESTING ACTIVITIES**Purchase
      of property, plant and equipment
    
    
    (1,111
    )
    
    (1,791
    )
    
    (2,151
    )Purchase
      of investment securities
    
    
    (5,984
    )
    
    —
    
    
    —Proceeds
      from sale of investments securities
    
    
    17,550
    
    
    5,074
    
    
    —Cost
      of acquisitions, net of cash acquired
    
    
    (1,920
    )
    
    1,855
    
    
    —Net
      cash provided/(used) in investing activities
    
    
    8,535
    
    
    5,138
    
    
    (2,151
    )**CASH
      FLOWS FROM FINANCING ACTIVITIES**Net
      proceeds from issuance of common stock
    
    
    193
    
    
    369
    
    
    373Net
      proceeds from issuance of preferred stock
    
    
    —
    
    
    —
    
    
    29,132Purchase
      of treasury stock
    
    
    (405
    )
    
    (392
    )
    
    —Sale
      of treasury stock
    
    
    —
    
    
    —
    
    
    4,423Payment
      on long-term debt, including capital lease obligations
    
    
    (90
    )
    
    (2,375
    )
    
    —Exercise
      of stock options
    
    
    43
    
    
    114
    
    
    1,577Decrease
      in notes receivable from stockholders
    
    
    50
    
    
    —
    
    
    43Restricted
      cash movement
    
    
    (856
    )
    
    558
    
    
    (99
    )Net
      cash (used)/provided by financing activities
    
    
    (1,065
    )
    
    (1,726
    )
    
    35,449(Decrease)/increase
      in cash and cash equivalents
    
    
    (5,453
    )
    
    (14,241
    )
    
    32,370Cash
      and cash equivalents, beginning of period
    
    
    53,620
    
    
    48,167
    
    
    33,926Cash
      and cash equivalents, end of period
    
    $
    48,167
    
    $
    33,926
    
    $
    66,296**SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION**Interest
      paid
    
    $
    161
    
    $
    26
    
    $
    —Income
      taxes paid
    
    $
    2
    
    $
    5
    
    $
    23





The
accompanying notes are an integral part of these financial statements





F-5







**AIRSPAN
NETWORKS INC.**


**NOTES
TO THE FINANCIAL STATEMENTS**


**(in
thousands, except for share and per share data)**






**1.
THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**




*Business*




The
Company is a global supplier of broadband fixed wireless access equipment that
allows communications service providers, internet service providers and other
telecommunications users such as utilities and enterprises to cost effectively
deliver high-speed data and voice services using radio frequencies rather than
wires. The Company’s systems are based on a number of digital wireless
techniques, that can be deployed rapidly and cost effectively, providing an
alternative or complement to traditional cellular, copper wire, cable, or
fiber-optic communications access networks. The Company’s products also include
software tools that optimize geographic coverage and provide ongoing network
management. To facilitate the deployment and operation of its systems, the
Company also offers network installation, training and support services. The
Company’s main operations are in Uxbridge, United Kingdom, and Airport City,
Israel, with corporate headquarters in Boca Raton, Florida, U.S.A.




*Principles
of consolidation*




The
consolidated financial statements include the accounts of the Company and its
subsidiaries, all of which are wholly owned. All significant inter-company
transactions and balances are eliminated on consolidation.




*Use
of estimates*




The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.




*Cash
equivalents*




The
Company considers all highly liquid investments with a maturity of three months
or less when purchased to be cash equivalents.




*Accounts
receivable and long term accounts receivable*




Accounts
receivable and long term accounts receivable represent receivables from
customers in the ordinary course of business. These are recorded at the invoiced
amount and do not bear interest. Receivables are recorded net of the allowance
for doubtful accounts in the accompanying consolidated balance sheets. The
Company evaluates the collectibility of its accounts receivable based on a
combination of factors. The Company regularly analyzes its customer accounts,
and when it becomes aware of a specific customer’s inability to meet its
financial obligations to the Company records a specific reserve to reduce the
related receivable to the amount it reasonably believes to be collectible. The
Company records reserves for bad debt based on a variety of factors, including
the length of time the receivables are past due, the financial health of the
customer, macroeconomic considerations and historical experience. If
circumstances related to specific customers change, the Company’s estimates of
the recoverability of receivables could be further adjusted. At December 31,
2004 and 2003, the allowance for doubtful accounts was $2.8 million and $5.2
million, respectively.




*Fair
value of financial instruments*




The
financial instruments of the Company consist mainly of cash and cash
equivalents, restricted cash, accounts receivable, long term accounts
receivable, accounts payable, promissory notes, foreign currency forward
contracts and foreign currency options. The estimated fair values approximate
amounts at which these financial instruments could be exchanged in a current
transaction between willing parties. Therefore, fair values are based on
estimates using present value and other techniques, which are significantly
affected by assumptions used concerning the amount and timing of, estimated
future cash flows and discount rates, which reflect varying degrees of risk.
Specifically, the fair value of the foreign currency forward contracts reflects
the present value of the potential gain or loss if settlement were to take place
on December 31, 2004. Accordingly, although the carrying amount of all financial
instruments approximates fair value at December 31, 2004 and 2003 they are not
necessarily indicative of the amounts that the Company could realize in a
current market exchange in the future.




F-6
 **AIRSPAN
NETWORKS INC.****NOTES
TO THE FINANCIAL STATEMENTS**


**(in
thousands, except for share and per share
data)**




*Derivative
financial instruments and hedging activities*




The
Company enters into forward and option contracts to manage its exposure to
fluctuations in foreign exchange rates. The Company does not hold any derivative
instruments for trading purposes. As part of the Company’s risk management
policy the Company assesses its foreign currency risk on each transaction on a
case-by-case basis. The Company will only enter into forward and option
contracts after taking into account the size of the transaction, expected
volatility of the currency and prevailing foreign currency exchange rates.




Our
foreign exchange option contracts are designated as hedging the exposure to
changes in the fair value of a recognized asset and the gain or loss is
recognized in income in the period of change together with the offsetting loss
or gain on the hedged item attributable to the risk being hedged. There were no
outstanding option contracts at December 31, 2004.




Our
foreign exchange forward contracts are designated as hedging the exposure to
variable cash flows of a forecasted transaction. The foreign exchange contracts
are revalued at the end of each period using current market exchange rates. The
effective portion of the derivatives gain or loss is initially reported as a
component of other comprehensive income and subsequently reclassified into
income when the forecast transaction affects earnings. Any ineffective portion
of the derivatives gain or loss is reported in interest and other income as it
arises. In the years 2003 and 2004 there were no ineffective portions. Our cash
flow hedges are being used to manage our pound sterling foreign currency risk,
primarily on our U.K. based employee salaries and other U.K. expenses. Our U.K.
salaries and expenses are accounted for each month and therefore
reclassification into earnings from comprehensive income will occur every month.
At December 31, 2004 there were three monthly contracts outstanding to purchase
a total of 2.5 million pounds sterling up until March 2005. At December 31, 2004
these were valued at $418 and are reported in prepaid expenses and other current
assets in the balance sheet.




During
2004 the Company recorded, after reclassification of amounts into net
income, a net unrealized loss in other comprehensive income of $1,421. During
2003 and 2002 the Company recorded, after reclassification of amounts into net
income, a net unrealized gain in other comprehensive income of $227 and
$1,104, respectively, related to derivatives that were designated as cash flow
hedging instruments. The tax effects of comprehensive income or loss were not
considered material for the years ended December 31, 2002, 2003 and 2004. Based
on the exchange rate at December 31, 2004, the Company would expect to
reclassify as gains to earnings during the next twelve months $418 from other
comprehensive income.




Realized
gains and losses arising from fair value and cash flow hedges are reported in
interest and other income.




The
foreign exchange forward contracts hedge our U.K. expenses through March 2005.




The total
forward purchases of pounds sterling for the year ended December 31, 2004, was
£8.1 million, and we paid expenses in local
currency of approximately £15.5 million over the same period. As the hedge
contracts are smaller than the hedged item they are recorded as being 100%
effective.




The fair
value of foreign exchange forward and options contracts are determined using
published rates.




*Inventories*




Inventories
are stated at the lower of cost or market value. Cost includes all costs
incurred in bringing each product to its present location and condition, as
follows:




Raw
materials, consumables and goods for resale — average cost




Work in
progress and finished goods — cost of direct materials, labor and allocated
manufacturing overhead





F-7


**AIRSPAN
NETWORKS INC.NOTES TO
THE FINANCIAL STATEMENTS**
***(in
thousands, except for share and per share data)***

*Property, plant and equipment*




Property
plant and equipment are stated at cost. Depreciation is provided on all tangible
fixed assets at rates calculated to write off the cost, less estimated residual
value based on prices prevailing at the date of acquisition, of each asset
evenly over its expected useful life, as follows:




Leasehold
improvements — over the minimum lease term




Plant,
machinery and equipment — over 2 to 5 years




Furniture
and fixtures — over 4 to 5 years




*Identifiable
intangible assets*




Intangible
assets other than goodwill are amortized using the straight-line method over
their estimated period of benefit, ranging from one to five years. The Company
periodically evaluates the recoverability of intangible assets and takes into
account events or circumstances that warrant revised estimates of useful lives
or that indicate that an impairment exists. All of the Company’s intangible
assets other than goodwill are subject to amortization. At least annually, the
Company tests its identified intangible assets for impairment. In addition, the
Company also tests such intangible assets for impairment whenever events or
changes in circumstances indicate that the carrying value of identified
intangible assets may not be recoverable. No impairment expense was recognized
in 2004, 2003 or 2002.




*Goodwill
arising on business combinations*




Beginning
in 2002 with the adoption of Statement of Financial Accounting Standards 142,
“Goodwill and Other Intangible Assets”, goodwill is no longer amortized, but is
instead tested for impairment at least annually. Prior to 2002, goodwill was
amortized using the straight-line method over its estimated period of benefit.
At least annually, the Company tests its goodwill for impairment. In addition,
the Company also tests its goodwill for impairment whenever events or changes in
circumstances indicate that the carrying value of goodwill may not be
recoverable. No impairment expense was recognized in 2004, 2003 or 2002.




*Impairment
of long-lived assets*




In
accordance with Statement of Financial Accounting Standards No. 144, “Accounting
for the Impairment or Disposal of Long-Lived Assets”, the Company reviews its
long-lived assets for impairment when events or changes in circumstances
indicate that the carrying value of such assets may not be recoverable. This
review consists of a comparison of the carrying value of the asset with the
asset’s expected future undiscounted cash flows. Estimates of expected future
cash flows represent Management’s best estimate based on reasonable and
supportable assumptions and projections. If the expected future cash flows
exceed the carrying value of the asset, no impairment is recognized. If the
carrying value of the asset exceeds the expected future cash flows, an
impairment exists and is determined by the excess of the carrying value over the
fair value of the asset. Any impairment provisions recognized are permanent and
may not be restored in the future. No impairment expense was recognized in 2002,
2003 or 2004.




*Other
non current assets.*




Other non
current assets represent the value of accumulated Israel severance pay
funds.  Under Israel’s Severance Pay Law, Israel employees are entitled to
one month of the employee's current salary, multiplied by the number of
years of employment.  The Company’s liability for these employees is fully
provided by monthly deposits with severance pay funds and by an accrual. 
The value of these funds is recorded in other non current assets in the
Company’s balance sheet and the liability is recorded in other accrued expense.
The deposited funds include profits accumulated up to the balance sheet date.
The deposited funds may be withdrawn only upon the fulfillment of the obligation
pursuant to Israel's Severance Pay Law or labor agreements.




Israel
severance pay expenses for the years ended December 31, 2002, 2003 and 2004,
were $74, $211 and $260, respectively.







F-8


AIRSPAN NETWORKS INC.NOTES TO
THE FINANCIAL STATEMENTS


**(in
thousands, except for share and per share data)**




*Restricted
cash*




Restricted
cash consists of cash pledged as collateral to secure the guarantees described
in note 10 and cash held on behalf of employees to purchase Airspan stock under
our Employee Share Purchase Plan.







**December
      31,****2003**
    
    **December
      31,****2004**Bank
      Guarantees - with Landlords
    
    $
    1,421
    
    $
    1,488- with Customers
    
    
    15
    
    
    14Employee
      cash held under the Employee Share Purchase Plan
    
    
    152
    
    
    185$
    1,588
    
    $
    1,687




*Research
and development*




All
research and development expenditures are charged to research and development
expense in the period incurred.




*Revenue
recognition*




***General***




The
Company recognizes revenue when all of the following conditions are met:




•  
an arrangement exists with the customer,




•  
delivery has occurred or services have been rendered,




•  
the price for the product or service is fixed or determinable, and




•  
collection of the receivable is reasonably assured.




***Product
Revenue***




Revenue
from product sales, including sales to distributors and resellers, is generally
recognized at the time the product is shipped to the customer. Revenue is
deferred when customer acceptance is required, rights of return exist, or other
significant obligations remain that are essential to the functionality of the
delivered products. Revenue is recognized when these conditions have been
satisfied. The estimated cost of any post-sale obligations, including basic
product warranties, is accrued at the time revenue is recognized based on
historical experience.




***Service
Revenue***




Revenue
from time-and-material service contracts is recognized once the services have
been performed. Revenue from service contracts that relate to a period of cover
is recognized ratably over the given contract period. Revenue is recognized on
fixed-price service contracts using the percentage of completion method unless
it is not possible to make reasonable estimates under that method, in which case
revenue is recognized on a completed contract basis.




***Revenue
Arrangements that include Multiple Elements***




In
certain cases, the company enters into agreements with customers whereby it is
obligated to deliver multiple products and/or multiple services (multiple
elements). In these transactions, the Company allocates the total revenue to be
earned under the arrangement among the various elements based on their relative
fair value. Revenue for these transactions is recognized on each element when
the revenue recognition criteria have been met for that element. Revenue is
recognized for delivered products and services only if: (i) the above Product
Revenue or Service Revenue criteria are met; (ii) undelivered products or
services are not essential to the functionality of the delivered elements, (iii)
payment for the delivered products or services is not contingent upon delivery
of the remaining products or services; and (iv) the fair value for each of the
undelivered elements is known.





F-9


AIRSPAN NETWORKS INC.NOTES TO
THE FINANCIAL STATEMENTS **(in
thousands, except for share and per share data)**


*Contingencies*




*Guarantees*




In
November 2002, the FASB issued FIN 45, “Guarantor’s Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others.” FIN 45 elaborates on the existing disclosure requirements for most
guarantees, including loan guarantees such as standby letters of credit. It also
clarifies that at the time a company issues a guarantee, the company must
recognize an initial liability for the fair value, or market value, of the
obligations it assumes under the guarantee and must disclose that information in
its interim and annual financial statements. The provisions related to
recognizing a liability at inception of the guarantee for the fair value of the
guarantor’s obligations do not apply to product warranties or to guarantees
accounted for as derivatives. The initial recognition and initial measurement
provisions apply on a prospective basis to guarantees issued or modified after
December 31, 2002. The adoption of FIN 45 did not have a material impact on the
Company’s results of operations or financial condition.




*Warranty*




The
Company provides a limited warranty for periods, usually ranging from twelve to
twenty-four months, to all purchasers of its new equipment. Warranty expense is
accrued at the date revenue is recognized on the sale of equipment and is
recognized as a cost of revenue. The expense is estimated based on analysis of
historic costs and is amortized over the warranty period. Management believes
that the amounts provided for are sufficient for all future warranty cost on
equipment sold through December 31, 2004 but if actual product failure rates,
material usage or service delivery costs differ from estimates, revisions to the
estimated warranty liability would be required.




Information
regarding the changes in the Company’s product warranty liabilities was as
follows for the year ended December 31, 2004.





**Balance
      at****beginning
      of****period**
    
    **Accrual
      for****warranties****issued
      during****the
      period**
    
    **Accruals
      related to****pre-existing****warranties****(including
      changes****in
      estimates)**
    
    **Settlements
      made****(in
      cash or in****kind)
      during****the
      period**
    
    **Balance
      at end****of
      period**Year
      ended December 31, 2004Product
      warranty liability
    
    $
    652
    
    $
    1,003
    
    $
    (299
    )
    $
    (752
    )
    $
    604




*Other
guarantees*




The
Company had delivered to its landlords and customers bank guarantees aggregating
to $1,435 at December 31, 2003 and $1,502 as at December 31, 2004. The foregoing
figures represent the maximum potential amount of future payments the Company
could be required to make under these guarantees. The guarantees secure payment
or performance obligations of the Company under contracts. The Company has
pledged cash to the banks as collateral for the guarantees in the same amounts
as the guarantees. These pledges have been classified as restricted cash. The
Company has not recognized any liability for these guarantees as in management’s
opinion the likelihood of having to make payments under the guarantees is
remote. These guarantees will all expire before the end of 2010 with the
majority expiring in the fourth quarter of 2010.




*Legal
claims*




On and
after July 23, 2001, three Class Action Complaints were filed in the United
States District Court for the Southern District of New York naming as defendants
Airspan, and Eric D. Stonestrom (our President and Chief Executive Officer),
Joseph J. Caffarelli (our former Senior Vice President and Chief Financial
Officer), Matthew Desch (our Chairman) and Jonathan Paget (our Executive Vice
President and Chief Operating Officer) (the “Individual Defendants”) together
with certain underwriters of our July 2000 initial public offering. A
Consolidated Amended Complaint, which is now the operative complaint, was filed
on April 19, 2002. The complaint alleges violations of Sections 11 and 15 of the
Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934 for issuing a Registration Statement and Prospectus that contained
materially false and misleading information and failed to disclose material
information. In particular, Plaintiffs allege that the underwriter-defendants
agreed to allocate stock in our initial public offering to certain investors in
exchange for excessive and undisclosed commissions and agreements by those
investors to make additional purchases of stock in the aftermarket at
pre-determined prices. The action seeks damages in an unspecified amount.




F-10


**AIRSPAN
NETWORKS INC.NOTES TO
THE FINANCIAL STATEMENTS**
**(in
thousands, except for share and per share data)**

This action is being coordinated with approximately three hundred
other nearly identical actions filed against other companies. On July 15, 2002,
the Company moved to dismiss all claims against it and the Individual
Defendants. On October 9, 2002, the Court dismissed the Individual Defendants
from the case without prejudice based upon Stipulations of Dismissal filed by
the plaintiffs and the Individual Defendants. This dismissal disposed of the
Section 15 and 20(a) control person claims without prejudice, since these claims
were asserted only against the Individual Defendants. On February 19, 2003, the
Court dismissed the Section 10(b) claim against us, but allowed the Section 11
claim to proceed. On October 13, 2004, the Court certified a class in six of the
approximately 300 other nearly identical actions. In her Opinion, Judge
Scheindlin noted that the decision is intended to provide strong guidance to all
parties regarding class certification in the remaining cases. Judge Scheindlin
determined that the class period for Section 11 claims is the period between the
IPO and the date that unregistered shares entered the market. Judge Scheindlin
also ruled that a proper class representative of a Section 11 class must (1)
have purchased shares during the appropriate class period; and (2) have either
sold the shares at a price below the offering price or held the shares until the
time of suit. In two of the six cases, the class representatives did not meet
the above criteria and therefore, the Section 11 cases were not certified.
Plaintiffs have not yet moved to certify a class in the Airspan
case.




Airspan
has approved a settlement agreement and related agreements which set forth the
terms of a settlement between Airspan, the Individual Defendants, the plaintiff
class and the vast majority of the other approximately 300 issuer defendants and
the individual defendants currently or formerly associated with those companies.
Among other provisions, the settlement provides for a release of Airspan and the
individual defendants for the conduct alleged in the action to be wrongful.
Airspan would agree to undertake certain responsibilities, including agreeing to
assign away, not assert, or release certain potential claims Airspan may have
against its underwriters. The settlement agreement also provides a guaranteed
recovery of $1 billion to plaintiffs for the cases relating to all of the
approximately 300 issuers. To the extent that the underwriter defendants settle
all of the cases for at least $1 billion, no payment will be required under the
issuers’ settlement agreement. To the extent that the underwriter defendants
settle for less than $1 billion, the issuers are required to make up the
difference. It is anticipated that any potential financial obligation of Airspan
to plaintiffs pursuant to the terms of the settlement agreement and related
agreements will be covered by existing insurance. The Company currently is not
aware of any material limitations on the expected recovery of any potential
financial obligation to plaintiffs from its insurance carriers. Its carriers are
solvent, and the company is not aware of any uncertainties as to the legal
sufficiency of an insurance claim with respect to any recovery by plaintiffs.
Therefore, we do not expect that the settlement will involve any payment by
Airspan. If material limitations on the expected recovery of any potential
financial obligation to the plaintiffs from Airspan’s insurance carriers should
arise, Airspan’s maximum financial obligation to plaintiffs pursuant to the
settlement agreement is less than $3.4 million. On February 15, 2005, the court
granted preliminary approval of the settlement agreement, subject to certain
modifications consistent with its opinion. Judge Scheindlin ruled that the
issuer defendants and the plaintiffs must submit a revised settlement agreement
which provides for a mutual bar of all contribution claims by the settling and
non-settling parties and does not bar the parties from pursuing other claims.
There will be a conference with Judge Scheindlin on March 18, 2005 to discuss
the status of the revised settlement agreement. The underwriter defendants will
have an opportunity to object to the revised settlement agreement. There is no
assurance that the parties to the settlement will be able to agree to a revised
settlement agreement consistent with the court’s opinion, or that the court will
grant final approval to the settlement to the extent the parties reach
agreement. If the settlement agreement is not approved and Airspan is found
liable, we are unable to estimate or predict the potential damages that might be
awarded.




Except as
set forth above, we are not currently subject to any other material legal
proceedings. We may from time to time become a party to various other legal
proceedings arising in the ordinary course of our business.




*Shipping
and handling costs*




Shipping
and handling costs are included within cost of sales.




*Foreign
currency transactions*




The
functional currency of all compaies in the group is the U.S. dollar.
Transactions in currencies other than U.S. dollars are converted at the monthly
average exchange rate in effect on the date of the transactions.




Monetary
assets and liabilities denominated in currencies other than U.S. dollars are
translated into U.S. dollars at the rate of exchange on the balance sheet date.
Transactional gains and losses arising from transactions not denominated in U.S.
dollars are recognized in the consolidated statement of operations as other
income or expense. The net value of exchange gains and losses during the year
ended December 31, 2004 was $2.6 million of which $2.2 million related to the
reclassification of our forward exchange contracts gains from part of other
comprehensive income into part of net loss.




F-11


AIRSPAN NETWORKS INC.NOTES TO
THE FINANCIAL STATEMENTS


**(in
thousands, except for share and per share data)**




*Advertising
costs*




Advertising
costs are expensed at the time the promotion is held or the advertisement is
first aired. Advertising expenses amounted to $287 in 2004, $379 in 2003 and
$625 in 2002. There were $29 prepaid advertising expenditures at December 31,
2004 and $0 at December 31, 2003.




*Comprehensive
Income*




The
Company reports comprehensive income or loss in accordance with the provisions
of Statement of Financial Accounting Standards No. 130 “Reporting Comprehensive
Income.” SFAS No. 130 establishes standards for reporting comprehensive income
and its components in financial statements. Comprehensive income or loss, as
defined, includes all changes in equity (net assets) during a period from
non-owner sources. Tax effects of other comprehensive income or loss are not
considered material for any period. The Companies only source of other
comprehensive income is from its foreigh exchange forward
contracts.




*Pension,
post retirement and post employment benefits.*




The
Company contributes to a defined contribution pension plan for all eligible
employees The Company recorded pension expense of $801, $1,193 and $1,230 in,
2002, 2003 and 2004, respectively. The increase in pension expenses between 2002
and 2003 and between 2003 and 2004 related primarily to the Company’s employment
of additional staff as a result of its acquisition of Airspan Israel at the
beginning of the fourth quarter of 2002 and Proximity at the end of the fourth
quarter 2003.




*Concentration
of credit risk*




Financial
instruments, which potentially subject Airspan to concentration of credit risk,
consist primarily of cash and cash equivalents and accounts receivable. Airspan
places its cash and cash equivalents only in highly rated financial instruments.
Airspan’s accounts receivable are derived from sales of fixed wireless access
products and approximately 89%, 97% and 97% of product sales were to non-U.S.
customers for the year ended December 31, 2002, 2003 and 2004 respectively. At
December 31, 2004 one customer in Mexico accounted for $11.1 million of our
accounts receivable balance. Airspan generally requires payment in advance or
payment security in the form of an irrevocable letter of credit for the full
amount of significant sales to be in place at the time of shipment, except in
cases where credit risk is considered to be acceptable. Airspan’s top three
customers accounted for 47.0% of revenue in 2002, 32.4% of revenue in 2003 and
74.6% of revenue in 2004.




*Stock
based compensation*
  At
December 31, 2004 the Company has three stock-based employee compensation plans
and one employee share purchase plan, which are described more fully in Note 12.
The Company accounts for those plans under the recognition and measurement
principles of APB Opinion No.25 Accounting for Stock issued to Employees, and
related interpretations and values stock based compensation via the intrinsic
value method. No stock-based compensation cost is reflected in net income, as
all options granted under those plans had an exercise price equal to the market
value of the underlying common stock on the date of grant. The following table
illustrates the effect on net income and earnings per share if the Company had
applied fair value recognition provisions of FASB Statement No. 123, Accounting
for Stock Based Compensation, to stock-based employee compensation.
  
 **Year
      ended****December
      31,****2002**
    
    **Year
      ended****December
      31,****2003**
    
    **Year
      ended****December
      31,****2004**Net
      loss, as reported
    
    $
    (28,138
    )
    $
    (29,455
    )
    $
    (9,975
    )Add:
      Stock-based employee compensation expense included in reported net loss,
      net of related tax effects
    
    
    —
    
    
    —
    
    
    —Deduct:
      Total stock-based employee compensation expense determined under fair
      value based method for all awards, net of related tax effects
    
    
    (1,111
    )
    
    (1,928
    )
    
    (2,149
    )Pro
      forma net loss
    
    $
    (29,249
    )
    $
    (31,383
    )
    $
    (12,124
    )Earnings
      per share — basic and diluted:Net
      loss per share
    
    $
    (0.80
    )
    $
    (0.84
    )
    $
    (0.27
    )Pro
      forma net loss per share
    
    $
    (0.83
    )
    $
    (0.89
    )
    $
    (0.33
    )


F-12





**AIRSPAN NETWORKS INC.NOTES TO
THE FINANCIAL STATEMENTS**
**(in
thousands, except for share and per share data)**
****
****


The
weighted average fair value of the options at their grant date was $0.52 during
2002, $1.74 during 2003 and $5.03 during 2004. The estimated fair value of each
option granted is calculated using the Black-Scholes option-pricing model. The
following summarizes the assumptions used in the model:





**Year
      ended****December
      31,****2002**
    
    **Year
      ended****December
      31,****2003**
    
    **Year
      ended****December
      31,****2004**Risk-free
      interest rate
    
    
    1.99%
    
    
    2.10%
    
    
    3.83%Expected
      years until exercised
    
    
    5
    
    
    4
    
    
    4Expected
      dividend yield
    
    
    —
    
    
    —
    
    
    —Expected
      volatility
    
    
    117%
    
    
    109%
    
    
    92%




The pro
forma effect of applying SFAS 123 is not likely to be representative of the
effects on reported net income or loss for future years.




*Segment
reporting* **




During
the periods, the Company operated as a single segment, being the development and
supply of fixed wireless access systems and solutions.




*Reclassifications*




Certain
prior-year amounts have been reclassified to conform to the current year
presentations. The reclassifications are cash and cash equivalents to short term
investments and customer advances out from deferred revenue in 2002.




*Recent
Accounting Pronouncements* **




On
December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued
Statement No. 123 (revised 2004), “Share Based Payment” (“SFAS No. 123R”), which
is a revision of Statement No. 123, “Accounting for Stock-Based Compensation”
(“SFAS No. 123”).  Statement No. 123R supersedes APB Opinion No. 25,
“Accounting for Stock Issued to Employees and amends Statement No. 95,
“Statement of Cash Flows”.  Under SFAS No. 123R, companies must calculate
and record the cost of equity instruments, such as stock options or restricted
stock, awarded to employees for services received in the income statement based
on fair value of the instruments on the date they are granted (with certain
exceptions).  The cost of the equity instruments is required to be
recognized over the period during which the employees are required to provide
services in exchange for the equity instruments. The statement is effective in
the first interim or annual reporting period beginning after June 15,
2005.





As the
Company currently accounts for share based payments to employees in accordance
with the intrinsic value method permitted under ABP Opinion No. 25, no
compensation expense is recognized.  The adoption of SFAS No. 123R is
expected to have a significant impact on our results of operations, although it
will have no impact on our overall financial position.  The impact of
adopting SFAS No. 123R cannot be accurately estimated at this time, as it will
depend on the amount of share based awards granted in future periods.
 However, had we adopted SFAS No. 123R in a prior period, the impact would
approximate the impact of SFAS No. 123 as described in the disclosure above on
“Stock based compensation ”.
 SFAS No.
123R provides two alternatives for adoption: (1) “modified prospective” method
in which compensation cost is recognized for all awards granted subsequent to
the effective date of this statement as well as for the unvested portion of
awards outstanding as of the effective date and (2) a “modified retrospective”
method which follows the approach in the “modified prospective” method, but also
permits entities to restate prior periods to reflect compensation cost
calculated under SFAS No. 123 for pro forma amounts disclosure. The company
plans to adopt SFAS No. 123R using the modified prospective method.




F-13




AIRSPAN NETWORKS INC.NOTES TO
THE FINANCIAL STATEMENTS
 **(in
thousands, except for share and per share
data)**




**2.** **ACQUISITIONS**




On
December 23, 2003, the Company completed an agreement with Nortel Networks to
acquire the fixed wireless access business of Nortel Networks known as
“Proximity”. As part of the transaction, Airspan acquired Nortel Networks’
inventory relating to Proximity. The initial allocation of the purchase price
was preliminary. During 2004 the Company revised its estimates of the fair
values allocated to certain assets and liabilities acquired in the Proximity
transaction. Given the availability of more accurate information relating to the
acquired Proximity inventory, the Company increased its valuation of the
acquired inventory by $4.7 million. The adjustments to the purchase price
allocation gave rise to negative goodwill of $2.4 million which has been
allocated, on a pro rata basis, against purchased long-term assets.




The
following tables show the preliminary fair values along with the revisions made
to this during the year.





Calculation
of purchase price:





**CashConsideration**
    
    **Accrued
      costs**
    
    **Revisions
      to originalaccrued costs**
    
    **Total**Initial
      purchase price
    
    $
    12,850
    
    
    —
    
    
    —
    
    $
    12,850Working
      capital adjustment
    
    
    241
    
    
    —
    
    
    —
    
    
    241Acquisition
      costs
    
    
    —
    
    $
    800
    
    $
    (41
    )
    
    759Total
      purchase price
    
    $
    13,091
    
    $
    800
    
    $
    (41
    )
    $
    13,850





Fair
value adjustments:





**Preliminary
      Fair value**
      **Dec
      31, 2003**
    
    **Revisions
      to preliminary purchase price allocation/fair value
      adjustments**
    
    **Allocation
      of negative goodwill**
    
    **Final
      Fair value**
      **Dec
      31, 2004**Cash
    
    $
    14,946
    
    
    —
    
    
    —
    
    $
    14,946Inventory
    
    
    8,550
    
    $
    4,695
    
    
    —
    
    
    13,245Prepaid
      expenses and other current assets
    
    
    393
    
    
    —
    
    
    —
    
    
    393Property,
      plant and equipment, net
    
    
    419
    
    
    —
    
    $
    (221
    )
    
    198Intangible
      assets, net:Patents
    
    
    1,500
    
    
    —
    
    
    (790
    )
    
    710Customer
      contracts
    
    
    2,600
    
    
    —
    
    
    (1,362
    )
    
    1,238Accounts
      payable
    
    
    (8
    )
    
    —
    
    
    —
    
    
    (8
    )Deferred
      revenue
    
    
    (93
    )
    
    —
    
    
    —
    
    
    (93
    )Customer
      advances
    
    
    (14,946
    )
    
    —
    
    
    —
    
    
    (14,946
    )Other
      accrued expenses
    
    
    (1,817
    )
    
    (16
    )
    
    —
    
    
    (1,833
    )Goodwill
    
    
    2,347
    
    
    (4,720
    )
    
    2,373
    
    
    —Total
      purchase price
    
    $
    13,891
    
    $
    (41
    )
    $
    —
    
    $
    13,850




**3.
TAXATION**




The
income tax benefit of $1,938 in the year ended 31 December 2004 related to tax
credits accrued in respect of research and development expenditure in the UK in
the period 1 January 2002 to 31 December 2004 of $2,094 offset by tax charges
relating to local state and country income and franchise taxes of $156. In
exchange for the research and development tax credits of $2,094 the Company
forfeited $8,725 of losses in the UK, which equated to $2,618 of deferred tax
assets. The income tax provision of $5 recorded in the year ended 31 December
2003 relates to a foreign branch of ACL. The income tax benefit of $2,862 in the
year ended 31 December 2002 was for tax credits received in respect of research
and development expenditure in the UK in the period 1 April 2000 to 31 December
2001.




F-14


**AIRSPAN
NETWORKS INC.NOTES TO
THE FINANCIAL STATEMENTS**
**(in
thousands, except for share and per share data)**

The loss before tax was $11,913 for the year ended 31 December 2004
of which $3,925 was attributable to domestic operations. The loss for the year
ended 31 December 2003 attributable to domestic operations was $2,798 out of a
total loss before tax of $29,450.




The
Company did not record an income tax benefit for the remainder of the tax losses
generated in any of the territories in which it operates because it has
experienced operating losses since inception. At December 31, 2004 the Company
had the following net operating loss carry-forwards:





**Country**
    
    **Net
      operating loss****carry-forwards**
    
    **Expiry
      terms**U.K.
    
    $125,500
    
    
    Does
      not expireU.S.
    
    14,700
    
    
    Expires
      in 17 to 20 yearsAustralia
    
    3,700
    
    
    Does
      not expireIsrael
    
    27,800
    
    
    Does
      not expireOther
    
    3,100
    
    
    Does
      not expire




Significant
components of the Company’s deferred tax assets are as follows:







**December
      31,****2003**
    
    **December
      31,****2004**Net
      operating loss carry-forwards
    
    $
    44,130
    
    $
    44,811Accruals
      and reserves
    
    
    774
    
    
    1,038Fixed
      assets
    
    
    1,602
    
    
    2,92046,506
    
    
    48,769Valuation
      allowance
    
    
    (46,506
    )
    
    (48,769
    )$
    —
    
    $
    —




The net
increase in valuation allowances during 2004 was $2,263.




The
following is a reconciliation of income taxes, calculated at the US federal
income tax rate, to the income tax benefit included in the accompanying
consolidated statements of operation for each of the three years:




**December
      31,****2002**
    
    **December
      31,****2003**
    
    **December
      31,****2004**Income
      tax at U.S. rates
    
    $
    10,540
    
    $
    10,013
    
    $
    4,051Difference
      between U.S. rate and rates applicable to subsidiaries in other
      jurisdictions
    
    
    (851
    )
    
    (1,792
    )
    
    (753
    )Difference
      between U.S. rate and rate applicable to U.K. R&D tax credits
    
    
    (1,130
    )
    
    —
    
    
    (872
    )Expenditure
      not deductible for tax purposes
    
    
    (84
    )
    
    (54
    )
    
    (83
    )Valuation
      allowance on tax benefits
    
    
    (8,475
    )
    
    (8,172
    )
    
    (2,499
    )U.K.
      R&D tax credits
    
    
    2,862
    
    
    —
    
    
    2,094Income
      tax benefit/(provision)
    
    $
    2,862
    
    $
    (5
    )
    $
    1,938




Since the
Company’s utilization of these deferred tax assets is dependent on future
profits, a valuation allowance equal to the net deferred tax assets has been
provided following the criteria under SFAS 109 as it is considered more likely
than not that such assets will not be realized.




F-15


**AIRSPAN
NETWORKS INC.**NOTES
TO THE FINANCIAL STATEMENTS**
**(in
thousands, except for share and per share data)**

4. PROPERTY, PLANT AND EQUIPMENT**


**December
      31,****2003**
    
    **December
      31,****2004**Plant,
      machinery and equipment
    
    $
    15,920
    
    $
    13,714Furniture
      and fixtures
    
    
    705
    
    
    611Leasehold
      improvements
    
    
    3,001
    
    
    3,46419,626
    
    
    17,789Accumulated
      depreciation
    
    
    (15,861
    )
    
    (14,082
    )$
    3,735
    
    $
    3,707




Depreciation
expense totaled, $3,270 for the year ended December 31, 2002, $3,515 for the
year ended December 31, 2003 and $1,806 for year ended December 31, 2004.




**5.
GOODWILL AND INTANGIBLES** ****




On
January 1, 2002, FAS 142, “Goodwill and Other Intangible Assets”, was
implemented and as a result the Company ceased to amortize approximately $0.8
million of goodwill. The Company performed an initial impairment as of January
1, 2002 and its annual impairment review during the fourth quarter of 2002, 2003
and 2004. The carrying value of goodwill has been compared to its implied fair
value by using the expected present value of future cash flows. No impairment of
goodwill was recorded during the years ended December 31, 2002, 2003 and 2004.







**December
      31,****2003**
    
    **December
      31,****2004****Goodwill**
    
    $
    3,136
    
    $
    789








**December
      31,****2003****gross
      carrying****amount**
    
    **Accumulated****amortization**
    
    **Net**
    
    **December
      31,****2004****gross
      carrying****amount**
    
    **Accumulated****amortization**
    
    **Net**
    
    **Weighted
      average****amortization****period
      in****years****Intangibles**Customer
      contracts
    
    $
    4,691
    
    $
    (2,091
    )
    $
    2,600
    
    $
    1,240
    
    $
    (366
    )
    $
    874
    
    
    4.00Patent/developed
      technology
    
    
    4,181
    
    
    (2,226
    )
    
    1,954
    
    
    1,371
    
    
    (573
    )
    
    798
    
    
    2.73$
    8,872
    
    $
    (4,317
    )
    $
    4,554
    
    $
    2,611
    
    $
    (939
    )
    $
    1,672
    
    
    3.27




Goodwill
from business combinations represents the difference between the fair value of
the identified net assets purchased and the purchase price. For each acquisition
a detailed review is undertaken by management, which has primary responsibility,
to estimate the fair values and remaining economic life for all material
intangible assets. In addition to this review, independent experts may be used,
as was done with the Proximity business acquisition, to estimate the fair value
and remaining economic life of intangible assets.




Intangible
assets were acquired as part of the acquisition of the Proximity business from
Nortel Networks on December 23, 2003. During 2004 revisions were made to the
fair values of the purchase price allocation resulting in revisions to the
values of intangible assets (See Note 2). As a result of the revision to the
fair values of the purchase price allocation, the amount attributed to goodwill
of $2,347 at December 31, 2003 was reduced to $0 as at December 31,
2004.




During
2004 and 2003 there were no unamortized intangible assets other than goodwill.





F-16


AIRSPAN NETWORKS INC.NOTES TO
THE FINANCIAL STATEMENTS **(in
thousands, except for share and per share data)**


The
estimated amortization expense for intangibles over the next five years is as
follows:







**For
      the year ended December 31,**2005
    
    $
    5102006
    
    
    4702007
    
    
    3462008
    
    
    3462009
    
    
    —




The
changes in the gross carrying value of goodwill for the year ended December 31,
2004, are as follows





****
    
    
    **Goodwill**Balance
      as of January 1, 2004
    
    $
    3,136Fair
      value adjustment on the Proximity acquisition
    
    
    (2,347
    )Balance
      as of December 31, 2004
    
    $
    789




Amortization
of intangible assets amounted to $44 for the year ended December 31, 2002, $172
for the year ended December 31, 2003 and $723 for the year ended December 31,
2004.




**6.
INVENTORY**




Inventory
consists of the following:


**December
      31,****2003**
    
    **December
      31,****2004**Purchased
      parts and materials
    
    $
    10,688
    
    $
    4,419Work
      in progress
    
    
    1,084
    
    
    1,214Finished
      goods and consumables
    
    
    6,443
    
    
    7,201$
    18,215
    
    $
    12,834




**7.
ACCOUNTS RECEIVABLE**




Accounts
receivable consists of:





**December
      31,****2003**
    
    **December
      31,****2004**Amounts
      due within one year
    
    $
    17,716
    
    $
    23,761Allowance
      for doubtful debts
    
    
    (5,207
    )
    
    (2,814
    )$
    12,509
    
    $
    20,947




**8.
OTHER ACCRUED EXPENSES**


**December
      31,****2003**
    
    **December
      31,****2004**Warranty
    
    $
    652
    
    $
    604Restructuring
    
    
    1,539
    
    
    660Acquisition
      costs
    
    
    549
    
    
    —Other
    
    
    7,260
    
    
    10,084$
    10,000
    
    $
    11,349




F-17


**AIRSPAN
NETWORKS INC.**NOTES
TO THE FINANCIAL STATEMENTS**
**(in
thousands, except for share and per share data)**

******


**9.
ACCRUED RESTRUCTURING CHARGES**




In the
third quarter of 2002, a restructuring program was initiated to reduce operating
expenses. A charge of $278 was recorded in the quarter. Included in this charge
were costs related to the write off of tradeshow equipment and severance
payments. The total number of employees terminated as part of this restructuring
program was 19 and all severance payments were made by the end of the second
quarter of 2003.




In the
fourth quarter of 2002 the decision was made to completely outsource all our
manufacturing. As a result we recorded a $975 restructuring charge for the
closure of our Riverside, Uxbridge facility in 2003. All of this cost relates to
the excess facility. A further $368 was recognized as restructuring in the
income statement in the fourth quarter of 2003 as the Company reassessed the
ability to sublease the Riverside facility. All cash outflows arising from this
will be made by the end of 2006.




In the
second quarter of 2003 an additional restructuring program was initiated to
further lower operating expenses. The total cost incurred as part of this
restructuring program was $298 arising from costs associated with facility
closures and severance. The costs incurred during the year ended December 31,
2003 related to termination costs for 30 employees. All of these employees had
left the Company by December 31, 2003.





During
the first quarter of 2004 the Company revised its original restructuring
programs and initiated a new program to further reduce operating expenses. This
program was completed by the end of the third quarter of 2004. The total cost
incurred for this restructuring program was $413 related to termination costs
for 21 employees. All of these employees had left the Company by December 31,
2004.





In
conjunction with the purchase of the Proximity business the Company implemented
its plan to relocate the Proximity business from Maidenhead, England and
Sunrise, Florida to the Company’s facilities in Uxbridge, England and Boca
Raton, Florida. The Company recorded acquisition-related restructuring charges
of $520, in the fourth quarter of 2003, in connection with the relocation of the
Proximity business. The estimated relocation costs were reduced during 2004 to
$181. The adjustment formed part of the revised fair value adjustments of the
Proximity acquisition. This relocation plan was completed by December 31,
2004.




The
Company recorded significant acquisition-related restructuring charges in
connection with the relocation of the Proximity business.





**Accrued
      at****acquisition**
    
    **Paid
      in 2004**
    
    **Revision
      to preliminary fair value adjustments**
    
    **Accrued
      at****December
      31,****2004**Office
      closure — other associated costs
    
    $
    520
    
    $
    (181
    )
    $
    (339
    )
    $
    —










F-18


AIRSPAN NETWORKS INC.NOTES TO
THE FINANCIAL STATEMENTS


**(in
thousands, except for share and per share data)**







The
restructuring charges and their utilization are summarized as follows:





**Balance
      at****beginning
      of****period**
    
    **Restructuring****charge**
    
    **Accrued
      on****acquisition**
    
    **Utilized**
    
    **Balance
      at end****of
      period**Year
      ended December 31, 2004One-time
      termination benefits
    
    $
    —
    
    $
    413
    
    
    —
    
    $
    (413
    )
    $
    —Contract
      termination costs
    
    
    947
    
    
    —
    
    
    —
    
    
    (348
    )
    
    599Other
      associated costs
    
    
    592
    
    
    —
    
    $
    (339
    )
    
    (192
    )
    
    61$
    1,539
    
    $
    413
    
    $
    (339
    )
    $
    (953
    )
    $
    660Year
      ended December 31, 2003One-time
      termination benefits
    
    $
    79
    
    $
    342
    
    
    —
    
    $
    (421
    )
    $
    —Contract
      termination costs
    
    
    825
    
    
    397
    
    
    —
    
    
    (275
    )
    
    947Other
      associated costs
    
    
    150
    
    
    11
    
    $
    520
    
    
    (89
    )
    
    592$
    1,054
    
    $
    750
    
    $
    520
    
    $
    (785
    )
    $
    1,539Year
      ended December 31, 2002Facility
      related
    
    $
    307
    
    $
    1,142
    
    
    —
    
    $
    (474
    )
    $
    975Severance
      and other
    
    
    234
    
    
    278
    
    
    —
    
    
    (433
    )
    
    79$
    541
    
    $
    1,420
    
    
    —
    
    $
    (907
    )
    $
    1,054




Included
in the 2002 restructuring charge was $100 for the write down of certain fixed
assets used at tradeshows and the Riverside facility. All charges, other than
the fixed asset write-downs, have or will result in direct cash outlays.




**10.
COMMITMENTS** ****




Airspan
has capital commitments of $31 and $123 for the acquisition of property, plant
and equipment at December 31, 2004 and 2003, respectively. As of December 31,
2004, the Company had commitments with its main sub contract manufacturers under
various purchase order and forecast arrangements, to a value of $21,147and
$8,105 at December 31, 2003. All capital commitments and commitments with sub
contract manufacturers existing at December 31, 2004 will be realized during
2005.




Airspan
Networks Inc. has entered into various operating lease agreements, primarily for
office space, warehouse space and vehicles. Rent expense was $1,915 for the year
ended December 31, 2002, $1,844 for the year ended December 31, 2003 and $1,965
for the year ended December 31, 2004.




Future
minimum lease payments for assets under non-cancelable operating lease
agreements with original terms of more than one year as of December 31, 2004 are
as follows:





**As
      at December 31,**2005
    
    $
    1,7812006
    
    
    1,3962007
    
    
    1,1842008
    
    
    1,1262009
    
    
    824Thereafter
    
    
    186$
    6,497




The
Company had bank guarantees with its landlords and a customer totaling $1,435 at
December 31, 2003 and $1,502 at December 31, 2004. The guarantees secure payment
or performance obligations of the Company under contracts. The Company has
pledged cash to the banks as collateral for the guarantees in the same amounts
as the guarantees. These pledges have been classified as restricted cash.




F-19


**AIRSPAN
NETWORKS INC.**NOTES
TO THE FINANCIAL STATEMENTS**
**(in
thousands, except for share and per share data)****


****


**11.
SEGMENTS** ****




As a
developer and supplier of fixed wireless communications access systems and
solutions, the Company has one reportable segment. The revenue of this single
segment is comprised primarily of revenue from products and, to a lesser extent,
services. In 2004, the majority of the Company’s revenue was generated from
products manufactured in the United Kingdom, Mexico and Israel, with additional
revenue generated from sales of an original equipment manufacturer’s ("OEM")
products.




An
analysis of revenue by geographical market is given below:





**Year
      ended****December
      31,****2002**
    
    **Year
      ended****December
      31,****2003**
    
    **Year
      ended****December
      31,****2004**United
      States
    
    $
    2,918
    
    $
    930
    
    $
    3,027Asia
      PacificIndonesia
    
    
    1,390
    
    
    1,921
    
    
    1,599Japan
    
    
    2,661
    
    
    180
    
    
    559New
      Zealand
    
    
    516
    
    
    5,498
    
    
    769The
      rest of Asia Pacific
    
    
    1,665
    
    
    3,391
    
    
    5,156Europe
    
    
    2,892
    
    
    5,879
    
    
    11,191Africa
      and Middle EastLesotho
    
    
    5,661
    
    
    266
    
    
    218Nigeria
    
    
    2,939
    
    
    2,827
    
    
    524The
      rest of Africa and Middle East
    
    
    4,104
    
    
    5,212
    
    
    1,117South
      and Central America & CaribbeanMexico
    
    
    —
    
    
    —
    
    
    66,317The
      rest of South and Central America & Caribbean
    
    
    1,700
    
    
    4,547
    
    
    4,170$
    25,930
    
    $
    30,651
    
    $
    94,647




In 2004,
the Company received 72.8% of goods for resale from two suppliers, Solectron
International Distribution Inc and Solectron Scotland Ltd. In 2003, the Company
received 79% of goods for resale from two suppliers, Flextronics International
and Solectron Scotland Ltd. In 2002, the Company received 70% of goods for
resale from three suppliers, Flextronics International and Universal Scientific
Industrial Co and Solectron Scotland Ltd.
 During
the year ended December 31, 2004 net loss before income tax was $11,913. The net
loss before income taxes that related to operations in the United States was
$3,925 and that from foreign operations was $7,988. During the same period the
net loss was $9,975 of which a net loss of $5,913 arose from foreign
operations





F-20


AIRSPAN NETWORKS INC.NOTES TO
THE FINANCIAL STATEMENTS


**(in
thousands, except for share and per share data)**






For the
year ended December 31, 2002 the Company had two customers whose revenue was
greater than 10% of the year’s total. During the year ended December 31, 2003
the Company had one customer, accounting for 18% of revenue, with revenue
greater than 10% of total revenue for the year. For the year ended December 31,
2004 the Company had one customer whose revenue was greater than 10% of the
year’s total and such customer’s revenue accounted for 70% of the year’s total.





**December
      31,****2003**
    
    **December
      31,****2004**Long-lived
      assets:Property,
      plant and equipment, net:United
      States
    
    $
    104
    
    $
    97United
      Kingdom and Ireland
    
    
    3,209
    
    
    2,977Israel
    
    
    289
    
    
    518Rest
      of the world
    
    
    134
    
    
    1153,736
    
    
    3,707Goodwill
      and Intangible assets, net:United
      States
    
    
    789
    
    
    789Mexico
    
    
    2,600
    
    
    874United
      Kingdom and Ireland
    
    
    3,847
    
    
    509Israel
    
    
    454
    
    
    2897,690
    
    
    2,461Other
      non current assets and long term accounts receivable:United
      States
    
    
    —
    
    
    —United
      Kingdom and Ireland
    
    
    —
    
    
    305Israel
    
    
    983
    
    
    1,216983
    
    
    1,521Total
      long-lived assets
    
    $
    12,409
    
    $
    7,689Total
      assets, net:United
      States
    
    $
    28,216
    
    $
    55,703United
      Kingdom and Ireland
    
    
    44,212
    
    
    39,088Mexico
    
    
    3,915
    
    
    12,008Israel
    
    
    6,353
    
    
    7,624Rest
      of the world
    
    
    577
    
    
    775$
    83,272
    
    $
    115,198






**12.
STOCK OPTIONS AND COMMON STOCK**




On
February 1, 1998, the Board of Directors authorized the establishment of a
non-qualified employee stock options plan whereby the Company may grant
employees stock options to purchase up to 2,791,667 shares of common stock.
Under subsequent amendments to the 1998 plan the Board of Directors approved an
increase in the number of shares of common stock reserved under the plan from
2,791,667 to 4,591,667 in May 2000 and from 4,591,667 to 6,091,667 in February
2001. The 1998 Plan provides for the grant to our employees (including officers
and employee directors) of “incentive stock options” within the meaning of
Section 422 of the Internal Revenue Code of 1986 and for the grant of
non-statutory stock options to our employees, officers, directors, and
consultants.




F-21


**AIRSPAN
NETWORKS INC.NOTES TO
THE FINANCIAL STATEMENTS**
**(in
thousands, except for share and per share data)**


On
February 7, 2001, the Board of Directors authorized the establishment of the
2001 supplemental stock option plan. This is a non-qualified employee stock
options plan whereby the Company may grant employees stock options to purchase
up to 901,465 shares of common stock. Option grants under the 2001 plan are
limited to non-officer employees and consultants.




On
September 1, 2003, the Board of Directors authorized the establishment of the
2003 supplemental stock option plan. This is a non-qualified employee stock
options plan whereby the Company may grant stock options to purchase up to
241,500 shares of common stock. Option grants under the 2003 plan are limited to
non-officer employees, new hires and consultants.




On
January 30, 2004 the Board of Directors authorized the establishment of the 2004
omnibus equity compensation plan. The 2004 plan is designed for the benefit of
the directors, executives and key employees of the Company (i) to attract and
retain for the Company personnel of exceptional ability; (ii) to motivate such
personnel through added incentives to make a maximum contribution to greater
profitability; (iii) to develop and maintain a highly competent management team;
and (iv) to be competitive with other companies with respect to executive
compensation. Awards under the 2004 plan may be made to Participants in the form
of (i) Incentive Stock Options; (ii) Nonqualified Stock Options; (iii) Stock
Appreciation Rights; (iv) Restricted Stock; (v) Deferred Stock; (vi) Stock
Awards; (vii) Performance Shares; (viii) Other Stock-Based Awards; and (ix)
other forms of equity-based compensation as may be provided and are permissible
under this Plan and the law. The number of shares reserved under this plan is
5,000,000.




Under the
1998, 2001 2003 and 2004 plans, the Compensation Committee is authorized to
establish the terms of stock options. Under the 1998 plan, the exercise price of
all incentive stock options must be at least equal to the fair market value of
our common stock on the date of the grant and the exercise price of all
non-statutory options may be equal to, more than, or less than 100% of the fair
market value of our common stock on the date of the grant. Under the 2001, 2003
and 2004 plans, the exercise price of each option may be equal to, more than, or
less than 100% of fair market value of our common stock on the date of the
grant. Employee stock options granted under all the plans generally vest over a
four-year period and expire on the tenth anniversary of their issuance. The
total number of options granted to employees under the plans was 1,841,792 in
2002, 277,800 in 2003 and 616,450 in 2004.




Under the
plans described above, the Company also granted non-qualified common stock
options to directors under various discrete option agreements. The number of
non-qualified options granted to directors was 275,000, 120,000 and 125,000 in
2002, 2003 and 2004, respectively.




The
Company has a full recourse note receivable from a director relating to the
exercise of stock options in the amount of $130 outstanding at December 31, 2003
and $87 outstanding at December 31, 2004. Such options may be exercised for the
issuance of restricted stock to the extent such options are not vested.
Restrictions on such stock would lapse over the same four-year vesting schedule
as the underlying option. In the event of termination, the Company has a
repurchase right determined at the original exercise price.




In July
2001 the Board of Directors approved a plan to allow eligible employees to
exchange outstanding options granted between and including October 1, 1999 and
December 13, 2001 under the Airspan Networks Inc. 1998 stock option and
restricted stock plan and the 2001 supplemental stock option plan for new
options. The offer of exchange was made to eligible employees on December 13,
2001 and remained open for acceptance until January 18, 2002, at which time
surrendered options were cancelled. Under the offer, new options were issued on
July 19, 2002 to employees who tendered their old ones for exchange. On the
expiration of the offer, 665,796 options tendered were cancelled at a weighted
average price of $6.64. On July 19, 2002, 524,875 new options were granted at
$1.039 to those eligible employees who had accepted the offer of exchange and
validly tendered their options for exchange.




At
December 31, 2004 the Company had reserved 4,362,194 of its Common Stock for
purchase upon exercise of options to be granted in the future.





F-22


AIRSPAN NETWORKS INC.NOTES TO
THE FINANCIAL STATEMENTS **(in
thousands, except for share and per share data)**


The
following table sets forth the activity for all common stock
options:





**Number
      of****Shares**
    
    **Weighted****average****exercise
      price**Outstanding,
      January 1, 2002
    
    
    4,954,346
    
    $
    5.47Granted
    
    
    2,116,792
    
    
    0.64Forfeited
    
    
    (1,450,313
    )
    
    9.53Exercised
    
    
    (143,872
    )
    
    0.30Outstanding,
      December 31, 2002
    
    
    5,476,953
    
    $
    2.67Granted
    
    
    397,800
    
    
    2.30Forfeited
    
    
    (139,041
    )
    
    2.25Exercised
    
    
    (244,765
    )
    
    0.53Outstanding,
      December 31, 2003
    
    
    5,490,947
    
    $
    2.74Granted
    
    
    741,450
    
    
    5.03Forfeited
    
    
    (119,315
    )
    
    3.43Exercised
    
    
    (1,118,462
    )
    
    1.40Outstanding,
      December 31, 2004
    
    
    4,994,620
    
    $
    3.37




The
following table sets forth stock options outstanding at December 31,
2004:





**Outstanding
      options**
    
    **Weighted
      average**
    
    **Exercisable
      options**
    
    **Weighted
      average****Number**
    
    **Exercise****price**
    
    **Remaining****contractual****life
      in years**
    
    **Number**
    
    **Exercise****price**Exercise
      Price ranges$0.30
    
    
    131,802
    
    $
    0.30
    
    
    3.12
    
    
    131,795
    
    $
    0.300.45-0.49
    
    
    946,527
    
    
    0.46
    
    
    7.74
    
    
    362,600
    
    
    0.460.54-1.039
    
    
    333,722
    
    
    0.87
    
    
    6.41
    
    
    297,652
    
    
    0.881.09-1.85
    
    
    590,906
    
    
    1.83
    
    
    6.84
    
    
    473,698
    
    
    1.831.94-3.02
    
    
    804,882
    
    
    2.60
    
    
    7.35
    
    
    564,525
    
    
    2.603.14-4.38
    
    
    886,616
    
    
    4.26
    
    
    6.49
    
    
    738,127
    
    
    4.254.55-5.08
    
    
    498,050
    
    
    5.08
    
    
    9.39
    
    
    0
    
    
    0.005.19-6.18
    
    
    532,449
    
    
    5.97
    
    
    6.53
    
    
    235,082
    
    
    5.997.50-9.60
    
    
    99,666
    
    
    8.52
    
    
    5.31
    
    
    99,665
    
    
    8.5215.00
    
    
    170,000
    
    
    15.00
    
    
    5.58
    
    
    170,000
    
    
    15.00Total
    
    
    4,994,620
    
    $
    3.37
    
    
    7.05
    
    
    3,073,144
    
    $
    3.50




In 2000,
the Company adopted the 2000 Employee Stock Purchase Plan (“ESPP”), which is
intended to qualify as an employee stock purchase plan under Section 423 of the
Internal Revenue Code of 1986. On August 1, 2002, the Company issued 274,411
shares at $0.697 per share to employees participating in the ESPP. On August 1,
2003, the Company issued 531,164 shares at $0.697 per share to employees
participating in the ESPP. On January 30, 2004 the Board of Directors authorized
an increase to 3,000,000 shares from 1,000,000 shares of common stock reserved
for issuance under the ESPP. On August 1, 2004, the Company issued 211,754
shares at $1.76 per share to employees participating in the ESPP. As of December
31, 2004, there were 1,825,577 shares of common stock reserved for issuance
under the ESPP. Further offerings shall commence on each subsequent August 1 and
shall last for a period of one year, and the final offering under this Plan
shall commence on August 1, 2008 and terminate on July 31, 2009.




F-23


**AIRSPAN
NETWORKS INC.NOTES TO
THE FINANCIAL STATEMENTS**
**(in
thousands, except for share and per share data)**

The following table summarizes the total number of shares of common
stock that were reserved for issuance as of December 31, 2004:





**Plan
      reserved under**
    
    **Number
      of options**2000
      Employee Stock Purchase Plan
    
    
    1,825,5771998,
      2001, 2003 and 2004 Stock Option plans: — options still to be granted
    
    
    4,362,194—
      options outstanding
    
    
    4,994,62011,182,391




On
November 9, 2004, the Company sold 834,560 shares of its common Stock in
accordance with a prospectus it filed with the Securities and Exchange
Commission on October 12, 2004. Net proceeds to the Company were $5.30 per
share, or $4.4 million in total. The shares were being held as treasury stock,
having originally been acquired under a share buy back program implemented by
the Company in 2002. Using Oppenheimer & Co. Inc, whom the Company had
engaged to serve as
its exclusive solicitation agent for the sale, the Company sold the shares
through a series of block trades to a group of institutional investors.




**13.
NET LOSS PER SHARE**




Net loss
per share is computed using the weighted average number of shares of common
stock outstanding less the number of shares subject to repurchase. Shares
associated with stock options, warrants and the convertible preferred stock are
not included in the calculation of diluted net loss per share because they are
antidilutive. As described above, each share of convertible preferred stock
automatically converted to common stock upon the completion of the Company’s
initial public offering.




The
following table sets forth the computation of basic and diluted net loss per
share for the periods indicated:





**Year
      ended****December
      31,****2002**
    
    **Year
      ended****December
      31,****2003**
    
    **Year
      ended****December
      31,****2004**Numerator:Net
      loss
    
    $
    (28,138
    )
    $
    (29,455
    )
    $
    (9,975
    )Denominator:Weighted
      average common shares outstanding
    
    
    35,263,564
    
    
    35,073,315
    
    
    36,441,932Less
      weighted average shares of restricted stock
    
    
    (4,919
    )
    
    —
    
    
    —Denominator
      for basic and diluted calculations
    
    
    35,258,645
    
    
    35,073,315
    
    
    36,441,932Earnings
      per share — basic and diluted:Net
      loss per share — basic and diluted:
    
    $
    (0.80
    )
    $
    (0.84
    )
    $
    (0.27
    )




There
were 5,476,953 stock options and 83,333 Common stock warrants outstanding at
December 31, 2002 and 5,490,947 stock options and no common stock warrants
outstanding at December 31, 2003 and 4,994,620 stock options and no common stock
warrants outstanding at December 31, 2004 that were excluded from the
computation of diluted net loss per share as their effect was antidilutive. If
the Company had reported net income, the calculation of these per share amounts
would have included the dilutive effect of these common stock equivalents using
the treasury stock method for stock options and warrants. The convertible
preferred stock referred to in Note 14 was also excluded from the computation of
diluted net loss per share as its effect was antidiultive.





F-24


AIRSPAN NETWORKS INC.NOTES TO
THE FINANCIAL STATEMENTS


**(in
thousands, except for share and per share data)**






**14.
CONVERTIBLE PREFERRED STOCK**




On
September 13, 2004, the Company consummated the private sale of 73,000 shares of
Series A Preferred Stock to Oak Investment Partners XI Limited Partnership
(“Oak”) for aggregate gross proceeds of $29.2 million (net proceeds $29.1
million after legal fees) pursuant to the terms of a Preferred Stock Purchase
Agreement (the “Purchase Agreement”). The Purchase Agreement was amended
effective September 23, 2004. Pursuant to the Purchase Agreement, Oak purchased
73,000 shares of Series A Preferred Stock, which are convertible into 7,300,000
shares of common stock, for $400 per share of preferred stock or $4 per share of
common stock equivalent. The per common stock equivalent price was established
at a discount of approximately 10% off the trailing 10 day volume weighted
average closing price for the common stock on September 9, 2004.




Pursuant
to the Articles, holders of the Series A Preferred Stock may convert the stock
into shares of the Company’s common stock at any time at the rate of 100 shares
of common stock for each share of Series A Preferred Stock (the “Conversion
Rate”). To the extent that the holders of the Series A Preferred Stock do not
participate fully with other the Company stockholders with respect to dividends
paid, the Conversion Rate may be appropriately adjusted upon the occurrence of
any of the following events: (i) the Company’s payment of common stock dividends
and distributions, (ii) common stock splits, subdivisions or combinations and
(iii) reclassification, reorganization, change or conversion of the common
stock. To the extent that the holders of the Series A Preferred Stock do not
participate fully with other the Company stockholders with respect to dividends
paid, the Conversion Rate may be appropriately adjusted upon the occurrence of
any of the following events: (i) the Company’s payment of common stock dividends
and distributions, (ii) common stock splits, subdivisions or combinations and
(iii) reclassification, reorganization, change or conversion of the common
stock.




Holders
of the Series A Preferred Stock are entitled to participate in dividends
declared with respect to the common stock as if the Series A Preferred Stock was
converted into the common stock. The Series A Preferred Stock is identified as
ranking senior and prior to the common stock and all other classes or series of
capital stock with respect to payments upon liquidation. Upon any liquidation of
the Company, certain mergers, reorganizations and/or consolidations of the
Company into or with another corporation or any transaction or series of related
transactions in which a person, entity or group acquires 50% or more of the
combined voting power of the Company’s then outstanding securities (a
“Liquidation”), holders are entitled to receive prior and in preference to any
distribution to holders of the Company’s common stock, the greater of the amount
they invested plus all accumulated or accrued and unpaid dividends thereon or
the amount they would receive in such transaction if they converted the
preferred stock into common stock.




Pursuant
to the Company’s Articles of Incorporation, holders of the Series A Preferred
Stock are entitled to vote on matters presented to the holders of common stock
as if the Series A Preferred Stock was converted into the common stock. However,
the Company, Oak and each subsequent holder of the Series A Preferred Stock
(collectively, the “Parties”) have agreed that the holders of the Series A
Preferred Stock will only vote on matters presented to the holders of common
stock as if the Series A Preferred Stock was converted into the common stock at
the rate of 1 share of Series A Preferred Stock to 86 shares of common stock
(the “Voting Conversion Rate”). The Parties have agreed that the holders of the
Series A Preferred Stock shall abstain from voting with respect to any remaining
votes to which the holders of the Series A Preferred Stock may be entitled under
the Articles. The Parties have further agreed that the Voting Conversion Rate
will be adjusted from time to time in the same manner and under the same
circumstances as the Conversion Rate is adjusted pursuant to the Articles.




**15.
RELATED PARTY TRANSACTIONS**




On April
27, 1999, Mr. Stonestrom, the Company’s President and Chief Executive Officer,
incurred $130 of indebtedness to the Company in connection with the purchase of
five hundred thousand shares of the Company’s common stock. During the year
2004, Mr Stonestrom repaid $43 leaving indebtedness at December 31, 2004 of $87.
No interest is due on the debt.





F-25


AIRSPAN NETWORKS INC.NOTES TO
THE FINANCIAL STATEMENTS


**(in
thousands, except for share and per share data)**






**16.
QUARTERLY FINANCIAL DATA (UNAUDITED)**




The
following table represents the Company’s consolidated results for each of the
most recent eight quarters up to and including the quarter ending December 31,
2004. The information for each of these quarters is unaudited and has been
prepared on the same basis as our audited consolidated financial statements. In
the opinion of management, all necessary material adjustments have been included
to present fairly the unaudited quarterly results when read in conjunction with
the Company’s audited financial statements and related notes.





**Quarter
      Ended****Mar.
      30,****2003**
    
    **June
      29,****2003**
    
    **Sept.
      28,****2003**
    
    **Dec.
      31,****2003**
    
    **Apr.
      4,****2004**
    
    **July
      4,****2004**
    
    **Oct.
      3,****2004**
    
    **Dec.
      31,****2004****($
      in thousands, except per share data)**Consolidated
      statement of operations data:Revenue
    
    $
    7,811
    
    $
    7,524
    
    $
    6,293
    
    $
    9,023
    
    $
    12,420
    
    $
    18,252
    
    $
    26,452
    
    $
    37,523Cost
      of revenue
    
    
    5,253
    
    
    5,704
    
    
    5,656
    
    
    6,332
    
    
    8,693
    
    
    12,182
    
    
    18,294
    
    
    26,975Inventory
      provision
    
    
    —
    
    
    4,398
    
    
    —
    
    
    348
    
    
    —
    
    
    —
    
    
    1,099
    
    
    —Gross
      profit /(loss)
    
    
    2,558
    
    
    (2,578
    )
    
    637
    
    
    2,343
    
    
    3,727
    
    
    6,070
    
    
    7,059
    
    
    10,548Operating
      expenses:Research
      and development
    
    
    3,719
    
    
    3,670
    
    
    3,413
    
    
    3,593
    
    
    5,046
    
    
    4,743
    
    
    4,495
    
    
    4,510Sales
      and marketing
    
    
    2,604
    
    
    2,656
    
    
    2,269
    
    
    2,860
    
    
    2,560
    
    
    2,752
    
    
    2,782
    
    
    2,919Bad
      debt reserve
    
    
    —
    
    
    —
    
    
    —
    
    
    946
    
    
    —
    
    
    300
    
    
    249
    
    
    —General
      and administration
    
    
    2,386
    
    
    2,252
    
    
    2,037
    
    
    2,066
    
    
    2,051
    
    
    2,828
    
    
    3,342
    
    
    2,821Amortization
      of intangibles
    
    
    43
    
    
    44
    
    
    44
    
    
    41
    
    
    246
    
    
    158
    
    
    175
    
    
    144Restructuring
      provision
    
    
    —
    
    
    273
    
    
    46
    
    
    431
    
    
    —
    
    
    397
    
    
    16
    
    
    —Total
      operating expense
    
    
    8,752
    
    
    8,895
    
    
    7,809
    
    
    9,937
    
    
    9,903
    
    
    11,178
    
    
    11,059
    
    
    10,394(Loss)
      /profit from operations
    
    
    (6,194
    )
    
    (11,473
    )
    
    (7,172
    )
    
    (7,594
    )
    
    (6,176
    )
    
    (5,108
    )
    
    (4,000
    )
    
    154Other
      income/(expense):Interest
      expense
    
    
    (38
    )
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —
    
    
    —Interest
      and other income
    
    
    645
    
    
    1,070
    
    
    385
    
    
    921
    
    
    807
    
    
    686
    
    
    591
    
    
    1,133(Loss)
      /profit before income taxes
    
    
    (5,587
    )
    
    (10,403
    )
    
    (6,787
    )
    
    (6,673
    )
    
    (5,369
    )
    
    (4,422
    )
    
    (3,409
    )
    
    1,287Income
      tax (charge)/credit
    
    
    —
    
    
    (4
    )
    
    —
    
    
    (1
    )
    
    (16
    )
    
    14
    
    
    (48
    )
    
    1,988Net
      (loss)/profit
    
    $
    (5,587
    )
    $
    (10,407
    )
    $
    (6,787
    )
    $
    (6,674
    )
    $
    (5,385
    )
    $
    (4,408
    )
    $
    (3,457
    )
    $
    3,275Net
      (loss)/profit per share basic
    
    $
    (0.16
    )
    $
    (0.30
    )
    $
    (0.19
    )
    $
    (0.19
    )
    $
    (0.15
    )
    $
    (0.12
    )
    $
    (0.09
    )
    $
    0.09Net
      (loss)/profit per share diluted
    
    $
    (0.16
    )
    $
    (0.30
    )
    $
    (0.19
    )
    $
    (0.19
    )
    $
    (0.15
    )
    $
    (0.12
    )
    $
    (0.09
    )
    $
    0.07












F-26




**Financial
Statement Schedules**


****


**Schedule
II**


**Airspan
      Networks Inc. Valuation and Qualifying Accounts****Additions**
    
    **Deductions****Balance
      at****beginning****of
      period**
    
    ****
      **Charged
      to****expenses**
    
    **Written****back
      to****provision**
    
    **Credit
      to****expenses**
    
    **Charged****against****provision**
    
    **Balance
      at****end
      of****period****(in
      thousands of U.S. Dollars)**Allowance
      for doubtful debts:Year
      ended December 31, 2004
    
    $
    5,207
    
    $
    985
    
    $
    —
    
    $
    (436
    )
    $
    (2,942
    )
    $
    2,814Year
      ended December 31, 2003
    
    
    4,531
    
    
    1,212
    
    
    —
    
    
    (266
    )
    
    (270
    )
    
    5,207Year
      ended December 31, 2002
    
    
    2,601
    
    
    3,794
    
    
    150
    
    
    (114
    )
    
    (1,900
    )
    
    4,531




II-1