INTERWAVE COMMUNICATIONS INTERNATIONAL LTD, 10-Q, 2000-03-09

INTERWAVE COMMUNICATIONS INTERNATIONAL LTD
10-Q, 2000-03-09
RADIO & TV BROADCASTING & COMMUNICATIONS EQUIPMENT

Previous: OFFICIAL PAYMENTS CORP, 4, 2000-03-09

Next: PNC MORTGAGE SECURITIES CORP MORT PASS THR CERT SER 1999-10, 8-K, 2000-03-09

<PAGE>

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549

FORM 10-Q

[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarter ended DECEMBER 31, 1999

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

For the transition period from _____________ to _________________

Commission File Number 000-1095478
INTERWAVE COMMUNICATIONS INTERNATIONAL, LTD.
(Exact name of registrant as specified in its charter)

BERMUDA 98-0155633
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification No.)

CLARENDON HOUSE, 2 CHURCH STREET
P.O. BOX HM 1022
HAMILTON HM DX, BERMUDA NOT APPLICABLE
(Address of principal executive offices) (Zip code)

(441) 295-5950
(Registrant's telephone number including area code)
------

NOT APPLICABLE

(Former name, former address and former fiscal year, if changed
since last report.)

Indicate by check mark whether 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, and (2) has been subject to such filing requirements
for the past 90 days.

YES _X__ NO ___
As of March 6, 2000, 45,864,665 shares of Registrant's common stock, no par
value, were outstanding.

<PAGE>

INTERWAVE COMMUNICATIONS INTERNATIONAL, LTD.
AND SUBSIDIARIES
INDEX

PAGE
----
<S> <C>
PART I - FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

Condensed Consolidated Balance Sheets at December 31, 1999 and June 30, 1999 3

Condensed Consolidated Statements of Operations for the three month and six month
periods ended December 31, 1999 and 1998 4

Condensed Consolidated Statements of Cash Flows for the six month periods
ended December 31, 1999 and 1998 5

Notes to Condensed Consolidated Financial Statements 6

Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11

Item 3. Quantitative and Qualitative Disclosures About Market Risk 26

PART II - OTHER INFORMATION

Item 1. Legal Proceedings 28
Item 2. Changes in Securities and Use of Proceeds 28
Item 3. Defaults upon Senior Securities 29
Item 4. Submission of Matters to a Vote of Security Holders 29
Item 5. Other Information 29
Item 6. Exhibits and Reports on Form 8-K 29

SIGNATURES 30
</TABLE>

2
<PAGE>

INTERWAVE COMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

DECEMBER 31,1999 JUNE 30, 1999
----------------------- ------------------
<S> <C> <C>
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 32,805 $ 3,919
Receivables, net of allowance of $633 and $255 at
December 31, 1999 and June 30, 1999, respectively 10,198 6,999
Inventories 6,151 6,339
Prepaid expenses and other current assets 2,226 844
------------- -------------
Total current assets 51,380 18,101

Property and equipment, net 5,479 5,334
Intangibles, net, and other assets 4,028 3,133
------------- -------------
Total assets $ 60,887 $26,568
============= =============

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,857 $ 2,757
Accrued expenses and other current liabilities 2,720 2,354
Convertible notes -- 8,754
Other current liabilities 1,067 2,628
------------- -------------
Total current liabilities 9,644 16,493

Other long term liabilities 1,245 1,275
------------- -------------
Total liabilities 10,889 17,768

Shareholders' equity (deficit):
Convertible preferred shares, $0.83 par value; 56,500,000
shares authorized at December 31, 1999 and June 30, 1999.
Issued and outstanding 27,006,193 and 20,177,168 shares at
December 31, 1999 and June 30, 1999, respectively;
aggregate liquidation preference of $146,337 and $95,008 at
December 31, 1999 and June 30, 1999, respectively. 22,415 16,747
Common shares, $0.001 par value; 100,000,000 authorized;
Issued and outstanding 6,340,872 and 5,071,921 shares
at December 31, 1999 and June 30, 1999, respectively. 7 5
Additional paid-in capital 171,629 109,712
Deferred stock compensation (10,311) (3,717)
Services receivable from shareholder (5,139) (2,071)
Subscriptions and amounts receivable from shareholders (416) (2,284)
Accumulated other comprehensive income 92 128
Accumulated deficit (128,279) (109,720)
------------- -------------
Total shareholders' equity 49,998 8,800
------------- -------------
Total liabilities and shareholders' equity $ 60,887 $26,568
============= =============
</TABLE>

See Notes to Condensed Consolidated Financial Statements

3
<PAGE>

INTERWAVE COMMUNICATIONS INTERNATIONAL, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

THREE MONTHS SIX MONTHS
ENDED DECEMBER 31, ENDED DECEMBER 31,
1999 1998 1999 1998
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)

Net revenues $ 7,030 $ 4,097 $ 12,407 $ 8,584
Cost of revenues 4,179 3,047 8,153 5,524
------------- ------------- ------------- -------------
Gross profit 2,851 1,050 4,254 3,060

Operating expenses:
Research and development 4,198 3,891 7,760 7,763
Selling, general and
administrative 3,285 1,669 5,372 3,428
Amortization of deferred stock
compensation * 2,495 1,234 5,819 2,757
------------- ------------- ------------- -------------
Total costs and expenses 9,978 6,794 18,951 13,948

------------- ------------- ------------- -------------
Operating loss (7,127) (5,744) (14,697) (10,888)

Interest expense (27) (46) (1,987) (95)
Other income, net 121 38 180 139
------------- ------------- ------------- -------------
Net loss before income taxes (7,033) (5,752) (16,504) (10,844)

Income tax expense -- -- -- --
------------- ------------- ------------- -------------
Net loss (7,033) (5,752) (16,504) (10,844)

Dividend effect of beneficial
conversion feature to H-1 preferred
shareholders -- -- (2,055) --
------------- ------------- ------------- -------------
Net loss attributable to common
shareholders $ (7,033) $ (5,752) $ (18,559) $ (10,844)
============= ============= ============= =============

Basic and diluted loss per share $ (1.14) $ (1.17) $ (3.19) $ (2.22)

Weighted average common shares
used in computing loss per share 6,182 4,910 5,826 4,877

- ----------------------------------------------------------------------------------------------------------------------

*AMORTIZATION OF DEFERRED
STOCK COMPENSATION:
Cost of revenues $ 322 $ 99 $ 775 $ 374
Research and development 1,426 407 2,894 1,243
Selling, general and administrative 747 728 2,150 1,140
------------- ------------- ------------- -------------
Total $ 2,495 $ 1,234 $ 5,819 $ 2,757
============= ============= ============= =============

See Notes to Condensed Consolidated Financial Statements
</TABLE>

4
<PAGE>

INTERWAVE COMMUNICATIONS INTERNATIONAL, LTD AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998
(IN THOUSANDS)

SIX MONTHS ENDED DECEMBER 31,
1999 1998
(UNAUDITED)
---------------------------------------
<S> <C> <C>
Net cash used in operating activities $ (9,006) $ (5,529)
------------- ------------

Cash flows from investing activities:
Purchases of property and equipment (1,649) (544)
Investment in licensed technologies (367) (188)
Investment in short-term securities -- 75
------------- ------------
Net cash used in investing activities (2,016) (657)

Cash flows from financing activities:
Proceeds from issuances of convertible preferred shares
and warrants 39,590 --
Proceeds from issuances of convertible notes and warrants -- 1,400
Principal payments on notes payable (253) (236)
Proceeds from exercise of options 611 149
Other long term liabilities (3) (20)
------------- ------------
Net cash provided by financing activities 39,945 1,293
------------- ------------

Effect of exchange rate changes on cash and short-term investments (37) (60)
------------- ------------

Net increase (decrease) in cash and cash equivalents 28,886 (4,953)
Cash and cash equivalents at beginning of period 3,919 7,340
------------- ------------
Cash and cash equivalents at end of the period $ 32,805 $ 2,387
============= ============

SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:

Cash paid during the period for interest $ 95 $ 65
Non-cash investing and financing activities:
Conversion of convertible notes for preferred stock $ 8,754 --
Exchange of warrants in connection with joint sales agreement $ 4,121 --

Dividend effect of beneficial conversion feature to H1
shareholders $ 2,055 --
</TABLE>

See Notes to Condensed Consolidated Financial Statements

5
<PAGE>

INTERWAVE COMMUNICATIONS INTERNATIONAL, LTD.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

The accompanying interim consolidated financial statements are unaudited,
but in the opinion of management, reflect all adjustments (consisting only of
normal recurring adjustments) necessary to fairly state the Company's
consolidated financial position, results of operations, and cash flows as of and
for the dates and periods presented. The consolidated financial statements of
the Company are prepared in accordance with generally accepted accounting
principles as adopted in the United States for interim financial information,
the instructions to Form 10-Q and Article 10 of Regulation S-X.

These unaudited consolidated financial statements should be read in
conjunction with the Company's audited consolidated financial statements and
footnotes included in the Registration Statement on Form F-1 declared effective
by the Securities and Exchange Commission on January 28, 2000. The results of
operations for the three and six-month periods ended December 31, 1999 are not
necessarily indicative of results for the entire fiscal year ending June 30,
2000.

2. COMPREHENSIVE LOSS

The components of the Company's total comprehensive loss were (in
thousands):

Three Months Ended Six Months Ended
December 31 December 31
1999 1998 1999 1998
(Unaudited) (Unaudited)
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net loss attributable to common
shareholders $ (7,033) $ (5,752) $(18,559) $(10,844)
Foreign currency
translation adjustment 41 8 (36) (60)
-------- -------- -------- --------

Total comprehensive
loss $ (6,992) $ (5,744) $(18,595) $(10,904)
======== ======== ======== ========
</TABLE>

3. INVENTORIES

Inventories consist of the following (in thousands):

December 31, 1999 June 30, 1999
(unaudited)
<S> <C> <C>
Work in Process $ 4,185 $ 5,290
Finished goods 497 373
Consignment inventory 1,469 676
----- ---
$ 6,151 $ 6,339
======== ========
</TABLE>

6
<PAGE>

4. BASIC AND DILUTED NET LOSS PER SHARE

Basic and diluted net loss per share is calculated in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" and
SEC Staff Accounting Bulletin ("SAB") No. 98. The denominator used in the
computation of basic and diluted net loss per share is the weighted average
number of common shares outstanding for the respective period. All potentially
dilutive securities were excluded from the calculation of diluted net loss per
share, as the effect would be anti-dilutive. Diluted shares outstanding includes
the assumed conversion of preferred stock.

Pro forma net loss per share has been computed by dividing net loss by the
pro forma weighted average number of shares outstanding. Pro forma weighted
average shares assume the conversion of all preferred shares, which were
ultimately converted to common shares in conjunction with the initial public
offering, as if the conversion occurred at the beginning of the period.

The computations of earnings per share are as follows (in thousands,
except per share data):

Three Months Ended Six Months Ended
December 31, December 31,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
(Unaudited)

Net loss attributable to common shareholders $(7,033) $(5,752) $(18,559) $(10,844)
Weighted average common shares outstanding 6,182 4,910 5,826 4,877
Basic and diluted loss per share $(1.14) $(1.17) $(3.19) $(2.22)

Pro forma basic and diluted EPS:
Weighted average common shares outstanding 6,182 4,910 5,826 4,877
Conversion of preferred shares to common shares 27,006 19,532 27,006 19,532
------ ------ ------ ------
Pro forma shares outstanding 33,188 24,442 32,832 24,409
====== ====== ====== ======
Pro forma basic and diluted loss per share $(0.21) $(0.24) $(0.57) $(0.44)
</TABLE>

5. CASH EQUIVALENTS

Cash equivalents have been classified as available-for-sale securities
and consisted of the following (in thousands):

December 31, 1999 June 30, 1999
Cash Equivalents (unaudited)
<S> <C> <C>
Cash................................................ $ 77 $ 708
Money market funds.................................. 15,457 2,216
Commercial paper.................................... 17,271 995
-------- -------
$ 32,805 $ 3,919
======== =======
</TABLE>

For all short-term investments, the maturities were less than 90 days
as of December 31, 1999 and June 30, 1999, and cost approximates fair market
value.

7
<PAGE>

6. TRANSACTIONS WITH RELATED PARTIES, MAJOR CUSTOMERS AND CONCENTRATION OF RISK

The Company engaged in business transactions with investors and major
customers resulting in the following revenue, deferred revenue, and trade
receivables (in thousands):

Six months ended December 31,
1999 1998
<S> <C> <C>
(Unaudited)
Revenue
Nortel Networks....................................................... $3,224 $4,724
Hutchison Telecommunications.......................................... 3,114 382
HangZhou Topper Electric Corporation.................................. 2,068 0
ADC Telecommunications/Microcellular Systems, Ltd.(1)................. 1,317 2,631
</TABLE>

(1) Microcellular Systems, Ltd. was created by a spin-off from ADC
Telecommunications in May 1999.

These customers accounted for the following percentages of revenues
comprising greater than 10% of revenue:

<TABLE>
<CAPTION>
Six months ended December 31,
1999 1998
<S> <C> <C>
(Unaudited)
Revenue
Nortel Networks....................................................... 26% 55%
Hutchison Telecommunications.......................................... 25% 4%
HangZhou Topper Electric Corporation.................................. 17% 0%
ADC Telecommunications/Microcellular Systems, Ltd.(1)................. 11% 31%
</TABLE>

(1) Microcellular Systems, Ltd. was created by a spin-off from ADC
Telecommunications in May 1999.

Financial instruments, which potentially subject the Company to a
concentration of credit risk, principally consist of accounts receivable. The
Company performs ongoing credit evaluations of its customers and generally does
not require collateral on accounts receivable, as a majority of the Company's
customers are large, well established companies.

The following table summarizes information relating to the Company's
significant customers with balances greater than 10% of accounts receivable as
of:

December 31, June 30,
1999 1999
<S> <C> <C>
(unaudited)
Accounts Receivable
Hutchison Telecommunications....................................... 28% 8%
Nortel Networks.................................................... 21% 48%
HangZhou Topper Electric Corp...................................... 20% 5%
ADC Telecommunications/Microcellular Systems, Ltd.(1).............. 13% 0%

</TABLE>

(1) Microcellular Systems, Ltd. was created by a spin-off from ADC
Telecommunications in May 1999.

8
<PAGE>

7. CONVERTIBLE NOTES

In 1999, as part of a bridge financing the Company issued $12,691,830
of convertible notes payable to a group of its preferred and common shareholders
in exchange for $12,163,965 in cash and a note receivable of $527,865. The
principal amount, together with interest accrued at 8% per annum, was due and
payable on December 3, 1999 and automatically converted on September 10, 1999
into 1,872,362 shares of our Series H-1 preferred stock at a price of $7 per
share. As an incentive to participate in the convertible note financing, holders
of Series A, B, C, D, E, F and G preferred stock ("original preferred stock")
who participated at a minimum level based on their respective ownership
percentage were entitled to exchange their original preferred stock for A-1,
B-1, C-1, D-1, E-1, F-1 and G-1 preferred stock, respectively ("new preferred
stock"), whose terms were identical to the original preferred stock, except that
the new preferred stock was preferential in liquidation to all original
preferred stock. As of June 30, 1999, the convertible notes, including accrued
interest of $231,211, amounted to $12,923,041.

8. PREFERRED SHARES

In November 1999, the Company completed an offering of 1,526,663 Series
I-1 preferred shares to Alcatel for $12,013,304 (net of financing costs
$200,000). The Series I-1 contained an $8 per share liquidation preference and
converted to common shares on a one-to-one basis on the Company's initial public
offering. In connection with the sale of Series I-1 preferred shares, the
Company and Alcatel entered into a purchase and distribution agreement whereby
Alcatel will market the Company's wireless office network products through their
enterprise solutions division.

In December 1999, the Company sold 2,000,000 Series I-1 preferred
shares to Holodeck Limited for $16 million on similar terms as the November 1999
sale of shares to Alcatel. The preferred shares converted to common shares on a
one-to-one basis on the Company's initial public offering.

(Dollars In thousands)
Shares Total Dollars
<S> <C> <C>

Balance June 30, 1999 20,177,168 $ 90,684
Conversion of bridge financing to Series H1 preferred shares 1,872,362 10,846
Issuance of Series H1 preferred shares 1,430,000 9,244
Issuance of Series I1 preferred shares 3,526,663 28,167
-------------- -------------

Balance December 31, 1999 27,006,193 $ 138,941
========== =========
</TABLE>

9. COMMITMENTS

(a) LEASE FOR REDWOOD CITY PREMISES.

Our existing lease for 28,533 square feet for administrative and
engineering facilities in Redwood City expires in September 2002. We vacated
these premises and moved to larger facilities in Menlo Park in early March 2000.
The scheduled lease payments after January 1, 2000 under our existing lease are
as follows (in thousands):

9
<PAGE>

PERIOD ENDING JUNE 30

<TABLE>
<S> <C>
2000. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 426
2001. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 907
2002. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 959
2003. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 320
---
Total Minimum Lease Payments $ 2,612
=======
</TABLE>

Subsequent to December 31, 1999, we subleased a portion of the
facilities under our existing lease. The sublease will cover our facility costs
for that portion under our existing lease. See "Subsequent Events".

(b) NEW LEASE FOR ADMINISTRATIVE AND ENGINEERING FACILITIES.

We signed a new five-year lease commencing December 15, 1999 for about
56,000 square feet in Menlo Park, California for the relocation of our
principal administrative and engineering facilities. We relocated our
administration and engineering departments to Menlo Park in early March 2000.

Future minimum lease payments for the new lease are as follows for the
fiscal years ending June 30 (in thousands):

PERIOD ENDING JUNE 30
<TABLE>
<S> <C>
2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 879
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,062
2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,145
2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,330
2004 and thereafter. . . . . . . . . . . . . . . . . . . . 3,704
---------------
Total Minimum Lease Payments . . . . . . . . . . . $ 11,020
========
</TABLE>

The Company generally commits to purchase products from its contract
manufacturers to be delivered within the most recent 60 days covered by
forecasts with cancellation fees. As of December 31, 1999, the Company had
committed to make purchases totaling $4.2 million from these manufacturers in
the next 60 days. In addition, in specific instances, the Company may agree to
assume liability for limited quantities of specialized components with lead
times beyond this 60-day period.

10. GEOGRAPHIC SEGMENT INFORMATION

In fiscal 1999, the Company adopted SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information". SFAS No. 131 establishes
standards for the manner in which public companies report information about
operating segments in annual and interim financial statements. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers. The method for determining what
information to report is based on the way management organizes the operating
segments within the Company for making operating decisions and assessing
financial performance. The Company's chief operating decision-maker is
considered to be the chief executive officer (CEO). The financial information

10
<PAGE>

that the CEO reviews are identical to the information presented in the
accompanying statements of operations. Therefore, the Company has determined
that it operates in a single operating segment: manufacturing and sale of
compact mobile wireless network solutions.

11. SUBSEQUENT EVENTS

(a) SUBLEASE OF ADMINISTRATIVE AND ENGINEERING PREMISES

On January 24, 2000 we subleased 18,341 square feet, of our 28,533 square
foot leased facility in Redwood City, California. The sublease commences on
March 9, 2000 and ends on September 30, 2002, at the same time that our lease
ends. The payments received from the sublease will cover our proportionate costs
to the landlord under the existing lease.

(b) INITIAL PUBLIC OFFERING

On January 28, 2000, the Securities and Exchange Commission declared
effective the Company's Registration Statement on Form F-1. Pursuant to this
Registration Statement, the Company completed an initial public offering of
9,775,000 shares of its common stock (including 1,275,000 shares sold pursuant
to the exercise of the Underwriters' over-allotment option) at an initial public
offering price of $13.00 per share ("Offering"). The Offering was managed by
Salomon Smith Barney, Banc of America Securities LLC and SG Cowen. Proceeds to
the Company, after deduction of the Underwriters' discount and commission,
totaled approximately $116.8 million, net of offering costs of approximately
$1.35 million.

Upon completion of the Offering, the Company's preferred stock was
converted into 27,006,193 shares of common stock, and all outstanding shares of
preferred stock were cancelled and retired.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Statements in this Form 10-Q which are not historical facts are
"forward- looking statements" that are subject to known and unknown risks and
uncertainties that could cause the results of interWAVE Communications
International, Ltd. to differ materially from management's current expectations.
These risks and uncertainties include, but are not limited to, the risks
relating to interWAVE's history of losses, the expectation of future losses,
reliance on a small number of customers, reliance on the purchase commitments of
large customers, complexity of products, difficulties in introducing new or
enhanced products, compliance with regulations and evolving industry standards,
long sales cycles, intense competition, sales to China, management of global
operations, the ability to retain and motivate key employees, and the Risk
Factors discussed in the initial public offering prospectus dated January 28,
2000, and in the filings and reports made from time to time by interWAVE with
the Securities and Exchange Commission. We cannot assure you that future results
will be achieved, and actual results could differ materially from expectations,
forecasts and estimates. InterWAVE assumes no obligation to update any
forward-looking statements, which speak only as of their respective dates.
Important factors that could cause actual results to differ materially are
discussed in the section "Risk Factors" included in our prospectus dated January
28, 2000. You are encouraged to review such risk factors carefully.

11
<PAGE>

OVERVIEW

interWAVE Communications International, Ltd. and subsidiaries (the
Company) provides compact mobile wireless communications systems using GSM, an
international standard for voice and data communications. We have pioneered what
we believe is the only commercially available system that provides all of the
infrastructure equipment and software necessary to support an entire wireless
network within a single, compact enclosure. We have designed our systems to
serve both wireless office networks and small community networks in a
cost-effective manner.

We are a leading provider of compact wireless communications systems in
the Global System for Mobile Communications, or GSM, market. We were
incorporated in June 1994 and recorded our first product sale in May 1997. Our
systems were initially deployed to add capacity and coverage to existing
systems, primarily in Asia. Deployments of community networks began in 1998,
primarily in China and Africa. Trials of our wireless office systems commenced
in 1999 in both Europe and Asia. Prior to May 1997, we had no sales and our
operations consisted primarily of various start-up activities, such as research
and development, recruiting personnel, conducting customer field trials and
raising capital.

We generated net revenues of $17.3 million in fiscal 1999 and $12.4
million in the six months ended December 31, 1999. We incurred net losses of
$24.5 million in fiscal 1999 and $18.6 million in the six months ended December
31, 1999. As of December 31, 1999, we had an accumulated deficit of $128.3
million.

We generate net revenues from sales of our systems and, in connection
with our direct sales activity, from installation, maintenance contracts and
support of those systems. Revenue derived from systems sales, comprised of unit
sales of our WAVEXpress base station and base station controller, our
WAVEXchange, our Network In A Box and our WAVEView management system,
constituted 88% of net revenues in fiscal 1999 and 96% in the six months ended
December 31, 1999.

Currently, our revenues are generated by sales to communications
equipment providers and system integrators that may either sell our systems on a
stand-alone basis or integrate them with their systems and by our direct sales
force. The components of sales by providers are as follows:

SIX MONTHS ENDED
DECEMBER 31, FISCAL YEAR ENDED
1999 JUNE 30, 1999
---------------------- ----------------------
<S> <C> <C>

Communication equipment providers................................. 28% 61%
System integrators................................................ 42% 23%
Direct sales to wireless providers................................ 30% 16%
</TABLE>

Net revenues outside the United States represented approximately 39%
and 21% of total net revenues for the six months ended December 31, 1999 and
1998, respectively. We believe that the majority of our products sold in the
United States are ultimately installed by the purchasers outside the United
States. We have derived and expect to continue to derive a majority of our
revenues from products installed outside the U.S. by both non-U.S. and U.S.
based communications equipment providers, systems integrators and wireless
service providers, subjecting our revenue stream to risks from economic
uncertainties, currency fluctuations, political instability and uncertain
cultural and regulatory environments.

12
<PAGE>

Since our inception, we have used share option programs for key
employees as compensation to attract strong business and technical talent. We
have recorded compensation expense for our option grants. The expense is equal
to the excess of the fair market price on the date of grant or sale over the
option exercise price. Of the total deferred compensation, approximately $5.8
million and $2.8 million was amortized in the six months ended December 31, 1999
and 1998, respectively. The balance in deferred compensation of $10.3 million at
December 31, 1999 is being amortized on an accelerated basis over the vesting
period of the applicable options, which is typically four years.

RESULTS OF OPERATIONS

The following table sets forth for the periods indicated our results of
operations expressed as a percentage of revenues:

<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
1999 1998 1999 1998
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net revenue 100.0% 100.0% 100.0% 100.0%
Cost of revenue 59.4 74.4 65.7 64.4
----------- ------------ ------------ ------------
Gross Margin 40.6 25.6 34.3 35.6
----------- ------------ ------------ ------------
Operating Expenses:
Research and development 59.7 95.0 62.6 90.4
Selling, general and administrative 46.7 40.7 43.3 39.9
Amortization of deferred stock
compensation 35.5 30.1 46.9 32.1
----------- ------------ ------------ ------------
Operating loss (101.3) (140.2) (118.5) (126.8)
Interest and other expense 1.3 (0.2) (14.5) 0.5
Dividend effect to preferred shareholders -- -- (16.6) --
----------- ------------ ------------ ------------
Net loss attributable to common shareholders (100.0)% (140.4)% (149.6)% (126.3)%
=========== ============ ============ ============
</TABLE>

THREE MONTHS ENDED DECEMBER 31, 1999 AND 1998

CONTRACTS WITH ALCATEL AND HUTCHISON

On October 27, 1999 we entered into a distribution and Original
Equipment Manufacturer ("OEM") agreement with Alcatel Business Systems
("Alcatel") of France. Under the agreement, Alcatel will integrate our products,
including those that use the Internet protocol, with their corporate office
networking products and market them through their enterprise solutions division.
Alcatel made minimum purchase commitments through December 2001, and intends to
resell our products primarily to their corporate office customers. We agreed to
modify our products to contain certain features by various product development
milestone dates. Alcatel agreed to purchase minimum amounts of goods and
services according to defined specifications in each successive 6-month period
beginning January 1, 2000. If we do not meet our product development
obligations, the purchase commitments from Alcatel may be lowered or removed
entirely, and Alcatel may elect to receive a manufacturing license from us for a
fee.

On December 20, 1999 Holodeck Ltd., an affiliate of Hutchison
Telecommunications Group ("Hutchison"), entered into an agreement with us in
which Holodeck agreed to purchase our goods and services in Sri Lanka according
to defined specifications. We estimate that

13
<PAGE>

Hutchison will purchase about $6.7 million of our products under this agreement
in Sri Lanka. In connection with this agreement, we agreed not to sell our
WAVEXchange and WAVExpress products to any party other than Hutchison's
affiliate in Sri Lanka for three years, and in Mumbai, India until March 31,
2000. If by that date we receive an order from Hutchison for at least $6
million, then we will not supply these products to any third party for three
years in Mumbai. This period will be extended two years if at the end of the
three-year period Hutchison or its affiliate has placed an order in an aggregate
value of $15 million.

The agreement between us and Hutchison's affiliate may be immediately
terminated if we fail to complete the work under the agreement and the failure
continues for 45 days after written notice is sent by the affiliate to us.

In connection with these agreements, Alcatel purchased 1,536,663 of our
Series I-1 preferred shares for $12,013,304 in net proceeds and Holodeck Ltd.
purchased 2,000,000 of our Series I-1 preferred shares for proceeds of
$16,000,000.

NET REVENUES

Total revenues increased 71.6% from $4.1 million in the second
quarter of fiscal 1999 to $7.0 million in the second quarter of fiscal 2000.
This increase was primarily due to increased sales to wireless service
providers, which increased from $0.2 million in the second quarter of fiscal
1999 to $2.9 million in the second quarter of fiscal 2000. Sales to
communications systems providers decreased from $2.6 million to $2.4 million,
while sales to systems integrators increased from $1.2 million to $1.7
million.

GROSS MARGIN

Gross margin increased to 40.6% in the second quarter of fiscal 2000
from 25.6% in the second quarter of fiscal 1999, primarily due to the increased
portion of revenue generated from sales directly to wireless service providers,
the decreased portion of revenues generated from sales to communications systems
providers, and the absorption of fixed costs in higher overall revenue levels.
Margins were also favorably impacted by a higher percentage of revenues from
specialized networks.

RESEARCH AND DEVELOPMENT EXPENSES

Research and development expenses increased 7.9% to $4.2 million in the
second quarter of fiscal 2000 from $3.9 million in the second quarter of fiscal
1999. The increase in the second quarter of fiscal 2000 is primarily due to an
increase in the number of employees engaged in development activities.

SELLING, GENERAL AND ADMINISTRATIVE

Selling, general and administrative expenses increased 96.8% to $3.3
million in the second quarter of fiscal 2000 compared to $1.7 million in the
comparable period in the prior year. We substantially strengthened our senior
management team in the six months ended December 31, 1999, with the entire team
on board during the second quarter. The President and Chief Operating Officer,
the Executive Vice President and Chief Financial Officer, the Vice President of
Engineering, the Vice President of Operations and the Vice President of Product
Marketing joined InterWave as employees during the first two quarters of fiscal
2000. Additional personnel in selling, marketing, general and administrative
activities, increases in the allowance for doubtful

14
<PAGE>

accounts, and non-cash amortization charges ascribed to warrants issued in
September 1999 in conjunction with a distribution agreement also increased
selling, general and administrative expenses.

AMORTIZATION OF DEFERRED STOCK COMPENSATION

Amortization of deferred stock compensation increased 102.2% to $2.5
million in the second quarter of fiscal 2000 from $1.2 million in the second
quarter of fiscal 1999. During the second quarter of fiscal 2000, options to
purchase 886,000 common shares were granted at an average exercise price of
$6.56, resulting in an addition to deferred stock compensation of $0.7 million.
.

SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998

NET REVENUES

Total revenues increased 45% from $8.6 million in the first six months
of fiscal 1999 to $12.4 million in the first six months of fiscal 2000. This
increase was primarily due to increased sales to wireless service providers and
systems integrators, which increased from $0.4 million and $2.6 million
respectively in the second quarter of fiscal 1999 to $3.7 million and $5.2
million respectively in the second quarter of fiscal 2000. Sales to
communications systems providers decreased from $5.5 million to $3.5 million.

GROSS MARGIN

Gross margin decreased to 34.3% in the first six months of fiscal 2000
from 35.6 % in the first six months of fiscal 1999, primarily due to the
increased portion of revenue generated from sales of our lower margin
WAVEXpress/BTS products compared to sales of our higher margin WAVEXchange and
Network In A Box products.

RESEARCH AND DEVELOPMENT EXPENSES

Research and development was $7.8 million in each six-month period of
fiscal 1999 and 2000. Increases in expenses associated with higher numbers of
employees engaged in research and development were offset by decreases in
expenses associated with outside engineering services.

SELLING, GENERAL AND ADMINISTRATIVE

Selling, general and administrative expenses increased 56.7% to $5.4
million in the first six months of fiscal 2000 compared to $3.4 million in the
comparable period in the prior year. We substantially strengthened our senior
management team in the six months ended December 31, 1999, with the entire team
on board during the second quarter. The President and Chief Operating Officer,
the Executive Vice President and Chief Financial Officer, the Vice President of
Engineering, the Vice President of Operations and the Vice President of Product
Marketing joined InterWave as employees during the first six months of fiscal
2000. Additional personnel in selling, marketing, general and administrative
activities, increases in the allowance for doubtful accounts, and non-cash
amortization charges ascribed to warrants issued in September 1999 in
conjunction with a distribution agreement also increased selling, general and
administrative expenses.

15
<PAGE>

AMORTIZATION OF DEFERRED STOCK COMPENSATION

Amortization of deferred stock compensation increased 111.1% to $5.8
million in the first six months of fiscal 2000 from $2.8 million in the first
six months of fiscal 1999. During the first six months of fiscal 2000, options
to purchase 2,820,000 common shares were granted at an average exercise price of
$3.07, resulting in an addition to deferred stock compensation of $12.4 million.

INTEREST EXPENSE

Interest expense totaled $2.0 million in the first six months of fiscal
2000 as compared to $95,000 in the first six months of fiscal 1999. The increase
in fiscal 2000 was due to amortization of the discount ascribed to warrants
issued in conjunction with the fiscal 1999 bridge loan financing. The bridge
loan notes were converted to Series H1 preferred shares as of September 10, 1999
and the unamortized remaining discount was charged to additional paid in
capital.

LIQUIDITY AND CAPITAL RESOURCES

We have financed our operations primarily through the sale of preferred
equity securities and more recently through the sale of secured convertible
notes and warrants. In January 2000, we completed the initial public offering of
9,775,000 common shares (including 1,275,000 shares sold pursuant to the
exercise of the Underwriters' over-allotment option), which generated net
proceeds of $116.8 million.

Net cash used in operating activities was $9.0 million for the first
six months of fiscal 2000, and $5.5 million for the same period during fiscal
1999. Net cash used in operating activities increased in the first six months of
fiscal 2000 due to a $3.2 million increase in trade receivables on higher net
revenues during the period.

Net cash used in investing activities was $2.0 million for the first
six months of fiscal 2000 and $0.7 million for the same period in the prior
year. The increase was primarily attributable to higher levels of capital
equipment purchased during the first six months of fiscal 2000.

Net cash provided by financing activities was $39.9 million for the
first six months of fiscal 2000 and $1.3 million for the same period during
fiscal 1999. In the first six months of fiscal 2000, our financing activities
primarily consisted of the issuance of 5.0 million preferred shares for $38.2
million of net proceeds. These preferred shares converted into common shares on
a one-to-one basis in conjunction with the January 2000 initial public offering.

On September 10, 1999 we completed an offering of 1,715,715 shares of
H-1 preferred shares and issued warrants to purchase an aggregate of 240,000
shares of common stock at $1 per share to a group of investors in exchange for
$11,244,000, net of financing costs of $766,000. The warrants, valued at
$1,340,000, were exercised on our initial public offering for 240,000 shares of
common stock. The sale of Series H-1 preferred stock resulted in the automatic
conversion of our convertible notes and interest into 1,872,362 shares of Series
H-1 preferred stock, and the issuance of warrants to purchase 253,874 shares of
common stock at $1 per share. The Series H-1 preferred shares converted on a
one-to-one basis, and the warrants were exercised, on our initial public
offering.

16
<PAGE>

In September 1999 we issued a warrant to purchase 615,000 common shares
at an exercise price of $1 per share to Intasys Corp. and received a warrant to
purchase 225,225 shares of Intasys common shares at $3.3125 per share, expiring
in August 2002. Intasys exercised the warrant on our initial public offering.

In November 1999, we completed an offering of 1,526,663 Series I-1
preferred shares to Alcatel in exchange for $12,013,304, net of financing costs
of $200,000. The Series I-1 converted on a one-to-one basis on our initial
public offering. In connection with the sale of Series I-1 preferred shares, we
entered into a purchase and distribution agreement wherein Alcatel will market
our wireless office network products through their enterprise solutions
division.

In December 1999, we sold 2,000,000 Series I-1 preferred shares to
Holodeck, an affiliate of Hutchison Telecommunications, for $16 million on
similar terms as the November 1999 sale of shares to Alcatel. The Series I-1
preferred shares converted on a one-to-one basis on our initial public offering.

In the first six months of fiscal 1999, our financing activities
consisted primarily of issuance of $1.4 million in convertible notes and
warrants.

Although we had no material commitments for capital expenditures as of
December 31, 1999, management anticipates continuing increases in our capital
expenditures and working capital requirements consistent with our anticipated
growth in operations. Our capital requirements depend on numerous factors,
including market acceptance of our products, the resources we allocate to the
continuing development of new products, marketing and selling of our products
and other factors. We currently anticipate that we will continue to experience
growth in our operating expenses for the foreseeable future and that operating
expenses will be a material use of our cash resources.

RISK FACTORS

Set forth below and elsewhere in this Form 10-Q and in the other
documents that we file with the Securities and Exchange Commission are risks and
uncertainties that could cause actual results to differ materially from the
results contemplated by the forward-looking statements contained in this
quarterly report. Investing in our common shares involves a high degree of risk.
If any of the following risks occur, the market price of our common shares could
decline and you could lose all or part of your investment.

BECAUSE WE HAVE A LIMITED OPERATING HISTORY, WE CANNOT BE SURE THAT WE CAN
SUCCESSFULLY EXECUTE OUR BUSINESS STRATEGY.

We did not record revenue from our first product sale until May 1997.
We have a limited history of generating significant revenues. Many of our
products have only recently been introduced and many of our customers are
testing our products for incorporation into live networks. Therefore, you have
limited historical financial data and operating results with which to evaluate
our business and our prospects. You must consider our prospects in light of the
early stage of our business in a new and rapidly evolving market. Our limited
operating history may make it difficult for you to assess, based on historical
information, whether we can successfully execute our business strategy. If we
are unable to successfully execute our business strategy, we would likely not
achieve anticipated levels of revenue growth. In this event, we would be unable
to achieve profitability or build a sustainable business.

17
<PAGE>

WE HAVE A HISTORY OF LOSSES, EXPECT FUTURE LOSSES AND MAY NEVER ACHIEVE OR
SUSTAIN PROFITABILITY.

As of December 31, 1999, we had an accumulated deficit of $128.3
million. We incurred net losses of approximately $18.6 million and $10.8
million in the six months ended December 31, 1999 and 1998, respectively. We
expect to continue to incur net losses and these losses may be substantial.
Furthermore, we expect to generate significant negative cash flow in the
future. We will need to generate substantially higher revenues to achieve and
sustain profitability and positive cash flow. Our ability to generate future
revenues and achieve profitability will depend on a number of factors, many
of which are beyond our control. These factors include:

- the rate of market acceptance of compact mobile wireless
systems;

- our ability to compete successfully against much larger GSM
communications equipment providers; and

- our ability to continue to expand our customer base.

Due to these factors, as well as other factors described in this risk
factors section, we may be unable to achieve or sustain profitability. If we are
unable to achieve or sustain profitability, we will be unable to build a
sustainable business. In this event, our share price and the value of your
investment would likely decline.

OUR QUARTERLY OPERATING RESULTS ARE LIKELY TO FLUCTUATE SIGNIFICANTLY AND MAY
FAIL TO MEET THE EXPECTATIONS OF SECURITIES ANALYSTS AND INVESTORS, WHICH MAY
CAUSE OUR SHARE PRICE TO DECLINE.

Our quarterly operating results have fluctuated significantly in the
past and are likely to do so in the future. If our operating results do not meet
the expectations of securities analysts and investors, our share price is likely
to decline. The many factors that could cause our quarterly results to fluctuate
include:

- any delay in our introduction of new products or product
enhancements;

- the size and timing of customer orders and our product
shipments, which have typically consisted of a relatively
small number of units of wireless network systems at the end
of each quarter;

- the mix of products sold because our various products generate
different gross margins;

- any delay in shipments caused by component shortages or other
manufacturing problems, extended product testing or regulatory
issues;

- the timing of orders from and shipments to major customers,
including possible cancellation of orders and failure of major
customers to meet applicable minimum purchase commitments;

- the loss of a major customer;

18
<PAGE>

- reductions in the selling prices of our products;

- cost pressures from shortages of skilled technical employees,
increased product development and engineering expenditures and
other factors; and

- customer responses to announcements of new products and
product enhancements by competitors and the entry of new
competitors into our market.

Due to these and other factors, our results of operations could
fluctuate substantially in the future, and quarterly comparisons may not be
reliable indicators of future performance. In addition, because many of our
expenses for personnel, facilities and equipment are relatively fixed in nature,
if revenues fail to meet our expectations, we may not be able to reduce expenses
correspondingly. As a result, we would experience greater than expected net
losses. If we experience greater than expected net losses, our share price and
the value of your investment would likely decline.

WE RELY ON A SMALL NUMBER OF CUSTOMERS FOR MOST OF OUR REVENUES, AND A DECREASE
IN REVENUES FROM THESE CUSTOMERS COULD SERIOUSLY HARM OUR BUSINESS.

A small number of customers have accounted for a significant portion of
our revenues to date. Net revenues from significant customers as a percentage of
our total net revenues in the six months ended December 31, 1999 and December
31, 1998 were as follows:

SIX MONTHS ENDED DECEMBER 31,
1999 1998
<S> <C> <C>
(UNAUDITED)
Nortel Networks................................................... 26% 55%
Hutchison Telecommunications (Hong Kong).......................... 25% 4%
HangZhou Topper Electric Corporation.............................. 17% 0%
ADC Telecommunications/Microcellular Systems, Ltd(1).............. 11% 31%
</TABLE>

(1) Microcellular Systems, Ltd. was created by a spin-off from ADC
Telecommunications in May 1999.

Nortel Networks is one of our principal shareholders, and a Nortel
Networks employee is a member of our board of directors. ADC Telecommunications
and the corporate parent of Hutchison Telecommunications are shareholders of
ours. Microcellular Systems, Ltd. was created by a spin-off from ADC
Telecommunications in May 1999.

We expect that the majority of our revenues will continue to depend on
sales to a small number of customers. If any key customers experience a downturn
in their business or shift their purchases to our competitors, our revenues and
operating results could decline due to the reduction in sales.

We expect that for the foreseeable future a significant portion of our
net revenues will be derived from sales to Nortel Networks and Alcatel. If our
revenues, including those expected from Nortel Networks and Alcatel under our
purchase and distribution agreements, are lower than expected, we may not be
able to quickly reduce expenses because many of our expenses are fixed in the
near term. Nortel Networks and Alcatel have minimum purchase commitments under
their respective agreements. We rely on these commitments in making our
manufacturing commitments each quarter. We have also committed to Nortel
Networks and Alcatel that we will maintain quality, delivery, performance and
design standards for our systems. As a result, we bear the risk of carrying
excess inventory if Nortel Networks and Alcatel fail to meet their commitments
or if we

19
<PAGE>

fail to meet ours. From time to time, we have renegotiated minimum quarterly
commitments with Nortel Networks, including in the three months ending September
30, 1999. We cannot assure you that these minimum commitments will be met or
that they will not be renegotiated in the future. Failure of Nortel Networks or
Alcatel to meet minimum purchase commitments could cause our sales, revenues and
operating results to decline.

WE CURRENTLY DEPEND ON TWO CONTRACT MANUFACTURERS FOR MOST OF OUR PRODUCTS AND
PLAN TO USE ONLY A SINGLE CONTRACT MANUFACTURER IN THE FUTURE AND THIS
TRANSITION COULD CAUSE DISRUPTIONS IN OUR BUSINESS.

We depend on two contract manufacturers for most of our products. We do
not have long-term supply contracts with our contract manufacturers, and they
are not obligated to supply us with products for any specific period, in any
specific quantity or at any specific price, except as may be provided in a
particular purchase order. None of our products are manufactured by more than
one supplier, and we do not expect this to change for the foreseeable future.

We plan to consolidate the manufacture of our products with one of our
existing contract manufacturers by the middle of calendar year 2000. We may lose
revenue and damage our customer relationships if we do not manage this
consolidation effectively.

There are risks associated with our dependence on contract
manufacturers, including the contract manufacturer's control of capacity
allocation, labor relations, production quality and other aspects of the
manufacturing process. If we are unable to obtain our products from
manufacturers on schedule, revenues from the sale of those products may be
delayed or lost, and our reputation, relationship with customers and our
business could be harmed. In addition, in the event that a contract manufacturer
must be replaced, the disruption to our business and the expense associated with
obtaining and qualifying a new contract manufacturer could be substantial. If
problems with our contract manufacturers cause us to miss customer delivery
schedules or result in unforeseen product quality problems, we may lose
customers. As a result, our sales, revenues and our future growth prospects
would all likely decline.

BECAUSE SOME OF OUR KEY COMPONENTS COME FROM A SINGLE SOURCE, OR REQUIRE LONG
LEAD TIMES, WE COULD EXPERIENCE UNEXPECTED INTERRUPTIONS, WHICH COULD CAUSE OUR
OPERATING RESULTS TO SUFFER.

We believe that a number of our suppliers are sole sources for key
components. These key components are complex and difficult to manufacture and
require long lead times. In the event of a reduction or interruption of supply,
or a degradation in quality, as many as six months could be required before we
would begin receiving adequate supplies from other suppliers. Supply
interruptions could delay product shipments, causing our sales, revenues and
operating results to decline.

WE DO NOT TYPICALLY HAVE A SALES BACKLOG AND THEREFORE MAY INCUR EXPENSES FOR
EXCESS INVENTORY OR BE UNABLE TO MEET CUSTOMER REQUIREMENTS.

We do not have a significant backlog because our customers typically
give us firm purchase orders with short lead times before requested shipment.
However, our contract manufacturers require commitments from us so that they can
allocate capacity and be assured of having adequate components and supplies from
third parties. Failure by us to accurately estimate product demand could cause
us to incur expenses related to excess inventory or prohibit us from meeting
customer requirements.

20
<PAGE>

OUR PRODUCTS ARE COMPLEX AND MAY HAVE ERRORS OR DEFECTS THAT ARE DETECTED ONLY
AFTER DEPLOYMENT IN COMPLEX NETWORKS, WHICH MAY HARM OUR BUSINESS.

Our products are highly complex and are designed to be deployed in
complex networks. Although our products are tested during manufacturing and
prior to deployment, they can only be fully tested when deployed in networks
with high-call volume. Consequently, our customers may discover errors after the
products have been fully deployed. If we are unable to fix errors or other
problems that may be identified in full deployment, we could experience:

- costs associated with the remediation of any problems;

- loss of or delay in revenues;

- loss of customers;

- failure to achieve market acceptance and loss of market share;

- diversion of deployment resources;

- increased service and warranty costs;

- legal actions by our customers; and

- increased insurance costs.

In addition, our products often are integrated with other network
components. There may be incompatibilities between these components and our
products that could significantly harm the service provider or its subscribers.
Product problems in the field could require us to incur costs to remedy the
problems and subject us to liability for damages caused by the problems. These
problems could also harm our reputation and competitive position in the
industry.

WE MAY EXPERIENCE DIFFICULTIES IN THE INTRODUCTION OF NEW OR ENHANCED PRODUCTS
THAT COULD RESULT IN SIGNIFICANT, UNEXPECTED EXPENSES OR DELAY THEIR LAUNCH,
WHICH WOULD HARM OUR BUSINESS.

The development of new or enhanced products is a complex and uncertain
process. We may experience design, manufacturing, marketing and other
difficulties that could delay or prevent our development, introduction or
marketing of new products or product enhancements. We must also effectively
manage the transition from old products to new or enhanced products. In
particular, we are currently developing a system providing voice communication
over the Internet for commercial release in fiscal year 2000. We cannot assure
you that we will be able to develop, introduce or manage this or any other new
products or product enhancements in a timely manner or at all. Failure to
develop new products or product enhancements in a timely manner would
substantially decrease market acceptance and sales of our products.

FAILURE TO COMPLY WITH REGULATIONS AFFECTING THE TELECOMMUNICATIONS INDUSTRY
COULD SERIOUSLY HARM OUR BUSINESS AND RESULTS OF OPERATIONS.

Our failure to comply with government regulations relating to the
telecommunications industry in countries where our products are deployed and
failure to comply with any changes to

21
<PAGE>

those regulations could seriously harm our business and results of operations.
We have not completed all activities necessary to comply with existing
regulations and requirements in some of the countries in which we intend to sell
our products. Compliance with the regulations of numerous countries could be
costly and require delays in deployments.

OUR FAILURE TO COMPLY WITH EVOLVING INDUSTRY STANDARDS COULD DELAY OUR
INTRODUCTION OF NEW PRODUCTS.

An international consortium of standards bodies is working to establish
the specifications of the third generation wireless standard and its
interoperability with existing standards. Any failure of our products to comply
could delay their introduction and require costly and time consuming engineering
changes. After the third generation standard is adopted, any delays in our
introduction of third generation products could impair our ability to grow
revenues in the future. As a result, we will be unable to achieve or sustain
profitability if we do not comply with evolving industry standards.

OUR MARKET OPPORTUNITY COULD BE SIGNIFICANTLY DIMINISHED IN THE EVENT THAT GSM
OR ANY SUBSEQUENT GSM-BASED STANDARDS DO NOT CONTINUE TO BE OR ARE NOT WIDELY
ADOPTED.

Our products are designed to utilize only the Global System for Mobile
Communications, or GSM, standard. There are other competing standards including
code division multiple access, or CDMA, and time division multiple access, or
TDMA. We currently do not have plans to offer products that utilize these
standards. In the event that GSM or any GSM-based standards do not continue to
be or are not broadly adopted, our market opportunity could be significantly
limited, which would seriously harm our business.

WE HAVE A LONG SALES CYCLE, WHICH COULD CONTRIBUTE TO FLUCTUATIONS IN OUR
RESULTS OF OPERATIONS AND SHARE PRICE.

Our sales cycle is typically long and unpredictable, making it
difficult to plan our business. The long sales cycle also requires us to invest
resources in a possible transaction that may not be recovered if we do not
successfully conclude the transaction. Factors that affect the length of our
sales cycle include:

- time required for testing and evaluation of our products
before they are deployed in a network;

- size of the deployment;

- complexity of the customer's network environment; and

- the degree of system configuration necessary to deploy our
products.

In addition, the emerging and evolving nature of the market for the
systems we sell may lead prospective customers to postpone their purchasing
decisions. General concerns regarding year 2000 compliance may further delay
purchase decisions by prospective customers. Our long and unpredictable sales
cycle can result in delayed revenues, difficulty in matching revenues with
expenses and increased expenditures, which together may contribute to declines
in our results of operations and our share price.

22
<PAGE>

INTENSE COMPETITION IN THE GSM WIRELESS MARKET COULD PREVENT US FROM INCREASING
OR SUSTAINING REVENUES OR ACHIEVING OR SUSTAINING PROFITABILITY.

The GSM wireless market is rapidly evolving and highly competitive. We
cannot assure you that we will have the financial resources, technical expertise
or marketing, manufacturing, distribution and support capabilities to compete
successfully in the future. We expect that competition in each of our markets
will increase in the future. We currently compete against GSM communications
equipment providers such as Ericsson, Lucent, Motorola, Nokia and Siemens. In
some market applications, we also compete with our customers Alcatel and Nortel
Networks. All of the major GSM communications equipment providers have broad
product lines that include at least partial GSM solutions that address our
target markets.

Many of our competitors and potential competitors have substantially
greater name recognition and technical, financial and sales and marketing
resources than we have. Such competitors may undertake more extensive marketing
campaigns, adopt more aggressive pricing policies and devote substantially more
resources to developing new products than we can. Trends toward increased
consolidation in the telecommunications industry may increase the size and
resources of some of our current competitors and could affect some of our
current relationships.

Increased competition is likely to result in price reductions, shorter
product life cycles, reduced gross margins, longer sales cycles and loss of
market share, any of which would seriously harm our business. We cannot assure
you that we will be able to compete successfully against current or future
competitors. Competitive pressures we face may cause our revenues or growth to
decline and may therefore seriously harm our business and results of operations.

IF WE ARE UNABLE TO MANAGE OUR GLOBAL OPERATIONS EFFECTIVELY, OUR BUSINESS WOULD
BE SERIOUSLY HARMED.

Substantially all of our revenue to date has been derived from systems
intended for installation outside of the United States. In addition to the
regulatory issues discussed previously, our operations are subject to the
following risks and uncertainties:

- legal uncertainties regarding liability, tariffs and other
trade barriers;

- greater difficulty in accounts receivable collection and
longer collection periods;

- costs of staffing and managing operations in several
countries;

- difficulties in protecting intellectual property rights;

- changes in currency exchange rates which may make our U.S.
dollar-denominated products less competitive in global
markets;

- the impact of recessions in global economies; and

- political and economic instability.

We expect to establish manufacturing operations in China during
calendar year 2000 which may subject us to all of the risks listed above,
particularly the difficulty of protecting intellectual property rights.

23
<PAGE>

WE HAVE EXPERIENCED AN INCREASE IN SALES TO COMPANIES IN THE PEOPLE'S REPUBLIC
OF CHINA. FUTURE SALES IN CHINA WILL BE SUBJECT TO ECONOMIC AND POLITICAL RISK.

In the six months ended December 31, 1999, sales to HangZhou Topper
Electric, which is located in the People's Republic of China, accounted for 17%
of our revenues. Sales in China pose significant additional risks, which
include:

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

- difficulty in collecting revenues and risks related to
fluctuations in currency exchange rates, particularly when
sales are denominated in the local currency rather than in
U.S. dollars;

- changes in U.S. foreign trade policy towards China which may
restrict our ability to export products to or make sales in
China, and similar changes in China's policy regarding the
U.S.; and

- changes in government regulation affecting companies doing
business in China, either through export sales or local
manufacturing operations.

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

IF WE FAIL TO IMPROVE OUR OPERATIONAL SYSTEMS AND CONTROLS TO MANAGE FUTURE
GROWTH, OUR BUSINESS COULD BE SERIOUSLY HARMED.

We plan to continue to expand our operations significantly to pursue
existing and potential market opportunities. This growth places significant
demands on our management and our operational resources. In order to manage
growth effectively, we must implement and improve our operational systems,
procedures and controls on a timely basis. In addition, we expect that we may
need to expand our principal U.S. facilities in the next six to 12 months and we
have moved our offices to a different location. Additional expansion could be
disruptive to our operations and could delay production or development
activities.

IF WE ARE UNABLE TO HIRE OR RETAIN KEY PERSONNEL, WE MIGHT NOT BE ABLE TO
OPERATE OUR BUSINESS SUCCESSFULLY.

Our business is highly dependent on our ability to attract, retain and
motivate qualified technical and management personnel. Competition is intense
for qualified personnel in our industry and in Northern California, where most
of our engineering personnel are located, and we may not be successful in
attracting and retaining these personnel. We do not have non-compete agreements
with any of our key employees. We currently do not maintain key person life
insurance on any of our key executives. Our success also depends upon the
continuing contributions of our key management and our research, product
development, sales and marketing and manufacturing personnel. Many of these
would be difficult to replace, in particular Dr. Priscilla Lu, our Chief
Executive Officer and Chairman of the Board, Ian Sugarbroad, our President and
Chief Operating Officer and Thomas Hubbs, our Executive Vice President and Chief
Financial Officer.

24
<PAGE>

OUR INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS MAY BE INSUFFICIENT TO PROTECT
OUR COMPETITIVE POSITION.

We cannot assure you that the protection offered by our U.S. patents
will be sufficient or that any of our pending U.S. or foreign patent
applications will result in the issuance of patents. In addition, competitors in
the United States and other countries, many of whom have substantially greater
resources, may apply for and obtain patents that will prevent or interfere with
our ability to make and sell our products in the U.S. and/or abroad.
Unauthorized parties may attempt to design around our patents, copy or otherwise
obtain and use our products. We cannot be certain that the steps we have taken
will prevent unauthorized use of our technology, particularly in countries where
the laws may not protect our proprietary rights as fully as in the United
States. Failure to protect our proprietary rights could worsen our competitive
position and therefore cause our revenues and operating results to decline.

On June 28, 1999, we filed a complaint against JetCell Corporation in
the United States District Court for the Northern District of California
alleging misappropriation of trade secrets patent infringement. JetCell has
filed a series of counterclaims against us, which include allegations of unfair
trade practices, unfair competition, defamation, patent misuse and patent
invalidity. We are unable to predict the outcome of this litigation and do not
expect it to be resolved in the near future. The legal proceedings may be
distracting to our management and expensive and the outcome could be adverse to
us. An adverse outcome could have a material adverse affect on our financial
position. If the outcome is adverse to us, we could also experience more
competition or could be required to license our technology, either of which
could harm our business and financial results, and have a material adverse
affect on our financial position.

CLAIMS THAT WE INFRINGE THIRD-PARTY INTELLECTUAL PROPERTY RIGHTS COULD RESULT IN
SIGNIFICANT EXPENSES AND RESTRICTIONS ON OUR ABILITY TO SELL OUR PRODUCTS IN
PARTICULAR MARKETS.

From time to time, third parties may assert patent, copyright,
trademark and other intellectual property rights to technologies that are
important to our business. Any claims could result in costly litigation, divert
the efforts of our technical and management personnel, cause product shipment
delays, require us to enter into royalty or licensing agreements or prevent us
from making or selling certain products. Any of these could seriously harm our
operating results. Royalty or licensing agreements, if available, may not be
available on commercially reasonable terms, if at all. In addition, in some of
our sales agreements, we agree to indemnify our customers for any expenses or
liabilities resulting from claimed infringements of patents, trademarks or
copyrights of third parties. Costs associated with these indemnification
obligations could be significant and could cause our operating results and stock
price to decline.

WE MAY NOT BE ABLE TO LICENSE NECESSARY THIRD-PARTY TECHNOLOGY OR IT MAY BE
EXPENSIVE TO DO SO.

From time to time, we may be required to license technology from third
parties to develop new products or product enhancements. We cannot assure you
that third-party licenses will be available to us on commercially reasonable
terms, if at all. The inability to obtain any third-party license required to
develop new products and product enhancements could require us to obtain
substitute technology of lower quality or performance standards or at greater
cost which could seriously harm our competitive position, revenues and growth
prospects.

25
<PAGE>

There are a number of general GSM patents held by different companies,
which may impact our technology. We have not received any notice from any third
parties that our proprietary assets conflict with or infringe upon the rights of
others.

IF WE, OUR SUPPLIERS OR OUR CUSTOMERS FAIL TO BE YEAR 2000 COMPLIANT, OUR
BUSINESS COULD BE SEVERELY DISRUPTED.

On and after January 1, 2000, we have experienced no material
disruptions of our operations as a result of year 2000 problems. In addition, we
are not aware of any difficulties with our products or services, nor have we
experienced any material problems related to products or services provided by
critical external parties for our use. We have no reason to believe that year
2000 failures will seriously affect us in the future. However, given the
possibility of latent year 2000 defects, we cannot yet be sure that we will not
experience year 2000 failures or be affected by third-party year 2000 failures.
We will continue to monitor the operations of our computers and
micro-processor-based devices for any Year 2000 related problems

The risk that software or hardware may inaccurately process dates
beginning in the year 2000 and beyond presents several potential problems for
our business. In particular, we are subject to the following:

- costs associated with the failure of our products to be year
2000 compliant, including potential warranty or other claims
from our customers, which may result in significant expenses
to us;

- shutdowns or slowdowns of our business as a result of a
failure of our internal management systems, which could
disrupt our business operations;

- interruption of product or component supplies or a reduction
in product quality as a result of the failure of systems used
by our contract manufacturers or suppliers; and

- reductions or deferrals in sales activities as a result of
year 2000 compliance problems of our customers.

Our products may contain undetected errors or defects associated with
year 2000 date functions. Known or unknown errors or defects in our products
could result in delay or loss of revenue, diversion of development resources,
damage to our reputation, product liability claims or increased service and
warranty costs, any of which could significantly harm our business and operating
results. Some industry analysts have predicted significant litigation regarding
year 2000 compliance issues. It is uncertain whether or to what extent we may be
affected by any litigation.

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

FOREIGN EXCHANGE

Our financial market risk includes risks associated with international
operations and related foreign currencies. We anticipate that international
sales will continue to account for a significant portion of our consolidated
revenue. Our international sales are in U.S. dollars and therefore are not
subject to foreign currency exchange risk. Expenses of our international
operations are denominated in each country's local currency and therefore are
subject to foreign currency exchange risk. Through December 31, 1999, we have
not experienced any significant negative impact on our

26
<PAGE>

operations as a result of fluctuations in foreign currency exchange rates. We do
not engage in any hedging activity in connection with our international business
or foreign currency risk.

INTEREST RATES

We invest our cash in financial instruments, including commercial
paper, and repurchase agreements, and in money market funds. These investments
are denominated in U.S. dollars. Cash balances in foreign currencies overseas
are operating balances and are only invested in short term deposits of the local
operating bank.

Investments in both fixed rate and floating rate interest earning
instruments carry a degree of interest rate risk. Fixed rate securities may have
their market value adversely impacted because of a rise in interest rates, while
floating rate securities may produce less income than expected if interest rates
fall. Due in part to these factors, our future investment income may fall short
of expectations because of changes in interest rates. We may suffer losses in
principal if forced to sell securities, which have seen a decline in market
value because of changes in interest rates. We are primarily vulnerable to
changes in short-term U.S. prime interest rates.

No investment securities have maturities exceeding 90 days as of
December 31, 1999. Our investments are made in accordance with an investment
policy approved by the Board of Directors.

27
<PAGE>

PART II: OTHER INFORMATION

ITEM 1. Legal Proceedings

On June 28, 1999, we filed a complaint against JetCell Corporation in
the United States District Court for the Northern District of California
(interWAVE Communications International Ltd., v. JetCell Corporation, Case No.
C99-3125) alleging misappropriation of trade secrets and infringement of United
States Patent Nos. 5,734,979 and 5,818,824. One of the founders of JetCell
Corporation is a former employee of interWAVE and JetCell also employs another
former employee of interWAVE. The complaint seeks injunctive relief and damages.
On July 19, 1999, JetCell filed an answer to the complaint and a series of
counterclaims against us. The answer denied the allegations made in the
complaint and the counterclaims included allegations against us of unfair trade
practices, unfair competition, defamation, patent misuse and patent invalidity.
The answer and counterclaims seek injunctive relief, damages, invalidation of
our patents and a dismissal of the complaint. On August 9, 1999, we filed an
answer to JetCell's counterclaims denying the allegations made in the
counterclaims. We are unable to predict the outcome of the litigation and do not
expect it to be resolved in the near future. However, if we are unable to settle
these proceedings in a satisfactory manner, the legal proceedings may be time
consuming and expensive and the outcome could be adverse to us. An adverse
outcome could have a material adverse affect on our financial position. If the
outcome is adverse to us, we would also experience more competition in our
markets and may be required to license technology required for our products,
either of which could harm our business and financial results, and have a
material adverse affect on our business and results of operations.

We may from time to time become a party to various legal proceedings
arising in the ordinary course of our business. However, other than as described
above, we are not currently involved in any material legal proceedings.

ITEM 2. Changes in Securities and Use of Proceeds

(a) CONVERSION OF PREFERRED STOCK.

(b) RECENT SALES OF UNREGISTERED SECURITIES.

The following is a summary of transactions by the Company during the
quarter ended December 31, 1999 involving sales of the Company's securities that
were not registered under the Securities Act:

- In November and December 1999, we sold a total of 3,526,663
Series I1 preferred shares at a price of $8.00 per share to
Alcatel USA, Inc. and Holodeck Limited for an aggregate
purchase price of $28,013,304 net of financing costs of
$200,000

28
<PAGE>

Each Series I1 preferred share was convertible into one common
share and all Series I1 preferred shares converted on our
initial public offering. These shares were exempt from
registration under Rule 506 of the Securities Act since the
sale was to a corporation, which is defined as an accredited
investor under Rule 501(a)(3) of the Securities Act.

Our registration statement on Form F-1 for our initial public offering
became effective on January 28, 2000. In the offering, we sold an aggregate
9,775,000 shares of our common stock (including 1,275,000 shares sold pursuant
to the exercise of the Underwriters' over-allotment option) at an initial public
offering price of $13.00 per share ("Offering"). Net proceeds from the offering
totaled approximately $116.8 million, net of offering costs of approximately
$1.35 million.

We intend to use the proceeds of the offering primarily for additional
working capital and other general corporate purposes, including increased
research and development, sales and marketing, and general and administrative
expenditures.

ITEM 3. Defaults Upon Senior Securities

None

ITEM 4. Submission of Matters to a Vote of Security Holders

None

ITEM 5. Other Information

None.

ITEM 6. Exhibits and Reports on Form 8-K

(a) EXHIBITS.

Exhibit 10. Material Contracts.

10.20 ** Distribution and OEM agreement between interWAVE Communications
International, Ltd. and Alcatel, dated October 27, 1999

10.21 ** Lease between Tyco Electronics Corporation and interWAVE
Communications, Inc. dated November 24, 1999

10.21.1 Sublease between interWAVE Communications, Inc. and Alter Ego
Networks, dated January 24, 2000 with landlord's consent of
February 25, 2000

10.22 ** Base Station System Agreement by and between interWAVE
Communications International, Ltd. and Lanka Cellular Services
(Pvt) Limited, dated December 1999
- ---
** Incorporated by reference to the exhibit of the same number to
Registrant's registration statement on Form F-1 (SEC File No. 333-92967).

29
<PAGE>

F-1.

Exhibit 27. Financial Data Schedule

(b) REPORTS ON FORM 8-K. None.

SIGNATURE

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

March 9, 2000 interWAVE Communications International, Ltd.

By /s/ THOMAS W. HUBBS
-------------------
Thomas W. Hubbs
Executive Vice President
and Chief Financial Officer
(Principal Financial and
Accounting Officer)

<PAGE>

[LETTERHEAD]

- --------------------------------------------------------------------------------
S U B L E A S E
- --------------------------------------------------------------------------------

SUBLESSOR: interWave Communications, Inc., PREMISES: 656 Bair Island Road
a Delaware corporation 1st Floor (Suites 101,
103, 105, 106, 108)
2nd Floor (Suite 200) and
3rd Floor (Suites 302 &
304)
Redwood City, California
94063

SUBLESSEE: AlterEgo Networks, Inc., DATE: January 24, 2000
a California corporation

1. PARTIES:
This Sublease is made and entered into as of January 24, 2000, by and
between interWave Communications, Inc. ("Sublessor"), and AlterEgo
Networks, Inc. ("Sublessee") and Sublessor under this Sublease dated
January 8, 1999, between Marina Investments, Inc. as ("Landlord") and
Sublessor under this Sublease as ("Tenant") (the "Original Lease"), as
amended by that certain first amendment to Peninsula Marina and Office
Park office lease agreement dated February 15, 1999 (the "First
Amendment"). The Original Lease and First Amendment are hereinafter
collectively referred to as the "Master Lease". A copy of the Master
Lease is attached hereto as Exhibit "A" and incorporated herein by this
reference. Any capitalized term used herein shall have the same meaning
ascribed to it under the Master Lease, unless separately defined in this
Sublease.

2. PROVISIONS CONSTITUTING SUBLEASE:
2.1 This Sublease is subject to all of the terms and conditions of the
Master Lease. Sublessee hereby assumes and agrees to perform all
of the obligations of Tenant under the Master Lease to the extent
said obligations apply to the Subleased Premises and Sublessee's
use of the common areas, except as otherwise specifically set
forth herein. Sublessor hereby agrees to cause Landlord, under
the Master Lease, to perform all of the obligations of Landlord
thereunder to the extent said obligations apply to the Subleased
Premises and Sublessee's use of the Common Areas. Sublessee shall
not commit or permit to be committed by any person other than
persons employed by Sublessor, unless such person acted at the
direct request of Sublessee on the Subleased Premises or on any
other portion of the Project, any act or omission which would
result in a default by Tenant of any term or condition of the
Master Lease. Except to the extent waived or consented to in
writing by the other party or parties hereto who are affected
thereby, neither of the parties hereto will, by renegotiations of
the Master Lease, assignment, subletting, default or any other
voluntary action, avoid or seek to avoid the observance or
performance of the terms to be observed or performed hereunder by
such party but, will at all times, in good faith assist in
carrying out all the terms of this Sublease and in taking all such
action as may be necessary or appropriate to protect the rights of
the other party or parties hereto who are affected thereby against

Page 1 of 9

<PAGE>

impairment. Nothing contained in this Section 2.1 or elsewhere in
this Sublease shall prevent or prohibit Sublessor (a) from
exercising its right to terminate the Master Lease pursuant to the
terms thereof; provided, however, Sublessor obtains a direct lease
between Sublessee and Landlord, based on the terms and conditions
of this Sublease, or (b) from assigning its interest in this
Sublease or subletting the Premises, exclusive of the Subleased
Premises, to any other third party as long as the Sublease is in
full force and effect and the Sublessee is not in default
thereunder. Sublessor shall provide thirty (30) days prior
written notice to Sublessee in the event it elects to terminate is
Master Lease with Landlord.

Sublessor shall use its good faith best efforts to maintain the
Master Lease in full force and effect during the Sublease Term;
provided, however, that Sublessor shall not be liable to Sublessee
for any default or failure by Landlord or any earlier termination
of the Master Lease which is not due to the fault of the
Sublessor.

Whenever the provisions of the Master Lease incorporated as
provisions of this Sublease require the written consent of
Landlord, said provisions shall be construed to require the
written consent of both Landlord and Sublessor. Sublessee hereby
acknowledges that it has read and is familiar with the terms of
the Master Lease, and agrees that this Sublease is subordinate and
subject to the Master Lease and that any termination thereof may
likewise terminate this Sublease and any obligation whatsoever of
the Landlord to provide the Subleased Premises to Sublessee.

2.2 All of the terms and conditions contained in the Master Lease are
incorporated herein, except as specifically provided below, and
shall together with the terms and conditions specifically set
forth in this Sublease constitute the complete terms and
conditions of this Sublease. It being understood that wherever in
the Master Lease the word "Landlord" is used for purposes of this
Sublease, the word "Sublessor" shall be substituted; and wherever
the word "Tenant" appears, the word "Sublessee" shall be
substituted; and wherever the word "Premises" appears, for
purposes of this Sublease, such word shall refer only to the
extent of the premises sublet under this Sublease. In the event
of any conflict between this Sublease and the Master Lease, the
terms of this Sublease shall control.

The following paragraphs of the Master Lease SHALL NOT be included
in this Sublease: 1.6 - limited to Suites defined herein; 1.7;
1.10; 1.11; 1.13; 1.14 - Percentage is defined as 21.2%; 1.15 -the
base year is defined as 2000; 1.16 - amount of security defined
herein; 2.4; Article 3; Rent Schedule.

3. PREMISES:
Sublessor leases to Sublessee and Sublessee leases from Sublessor the
Subleased Premises upon all of the terms, covenants and conditions
contained in this Sublease. The Subleased Premises consist of
approximately 18,341 = rentable square feet, located at 656 Bair Island
(1st Floor - 7,325 sq. ft., 2nd

Page 2 of 9
<PAGE>

Floor - 7,583 sq. ft., and 3rd Floor - 3,433 sq. ft.), Redwood City, as
shown and described in Exhibit "B".

4. RENT:
Upon execution of this Agreement, Sublessee shall pay to Sublessor as
Rent for the Subleased Premises the sum of Fifty-Four Thousand One
Hundred Five and 95/100 Dollars ($54,105.95) representing the first
month's rent. The rent schedule shall be in accordance with the
following:

MONTHS AMOUNT PER SQUARE FOOT/FULL SERVICE
------ -----------------------------------
02/15/00 - 02/28/01 $2.95/sq. ft./full service ($54,105.95)
03/01/01 - 02/28/02 $3.04/sq. ft./full service ($55,756.64)
03/01/02 - 09/30/02 $3.13/sq. ft./full service ($57,429.34)

The rental amount shall be paid, without deductions, offset, prior
notice or demand on the first calendar day of each month during the
Sublease Term except as otherwise expressly provided for in Paragraph
7.1 hereof. If the commencement date or the termination date of the
Sublease occurs on a date other than the first day or the last day,
respectively, of a calendar month, then the Rent for such partial month
shall be prorated and the prorated Rent shall be payable on the second
month of the Sublease term or on the first day of the calendar month in
which the Sublease termination date occurs, respectively.

5. SECURITY DEPOSIT:
Upon execution of this Sublease, Sublessee shall pay to Sublessor a
Security Deposit equivalent to Three Hundred Thirty-Five Thousand and
00/100 Dollars ($335,000.00) as a non-interest bearing Security
Deposit. In addition to the foregoing, certain individuals have
guaranteed all of the obligations of Sublessee as more particularly
described in the Guaranty of Sublease executed by Richard Ling, Mike
Santer, Alexander Hern and Bryan Kennedy, dated of even date herewith.
If the Sublessee is not in default and has received equity in an amount
equal to or in excess of $5,000,000.00 in cash or cash equivalent, the
Guaranty of Sublease attached hereto shall be null and void effective
two (2) working days following Sublessor's receipt of Sublessee's bank
statement verifying such amount. In addition, if Sublessee is not then
in default, Sublessor shall credit the rental amount due for months 22,
23 & 24 of the Sublease Term from the Security Deposit held. The
remaining Security Deposit of One Hundred Sixty-Seven Thousand Seven
Hundred Thirty and 08/100 Dollars ($167,730.08) shall be held throughout
the balance of the Sublease Term. At the end of the Sublease Term, in
the event Sublessee has performed all of the terms and conditions of
this Sublease during the Sublease Term hereof, Sublessor shall return
to Sublessee, within ten (10) days after Sublessee has vacated the
Subleased Premises, the Security Deposit less any sums due and owing
to Sublessor.

Page 3 of 9
<PAGE>

6. RIGHTS OF ACCESS AND USE:
6.1 Use:
Sublessee shall use the Subleased Premises only for those
proposes permitted in the Master Lease, unless Sublessor and
Landlord consent in writing to other uses prior to the
commencement thereof.

7. SUBLEASE TERM:
7.1 Sublease Term:
The Sublease Term shall be for the period commencing on Tuesday,
February 22, 2000, (Sublease Commencement Date) or earlier, if
Sublessor can vacate earlier, and continuing through September
30, 2002. Notwithstanding the foregoing, Sublessor shall deliver
possession to Sublessee Suite 302, consisting of 518 square feet
on or before February 1, 2000 or within five (5) days of Sublease
execution by all parties, including Landlord, whichever is later.
Any occupation of the Subleased Premises prior to the
Commencement Date shall be subject to all the terms and
conditions of this Sublease and rent for any early entry shall be
billed and payable with the second month's rent. If Sublessor
can vacate earlier, Sublessor shall provide a five (5) business
day prior notification to Sublessee of availability and shall
define the new Commencement Date accordingly. In no event shall
the Sublease Term extend beyond the Term of the Master Lease.

Sublessor and Sublessee acknowledge Sublessee Commencement Date
for the Premises shall be a phase-in schedule as follows:

Suite 302: 518 sq ft. February 1, 2000 or five
(5) days following execution
of Sublease by all parties,
whichever is later.

Suite 106, 105
103 & 101: 4,067 sq.ft. February 22, 2000

Balance of Premises: 13,756 sq.ft. March 8, 2000
-------------
Total of Premises: 18,341 sq.ft.

If Sublessor fails to deliver possession of all of the Subleased
Premises on or before June 1, 2000, then Sublessee shall have the
right to terminate this Sublease upon thirty (30) days prior
written notice to Sublessor.

7.2 Inability to Deliver Possession:
In the event Sublessor is unable to deliver possession of the
Subleased Premises at the commencement of the term, Sublessor
shall not be liable for any damage caused thereby nor shall this
Sublease be void or voidable, but Sublessee shall not be liable
for Rent until such time as Sublessor offers to deliver
possession of the Subleased Premises to Sublessee, but the term
hereof shall not be extended by such delay. If

Page 4 of 9
<PAGE>

Sublessee, with Sublessor's consent, takes possession prior to
commencement of the term. Sublessee shall do so subject to all the
covenants and conditions hereof and shall pay Rent for the period ending
with commencement of the term at the same rental as that prescribed for
the first month of the term prorated at the rate of 1/30th thereof per
day.

8. TENANT IMPROVEMENTS:
A. Sublessor, at Sublessor's sole cost and according to building
standard, shall steam clean the carpets, touch-up paint where
needed, replace any damaged or stained ceiling tiles, clean all
heating, ventilation, and air-conditioning ("HVAC") vents and
returns and replace lights where needed. Notwithstanding the
above, Sublessee accepts the Premises "as is"; provided, however,
all lighting, HVAC, roofs, electrical and utility systems, to the
best of Sublessor's knowledge, are in good condition and repair as
of the Sublease Commencement Date.

B. Sublessee acknowledges there are supplemental HVAC units in three
locations in the Subleased Premises and such supplemental HVAC
units shall be in good condition and repair as of the Sublease
Commencement Date. If used, Sublessee shall be responsible for
the cost of use and maintenance as applicable and billed for the
cost thereof by the Landlord.

9. ASSIGNMENT/SUBLEASE:
Sublessor grants Sublessee the right to sublet/assign the Premises
subject to Sublessor's approval, which approval shall not be unreasonably
withheld, conditioned or delayed, and according to the terms of the
Master Lease.

10. PARKING:
Landlord shall provide on-site parking as defined in the underlying
Master Lease.

11. NOTICES:
All notices, demands, consents and approvals which may or are required to
be given by either party to the other hereunder shall be given in the
manner provided in the Master Lease at the addresses shown below or
addressed to such other address or addresses as either Sublessor or
Sublessee may from time to time designate to the other in writing.
Sublessor shall notify Sublessee and the Guarantors, if any, of any Event
of Default under the Master Lease, or of any other event of which
Sublessor has actual knowledge which will impair Sublessee's ability to
conduct its normal business at the Subleased Premises, as soon as
reasonably practicable following Sublessor's receipt of notice from
Landlord of an Event of Default (but in no event later than seven (7)
days after receipt) or actual knowledge of such impairment. In an Event
of Default, Sublessee may elect to provide written notice of such default
to Landlord, in addition to the notice of default it shall provide to
Sublessor.

Page 5 of 9

<PAGE>

SUBLESSOR'S SUBLESSEE'S
ADDRESS: Interwave Communications, Inc. ADDRESS: AlterEgo Networks,
312 Constitution Drive Inc.
Menlo Park, CA 94025 Address herein

Attn: Michelle Hogan Attn: Richard Ling

PHONE NUMBER (650) 482-2109 PHONE NUMBER (650) 366-4603
FAX NUMBER: (650) 261-6220 FAX NUMBER: (208) 293-2181

PRIOR TO
COMMENCEMENT: Guarantor Address

12. BROKER FEE:
Upon execution of the Sublease, Sublessor shall pay Cornish & Carey
Commercial, a licensed real estate broker, fees set forth in a separate
agreement between Sublessor and Broker for brokerage services rendered by
Broker to Sublessor in these transactions. Sublessor shall defend,
indemnify and hold Sublessee harmless from and against any and all
claims, demands, costs, expenses or liabilities related to or connected
with Broker or any other broker's or finder's fee, commission or payment
of any kind asserted by any person or entity.

Sublessee shall defend, indemnify and hold Sublessor harmless from and
against any and all claims, demands, costs, expenses or liabilities
related to or connected with Broker or any other broker's or finder's
fee, commission or payment of any kind asserted by any person or entity.

13. BROKER REPRESENTATION:
The only Brokers involved in this Sublease are Cornish & Carey Commercial
representing Sublessor and Cornish & Carey Commercial representing
Sublessee. Cornish & Carey Commercial represents both parties, for which
Sublessor and Sublessee consent to such dual representation and waive any
conflict of interest arising out of such dual agency.

14. TOXIC CONTAMINATION DISCLOSURE:
Sublessor and Sublessee each acknowledge that they have been advised that
numerous federal, state, and/or local laws, ordinances and regulations
(Laws) affect the existence and removal, storage, disposal, leakage of
and contamination by materials designated as hazardous or toxic
("Toxics"). Many materials, some utilized in everyday business
activities and property maintenance, are designated as hazardous or
toxic.

Some of the Laws require that Toxics be removed or cleaned up by
landowners, future landowners or former landowners without regard to
whether the party required to pay for "clean up" caused the
contamination, owned the property at the time the contamination occurred
or even knew about the contamination. Some items, such as asbestos or
PCBs, which were legal when installed, now are classified as Toxics and
are subject to removal requirements. Civil lawsuits for damages
resulting from Toxics may be filed by third parties in certain
circumstances. Notwithstanding the foregoing, under no circumstances
shall Sublessee be liable for any claim, demand, cost expenses or
liabilities

Page 6 of 9
<PAGE>

related to or connected with the environmental condition of the Project
(collectively "Environmental Claims"), including the Subleased
Premises, that existed prior to the Sublease Commencement Date.
Sublessor, limited to Sublessor's activities, shall indemnify and hold
Sublessee harmless from any Environmental Claim relating to the
environmental conditions of the Project, including but not limited to
the Subleased Premises, that existed as of the Sublease Commencement
Date.

Sublessor and Sublessee each acknowledge that Broker has no specific
expertise with respect to environmental assessment or physical condition
of the Subleased Premises, including, but not limited to, matters
relating to: (i) problems which may be posed by the presence or disposal
of hazardous or toxic substances on or from the Subleased Premises,
(ii) problems which may be posed by the Subleased Premises being within
the Special Studies Zone as designated under the Alquist-Priolo Special
Studies Zone Act (Earthquake Zones), Section 2621 - 2630, inclusive of
California Public Resources Code, and (iii) problems which may be posed
by the Subleased Premises being within a HUD Flood Zone as set forth in
the U.S. Department of Housing and Urban Development "Special Flood Zone
Area Maps", as applicable.

Sublessor and Sublessee each acknowledge that Broker has not made an
independent investigation or determination of the physical or
environmental condition of the Subleased Premises, including, but not
limited to, the existence or nonexistence of any underground tanks,
sumps, piping, toxic or hazardous substances on the Subleased Premises.
Sublessee agrees that it will rely solely upon its own investigation
and/or the investigation of professionals retained by it or Sublessor,
and neither Sublessor nor Sublessee shall rely upon Broker to determine
the physical and environmental condition of the Subleased Premises or
to determine whether, to what extent or in what manner, such condition
must be disclosed to potential sublessees, assignees, purchasers or
other interested parties.

15. RENT ABATEMENT:
In the event Sublessor, pursuant to the terms of the Master Lease, is
entitled to and receives any rent abatement, then to the extent such
rent abatement affects the Subleased Premises, Sublessee shall be
entitled to a rent abatement in an amount that the usable area of the
Subleased premises bears to the total useable area of the Master Lease,
and only to the extent any such abatement applies to the Sublease Term.

16. LANDLORD'S OBLIGATIONS:
It shall be the obligation of Landlord to (i) provide all services to be
provided by Landlord to Sublessor under the terms of the Master Lease
and (ii) to satisfy all obligations and covenants of Landlord made to
Sublessor in the Master Lease. Sublessee acknowledges the Sublessor shall
be under no obligation to provide such services or satisfy any such
obligation to provide such services or satisfy any such obligations or
covenants; provided, however, Sublessor, upon written notice by
Sublessee, shall diligently attempt to enforce all obligations of
Landlord under the Master Lease for the benefit of Sublessee.

17 LANDLORD'S WRITTEN CONSENT:
This Sublease is conditioned upon Landlord's written consent to this
Sublease. If Landlord's consent has not been obtained prior to the
Sublease Commencement Date, the Sublease Commencement Date shall be
postponed for each day of delay until such consent is obtained, up to
March 15, 2000. If

Page 7 of 9
<PAGE>

Landlord refuses to consent to this Sublease, or if the consent period
expires, this Sublease shall terminate and neither party shall have any
continuing obligation to the other with respect to the Subleased
Premises, and any funds previously deposited with Sublessor or paid to
Sublessor shall be returned to Sublessee.

SUBLESSOR: INTERWAVE COMMUNICATIONS, INC. a Delaware corporation

By: /s/ Michele D. Hogan Date: 1/26/00
----------------------- -----------------------

Printed Name & Title: /s/ Michele D. Hogan
-----------------------
Vice President, Finance

SUBLESSEE: ALTEREGO NETWORKS, INC., a California corporation

By: /s/ Richard Ling Date: 1/25/00
----------------------- -----------------------

Printed Name & Title: Richard Ling, CEO
-----------------------

NOTICE TO THE SUBLESSOR AND SUBLESSEE: CORNISH & CAREY, COMMERCIAL, IS NOT
AUTHORIZED TO GIVE LEGAL OR TAX ADVICE: NOTHING CONTAINED IN THIS SUBLEASE OR
ANY DISCUSSION BETWEEN CORNISH & CAREY COMMERCIAL AND SUBLESSOR AND OR
EMPLOYEES AS TO THE LEGAL EFFECT OR TAX CONSEQUENCES OF THIS DOCUMENT OR ANY
TRANSACTION RELATING THERETO. ALL PARTIES ARE ENCOURAGED TO CONSULT WITH
THEIR INDEPENDENT FINANCIAL CONSULTANTS AND/OR ATTORNEYS REGARDING THE
TRANSACTION CONTEMPLATED BY THIS PROPOSAL.

Exhibit "A" Master Lease

Exhibit "B" Premises

Page 8 of 9
<PAGE>

Exhibit A
Landlord Consent

The undersigned, Landlord, under the Master Lease attached as Exhibit A,
hereby consents to the subletting of the Subleased Premises described as
follows: 656 Bair Island Road, Suites (101, 103, 105, 106, 108, 200, 302 and
304) for a total of 18,341 sq. ft., on the terms and conditions contained in
the Sublease attached hereto with Alter Ego Networks, Inc., a California
Corporation, provided however that (I) this Sublease remains subordinate and
subject to the Master Lease and that any termination of the Master Lease
shall result in an automatic termination of this Sublease. (II) This Consent
shall apply only to this Sublease and shall not be deemed to be a consent to
any other sublease. (III) Sublessor is not permitted to approve any
assignment or Sublease of the premises by the Sublessee without the prior
written approval of Landlord. (IV) The first sentence of Clause 16 of the
Sublease should not be binding on Landlord. (V) That the security deposit
under the Master Lease shall be increased by $100,000, on or before March 15,
2000 in the form of cash or letter of credit acceptable to Landlord.

LANDLORD: Marina Investments, Inc.
a Delaware Corporation

By: /s/ Rim A. Hindieh Date: February 25, 2000
----------------------------------- ------------------
Name & Title: Rim A. Hindieh, President

Page 9 of 9

<PAGE>

[FLOOR PLAN]

First Floor
- ----------- 1) Move In 2/21/2000
Peninsula Marina 2) Balance:
656 Bair Island Boulevard, Redwood City, Ca
Total: 7,325 Sq. Ft. / / Common Area

EXHIBIT B

<PAGE>

[FLOOR PLAN]

Second Floor
- ------------
Peninsula Marina
656 Bair Island Boulevard, Redwood City, Ca
Total: 7,583 Sq. Ft. / / Common Area

EXHIBIT B

<PAGE>

[FLOOR PLAN]

Third Floor
- -----------
Peninsula Marina / / Leased
656 Bair Island Boulevard, Redwood City, Ca
Total: 3,433 Sq. Ft. / / Common Area

EXHIBIT B
<PAGE>

This Guaranty of Sublease is made as of this 21st day of January 2000 by the
undersigned (collectively, "Guarantor") concerning that certain Sublease,
dated January 21, 2000, by and between interWave Communications, Inc., a
Delaware corporation ("Sublessor") and AlterEgo Networks, Inc., a California
corporation ("Sublessee") relating to the property commonly known as 656 Bair
Island Road, 1st floor, 2nd floor and Suites 302 and 304 of the 3rd floor,
Redwood City, California 94063-2704 (the "Sublease") attached hereto.

1. Subject to the terms and conditions hereof, Guarantor hereby
unconditionally guarantees the full performance of each and all of the
terms, covenants and conditions of the Sublease to be kept and
performed by Sublessee, including the payment of all rentals and other
charges under the Sublease.

2. This Guaranty will continue in favor of Sublessor notwithstanding any
extension, modification or alteration of the Sublease entered into by
and between the parties thereto, or their successors or assigns, and
notwithstanding any assignment of the Sublease, with or without the
consent of the undersigned. No extension, modification, alteration or
assignment of the Sublease shall release or discharge the Guarantor.

3. This Guaranty will continue unchanged by any bankruptcy, reorganization
or insolvency of Sublessee or any successor or assignee thereof or by
any disaffirmance or abandonment by a trustee of Sublessee. This
Guaranty shall be subject and subordinate to all applicable bankruptcy,
reorganization or insolvency laws applicable to any petition filed for
the benefit of any Guarantor.

4. Sublessor may, without notice, assign this Guaranty in whole or in
part and no assignment or transfer of the Sublease or this Guaranty
will operate to extinguish or diminish the liability of the undersigned
hereunder; provided, however, Sublessor also assigns its interest in
the Sublease and the Lease.

5. The liability of the Guarantor under this Guaranty shall be primary.
In any right of action, which accrues to Sublessor under the Sublease,
Sublessor may, at its option, proceed directly against the Guarantor
without having commenced any action or having obtained any judgment
against the Sublessee; provided, however, Sublessor has notified
Guarantor of the facts and circumstances surrounding such liability and
provided Guarantor is given at least ten (10) days to cure.

6. The Guarantor shall, in addition to any other sums to which Sublessor
may be entitled to hereunder, pay to Sublessor reasonable attorney's
fees and all costs and other expenses

Page 1 of 4
<PAGE>

incurred in any collection or attempted collection or in any
negotiations relating to the obligations hereby guaranteed or enforcing
the Guaranty against the Guarantor.

7. The Guarantor hereby waives (i) notice of any demand by the Sublessor,
(ii) notice of default in the payment of rent or any other amounts
contained or reserved in the Sublease, (iii) notice of acceptance of
this Guaranty by any person and (iv) any other notice to which the
Guarantor may be entitled in connection herewith.

8. In the event any provision of this Guaranty is deemed to be invalid,
unenforceable or void, the remaining provisions of this Guaranty shall
be unaffected and shall remain in full force and effect. The terms and
provisions of this Guaranty are binding upon and inure to the benefit
of the respective successors and assigns of the parties named in this
Guaranty.

9. The Guarantors herein are jointly and severely liable.

10. This Guaranty shall be null and void effective two (2) working days
following Sublessee providing Sublessor a bank statement verifying that
Sublessee is in receipt of their initial round of equity equivalent to
a minimum of $5,000,000.00 in cash or cash equivalent as defined in the
Sublease document.

11. The total maximum amount guaranteed under this Guaranty is
$2,500,000.00.

12. All notices which may be required, or which any party may desire to
serve on another shall be in writing and shall be served at the
address provided below, or at such other address as any party may from
time to time designate in writing in the manner provided in The
Sublease.

Page 2 of 4
<PAGE>

IN WITNESS WHEREOF, the undersigned has caused this Guaranty to be
executed as of the date first above written.

<TABLE>

<S> <C>
Guarantor: RICHARD LING MIKE SANTER
7 Almendral Avenue 732 Rosewood Drive
Atherton, CA 94027 Palo Alto, CA 94303
Telephone: (650) 366-4603 Telephone: (650) 327-9409
Fax: (208) 293-2181 Cell: (415) 806-5214/Fax: (650) 327-9409

/s/ Richard Ling /s/ Mike Santer
------------------------ ------------------------
Date: 1/25/00 Date: 1/25/00
------------------- -------------------

ALEXANDER HERN BRYAN KENNEDY
533 S. Howard Avenue 1250 University Drive
PNB #852 Menlo Park, CA 94026
Tampa, Florida 33606 Telephone: (650) 566-8250
Telephone: (813) 414-0233 Pager #: (877) 769-3913

/s/ Alexander Hern /s/ Bryan Kennedy
------------------------ ------------------------
Date: 1/25/00 Date: 1/25/00
------------------- -------------------

</TABLE>

Page 3 of 4
<PAGE>

ACKNOWLEDGED:

Sublessor: INTERWAVE COMMUNICATIONS, INC., A DELAWARE CORPORATION

By: /s/ Michele D. Hogan Date: 1/26/00
------------------------- ----------------------

Print Name: Michele D. Hogan
-----------------

Sublessee: ALTEREGO NETWORKS, INC., A CALIFORNIA CORPORATION

By: /s/ Richard Ling Date: 1/25/00
------------------------- ----------------------

Print Name: Richard Ling
-----------------

NOTICE TO SUBLESSOR AND SUBLESSEE: CORNISH & CAREY COMMERCIAL IS NOT
AUTHORIZED TO GIVE LEGAL OR TAX ADVICE: NOTHING CONTAINED IN THIS
GUARANTY OR ANY DISCUSSIONS BETWEEN CORNISH & CAREY AND SUBLESSOR AND/OR
SUBLESSEE SHALL BE DEEMED TO BE A REPRESENTATION OR RECOMMENDATION BY
CORNISH & CAREY COMMERCIAL. OR ITS AGENTS OR EMPLOYEES AS TO THE LEGAL
EFFECT OR TAX CONSEQUENCES OF THIS DOCUMENT OR ANY TRANSACTION RELATING
HERETO. ALL PARTIES ARE ENCOURAGED TO CONSULT WITH THEIR INDEPENDENT
FINANCIAL CONSULTANTS AND/OR ATTORNEYS REGARDING THE TRANSACTION
CONTEMPLATED BY THIS GUARANTY.

Page 4 of 4

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
INTERWAVE COMMUNICATIONS INTERNATIONAL, LTD. FORM 10-Q FOR THE PERIOD ENDED
DECEMBER 31, 1999.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 32,805
<SECURITIES> 0
<RECEIVABLES> 10,831
<ALLOWANCES> 633
<INVENTORY> 6,151
<CURRENT-ASSETS> 51,380
<PP&E> 15,983
<DEPRECIATION> 10,504
<TOTAL-ASSETS> 60,887
<CURRENT-LIABILITIES> 9,644
<BONDS> 0
0
22,415
<COMMON> 7
<OTHER-SE> 27,576
<TOTAL-LIABILITY-AND-EQUITY> 60,887
<SALES> 12,407
<TOTAL-REVENUES> 0
<CGS> 8,153
<TOTAL-COSTS> 8,153
<OTHER-EXPENSES> 20,671
<LOSS-PROVISION> 329
<INTEREST-EXPENSE> (1,987)
<INCOME-PRETAX> (18,599)
<INCOME-TAX> 0
<INCOME-CONTINUING> (18,599)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,559)
<EPS-BASIC> (3.19)
<EPS-DILUTED> (3.19)

</TABLE>