PROXIM INC /DE/, 10-K405, 1999-03-31

PROXIM INC /DE/
10-K405, 1999-03-31
COMPUTER COMMUNICATIONS EQUIPMENT

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<PAGE> 1

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

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

Commission File No. 0-22700

PROXIM, INC.
(Exact name of Registrant as specified in its charter)

<TABLE>
<S> <C>
DELAWARE 77-0059429
(State of incorporation) (I.R.S. Employer
</TABLE>
Identification No.)

295 NORTH BERNARDO AVENUE
MOUNTAIN VIEW, CALIFORNIA 94043
(650) 960-1630
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)

Securities registered pursuant to section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act:

Title of Class
Common Stock, par value $.001 per share

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.

Yes [X] No [ ]

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

Based on the closing sale price of the Common Stock on the NASDAQ National
Market System on March 4, 1999, the aggregate market value of the voting stock
held by non-affiliates of the Registrant was $228,703,901. Shares of Common
Stock held by each officer and director and by each person who owns 5% of more
of the outstanding Common Stock have been excluded in that such persons may be
deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.

The number of shares outstanding of the Registrant's Common Stock, $.001 par
value, was 10,669,207 at March 4, 1999.

DOCUMENTS INCORPORATED BY REFERENCE

Parts of the Proxy Statement for the Registrant's 1999 Annual Meeting of
Stockholders are incorporated by reference into Part III of this Form 10-K
Annual Report.

<PAGE> 2

PART 1

ITEM 1. BUSINESS

The discussion and analysis below contains trend analysis and other
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Company
may from time to time make additional written and oral forward-looking
statements, including statements contained in the Company's filings with the
Securities and Exchange Commission and in its reports to stockholders. Such
forward-looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those reflected in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed below under "Certain Factors That May
Affect Future Operating Results" and elsewhere in this report. The Company does
not undertake to update any forward-looking statement that may be made from time
to time by or on behalf of the Company. Readers should carefully review the risk
factors described in other documents the Company files from time to time with
the Securities and Exchange Commission.

Proxim designs, manufactures and markets high performance wireless local
area networking ("LAN") products based on radio frequency ("RF") technology.
Proxim's highly integrated wireless client adapters and network infrastructure
systems seamlessly extend existing enterprise LANs to enable mobility-driven
applications in a wide variety of in-building and campus area environments.
Introduced in 1994, Proxim's RangeLAN2(TM) 2.4 GHz wireless LAN technology has
been adopted by a number of major mobile computer system and handheld data
terminal manufacturers, as well as many leading wireless solution providers, for
real-time data collection applications in manufacturing, warehousing,
transportation and retailing and for point-of-service network applications in
healthcare, hospitality, education and financial services.

In 1998, the Company introduced the Symphony(TM) product family designed to
address the requirements for networking personal computers ("PCs") in home and
small office environments. Symphony products provide cordless peer-to-peer
networking of PCs, enabling simultaneous Internet access for multiple PCs, and
resource sharing among network users for devices such as printers and other
peripheral equipment. In addition, notebook PC users are free to be anywhere in
or around the home while being connected to the Internet, other PCs and
peripherals. Symphony products also address many of the PC networking
requirements for small office environments. Proxim has begun to sell Symphony
branded products through a variety of consumer distribution channels, including
computer retailers and catalogs, as well as on-line retail sites over the
Internet, including Proxim's e-commerce Web site.

BACKGROUND

In recent years, organizations have shifted from centralized computing
environments to distributed client/server networks in order to move information
processing power closer to end users. Traditionally, these networks have been
accessed from desktop computers situated in fixed locations throughout an
enterprise and, accordingly, have not addressed the needs of organizations which
require their employees to be mobile within the workplace. In response,
organizations have begun to utilize wireless technologies to extend their
client/server networks to mobile end users.

Wireless technology can also address the growing requirement for networking
PCs in home and small office environments. The widespread adoption of personal
computers, fueled in particular by the advent of sub-$1,000 PCs, has resulted in
millions of homes and small offices with two or more PCs. In addition, the rapid
growth of notebook PC sales in business over the past several years has led to
increased usage in the home as more and more business professional bring their
laptops home on a regular basis. Furthermore, the popularity of the Internet as
a primary force in the growth of PCs in home and small office environments,
coupled with the emerging availability of higher-cost broadband services, has
created a growing need to share high speed Internet access among multiple users.

<PAGE> 3

Significant technological advances and changes in the regulatory
environment have facilitated the development and proliferation of wireless
networking solutions which extend the reach of existing wireline networks. In
voice communications, wireless technology has made possible the extension of
wired networks to serve mobile business and consumer users through devices such
as cordless and cellular telephones. Similarly, advances in wireless data
communications, including wireless LAN adapters and radio modems, have enabled
the extension of enterprise networks to notebook computers, pen-based notepads
and handheld data collection terminals in the local area environment. By
providing network connectivity for mobile business users, these products
increase the accuracy, timeliness and convenience of data collection and
information access, thereby improving productivity and enhancing customer
service. In home and small office environments, cordless networking enables
resource and Internet sharing without the need for new wiring, and provides the
additional benefit of allowing location independent access for mobile devices
such as notebook and handheld computers.

Commercial applications of wireless local area networking technology
initially addressed a limited number of vertical markets such as retailing,
warehousing and distribution. In these industries, businesses quickly recognized
the advantages of mobile handheld data collection devices and the productivity
benefits associated with applications such as on-line inventory management and
real-time asset tracking. Early wireless networking products failed to achieve
widespread adoption, however, because these systems typically involved
proprietary wireless network architectures operating at low data rates with
limited connectivity to existing enterprise LANs. Furthermore, because these
systems operated in licensed narrowband frequencies or in the 900 MHz frequency
band, they were generally authorized for use only in the U.S. and in a limited
number of international markets.

During the past several years, advances in wireless data communications
technology have enabled the development of a new generation of wireless LAN
systems designed to operate in the 2.4 GHz frequency band. This new generation
of 2.4 GHz products operates at significantly higher data rates and utilizes
standard network interfaces and protocols to seamlessly extend existing
enterprise data networks. The recent development of these high performance, open
systems products has enabled the emergence of a number of new high bandwidth
applications in established industrial data collection markets and has fostered
the creation of many applications in new vertical markets such as healthcare,
hospitality, education and financial services. In healthcare, for example,
wireless LANs now allow medical professionals to access clinical data and input
patient charting information at the point-of-care anywhere in a hospital
environment. These same wireless networks can also be used to facilitate
admissions, billing, materials management and other administrative applications.
Data-intensive applications in markets such as healthcare require robust and
scalable wireless networks capable of supporting an increasing number of
applications and users over time.

As 2.4 GHz wireless LAN technology has matured, lower costs and ease of use
features have created the opportunity to serve the growing number of homes and
small offices that need to network PCs and peripherals and share Internet
access. For example, users in homes with multiple PCs can share files, computer
peripherals and Internet access without the hassle and expense of new wiring or
the limitations of old existing wires not suited to carrying high bandwidth
data. Laptop users are truly free to be anywhere in or around the home while
being connected to the Internet, other PCs and peripherals. Desktop PCs can be
positioned anywhere in the home or small office and still maintain network
access, regardless of telephone jack, powerline plug or other wiring
constraints. In addition, those in small offices can enjoy the benefits of
corporate networking without investing in a wired networking infrastructure.

Concurrent with the emergence of new applications and new markets, three
primary factors have led to an expansion in the worldwide market potential for
wireless LANs. First, from a regulatory perspective, the 2.4 GHz frequency band
has recently been allocated for unlicensed wireless networks in virtually every
developed country around the world. Second, the universal availability of this
unlicensed spectrum has encouraged wireless LAN suppliers to design standard
products and solutions that can be marketed and sold globally.

<PAGE> 4

Third, the cost of 2.4 GHz products continues to decline through both advanced
design integration and volume manufacturing efficiencies and economies of scale.

The Company believes that the convergence of worldwide spectrum
availability, emerging standards and lower cost wireless and computing products,
as well as high performance products, will lead to more widespread deployment of
wireless LAN products in traditional industrial data collection applications,
developing point-of-service network applications, and the emerging home and
small office PC networking market.

THE PROXIM SOLUTION

In 1994, Proxim pioneered 2.4 GHz frequency hopping wireless LAN technology
by being first to market with its RangeLAN2 product family. Since then the
Company has captured a substantial number of key design wins with major 2.4 GHz
OEM customers. The Company attributes this success to the architectural
advantages of its RangeLAN2 product line and key aspects of the Company's
overall technology approach. These advantages include:

- Seamless Extension of Existing Enterprise Data Networks. Proxim
designs high performance open systems wireless communications products
that transparently extend the reach of existing enterprise LANs using
standard network interfaces and protocols.

- Robust, Scalable Wireless Network Architecture. RangeLAN2's unique
frequency hopping systems architecture and wireless LAN protocols
create a robust RF network environment that cost-effectively expands
to accommodate an increasing number of mobile users and applications.

- Superior Product Performance and Functionality. The RangeLAN2 family
incorporates a number of industry-leading technology innovations to
achieve superior product performance and functionality, including a
fully-integrated, single chip gallium arsenide ("GaAs") RF transceiver
for enhanced radio sensitivity and power amplification, a high
throughput frequency hopping modulation approach with a fallback mode
for extended range and coverage, and sophisticated wireless networking
protocols for state-of-the-art roaming and power management
capabilities.

- Broad Array of Interoperable Products and Applications. Based on the
highly integrated design of Proxim's RangeLAN2 credit card and match
book-sized OEM adapter products, numerous mobile systems and handheld
device manufacturers have designed RangeLAN2 technology into their
products. The availability of RangeLAN2-based mobile computer and
peripheral systems allows end users to select from numerous
interoperable products in meeting their application requirements.

In 1998, Proxim introduced the Symphony product family of cordless networking
products designed to address the requirements of the emerging home and small
office networking markets. The unique advantages of Proxim's Symphony cordless
networking solution include:

- Robust Cordless Networking Architecture. Based on RangeLAN2's
commercially proven frequency hopping system architecture and wireless
LAN protocols, Symphony products create a robust RF network
environment operating at a 1.6 megabits per second ("Mbps") data rate.

- Cost Effective Design. Taking advantage of continued integration of
the RangeLAN2 design and improved manufacturing economies of scale,
Symphony products are targeted to be manufactured and sold at
cost-effective price points, similar to advanced cordless phones and
other PC peripheral products.

<PAGE> 5

- Ease of Use. Using standard networking interfaces and protocols,
Symphony products include software designed with menu-based wireless
network configuration and diagnostic tools. These tools simplify
numerous networking and resource sharing configuration issues required
to properly set up a PC network.

- Sharing of PC Resources. Symphony products allow multiple PC users to
easily share various resources such as printers and disc drives while
enabling simultaneous shared Internet access and multiplayer PC
gaming. All Symphony products feature Proxim's unique modem sharing
software that provides simultaneous Internet access through a single
modem and a single Internet Service Provider account.

PRODUCTS

Since 1989, Proxim has focused on supplying spread spectrum RF transceiver
modules and wireless LAN adapters to OEM customers for integration into mobile
computing platforms, handheld data terminals and portable peripheral devices.
Proxim designs its products to be small, lightweight, cost-effective and power
efficient in order to meet the needs of its OEM customers and the vertical
markets they serve. In addition, Symphony products are designed to meet the ease
of use requirements of the emerging home PC networking market. Proxim offers
wireless networking products based on 2.4 GHz frequency hopping spread spectrum
technology and 900 MHz direct sequence technology.

2.4 GHz Products. Introduced in 1994, RangeLAN2 was the industry's first
FCC-certified 2.4 GHz frequency hopping wireless LAN product family. The
RangeLAN2 family consists of two product lines: OEM design-in modules and
packaged "off the shelf" products. The design-in modules are integrated by OEM
customers into handheld computing and data collection devices. Packaged products
are used with standard notebook and desktop computers to extend existing
enterprise networks and to create ad hoc wireless networks. All RangeLAN2
products are designed to share the same software and are functionally
interoperable. In 1998, the Company introduced the Symphony product family,
delivering high-speed peer-to-peer cordless networking to the home and small
office environment. In 1998, the Company introduced the RangeLAN802 product
family, which is based on 2.4 GHz frequency hopping spread spectrum technology
operating at 2.0 Mbps, and includes many of the innovative software and network
management features provided by RangeLAN2 products

RangeLAN2 packaged products include both client adapters and network
infrastructure products. Packaged client adapters include the following form
factors: one-piece PC Card, desktop ISA board, Ethernet and Serial external
adapters. Packaged network infrastructure products include Ethernet and Token
Ring access points for transparent bridging to existing wireline LANs. In
addition, RangeLAN2 packaged products are available as private label models,
enabling OEM customers to offer a complete line of 2.4 GHz wireless LAN products
under their brand name.

RangeLAN2 OEM modules are design-in wireless LAN adapters that range in
size from credit card-sized devices to a match book-sized units. These modules
are highly integrated, miniaturized products which reduce the design-in cycle
time and expedite the time to market for OEMs by offering industry standard
interfaces and, if required, the ability to port to non-standard interfaces and
computing platforms with software tools and licensed source code. RangeLAN2 OEM
modules have been designed into numerous handheld computing and data collection
devices by various OEM partners.

<PAGE> 6

The Symphony product family provides high-speed peer-to-peer cordless
networking for the home and small office markets operating at a 1.6 Mbps data
rate. Symphony products currently include a cordless ISA adapter for desktop
PCs, a cordless PC Card adapter for notebook and sub-notebook computers, a
standalone Cordless Modem that provides plug-and-play V.90 56 Kbps modem sharing
and a Cordless Ethernet Bridge for connectivity to broadband Internet devices
such as cable modems, xDSL gateways and ISDN routers. Symphony products also
include the "Composer Installation Wizard" software setup tool, the "Conductor"
modem sharing software to use an existing PC modem, and the "Maestro" network
management software tool.

RangeLAN802 products include a one-piece PC Card for client computer
systems as well as network access points for transparent bridging to existing
Ethernet LANs. The RangeLAN802 product family also includes OEM design-in
modules for integration in a wide variety of mobile computing platforms.
Operating at 2.0 Mbps, RangeLAN802 products fully comply with the recently
adopted IEEE 802.11 frequency hopping wireless LAN standard.

900 MHz Products. Proxim offers several types of products based on the
Company's 900 MHz direct sequence spread spectrum technology: RF transceivers;
dual board radio-modems that combine a RF transceiver, controller and RS-232
interface in a single unit; ProxLink, a packaged version of the dual board
radio-modem units; and RangeLAN, a family of wireless LAN adapters. The RF
transceiver products and dual board radio-modems are OEM design-in products.
ProxLink products, originally introduced in 1991, are self-contained ruggedized
networking devices which enable both point-to-point and multipoint wireless data
communications. The 900 MHz RangeLAN product family, originally introduced in
1992, was Proxim's first generation of open systems wireless LAN adapters.

CUSTOMERS

The majority of Proxim's revenue has been derived from sales to OEM
customers that offer wireless LAN products as part of a complete solution that
typically includes specialized mobile computers developed by the OEM, network
infrastructure systems, peripheral devices, software and services. The Company's
OEM partners traditionally target industrial applications in one or more
specific markets such as manufacturing, warehousing, transportation and
retailing. Proxim's 2.4 GHz OEM customers include, among others, Casio Computer,
Data General, Fujitsu, Furuno Electric, Hand Held Products, Intermec/Norand,
LXE, Matsushita, Mitsubishi, Motorola, Percon, Sharp, Teklogix and Toshiba.

Proxim markets its branded RangeLAN2 products to value added resellers and
systems integrators in emerging wireless markets that include healthcare,
hospitality, education and financial services, where access to real-time
information is critical. In healthcare, ISVs such as HBO & Company, SMS, Cerner
and IDX are sales partners that drive the information technology decision making
process. In addition, RangeLAN2 software drivers are integrated into Microsoft's
Windows CE, Handheld PC Professional Edition software utilized by leading
handheld PC vendors including Casio Computer, Compaq Computer, Hewlett-Packard,
Hitachi, LG Electronics, NEC, Philips, Sharp and Vadem.

In 1998, sales to Intermec and LXE represented 41% and 11%, respectively,
of the Company's total revenue. In 1997, sales to Intermec, NTT-IT and LXE
represented 28%, 17% and 10%, respectively, of the Company's total revenue. In
1996, sales to Intermec, NTT-IT and LXE represented 22%, 22% and 12%,
respectively, of the Company's total revenue. Sales to OEM customers were
$29,393,000, $26,780,000 and $24,602,000, in 1998, 1997 and 1996, respectively,
representing 59%, 62% and 60% of total revenue during such periods.

The Company expects that sales to a limited number of OEM customers will
continue to account for a substantial portion of its revenue during any period
for the foreseeable future. The Company also has experienced quarter to quarter
variability in sales to each of its major OEM customers and expects this pattern

<PAGE> 7

to continue in the future. The loss of, or a significant reduction in sales to,
one or more of the Company's major OEM customers could have a material adverse
effect on the Company's results of operations. See "Certain Factors That May
Affect Future Operating Results -- Dependence on a Limited Number of OEM
Customers."

SALES AND MARKETING

The Company sells its commercial products directly to OEM customers, and
indirectly to value added resellers, systems integrators and end users through
regional, national and international distributors. Proxim offers OEM customers
both design-in products for integration into their wireless computing platforms,
and branded products as private label models. The Company is developing channels
for marketing and selling its Symphony product line, including sales through
national and regional PC and electronics retailers, computer catalogs, on-line
retail sites over the Internet, including Proxim's e-commerce Web site, and OEM
and private label partners.

Sales of many of the Company's wireless networking products depend in
significant part upon the decision of a prospective OEM customer to develop and
market wireless solutions that incorporate the Company's wireless technology.
OEM customers' orders are affected by a variety of factors such as new product
introductions, regulatory approvals, end user demand for OEM customers'
products, product life cycles, inventory levels, manufacturing strategy,
contract awards, competitive conditions and general economic conditions. Sales
of wireless LAN products generally involve significant commitments of capital
and other resources by the Company and its customers, with the attendant delays
associated with procedures to approve such commitments. In this regard, in the
fourth quarters of 1997 and 1998, the Company recorded charges of $2,400,000 and
$1,000,000, respectively, to selling, general and administrative expense related
to investments in two startup companies: one in a startup wireless services
company utilizing wireless LAN technology and the other in a developer of mobile
thin-client computing technology. Due to the nature of these entities and their
operations, there can be no assurance that these investments will be realizable
or will result in marketable and/or successful products. For these and other
reasons, the design-in cycle associated with the purchase of the Company's
wireless products by OEM customers is quite lengthy, generally ranging from six
months to two years, and is subject to a number of significant risks, including
customers' budgeting constraints and internal acceptance reviews, that are
beyond the Company's control. Because of the lengthy sales cycle, the Company
typically plans its production and inventory levels based on internal forecasts
of OEM customer demand, which is highly unpredictable and can fluctuate
substantially. In addition, the Company's agreements with OEM customers
typically do not require minimum purchase quantities and a significant
reduction, delay or cancellation of orders from any of these customers could
have a material adverse effect on the Company's results of operations. If
revenue forecasted from a specific customer for a particular quarter is not
realized in that quarter, the Company's operating results for that quarter could
be materially adversely affected. The loss of one or more of, or a significant
reduction in orders from, the Company's major OEM customers could have a
material adverse effect on the Company's results of operations. For example, in
the third quarter of 1997, the Company experienced a significant decrease in
orders from two of the Company's major customers resulting in a decrease in
revenue, an operating loss and higher inventory levels. In addition, there can
be no assurance that the Company will become a qualified supplier for new OEM
customers or that the Company will remain a qualified supplier for existing OEM
customers.

The Company generally does not operate with a significant order backlog.
The Company's sales to any single OEM customer are also subject to significant
variability from quarter to quarter. Such fluctuations could have a material
adverse effect on the Company's operating results. In addition, there can be no
assurance that the Company will become a qualified supplier for new OEM
customers or that the Company will remain a qualified supplier for existing OEM
customers.

<PAGE> 8

Proxim's branded RangeLAN2 products are sold to value added resellers,
systems integrators and end users in the U.S. through regional distributors, and
through TechData Corporation, Ingram Micro, Inc. and Anixter Corporation, three
nationwide distribution and sales organizations.

Proxim is also establishing new distribution channels and OEM partnerships
for its Symphony family of cordless home and small office networking products.
Symphony products are currently sold through computer retailers such as Fry's
Electronics, J&R Computer World and Micro Center, leading computer catalogs such
as CDW, MobilePlanet and PC Connection, and numerous on-line retail sites over
the Internet, including Proxim's e-commerce Web site. In addition, Proxim is
also forging OEM partnerships for its Symphony family of home networking
products.

Distributors generally offer products of several different companies,
including products that may compete with the Company's products. Accordingly,
these distributors may give higher priority to products of other suppliers, thus
reducing their efforts to sell the Company's products. Agreements with
distributors are generally terminable at the distributor's option. A reduction
in sales efforts or termination of a distributor's relationship with the Company
could have a material adverse effect on future operating results. Use of
distributors also entails the risk that distributors will build up inventories
in anticipation of substantial growth in sales. If such growth does not occur as
anticipated, these distributors may substantially decrease the amount of product
ordered in subsequent quarters. Such fluctuations could contribute to
significant variations in the Company's future operating results. In addition,
distributors generally have stock rotation rights and price protection on unsold
merchandise, which may adversely impact the Company's profit margins.

Proxim is expanding the international distribution channels for its
products. The Company is authorized to ship its RangeLAN2 products into more
than 50 countries. In addition to the Company's relationships with numerous OEM
customers who market the RangeLAN2 technology internationally, the Company has
over 30 authorized international distributors in over 50 sales territories.
Revenue from shipments by the Company to customers outside the United States,
principally to a limited number of distributors and OEM customers, represented
17%, 26% and 31% of total revenue during 1998, 1997 and 1996, respectively. The
Company expects that revenue from shipments to international customers will vary
as a percentage of total revenue. Sales to international customers or to U.S.
OEM customers who ship to international locations are subject to a number of
risks and uncertainties including, but not limited to, changes in foreign
government regulations and telecommunications standards, export license
requirements, tariffs and taxes, other trade barriers, fluctuations in currency
exchange rates, difficulty in collecting accounts receivable, difficulty in
staffing and managing foreign operations, and potential political and economic
instability.

While international sales are typically denominated in U.S. dollars and the
Company typically extends limited credit terms, fluctuations in currency
exchange rates could cause the Company's products to become relatively more
expensive to customers in a particular country, leading to a reduction in sales
or profitability in that country. Additionally, payment cycles for international
distributors are typically longer than for distributors in the United States.
There can be no assurance that foreign markets will continue to develop or that
the Company will receive additional orders to supply its products to foreign
customers. The Company's business and operating results could be materially and
adversely affected if foreign markets do not continue to develop or if the
Company does not receive additional orders to supply its products for use by
foreign customers. In the latter part of 1997 and throughout 1998, capital
markets in Asia were highly volatile, resulting in fluctuations in Asian
currencies and other economic instabilities. These instabilities may continue or
worsen, either of which could have a material adverse effect on the Company's
results of operations. In this regard, in the third and fourth quarters of 1997
and continuing in the first and second quarters of 1998, the Company experienced
a significant decrease in orders from NTT-IT, one of the Company's major
Japanese customers, resulting in a significant decrease in quarterly revenue and
an operating loss in the third quarter of 1997.

<PAGE> 9

As of December 31, 1998, the Company's selling, general and administrative
department consisted of 63 full-time employees. Selling, general and
administrative expenses were $12,555,000, $13,513,000, and $9,408,000 during
1998, 1997 and 1996, respectively.

MANUFACTURING

The Company's manufacturing operations consist primarily of final assembly
and testing, quality assurance, packaging and shipping at the Company's
manufacturing facility in Mountain View, California. The Company purchases all
of the circuit boards, integrated circuits and other components used in its
products from third party suppliers. The Company inspects these components for
quality, groups the components into kits by production order, and ships the kits
to its subcontractors for interim assembly and test.

The Company designs its products to provide a high degree of reliability.
The Company's products have achieved a field failure rate of its installed base
of less than 1% per annum to date. The Company believes that this reliability is
the result of its careful quality assurance procedures. Proxim has developed a
supplier selection procedure and approved vendor list to maintain quality. In
addition, the Company monitors its suppliers' performance to ensure consistent
quality, reliability and yields. While the Company's quality assurance program
is not currently certified under ISO 9000, it is modeled after the ISO 9000
quality standards, including process documentation, test procedures, quality
assurance procedures, process control, equipment maintenance, quality record
keeping and training of personnel. In addition, the Company generally uses ISO
9000 certified manufacturing assembly subcontractors and intends to pursue ISO
9000 certification for its internal manufacturing processes in the future.

The Company currently has limited manufacturing capability and has no
experience in large scale manufacturing. If the Company's customers were to
place or concurrently place orders for unexpectedly large quantities of the
Company's products, the Company's present manufacturing capacity might be
inadequate to meet such demand. There can be no assurance that the Company will
be able to develop or contract for additional manufacturing capacity on
acceptable terms on a timely basis. In addition, in order to compete
successfully, the Company will need to achieve significant product cost
reductions. Although the Company intends to achieve cost reductions through
engineering improvements and production economies, there can be no assurance
that the Company will be able to do so. In order to remain competitive, the
Company must continue to introduce new products and processes into its
manufacturing environment. The Company currently conducts its manufacturing
operations for all of its products in a single facility in Mountain View,
California. In addition, the Company relies on certain outside contract
manufacturers for circuit board assemblies which subjects the Company to a
number of risks, including a potential inability to obtain an adequate supply of
assembled circuit boards as well as reduced control over the price, timely
delivery and quality of such assembled circuit boards. If the Company's Mountain
View facility were to become incapable of operating, even temporarily, or were
unable to operate at or near its current or full capacity for an extended
period, the Company's business and operating results could be materially
adversely affected. Further, in order to remain competitive the Company expects
to continue to introduce new processes into its manufacturing environment.
Changes in the manufacturing operations to incorporate new products and
processes could cause disruptions, which, in turn, could adversely affect
customer relationships, cause a loss of market opportunities and have a material
adverse effect on the Company's business and operating results.

Certain parts and components used in the Company's products, including the
Company's proprietary Application Specific Integrated Circuits ("ASICs"),
Monolithic Microwave Integrated Circuits ("MMICs") and assembled circuit boards,
are only available from single sources, and certain other parts and components
are only available from a limited number of sources. The Company's reliance on
these sole source or limited source suppliers involves certain risks and
uncertainties, including the possibility of a shortage or discontinuation of
certain key components and reduced control over delivery schedules,
manufacturing capability, quality and costs. Any reduced availability of such
parts or components when required could

<PAGE> 10

materially impair the Company's ability to manufacture and deliver its products
on a timely basis and result in the cancellation of orders, which could have a
material adverse effect on the Company's operating results. In addition, the
purchase of certain key components involves long lead times and, in the event of
unanticipated increases in demand for the Company's products, the Company has in
the past been, and may in the future be, unable to manufacture certain products
in a quantity sufficient to meet its customers' demand in any particular period.
The Company has no guaranteed supply arrangements with its sole or limited
source suppliers, does not maintain an extensive inventory of parts or
components, and customarily purchases sole or limited source parts and
components pursuant to purchase orders placed from time to time in the ordinary
course of business. Business disruptions, production shortfalls or financial
difficulties of a sole or limited source supplier could materially and adversely
impact the Company by increasing product costs, or reducing or eliminating the
availability of such parts or components. In such event, the inability of the
Company to develop alternative sources of supply quickly and on a cost-effective
basis could materially impair the Company's ability to manufacture and deliver
its products on a timely basis and could have a material adverse effect on its
operating results.

RESEARCH AND DEVELOPMENT

The wireless communications industry is characterized by rapid
technological change, short product life cycles and evolving industry standards.
To remain competitive, the Company must develop or gain access to new
technologies in order to increase product performance and functionality, reduce
product size and maintain cost-effectiveness. The Company's research and
development efforts are focused on implementing enhancements to existing
products, investigating new technologies and developing new products. Since 1994
the Company's research and development efforts have been concentrated on
enhancing features and performance and reducing the cost of the RangeLAN2-based
products, including development of the Symphony product line. These efforts
include developing and integrating the Company's technology into ASICs/MMICs,
development of wireless protocols and network software drivers, performance
enhancements and cost reductions to wireless adapter and access point products
and efforts related to both domestic and international product certification. In
1997 and 1998 the Company substantially increased its research and development
efforts in developing Institute of Electrical and Electronics Engineers ("IEEE")
802.11 standard based products and 5 GHz high-speed wireless LAN technology.

The Company's success is also dependent on its ability to develop new
products for existing and emerging wireless communications markets, to introduce
such products in a timely manner and to have them designed into new products
developed by OEM customers. The development of new wireless networking products
is highly complex, and wireless LAN companies, including Proxim, from time to
time have experienced delays in developing and introducing new products. Due to
the intensely competitive nature of the Company's business, any delay in the
commercial availability of new products could have a material adverse effect on
the Company's operating results. If the Company is unable to develop or obtain
access to advanced wireless networking technologies as they become available, or
is unable to design, develop and introduce competitive new products on a timely
basis, or is unable to hire or retain qualified engineers to develop such
technologies and products, its future operating results would be materially and
adversely affected. In particular, the Company has expended substantial
resources in developing products that are designed to conform to the IEEE 802.11
standard that received final approval in June 1997. There can be no assurance
that the Company's IEEE 802.11 compliant products or the IEEE 802.11 standard
will have a meaningful commercial impact.

The Company has substantially increased its research and development
expenses to develop new technologies related to 5 GHz high-speed wireless LAN
products. In this regard, in the fourth quarter of 1997, the Company took a
charge of $2,500,000 to research and development expense for the acquisition of
certain technology to be used in developing a new family of 5 GHz high-speed
wireless LAN products. Given the emerging nature of the wireless LAN market,
there can be no assurance that the RangeLAN2 products and

<PAGE> 11

technology, or the Company's other products or technology, will not be rendered
obsolete by alternative technologies.

As of December 31, 1998, the Company's research and development department
consisted of 52 full-time employees. Research and development expenses were
$7,630,000, $8,720,000, and $4,949,000 during 1998, 1997 and 1996, respectively.

COMPETITION

The wireless local area networking market is intensely competitive. The
principal competitive factors in this market include effective RF coverage area,
data throughput, wireless networking protocol sophistication, network
scalability, roaming capability, power consumption, product miniaturization,
product reliability, product time to market, product certifications, price,
effective distribution channels, ability to support new industry standards and
company reputation. Although the Company believes that it currently competes
favorably on the basis of these factors, the Company could be at a disadvantage
to companies that have broader distribution channels and offer more diversified
product lines.

Proxim has several competitors in its commercial wireless LAN business,
including Lucent Technologies, Symbol Technologies and Telxon, among others.
Proxim also faces competition from a variety of companies that offer different
technologies in the nascent home networking market, including several companies
developing competing wireless networking products. Additionally, numerous
companies have announced their intention to develop competing products in both
the commercial wireless LAN and home networking markets. In addition to
competition from companies that offer or have announced their intention to
develop wireless LAN products, the Company could face future competition from
companies that offer products which replace network adapters or offer
alternative wireless communications solutions, or from large computer companies,
PC peripheral companies as well as networking equipment companies. Furthermore,
the Company could also face competition from certain of its OEM customers which
have, or could acquire, wireless engineering and product development
capabilities. There can be no assurance that the Company will be able to compete
successfully against these competitors or that competitive pressures faced by
the Company will not adversely affect its business or operating results.

Many of the Company's present and potential competitors have substantially
greater financial, marketing, technical and other resources than the Company
with which to pursue engineering, manufacturing, marketing, and distribution of
their products and may succeed in establishing technology standards or strategic
alliances in the wireless LAN market, obtain more rapid market acceptance for
their products, or otherwise gain a competitive advantage. There can be no
assurance that the Company will succeed in developing products or technologies
that are more effective than those developed by its competitors. Furthermore,
the Company competes with companies that have high volume manufacturing and
extensive marketing and distribution capabilities, areas in which the Company
has limited experience. Increased competition, direct and indirect, could
adversely affect the Company's revenue and profitability through pricing
pressure and loss of market share. There can be no assurance that the Company
will be able to compete successfully against existing and new competitors as the
market evolves and the level of competition increases.

GOVERNMENT REGULATION

In the United States, the Company is subject to various FCC rules and
regulations. Current FCC regulations permit license-free operation in certain
FCC-certified bands in the radio spectrum. Proxim's spread spectrum wireless
products are certified for unlicensed operation in the 902-928 MHz and
2.4-2.4835 GHz frequency bands. Operation in these frequency bands is governed
by rules set forth in Part 15 of the FCC regulations. The Part 15 rules are
designed to minimize the probability of interference to other users of the
spectrum and, thus, accord Part 15 systems secondary status. In the event that
there is interference between a primary user and a

<PAGE> 12

Part 15 user, a higher priority user can require the Part 15 user to curtail
transmissions that create interference. In this regard, if users of the
Company's products experience excessive interference from primary users, market
acceptance of the Company's products could be adversely affected, thereby
materially and adversely affecting the Company's business and results of
operations. The FCC, however, has established certain standards which create an
irrebuttable presumption of noninterference for Part 15 users and the Company
believes that its products comply with such requirements. There can be no
assurance that the occurrence of regulatory changes, including changes in the
allocation of available frequency spectrum or modification to the standards
establishing an irrebuttable presumption for unlicensed Part 15 users, would not
significantly impact the Company's operations by rendering current products
obsolete, restricting the applications and markets served by the Company's
products or increasing the opportunity for additional competition.

The Company's products are also subject to regulatory requirements in
international markets and, therefore, the Company has been monitoring the
development of spread spectrum regulations in certain countries that represent
potential markets for its products. The Company has extensive experience in
gaining regulatory approval outside of the United States. Several foreign
countries, such as Canada, have regulations that closely follow those of the
FCC. To date, Proxim or its distribution partners have obtained certifications
for or authorizations to ship the Company's products into over 50 countries.
Each new Proxim product or OEM customer product must be certified or otherwise
qualified for use in each country. The Company has an ongoing program to obtain
certifications for its products and to assist certain OEM customers in obtaining
certification for their products in all available markets. While there can be no
assurance that the Company will be able to comply with regulations in any
particular country, the Company has designed its RangeLAN2, RangeLAN802 and
Symphony products to minimize the design modifications required to meet various
2.4 GHz international spread spectrum regulations. In addition, the Company will
seek to obtain international certifications for the Symphony product line in
countries where there is a substantial market for home PCs and Internet
connectivity. Changes in, or the failure by the Company to comply with,
applicable domestic and international regulations could have a material adverse
effect on the Company's business and operating results. In addition, with
respect to those countries that do not follow FCC regulations, Proxim may need
to modify its products to meet local rules and regulations.

Regulatory changes, including changes in the allocation of available
frequency spectrum, could significantly impact the Company's operations by
restricting the Company's development efforts, rendering current products
obsolete or increasing the opportunity for additional competition. In September
1993 and in February 1995, the FCC allocated additional spectrum for personal
communications services. In January 1997, the FCC authorized 300 MHz of
additional unlicensed frequencies in the 5 GHz frequency range. These changes in
the allocation of available frequency spectrum could create opportunities for
other wireless networking products and services. There can be no assurance that
new regulations will not be promulgated which could have a material adverse
effect on the Company's business and results of operations.

PROTECTION OF PROPRIETARY RIGHTS

The Company relies on a combination of patents, trademarks and
non-disclosure agreements in order to establish and protect its proprietary
rights. Proxim has been issued four U.S. patents which were issued in 1991,
1993, 1995 and 1999, and are important to the current business of the Company,
and has five patent applications pending in the U.S. which relate to the
Company's core technology. There can be no assurance that patents will issue
from any of these pending applications or, if patents do issue, that the claims
allowed will be sufficiently broad to protect the Company's technology. In
addition, there can be no assurance that any patents issued to the Company will
not be challenged, invalidated or circumvented, or that the rights granted
thereunder will adequately protect the Company. Since U.S. patent applications
are maintained in secrecy until patents issue, and since publication of
inventions in the technical or patent literature tends to lag behind such
inventions by several months, the Company cannot be certain that it was the
first creator of the inventions covered by its issued patents or pending patent
applications or that it was the first to file patent applications for

<PAGE> 13

such inventions or that the Company is not infringing on the patents of others.
In addition, the Company has filed, or reserved its rights to file, a number of
patent applications internationally. There can be no assurance that any such
international patent applications will issue or that the laws of foreign
jurisdictions will protect the Company's proprietary rights to the same extent
as the laws of the United States.

In view of the rapid technological change in this industry, Proxim believes
that the technical expertise and creative skills of its engineers and other
personnel are crucial in determining the Company's future success. The Company's
ability to compete in the marketplace may be enhanced by its ability to protect
its proprietary information through the ownership of patents, registrations and
trademarks. The Company attempts to protect its trade secrets and other
proprietary information through agreements with customers and suppliers,
proprietary information and invention assignment agreements with employees and
other security measures. However, although the Company intends to protect its
rights vigorously, there can be no assurance that these measures will be
successful. Litigation may be necessary to enforce the Company's patents,
trademarks or other intellectual property rights, to protect the Company's trade
secrets, to determine the validity and scope of the proprietary rights of others
or to defend against claims of infringement. Such litigation could result in
substantial costs and diversion of resources and could have a material adverse
effect on the Company's business and operating results. No intellectual property
of the Company has been invalidated or declared unenforceable. However, there
can be no assurance that in the future such rights will be upheld. Furthermore,
there can be no assurance that any issued patents will provide the Company with
a competitive advantage or will not be challenged by third parties or that the
patents of others will not have an adverse effect on the Company's ability to do
business. There can be no assurance that the measures taken by the Company will
prevent misappropriation of its technology. In addition, there can be no
assurance that others will not independently develop similar products, design
around the Company's proprietary technology or duplicate the Company's products.

EMPLOYEES

As of December 31, 1998, the Company employed 182 full-time employees and
22 temporary employees. Of these individuals, 52 are in engineering and product
development, 51 are in marketing, sales and customer support, 89 are in
manufacturing and quality assurance, and 12 are in finance and administration.
The Company believes that its future success will depend in large measure on its
ability to retain certain key technical and management personnel and to attract
and retain additional highly skilled employees. Competition for qualified
personnel in the wireless data communications and networking industries is
intense, and there can be no assurance that the Company will be successful in
retaining its key employees or that it will be able to attract, assimilate or
retain the additional skilled personnel that will be required to support the
Company's anticipated growth. None of the Company's employees is represented by
a labor union. The Company believes that its relations with employees are good.

<PAGE> 14

EXECUTIVE OFFICERS OF THE REGISTRANT

The following table sets forth certain information concerning the Company's
executive officers as of December 31, 1998:

<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------ --- ---------------------------------------------
<S> <C> <C>
David C. King........... 39 Chairman of the Board of Directors,
President and Chief Executive Officer
Brian T. Button......... 40 Vice President of Sales and Marketing
Keith E. Glover......... 42 Vice President of Finance and Administration,
and Chief Financial Officer
Juan Grau............... 41 Vice President of Engineering
Brian S. Messenger...... 37 Vice President of Operations
</TABLE>

DAVID C. KING joined Proxim in December 1992 as Vice President of Marketing
and acting Chief Financial Officer, in July 1993 was appointed President, Chief
Executive Officer and Director, and in January 1996 was named Chairman of the
Board of Directors. From December 1990 to November 1992, Mr. King served in
various executive capacities at Vitalink Communications Corporation
("Vitalink"), a LAN internetworking subsidiary of Network Systems Corporation,
most recently as Vice President of Marketing and Customer Services. From 1985 to
1990, Mr. King was Senior Manager in the San Francisco office of McKinsey &
Company, Inc., an international management consulting firm, where he was a
member of the firm's high technology and health care practices.

BRIAN T. BUTTON joined Proxim as Vice President of Marketing in June 1994.
In September 1996 Mr. Button was appointed Vice President of Sales and
Marketing. From March 1989 to June 1994, Mr. Button worked for Stratacom
Corporation, where he held several management positions, most recently as
Director, Product Marketing. From May 1982 to February 1989, Mr. Button worked
for Hewlett-Packard Company, where he held several marketing management
positions.

KEITH E. GLOVER has served as the Vice President of Finance and
Administration and Chief Financial Officer since he joined Proxim in September
1993. From March 1986 to June 1993, Mr. Glover worked for Vitalink, where he
held several financial management positions, most recently as Vice President of
Finance.

JUAN GRAU joined Proxim in August 1988 as RF Communications Manager. Mr.
Grau was promoted to Director of Product Engineering in November 1989 and, in
June 1991, was appointed Vice President of Engineering. From 1980 to 1988, Mr.
Grau worked at Hewlett-Packard Company, where he served in several engineering
and project management positions.

BRIAN S. MESSENGER joined Proxim in January 1989 as an engineering manager
in the RF communications group. In April 1994 Mr. Messenger was promoted to
Director-Product Development, and in October 1998 was appointed Vice President
of Operations. From 1981 to 1988, Mr. Messenger worked at Hewlett-Packard
Company, where he served in several engineering positions.

<PAGE> 15

ITEM 2. PROPERTIES

FACILITIES

The Company maintains its corporate headquarters in a 40,000 square foot
building located in Mountain View, California pursuant to a lease that expires
in June 2000. The Company subleases a 20,000 square foot warehouse located in
Sunnyvale, California pursuant to a month-to-month agreement. The Company also
leases sales offices in Atlanta, Georgia, Nashua, New Hampshire and Paris,
France. The Company intends to increase its manufacturing capacity during the
next nine months and intends to seek additional space near its present facility
in Mountain View, California. There can be no assurance that the Company will be
able to locate sufficient space near its present facility at commercially
reasonable rates. Furthermore, this expansion and relocation could cause
disruption of operations and unexpected costs which could have a material
adverse effect on the Company's business and operating results.

ITEM 3. LEGAL PROCEEDINGS

None.

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

None.

<PAGE> 16

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

MARKET FOR COMMON STOCK.

Prior to December 15, 1993, the date of the Company's initial public
offering, there was no public market for the Company's Common Stock. Since
December 15, 1993, the Company's Common Stock has been available for quotation
through the Nasdaq National Market under the symbol "PROX." The following table
sets forth, for the period indicated, the high and low sale prices per share of
the Company's Common Stock as reported by the Nasdaq National Market:

<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1997:
First quarter............... $ 26.50 $ 15.75
Second quarter.............. $ 26.75 $ 15.50
Third quarter............... $ 25.50 $ 12.31
Fourth quarter.............. $ 15.50 $ 10.13

1998:
First quarter............... $ 17.23 $ 10.88
Second quarter.............. $ 17.00 $ 11.81
Third quarter............... $ 19.00 $ 12.38
Fourth quarter.............. $ 28.63 $ 11.50
</TABLE>

HOLDERS OF RECORD.

As of March 4, 1999, there were 185 stockholders of record of the Company's
Common Stock.

DIVIDENDS.

The Company has not declared or paid cash dividends.

<PAGE> 17

ITEM 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue.................................. $ 49,711 $ 42,951 $ 41,220 $ 22,083 $ 11,297
Gross profit............................. 23,985 20,592 19,837 11,240 6,076
Research and development................. 7,630 8,720 4,949 3,288 1,783
Selling, general and administrative...... 12,555 13,513 9,408 6,694 3,982
Income (loss) from operations............ 3,800 (1,641) 5,480 1,258 311
Net income............................... $ 4,698 $ 94 $ 6,654 $ 2,846 $ 745
Basic net income per share............... $ .46 $ .01 $ .79 $ .40 $ .11
Weighted average common shares........... 10,318 10,048 8,466 7,150 6,922
Diluted net income per share............. $ .42 $ .01 $ .71 $ .35 $ .10
Weighted average common shares and
equivalents............................ 11,218 11,108 9,386 8,172 7,738

BALANCE SHEET DATA:
Cash, cash equivalents and marketable
securities.............................. $ 66,687 $ 62,296 $ 54,232 $ 6,247 $ 11,300
Working capital.......................... 80,842 73,071 70,559 16,650 14,488
Total assets............................. 94,242 89,059 81,381 24,107 17,435
Stockholders' equity..................... 85,470 78,675 75,641 18,450 15,226
</TABLE>

<PAGE> 18

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

The following discussion should be read in conjunction with the Company's
Financial Statements and Notes thereto.

OVERVIEW

Since 1989, Proxim has focused on supplying spread spectrum RF transceiver
modules and wireless LAN adapters to OEM customers for integration into mobile
computing platforms, pen-based portables and handheld data collection terminals.
In 1990, the Company introduced its first commercial product for OEM customers,
a 900 MHz direct sequence spread spectrum RF transceiver. The Company introduced
ProxLink, its first branded wireless data communications product for the
commercial end user market in 1991, and RangeLAN, a family of 900 MHz direct
sequence wireless LAN adapters in 1992. In 1994, the Company began commercial
shipment of RangeLAN2, the industry's first FCC certified family of 2.4 GHz
frequency hopping spread spectrum wireless LAN products. In 1996, the Company
introduced an integrated single piece PC Card adapter and a compact access point
product. In 1997, the Company introduced the RangeLAN2 micro design-in module,
Token Ring access point and Extension Point. In 1998, the Company introduced
RangeLAN802 frequency hopping product family based on the IEEE 802.11 standard,
RangeLAN2 Ethernet and Serial external adapters and the Symphony product family,
a low-cost cordless networking solution for home and small office environments.

Since the introduction of the RangeLAN2 product family in 1994, Proxim's
2.4 GHz product sales have increased to over 92% of total revenue in 1998. The
Company anticipates that its 2.4 GHz product family will continue to increase as
a percentage of total revenue as a result of the worldwide availability of
unlicensed 2.4 GHz spectrum as well as the higher throughput and capacity
achievable with 2.4 GHz wireless networks. To date, the Company has realized
lower gross margins from sales of its 2.4 GHz products compared to its 900 MHz
products due primarily to the higher component costs, higher manufacturing costs
associated with early production of various 2.4 GHz products and declining
average selling prices on 2.4 GHz products. While the Company expects
manufacturing costs to decline over time as a result of greater efficiencies
associated with higher volume production, there can be no assurance that the
Company will be able to achieve higher gross margins with respect to 2.4 GHz
product sales. Gross margins will be affected by a variety of factors, including
manufacturing efficiencies, competitive pricing pressures, the degree of
customization of individual products required by OEM customers and component and
assembly costs.

Historically, the Company has marketed its products predominantly in the
United States and, until 1995, revenue from international sales was not
significant. Since 1994, the Company obtained regulatory certifications and
authorizations for its 2.4 GHz RangeLAN2 products in over 50 countries. These
certifications and authorizations have significantly increased the available
markets for these products. Revenue from sales

<PAGE> 19

directly to international customers were 17%, 26% and 31% in 1998, 1997 and
1996, respectively. See "Business -- Sales and Marketing."

A substantial portion of the Company's revenue to date has been derived
from a limited number of customers, most of which are OEM customers. Sales to
OEM customers represented approximately 59%, 62% and 60% of total revenue in
1998, 1997 and 1996, respectively. The Company expects that sales to a limited
number of OEM customers will continue to account for a substantial portion of
its revenue for the foreseeable future. The Company also has experienced quarter
to quarter variability in sales to each of its major OEM customers and expects
this pattern to continue in the future. The loss of, or significant reductions
in sales to, one or more of the Company's major OEM customers could have a
material adverse effect on the Company's results of operations. The development
of products for OEM customer applications is characterized by a lengthy sales
process and design-in cycle which typically lasts from six months to two years
and requires the Company to integrate its technologies into, and in certain
cases adapt its products to fit, OEM customers' products. In addition, the
Company's OEM customers' products are generally required to be certified by the
FCC or the equivalent regulatory agency in each country where such products are
sold. The Company has committed substantial engineering, marketing and sales
resources to develop key OEM relationships and has broadened its OEM customer
base. Due to the Company's current dependency on its OEM customers for a
significant percentage of its total revenue and the nature of its OEM business,
the Company's annual and quarterly operating results are subject to fluctuations
as a result of the level and timing of OEM customer orders. The Company works
closely with its OEM customers to manage the order cycle process in an attempt
to reduce the fluctuations inherent in its OEM business.

The Company's RangeLAN2 and RangeLAN802 branded products are marketed and
sold to value added resellers, systems integrators and end users primarily
through regional and national distributors. The Company's Symphony branded
products are marketed and sold through PC and electronics retailers, computer
catalogs, on-line retail sites over the Internet, including Proxim's e-commerce
Web site, and OEM and private label partners. The Company grants certain
distributors limited rights of return and price protection on unsold products.
Product revenue on shipments to distributors which have rights of return and
price protection is recognized upon shipment by the distributor. Many of the
Company's packaged products are also sold to OEM customers.

RESULTS OF OPERATIONS

THREE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996

Revenue increased 16% from 1997 to 1998 and 4% from 1996 to 1997. Revenue
increased in 1998 compared to 1997 primarily due to increased unit sales of 2.4
GHz OEM products, RangeLAN2 branded products and private label RangeLAN2
products in North America and Europe, partially offset by a significant decrease
in orders from NTT-IT, one of the Company's major customers, starting in the
third quarter of 1997 and continuing through the second quarter of 1998, and to
a lessor extent, lower revenue from 900 MHz products. Revenue increased in 1997
compared to 1996 primarily due to increased unit sales of 2.4 GHz OEM products,
RangeLAN2 branded products and private label RangeLAN2 products, including
increased revenue from shipments to international distributors and to OEM
customers that had recently introduced RangeLAN2-based 2.4 GHz product lines in
North America, Europe and Asia.

Gross profit as a percentage of revenue was 48% in 1998, 1997 and 1996.
Gross profit as a percentage of revenue was flat in 1998 compared to 1997 and
1996 due to engineering cost reductions on 2.4 GHz products, offset by declining
average selling prices on 2.4 GHz products and a decrease in revenue from higher
gross margin 900 MHz products. Gross profit as a percentage of revenue may
fluctuate in future periods depending primarily on the mix of revenue between
existing 2.4 GHz products and 900 MHz products, including RangeLAN802 product
line and Symphony product family.

<PAGE> 20
Research and development expenses consist primarily of personnel costs and, to a
lesser extent, consulting fees, prototype material, other costs of ASIC/MMIC
development and charges related to technology investments. Research and
development expenses are related primarily to the development and enhancement of
radio transceivers, ASICs/MMICs, wireless protocols and network software
drivers. Research and development expenses decreased in 1998 compared to 1997
primarily due to a charge of $2,500,000 related to the acquisition of technology
to be used in 5 GHz product development in 1997, partially offset by an
increased number of engineering employees, continued investment in integrating
the Company's technology into ASICs, development of wireless protocols and
network software drivers, costs related to product performance enhancements,
cost reductions in 2.4 GHz products, costs related to both domestic and
international product certifications, development of products based on the IEEE
802.11 standard, and development of 5 GHz high-speed wireless LAN technology.
Research and development expenses increased in 1997 compared to 1996 primarily
due to the charge in 1997, and an increased number of engineering employees,
continued investment in integrating the Company's technology into ASICs,
development of wireless protocols and network software drivers, costs related to
product performance enhancements, cost reductions in the RangeLAN2 architecture,
costs related to both domestic and international product certifications,
development of products based on the IEEE 802.11 standard, and development of 5
GHz high-speed wireless LAN technology. Research and development expenses as a
percentage of revenue were 15%, 20% and 12% in 1998, 1997 and 1996,
respectively. Research and development expenses as a percentage of revenue
declined in 1998 compared to 1997 primarily due to the charge for the
acquisition of technology to be used in 5 GHz product development in 1997,
partially offset by an increase in personnel and development program costs in
1998. Research and development expenses as a percentage of revenue increased in
1997 compared to 1996 primarily due to an increase in personnel costs and the
charge in 1997. To date, all of the Company's research and development costs
have been expensed as incurred.

Selling, general and administrative expenses consist primarily of personnel
costs, sales commissions and bonuses, costs related to domestic and
international product certifications, customer support, trade show and
advertising expenses, charges related to investments in startup companies,
communications and information systems, and to a lesser extent, professional
fees and facilities costs. Selling, general and administrative expenses
decreased in 1998 compared to 1997 primarily due a $2,400,000 charge related to
investments in two startup companies in 1997, partially offset by hiring of
additional marketing and sales personnel to support the Company's growth,
particularly its expansion into international and consumer markets, as well as
increased trade show and promotional expenses, and a $1,000,000 charge related
to an investment in a startup wireless services company in 1998. Selling,
general and administrative expenses increased in 1997 compared to 1996 primarily
due to the hiring of additional marketing and sales personnel to support the
Company's growth, particularly its expansion into international markets, as well
as increased trade show and promotional expenses and charges related to
investments in startup companies. Selling, general and administrative expenses
as a percentage of revenue were 25%, 31% and 23% in 1998, 1997 and 1996,
respectively. Selling, general and administrative expenses as a percentage of
revenue declined in 1998 compared to 1997 due to charges related to investments
in 1997, partially offset by an increase in personnel costs and charges related
to an investment in 1998. Selling, general and administrative expenses as a
percentage of revenue increased in 1997 compared to 1996 due to an increase in
personnel costs and charges related to investments.

Interest and other income net, is primarily interest income and
non-operating gains. Interest and other income increased from 1997 to 1998
primarily due to higher yields on cash balances. Interest and other income
increased from 1996 to 1997 primarily due to proceeds from the follow-on public
offering in July 1996 which increased cash balances, partially offset by
one-time non-operating gain of $1,500,000 related to the November 1996
termination of a proposed merger.

The Company recognized a provision for income taxes of $2,441,000 in 1998,
$1,243,000 in 1997, $1,664,000 in 1996. The provision of $2,441,000 in 1998 was
due to a current provision of $1,883,000 and

<PAGE> 21

deferred provision of $558,000. The provision of $1,243,000 in 1997 was due to
a current provision of $2,490,000, offset by the recognition of $1,247,000 of
deferred tax assets. The provision of $1,664,000 in 1996 was due to a current
provision of $2,629,000, offset by the recognition of $965,000 of deferred tax
assets. As of December 31, 1998, the Company had gross deferred tax assets of
$2,885,000.

INFLATION

To date, inflation has not had a significant impact on the Company's
operating results.

LIQUIDITY AND CAPITAL RESOURCES

The Company has financed its operations to date primarily through private
placements of its equity securities, and its public offerings in December 1993
and July 1996. As of December 31, 1998, the Company had retained earnings of
$2,295,000.

In 1998, 1997 and 1996, cash provided by operations was $3,532,000,
$6,548,000 and $633,000, respectively. In 1998, cash was provided primarily by
net income, a decrease in inventories and increases in accounts payable,
partially offset by cash used to fund increases in accounts receivable and
decreases in other current liabilities. In 1997, cash was provided primarily by
net income, a decrease in accounts receivable and by increases in other current
liabilities, partially offset by cash used to fund increases in inventories and
decreases in accounts payable. In 1996, cash was provided primarily by net
income and by increases in other current liabilities, partially offset by cash
used to fund increases in inventories and accounts receivable and decreases in
accounts payable. The increase in inventories in 1997 and 1996 was primarily
attributable to the addition of new products and the growth in revenue. The
Company believes that to the extent it experiences growth in its operations, if
any, then additional cash will be required to fund increases in inventories and
accounts receivable.

In 1998, 1997 and 1996, the Company purchased $1,238,000, $1,424,000 and
$3,185,000, respectively, of property and equipment. Expenditures related
primarily to the acquisition of manufacturing and engineering test equipment and
leasehold improvements. The Company expects to purchase approximately $5,000,000
of property and equipment during 1999, consisting primarily of leasehold
improvements, furniture, enterprise client/server application software,
manufacturing and engineering test equipment and tooling, engineering systems
software and equipment.

At December 31, 1998, the Company had working capital of $80,842,000,
including $38,509,000 in cash and cash equivalents and $28,178,000 in marketable
securities. The Company believes that its existing working capital and cash
generated from operations, if any, will be sufficient to finance any cash
acquisitions which the Company may consider and provide adequate working capital
for the foreseeable future. However, to the extent that additional funds may be
required in the future to address working capital needs and to provide funding
for capital expenditures, expansion of the business or acquisitions, the Company
will consider additional financing. There can be no assurance that such
financing will be available on terms acceptable to the Company, if at all.

YEAR 2000 READINESS DISCLOSURE

Customary computer programming practices, developed prior to the upcoming
change in the century becoming a concern, have used two digits rather than four
to identify the year in a date field. If not corrected, many computer
applications may fail to treat year dates intended to represent years in the
twenty-first century as such but instead treat them as still in the twentieth
century, potentially resulting in system failure or

<PAGE> 22

miscalculations disruptive of business operations, including, among other
things, an inability to initiate, receive, process, invoice or otherwise
complete normal business activities. These Year 2000 issues affect virtually all
companies and organizations.

The Year 2000 issues affect the Company's internal operations. Management
is engaged in a comprehensive program to assess its Year 2000 risk exposure and
to plan and implement remedial and corrective action where necessary. The
Company has several computer software programs and operating systems in its
internal operations, including applications used in its financial, human
resources (HR), order management and manufacturing information systems.
Management has reviewed all of its major internal systems, including human
resources, financial and manufacturing systems, to assess Year 2000 readiness
and to identify critical systems that require correction or remediation. The
Company's existing HR, financial and manufacturing information systems will be
Year 2000 ready by the second quarter of 1999.

Management is working with consultants to develop and implement a new
manufacturing and finance information system. The new system was identified as a
strategic business initiative independent of Year 2000 considerations. While the
new information system will be a dynamic one permitting ongoing improvements as
business needs are identified, the basic operational systems are expected to be
substantially completed in 1999 at a total estimated expenditure of
approximately $2 million. Those time and cost targets are management's current
best estimates based on presently available information and numerous
assumptions. Given the uncertainties and complexities inherent in any new system
installation, there can be no assurance that the project will be completed
within the estimated time and cost parameters. A significant disruption of the
Company's financial or manufacturing information systems would adversely impact
its ability to process orders, manage production and issue and pay invoices, and
may have a material adverse impact on operating results and financial condition.

The Company's manufacturing processes incorporate sophisticated computer
integrated manufacturing test systems that depend on a mix of proprietary
software and systems and software purchased from third parties. Failure of these
systems would cause a disruption in the manufacturing process and could result
in a delay in completion and shipment of products. Management's assessment of
the Year 2000 readiness of its manufacturing systems is approximately 90%
complete. Based on information currently available, management believes that its
systems will not be materially impacted by Year 2000 issues. However, the
Company cannot guaranty that a significant disruption in systems resulting from
a Year 2000 problem will not occur. If the computer integration system fails for
this or any other reason, there could be a material adverse impact on operating
results and financial condition.

Management is working with critical suppliers of products and services to
assess their Year 2000 readiness with respect both to their operations and the
products and services they supply to the Company. Comprehensive inquiries have
been sent and responses are being monitored, with appropriate follow-up where
required. This analysis will continue throughout 1999, with corrective action
taken commensurate with the criticality of affected products and services.

Management is currently developing various types of contingency plans to
address potential problems with critical internal systems and third party
interactions. Management's contingency plans include procedures for dealing with
a major disruption of internal business systems, plans for long term factory
shutdown and identification of alternative vendors of critical materials in the
event of a Year 2000 related disruption in supply. Contingency planning will
continue through at least 1999, and will depend heavily on the results of the
remediation and testing of critical systems. The potential ramifications of a
Year 2000 type failure are potentially far-reaching and largely unknown. The
Company cannot guaranty that a contingency plan in effect at the time of a
system failure will adequately address the immediate or long term effects of a
failure, or that such a failure would not have a material adverse impact on its
operations or financial results in spite of prudent planning.

<PAGE> 23

The Company's costs to date related to the Year 2000 issue consist
primarily of reallocation of internal resources to evaluate and assess system as
described above and to plan remediation and testing efforts. The Company has not
maintained detailed accounting records, but based on its review of department
budgets and staff allocations, the Company believes these costs to be
immaterial. Management currently estimates that the total cost of ongoing
assessment, remediation, testing and planning directly related to Year 2000
issues will amount to approximately $2.5 million. Of this, approximately $2
million is expected to consist of expenses attributed to cost of software and
external consulting fees and five hundred thousand for capital expenditures. The
capital expenditures represent early replacement of information technology
equipment and software to obtain the full benefits of Year 2000 protections
versus the normal technical obsolescence replacement cycle. The estimate is
based on the current assessment of the projects and is subject to change as the
projects progress. The Company cannot guaranty that remediation and testing will
not identify issues which require additional expenditure of material amounts
which could result in an adverse impact on financial results in future reporting
periods.

Based on currently available information, management does not believe that
the Year 2000 issues discussed above related to internal systems will have a
material adverse impact on the Company's operations and financial condition.
However, the Company is uncertain to what extent it may be affected by such
matters. In addition, the Company cannot assure you that the failure to ensure
Year 2000 capability by a supplier not considered critical or another third
party would not have a material adverse effect on its operations and financial
condition.

CERTAIN FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS

In addition to the other information in this Form 10-K, the following are
important factors that should be considered carefully in evaluating the Company
and its business.

Potential Fluctuations in Future Operating Results. The Company has
experienced, and may in the future continue to experience, significant annual
and quarterly fluctuations in revenue, gross margins and operating results due
to numerous factors, many of which are outside the Company's control. These
factors include fluctuating market demand for, and declines in the average
selling prices of, the Company's products, the timing of and delays or
cancellations of significant orders from major customers, loss of one or more of
the Company's major customers, the cost, availability and quality of components
from the Company's suppliers, the cost, availability, and quality of assemblies
from contract and subcontract manufacturers, the lengthy sales and design-in
cycles for OEM products, delays in the introduction of the Company's new
products, competitive product introductions, market adoption of new
technologies, market adoption of standards-based products (such as those
compliant with the recently approved IEEE 802.11 standard), the mix of products
sold, the effectiveness of the Company's distribution channels, the success of
the Company in developing new distribution channels, the failure to anticipate
changing customer product requirements, seasonality in demand, manufacturing
capacity and efficiency, changes in the regulatory environment, product health
and safety concerns, Year 2000 issues and general economic conditions.

Historically, the Company has not operated with a significant order backlog
and a substantial portion of the Company's revenue in any quarter has been
derived from orders booked and shipped in that quarter. Accordingly, the
Company's revenue expectations are based almost entirely on its internal
estimates of future demand and not on firm customer orders. Planned expense
levels are relatively fixed in the short term and are based in large part on
these estimates, and if orders and revenue do not meet expectations, the
Company's operating results could be materially adversely affected. In this
regard, in the third quarter of 1997, the Company experienced a decrease in
revenue and an operating loss as a result of a significant decrease in orders
from two of the Company's major customers. There can be no assurance that the
Company will not experience future quarter to quarter decreases in revenue or
quarterly operating losses. In addition, due to the timing of orders from OEM
customers, the Company has often recognized a substantial portion of its revenue
in the last

<PAGE> 24

month of a quarter. As a result, minor fluctuations in the timing of orders and
the shipment of products have caused, and may in the future cause, operating
results to vary significantly from quarter to quarter.

It is possible that due to the potential fluctuations identified above or
other factors, the Company's future operating results could be below the
expectations of securities analysts and investors. In such an event, or in the
event that adverse market conditions prevail or are perceived to prevail
generally or with respect to the Company's business, the price of the Company's
Common Stock would likely decline. For example, in the third quarter of 1997 the
Company announced that revenue and operating results were expected to be
significantly below expectations of securities analysts and investors, resulting
in a decrease in the market price of the Company's Common Stock.

Dependence on a Limited Number of OEM Customers. Historically, a
substantial portion of the Company's revenue has been derived from a limited
number of customers, most of which are OEM customers. Approximately 59%, 62% and
60% of the Company's sales during the 1998, 1997 and 1996, respectively, were to
OEM customers. In addition, sales to two customers represented approximately 41%
and 11% of the Company's revenue during 1998. Sales to three customers
represented approximately 28%, 17% and 10% of the Company's revenue during 1997.
The Company expects that sales to a limited number of OEM customers will
continue to account for a substantial portion of its revenue for the foreseeable
future. The Company also has experienced quarter to quarter variability in sales
to each of its major OEM customers and expects this pattern to continue in the
future.

Sales of many of the Company's wireless networking products depend in
significant part upon the decision of a prospective OEM customer to develop and
market wireless solutions which incorporate the Company's wireless technology.
OEM customers' orders are affected by a variety of factors such as new product
introductions, regulatory approvals, end user demand for OEM customers'
products, product life cycles, inventory levels, manufacturing strategy,
contract awards, competitive conditions and general economic conditions. Sales
of wireless LAN products generally involve significant commitments of capital
and other resources by the Company and its customers, with the attendant delays
associated with procedures to approve such commitments. In this regard, in the
fourth quarters of 1997 and 1998, the Company recorded charges of $2,400,000 and
$1,000,000 respectively, to selling, general and administrative expense related
to investments in two startup companies: one in a startup wireless services
company utilizing wireless LAN technology and the other in a developer of mobile
thin-client computing technology. Due to the nature of these entities and their
operations, there can be no assurance that these investments will be realizable
or will result in marketable and/or successful products. For these and other
reasons, the design-in cycle associated with the purchase of the Company's
wireless products by OEM customers is quite lengthy, generally ranging from six
months to two years, and is subject to a number of significant risks, including
customers' budgeting constraints and internal acceptance reviews, that are
beyond the Company's control. Because of the lengthy sales cycle, the Company
typically plans its production and inventory levels based on internal forecasts
of OEM customer demand, which is highly unpredictable and can fluctuate
substantially. In addition, the Company's agreements with OEM customers
typically do not require minimum purchase quantities and a significant
reduction, delay or cancellation of orders from any of these customers could
have a material adverse effect on the Company's results of operations. If
revenue forecasted from a specific customer for a particular quarter is not
realized in that quarter, the Company's operating results for that quarter could
be materially adversely affected. The loss of one or more of, or a significant
reduction in orders from, the Company's major OEM customers could have a
material adverse effect on the Company's results of operations. For example, in
the third quarter of 1997, the Company experienced a significant decrease in
orders from two of the Company's major customers resulting in a decrease in
revenue, an operating loss and higher inventory levels. In addition, there can
be no assurance that the Company will become a qualified supplier for new OEM
customers or that the Company will remain a qualified supplier for existing OEM
customers.

<PAGE> 25

Sole or Limited Sources of Supply. Certain parts and components used in the
Company's products, including the Company's proprietary Application Specific
Integrated Circuits ("ASICs"), Monolithic Microwave Integrated Circuits
("MMICs") and assembled circuit boards, are only available from single sources,
and certain other parts and components are only available from a limited number
of sources. The Company's reliance on these sole source or limited source
suppliers involves certain risks and uncertainties, including the possibility of
a shortage or discontinuation of certain key components and reduced control over
delivery schedules, manufacturing capability, quality and costs. Any reduced
availability of such parts or components when required could materially impair
the Company's ability to manufacture and deliver its products on a timely basis
and result in the cancellation of orders, which could have a material adverse
effect on the Company's operating results. In addition, the purchase of certain
key components involves long lead times and, in the event of unanticipated
increases in demand for the Company's products, the Company has in the past
been, and may in the future be, unable to manufacture certain products in a
quantity sufficient to meet its customers' demand in any particular period. The
Company has no guaranteed supply arrangements with its sole or limited source
suppliers, does not maintain an extensive inventory of parts or components, and
customarily purchases sole or limited source parts and components pursuant to
purchase orders placed from time to time in the ordinary course of business.
Business disruptions, production shortfalls or financial difficulties of a sole
or limited source supplier could materially and adversely impact the Company by
increasing product costs, or reducing or eliminating the availability of such
parts or components. In such event, the inability of the Company to develop
alternative sources of supply quickly and on a cost-effective basis could
materially impair the Company's ability to manufacture and deliver its products
on a timely basis and could have a material adverse effect on its operating
results.

Manufacturing Risks. The Company currently has limited manufacturing
capability and has no experience in large scale manufacturing. If the Company's
customers were to place or concurrently place orders for unexpectedly large
quantities of the Company's products, the Company's present manufacturing
capacity might be inadequate to meet such demand. There can be no assurance that
the Company will be able to develop or contract for additional manufacturing
capacity on acceptable terms on a timely basis. In addition, in order to compete
successfully, the Company will need to achieve significant product cost
reductions. Although the Company intends to achieve cost reductions through
engineering improvements and production economies, there can be no assurance
that the Company will be able to do so. In order to remain competitive, the
Company must continue to introduce new products and processes into its
manufacturing environment. The Company currently conducts its manufacturing
operations for all of its products in a single facility in Mountain View,
California. In addition, the Company relies on certain outside contract
manufacturers for circuit board assemblies which subjects the Company to a
number of risks, including a potential inability to obtain an adequate supply of
assembled circuit boards as well as reduced control over the price, timely
delivery and quality of such assembled circuit boards. If the Company's Mountain
View facility were to become incapable of operating, even temporarily, or were
unable to operate at or near its current or full capacity for an extended
period, the Company's business and operating results could be materially
adversely affected. Further, in order to remain competitive the Company expects
to continue to introduce new processes into its manufacturing environment.
Changes in the manufacturing operations to incorporate new products and
processes could cause disruptions, which, in turn, could adversely affect
customer relationships, cause a loss of market opportunities and have a material
adverse effect on the Company's business and operating results.

The Company has in the past experienced higher than expected demand for its
products. This resulted in delays in the delivery of certain products due to
temporary shortages of certain components, particularly components with long
lead times, and insufficient manufacturing capacity. Although the Company has
taken certain steps to minimize such delays in the future by increasing its
manufacturing capacity and stocking certain critical and long lead time
components, due to the complex nature of the Company's products and
manufacturing processes, the worldwide demand for certain wireless technology
components and other factors, there can be no assurance that delays in the
delivery of products will not occur in the future.

<PAGE> 26

The Company intends to increase its manufacturing capacity during the next
nine months and intends to seek additional space near its present facility in
Mountain View, California. There can be no assurance that the Company will be
able to locate sufficient space near its present facility at commercially
reasonable rates. Furthermore, this expansion and relocation could cause
disruption of operations and unexpected costs which could have a material
adverse effect on the Company's business and operating results.

Rapid Technological Change; Ongoing New Product Development Requirements;
Evolving Industry Standards. The wireless communications industry is
characterized by rapid technological change, short product life cycles and
evolving industry standards. To remain competitive, the Company must develop or
gain access to new technologies in order to increase product performance and
functionality, reduce product size and maintain cost-effectiveness. The
Company's research and development efforts are focused on implementing
enhancements to existing products, investigating new technologies and developing
new products. Since 1994 the Company's research and development efforts have
been concentrated on enhancing features and performance and reducing the cost of
the RangeLAN2-based products, including development of the Symphony product
line. These efforts include developing and integrating the Company's technology
into ASICs/MMICs, development of wireless protocols and network software
drivers, performance enhancements and cost reductions to wireless adapter and
access point products and efforts related to both domestic and international
product certification. In 1997 and 1998 the Company substantially increased its
research and development efforts in developing Institute of Electrical and
Electronics Engineers ("IEEE") 802.11 standard based products and 5 GHz
high-speed wireless LAN technology.

Competition. The wireless local area networking market is intensely
competitive. The principal competitive factors in this market include effective
RF coverage area, data throughput, wireless networking protocol sophistication,
network scalability, roaming capability, power consumption, product
miniaturization, product reliability, product time to market, product
certifications, price, effective distribution channels, ability to support new
industry standards and company reputation. Although the Company believes that it
currently competes favorably on the basis of these factors, the Company could be
at a disadvantage to companies that have broader distribution channels and offer
more diversified product lines.

<PAGE> 27

International Sales. Revenue from shipments by the Company to customers
outside the United States, principally to a limited number of distributors and
OEM customers, represented 17%, 26% and 31% of total revenue during 1998, 1997
and 1996, respectively. The Company expects that revenue from shipments to
international customers will vary as a percentage of total revenue. Sales to
international customers or to U.S. OEM customers who ship to international
locations are subject to a number of risks and uncertainties including, but not
limited to, changes in foreign government regulations and telecommunications
standards, export license requirements, tariffs and taxes, other trade barriers,
fluctuations in currency exchange rates, difficulty in collecting accounts
receivable, difficulty in staffing and managing foreign operations, and
potential political and economic instability.

While international sales are typically denominated in U.S. dollars and the
Company typically extends limited credit terms, fluctuations in currency
exchange rates could cause the Company's products to become relatively more
expensive to customers in a particular country, leading to a reduction in sales
or profitability in that country. Additionally, payment cycles for international
distributors are typically longer than for distributors in the United States.
There can be no assurance that foreign markets will continue to develop or that
the Company will receive additional orders to supply its products to foreign
customers. The Company's business and operating results could be materially and
adversely affected if foreign markets do not continue to develop or if the
Company does not receive additional orders to supply its products for use by
foreign customers. In the latter part of 1997 and throughout 1998, capital
markets in Asia were highly volatile, resulting in fluctuations in Asian
currencies and other economic instabilities. These instabilities may continue or
worsen, either of which could have a material adverse effect on the Company's
results of operations. In this regard, in the third of 1997 and continuing
through the second quarter of 1998, the Company experienced a significant
decrease in orders from NTT-IT, one of the Company's major Japanese customers,
resulting in a significant decrease in quarterly revenue and an operating loss
in the third quarter of 1997.

<PAGE> 28

Protection of Proprietary Rights. The Company relies on a combination of
patents, trademarks and non-disclosure agreements in order to establish and
protect its proprietary rights. Proxim has been issued four U.S. patents which
were issued in 1991, 1993, 1995 and 1999, and are important to the current
business of the Company, and has five patent applications pending in the U.S.
which relate to the Company's core technology. There can be no assurance that
patents will issue from any of these pending applications or, if patents do
issue, that the claims allowed will be sufficiently broad to protect the
Company's technology. In addition, there can be no assurance that any patents
issued to the Company will not be challenged, invalidated or circumvented, or
that the rights granted thereunder will adequately protect the Company. Since
U.S. patent applications are maintained in secrecy until patents issue, and
since publication of inventions in the technical or patent literature tends to
lag behind such inventions by several months, the Company cannot be certain that
it was the first creator of the inventions covered by its issued patents or
pending patent applications or that it was the first to file patent applications
for such inventions or that the Company is not infringing on the patents of
others. In addition, the Company has filed, or reserved its rights to file, a
number of patent applications internationally. There can be no assurance that
any such international patent applications will issue or that the laws of
foreign jurisdictions will protect the Company's proprietary rights to the same
extent as the laws of the United States.

Management of Growth. The Company's growth to date has caused, and will
continue to cause, a significant strain on its management, operational,
financial and other resources. The Company's ability to manage its growth
effectively will require it to improve its management, operational and financial
processes and controls as well as the related information and communications
systems. These demands will require the addition of new management personnel and
the development of additional expertise by existing management. The failure of
the Company's management team to effectively manage growth, should it occur,
could have a material adverse impact on the Company's results of operations.

Uncertain Government Regulation. In the United States, the Company is
subject to various FCC rules and regulations. Current FCC regulations permit
license-free operation in certain FCC-certified bands in the radio spectrum.
Proxim's spread spectrum wireless products are certified for unlicensed
operation in the 902-928 MHz and 2.4-2.4835 GHz frequency bands. Operation in
these frequency bands is governed by rules set forth in Part 15 of the FCC
regulations. The Part 15 rules are designed to minimize the probability of
interference to other users of the spectrum and, thus, accord Part 15 systems
secondary status. In the event that there is

<PAGE> 29

interference between a primary user and a Part 15 user, a higher priority user
can require the Part 15 user to curtail transmissions that create interference.
In this regard, if users of the Company's products experience excessive
interference from primary users, market acceptance of the Company's products
could be adversely affected, thereby materially and adversely affecting the
Company's business and results of operations. The FCC, however, has established
certain standards which create an irrebuttable presumption of noninterference
for Part 15 users and the Company believes that its products comply with such
requirements. There can be no assurance that the occurrence of regulatory
changes, including changes in the allocation of available frequency spectrum or
modification to the standards establishing an irrebuttable presumption for
unlicensed Part 15 users, would not significantly impact the Company's
operations by rendering current products obsolete, restricting the applications
and markets served by the Company's products or increasing the opportunity for
additional competition.

Emission of Electromagnetic Radiation. The intentional emission of
electromagnetic radiation has been the subject of recent public concern
regarding possible health and safety risks, and though the Company's products,
when installed in any of the intended configurations, will not exceed the
maximum permissible exposure limits listed in Section 1.1311 of the Federal
Communications Commission Regulations, there can be no assurance that such
safety issues will not arise in the future and will not have a materially
adverse effect on the Company's business.

Expanded Distribution Required for Branded Products. To date, a substantial
percentage of Proxim's revenue has been derived from OEM customers through the
Company's direct sales force. The Company sells its branded RangeLAN2 products
through domestic and international distributors. In general, distributors offer
products of several different companies, including products that may compete
with the Company's products. Accordingly, these distributors may give higher
priority to products of other suppliers, thus reducing their

<PAGE> 30

efforts to sell the Company's products. Agreements with distributors are
generally terminable at the distributor's option. A reduction in sales efforts
or termination of a distributor's relationship with the Company may have a
material adverse effect on the Company's future operating results. Use of
distributors also entails the risk that distributors will build up inventories
in anticipation of substantial growth in sales. If such growth does not occur as
anticipated, these distributors may substantially decrease the amount of product
ordered in subsequent quarters. Such fluctuations could contribute to
significant variations in the Company's future operating results.

Dependence on Key Employees. The Company is highly dependent on the
technical and management skills of its key employees, in particular David C.
King, Chairman, President and Chief Executive Officer, and Juan Grau, Vice
President of Engineering. The Company does not have employment agreements with,
or life insurance on the life of, either person. The loss of the services of any
key employee could adversely affect the Company's business and operating
results. The Company's success also depends in large part on a limited number of
key technical, marketing and sales employees and on the Company's ability to
continue to attract, assimilate and retain additional highly talented personnel.
Competition for qualified personnel in the wireless data communications and
networking industries is intense. There can be no assurance that the Company
will be successful in retaining its key employees or that it can attract,
assimilate or retain the additional skilled personnel as required.

Volatility of Stock Price. Recently, the price of the Company's Common
Stock has been volatile. The Company believes that the price of its Common Stock
may continue to fluctuate, perhaps substantially, as a result of factors such as
announcements of developments relating to the Company's business, fluctuations
in the Company's operating results, general conditions in the wireless
communications industry or the worldwide economy, a shortfall in revenue or
earnings from securities analysts' expectations or other changes in financial
estimates by securities analysts, announcements of technological innovations or
new products or enhancements by the Company or its competitors, developments in
patent, copyrights or other intellectual property rights and developments in the
Company's relationships with its customers, distributors and suppliers. In the
third quarter of 1997, the Company announced revenue and operating results below
expectations of securities analysts and investors, resulting in a decrease in
the market price of the Company's Common Stock. In addition, in recent years the
stock market in general, and the market for shares of high technology stocks in
particular, have experienced extreme price fluctuations, which have often been
unrelated to the operating performance of affected companies. There can be no
assurance that the market price of the Company's Common Stock will not
experience significant fluctuations in the future, including fluctuations that
are unrelated to the Company's performance.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Interest Rate Sensitivity. The Company maintains a short-term investment
portfolio consisting mainly of government and corporate bonds purchased with an
average maturity of less than one year. These available-for-sale securities are
subject to interest rate risk and will decline in value if market interest rates
increase. If market interest rates were to increase immediately and uniformly by
10 percent from levels at December 31, 1998, the fair value of the portfolio
would decline by an immaterial amount. The Company generally has the ability to
hold its fixed income investments until maturity and therefore does not expect
its operating results or cash flows to be affected to any significant degree by
the effect of a sudden change in market interest rates on its securities
portfolio.

<PAGE> 31

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INDEX TO FINANCIAL STATEMENTS

Report of Independent Accountants...................................... 32

Balance Sheet at December 31, 1998 and 1997............................ 33

Statement of Operations for the Years Ended
December 31, 1998, 1997 and 1996.................................. 34

Statement of Stockholders' Equity for the Years Ended
December 31, 1998, 1997 and 1996.................................. 35

Statement of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996.................................. 36

Notes to Financial Statements.......................................... 37
</TABLE>

FINANCIAL STATEMENT SCHEDULES

All financial statement schedules have been omitted because the information
is not required to be set forth herein, is not applicable or is included in the
financial statements or notes thereto.

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

None.

<PAGE> 32

REPORT OF INDEPENDENT ACCOUNTANTS

To the Stockholders and Board of Directors of
Proxim, Inc.

In our opinion, the accompanying balance sheet and the related statements
of operations, of stockholders' equity and of cash flows present fairly, in all
material respects, the financial position of Proxim, Inc. at December 31, 1998
and 1997, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.

PricewaterhouseCoopers LLP

San Jose, California
January 25, 1999

<PAGE> 33

PROXIM, INC.
BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 38,509 $ 62,296
Marketable securities............................................. 28,178 --
Accounts receivable, net.......................................... 9,193 6,879
Inventories....................................................... 11,825 12,309
Deferred tax assets............................................... 1,612 1,625
Other current assets.............................................. 297 346
-------- --------
Total current assets............................................ 89,614 83,455
Property and equipment, net......................................... 3,355 3,786
Deferred tax assets................................................. 1,273 1,818
-------- --------
$ 94,242 $ 89,059
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable.................................................. $ 2,321 $ 1,354
Other current liabilities......................................... 6,451 9,030
-------- --------
Total current liabilities....................................... 8,772 10,384
-------- --------

Commitments (Note 10)

Stockholders' equity:
Common Stock, $.001 par value, 25,000 shares authorized;
10,435 and 10,194 shares issued and outstanding.................. 10 10
Additional paid-in capital........................................ 83,165 81,068
Retained earnings (accumulated deficit)........................... 2,295 (2,403)
-------- --------
Total stockholders' equity...................................... 85,470 78,675
-------- --------
$ 94,242 $ 89,059
======== ========
</TABLE>

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

<PAGE> 34

PROXIM, INC.
STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Revenue........................................... $ 49,711 $ 42,951 $ 41,220
Cost of revenue................................... 25,726 22,359 21,383
-------- -------- --------
Gross profit...................................... 23,985 20,592 19,837
-------- -------- --------

Operating expenses:
Research and development........................ 7,630 8,720 4,949
Selling, general and administrative............. 12,555 13,513 9,408
-------- -------- --------
Total operating expenses...................... 20,185 22,233 14,357
-------- -------- --------
Income (loss) from operations..................... 3,800 (1,641) 5,480
Interest and other income, net.................... 3,339 2,978 2,838
-------- -------- --------
Income before income taxes........................ 7,139 1,337 8,318
Provision for income taxes........................ 2,441 1,243 1,664
-------- -------- --------
Net income........................................ $ 4,698 $ 94 $ 6,654
======== ======== ========

Basic net income per share........................ $ .46 $ .01 $ .79
======== ======== ========
Weighted average common shares.................... 10,318 10,048 8,466
======== ======== ========
Diluted net income per share...................... $ .42 $ .01 $ .71
======== ======== ========
Weighted average common shares and equivalents.... 11,218 11,108 9,386
======== ======== ========
</TABLE>

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

<PAGE> 35

PROXIM, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)

<TABLE>
<CAPTION>
RETAINED
COMMON STOCK ADDITIONAL EARNING
-------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
-------- -------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995....... 7,257 $ 7 $ 27,594 $ (9,151) $ 18,450
Exercise of stock options.......... 381 1 822 -- 823
Issuance of Common Stock under
Stock Purchase Plan............. 136 -- 610 -- 610
Issuance of Common Stock in
follow-on public offering, net... 2,013 2 47,002 -- 47,004
Tax benefit of stock options....... -- -- 2,100 -- 2,100
Net income......................... -- -- -- 6,654 6,654
-------- -------- -------- -------- --------

Balance at December 31, 1996....... 9,787 10 78,128 (2,497) 75,641
Exercise of stock options.......... 306 -- 1,068 -- 1,068
Issuance of Common Stock under
Stock Purchase Plan............. 101 -- 692 -- 692
Tax benefit of stock options....... -- -- 1,180 -- 1,180
Net income......................... -- -- -- 94 94
-------- -------- -------- -------- --------

Balance at December 31, 1997....... 10,194 10 81,068 (2,403) 78,675
Exercise of stock options.......... 190 -- 1,272 -- 1,272
Issuance of Common Stock under
Stock Purchase Plan............. 51 -- 572 -- 572
Tax benefit of stock options....... -- -- 253 -- 253
Net income......................... -- -- -- 4,698 4,698
-------- -------- -------- -------- --------

Balance at December 31, 1998....... 10,435 $ 10 $ 83,165 $ 2,295 $ 85,470
======== ======== ======== ======== ========
</TABLE>

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

35
<PAGE> 36

PROXIM, INC.
STATEMENT OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................ $ 4,698 $ 94 $ 6,654
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization......................... 1,669 1,640 983
Deferred tax assets................................... 558 (1,247) (965)
Changes in assets and liabilities:
Accounts receivable................................. (2,314) 3,392 (3,461)
Inventories......................................... 484 (1,830) (2,588)
Other assets........................................ 49 (145) (73)
Accounts payable.................................... 967 (479) (1,914)
Other current liabilities........................... (2,579) 5,123 1,997
-------- -------- --------
Net cash provided by operating activities....... 3,532 6,548 633
-------- -------- --------

Cash flows used in investing activities:
Purchase of property and equipment.................. (1,238) (1,424) (3,185)
Marketable Securities............................... (28,178) -- --
-------- -------- --------
Net cash used in investing activities........... (29,416) (1,424) (3,185)
-------- -------- --------

Cash flows from financing activities:
Proceeds from issuance of Common Stock, net........... 1,844 1,760 48,437
Tax benefit of stock options.......................... 253 1,180 2,100
-------- -------- --------
Net cash provided by financing activities......... 2,097 2,940 50,537
-------- -------- --------

Net increase (decrease) in cash and cash equivalents.... (23,787) 8,064 47,985
Cash and cash equivalents, beginning of period.......... 62,296 54,232 6,247
-------- -------- --------
Cash and cash equivalents, end of period................ $ 38,509 $ 62,296 $ 54,232
======== ======== ========
</TABLE>

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

<PAGE> 37

PROXIM, INC.
NOTES TO FINANCIAL STATEMENTS

NOTE 1 -- THE COMPANY:

Proxim, Inc. (the "Company") designs, manufactures and markets high
performance wireless local area data networking products. Based on spread
spectrum radio frequency technology, Proxim's highly integrated wireless client
adapters and network infrastructure systems seamlessly extend existing
enterprise LANs to enable mobility-driven applications in a wide variety of
in-building and campus area environments. In addition, the Company's products
are designed to address the requirements for networking personal computers in
home and small office environments.

NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Use of Estimates

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

Cash Equivalents and Marketable Securities

The Company considers all highly liquid instruments with a maturity of
three months or less when purchased to be cash equivalents. Cash equivalents
consist primarily of market rate accounts and highly rated commercial paper that
are stated at cost, which approximate fair value. Marketable securities consist
of short-term investments in debt securities classified as available-for-sale.
Unrealized gains and losses at December 31, 1998 were not significant.

Inventories

Inventories are stated at the lower of cost or market, cost being
determined using the first in, first out method.

Property and Equipment

Property and equipment are stated at cost. Depreciation and amortization
are computed using the straight-line method over the estimated useful lives of
the assets, ranging from two to five years. Amortization of leasehold
improvements is computed using the straight-line method over the shorter of the
remaining lease term or the estimated useful lives of the improvements.

Revenue

Product revenue is generally recognized upon shipment to the customer. The
Company grants certain distributors limited rights of return and price
protection on unsold products. Product revenue on shipments to distributors
which have rights of return and price protection is recognized upon shipment by
the distributor. The provision for estimated future warranty is recorded at the
time revenue is recognized.

Software Development Costs

Software development costs are included in research and development and are
expensed as incurred. Statement of Financial Accounting Standards No. 86
requires the capitalization of certain software development costs once
technological feasibility is established, which the Company defines as
completion of a working model. The capitalized cost is then amortized on a
straight-line basis over the estimated product life, or on the ratio of current
revenues to total projected product revenues, whichever is greater. To date, the
period between achieving technological feasibility and the general availability
of such software has been short and software development costs qualifying for
capitalization have been insignificant. Accordingly, the Company has not
capitalized any software development costs.

<PAGE> 38

Income Taxes

A deferred tax liability or asset, net of a valuation allowance, is
established for the expected future consequences resulting from the differences
between the financial reporting and income tax bases of assets and liabilities
and from net operating loss carryforwards.

Net Income Per Share

Basic net income per share is computed by dividing net income available to
Common Stockholders by the weighted average number of common shares outstanding
during the period. Diluted net income per share is calculated using the weighted
average number of outstanding shares of Common Stock plus dilutive Common Stock
equivalents. Common Stock equivalents consist of stock options, using the
treasury stock method based on the average stock price for the period.

Stock-Based Compensation

The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion (APB) No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations. The
Company provides additional pro forma disclosures as required under Statement of
Financial Accounting Standards No. 123 (FAS 123), "Accounting for Stock-Based
Compensation." (See Note 6)

Comprehensive Income

Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS 130) establishes new rules for the reporting of
comprehensive income and its components. Comprehensive income is defined to
include all changes in equity during a period except those resulting from
investments by owners and distributions to owners. The adoption of SFAS 130 had
no material impact on the Company's net income or stockholders equity.

Segment Reporting

Financial Accounting Standards Board Statement No. 131 (SFAS 131),
"Disclosures About Segments of an Enterprise and Related Information," requires
that companies report separately in the financial statements certain financial
and descriptive information about operating segments' profit or loss, certain
specific revenue and expense items and segment assets. Additionally, companies
are required to report information about revenue and assets by geographic areas
and about major customers. The Company operates in one industry segment, and
assets located outside of the United States are not significant.

<PAGE> 39

NOTE 3 -- BALANCE SHEET COMPONENTS:

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Accounts receivable:
Gross accounts receivable........................... $ 9,593 $ 7,379
Less: allowance for doubtful accounts............... (400) (500)
-------- --------
$ 9,193 $ 6,879
======== ========
Inventories:
Raw materials....................................... $ 5,149 $ 6,032
Work-in-process..................................... 6,028 5,831
Finished goods...................................... 648 446
-------- --------
$ 11,825 $ 12,309
======== ========
Property and equipment:
Computer and test equipment......................... $ 8,080 $ 7,179
Furniture and fixtures.............................. 758 522
Leasehold improvements.............................. 1,076 975
-------- --------
9,914 8,676
Less: accumulated depreciation and amortization..... (6,559) (4,890)
-------- --------
$ 3,355 $ 3,786
======== ========
Other current liabilities:
Income taxes payable................................ $ 2,074 $ 1,751
Accrued compensation................................ 1,873 1,366
Deferred revenue.................................... 772 422
Other accrued liabilities........................... 1,732 5,491
-------- --------
$ 6,451 $ 9,030
======== ========
</TABLE>

NOTE 4 -- INCOME TAXES:

The provision for income taxes consists of the following (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal............................ $ 1,634 $ 2,309 $ 1,974
State.............................. 249 181 655
-------- -------- --------
1,883 2,490 2,629
-------- -------- --------
Deferred:
Federal............................ 480 (1,082) (995)
State.............................. 78 (165) 30
-------- -------- --------
558 (1,247) (965)
-------- -------- --------
$ 2,441 $ 1,243 $ 1,664
======== ======== ========
</TABLE>

<PAGE> 40

The tax provision reconciles to the amount computed by applying the U.S.
federal statutory rate to income before taxes as follows (in thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>

Tax at federal statutory rate............. $ 2,427 $ 455 $ 2,911
State taxes, net of federal tax benefit... 211 118 452
Research and development credits.......... (239) (104) (100)
Permanent difference...................... 404 912 --
Net operating loss carryforwards,
net of minimum tax effect............. -- -- (843)
Change in valuation allowance............. (362) (204) (758)
Other..................................... -- 66 2
-------- -------- --------
$ 2,441 $ 1,243 $ 1,664
======== ======== ========
</TABLE>

Deferred tax assets comprise the following (in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
-------- --------
(IN THOUSANDS)
<S> <C> <C>

Net operating loss and credit carryforwards............ $ 1,095 $ 1,406
Capitalized research and development costs............. 131 98
Depreciation and amortization.......................... 629 1,215
Accrued expenses and reserves.......................... 1,030 1,086
-------- --------
Total deferred tax assets.............................. 2,885 3,805
Valuation allowance.................................... -- (362)
-------- --------
$ 2,885 $ 3,443
</TABLE>

At December 31, 1998, the Company had approximately $3,100,000 of net
operating loss carryforwards for federal tax reporting purposes available to
offset future taxable income; such carryforwards expire through 2008. The
amounts of and the benefits from net operating losses that can be carried
forward may be impaired or limited in certain circumstances. Events which may
cause such limitations include, but are not limited to, a cumulative stock
ownership change of greater than 50%, as defined, over a three year period.

NOTE 5 -- STOCKHOLDERS' EQUITY:

Follow-on Public Offerings

In July 1996, the Company completed a follow-on public offering of
2,012,500 shares of Common Stock at $25.00 per share and realized proceeds of
approximately $47.0 million, net of issuance costs of $795,000.

<PAGE> 41

Preferred Stock

In December 1993, the stockholders approved a class of Preferred Stock
consisting of 5,000,000 shares, at a par value of $.001 per share, issuable in
series and having such rights, preferences, privileges and restrictions as may
be determined by the Board of Directors. As of December 31, 1998, no Preferred
Stock had been issued.

Preferred Share Purchase Rights

In March 1997, the Company declared a dividend distribution of one
Preferred Share Purchase Right (the "Rights") on each outstanding share of the
Company's Common Stock. Each right will entitle stockholders to buy one
one-thousandth of a share of the Company's Series A Participating Preferred
Stock at an exercise price of $115.00. The Rights will become exercisable
following the tenth day after a person or group announces acquisition of 15% or
more of the Company's Common Stock or announces commencement of a tender offer
the consummation of which would result in ownership by the person or group of
15% or more of the Common Stock. The Company will be entitled to redeem the
Rights at $0.001 per Right at any time on or before the tenth day following
acquisition by a person or group of 15% or more of the Company's Common Stock.

If, prior to redemption of the Rights, a person or group acquires 15% or
more of the Company's Common Stock, each Right not owned by a holder of 15% or
more of the Common Stock will entitle its holder to purchase, at the Right's
then current exercise price, that number of shares of Common Stock of the
Company (or, in certain circumstances as determined by the Board, cash, other
property or other securities) having a market value at that time of twice the
Right's exercise price. If, after the tenth day following acquisition by a
person or group of 15% or more of the Company's Common Stock, Proxim sells more
than 50% of its assets or earning power or is acquired in a merger or other
business combination transaction, the acquiring person must assume the
obligations under the Rights and the Rights will become exercisable to acquire
Common Stock of the acquiring person at the discounted price. At any time after
an event triggering exercisability of the Rights at a discounted price and prior
to the acquisition by the acquiring person of 50% or more of the outstanding
Common Stock, the Board of Directors of the Company may exchange the Rights
(other than those owned by the acquiring person or its affiliates) for Common
Stock of the Company at an exchange ratio of one share of Common Stock per
Right.

NOTE 6 - STOCK PLANS:

1986 Stock Option Plan

The Company's 1986 Stock Option Plan (the "1986 Plan") provided for the
grant of stock options to employees and consultants at prices not less than 85%
of the fair market value of the Company's Common Stock on the date of grant. The
options terminate ten years after the date of grant. All options granted have
been at the fair market value of the Company's Common Stock on the dates of
grant. An aggregate of 2,272,088 shares of Common Stock were reserved for
issuance pursuant to the 1986 Plan. Unless otherwise provided for by the Board
of Directors, the options are exercisable only upon vesting. Options generally
vest ratably over a 48 month period. The 1986 Plan (but not outstanding options
issued thereunder) terminated by its terms on March 20, 1996.

1995 Long-Term Incentive Plan

In April 1995, the Company established the 1995 Long-Term Incentive Plan
(the "1995 Plan") and reserved 250,000 shares of Common Stock for issuance to
employees, consultants and officers upon the exercise of awards granted
thereunder. In March 1996, the Board of Directors increased the number of shares
of Common Stock authorized for issuance under the 1995 Plan by 1,000,000 shares
to an aggregate of 1,250,000 shares. In May 1997, the Board of Directors
increased the number of shares of Common Stock authorized for issuance

<PAGE> 42

under the 1995 Plan by 500,000 shares to an aggregate of 1,750,000 shares. In
May 1998, the Board of Directors increased the number of shares of Common Stock
authorized for issuance under the 1995 Plan by 500,000 shares to an aggregate of
2,250,000 shares. The 1995 Plan provides for the grant of awards in the form of
stock options, restricted stock, performance shares, restricted stock units, and
stock unit awards to employees, consultants and officers at prices not less than
100% of the fair market value of the Company's Common Stock on the date of
grant. The options terminate ten years after the date of grant. Through December
31, 1998, only stock options have been granted under the 1995 Plan and all such
options have been granted at the fair market value of the stock at the dates of
grant. Unless otherwise provided for by the Board of Directors, the options are
exercisable only upon vesting. Options generally vest ratably over a 48 month
period.

1994 Director Option Plan

In May 1994, the Company adopted the 1994 Director Option Plan (the
"Directors' Plan") which provides for the grant of stock options to directors at
the fair market value of the Company's Common Stock on the date of grant. The
options terminate 10 years after the date of grant. All options granted have
been at the fair market value of the Company's Common Stock at the dates of
grant. In May 1997, the Board of Directors increased the number of shares of
Common Stock authorized for issuance under the 1994 Director Option Plan by
100,000 shares to an aggregate of 200,000 shares. Options granted under the
Directors' Plan are exercisable only upon vesting. Grants made prior to January
1, 1996 vest ratably over a 48 month period, and grants made on or after January
1, 1996 fully vest one year from the date of grant.

The following table summarizes stock option activity under the Company's
stock option plans (shares in thousands):

<TABLE>
<CAPTION>
SHARES OPTIONS WEIGHTED AVERAGE
AVAILABLE OUTSTANDING EXERCISED PRICE
--------- ----------- ----------------
<S> <C> <C> <C>
Balance at December 31, 1995............ 460 1,335 $ 4.20
Shares authorized.................... 1,000 --
Termination of 1986 Plan............. (120) --
Options granted...................... (602) 602 20.19
Options exercised.................... -- (380) 2.21
Options canceled..................... 41 (41) 13.45
-------- --------

Balance at December 31, 1996............ 779 1,516 10.79
Shares authorized.................... 600 --
Termination of 1986 Plan............. (40) --
Options granted...................... (1,589) 1,589 11.16
Options exercised.................... -- (305) 3.37
Options canceled..................... 560 (560) 18.80
-------- --------

Balance at December 31, 1997............ 310 2,240 10.06
Shares authorized.................... 500 --
Options granted...................... (769) 769 12.35
Options exercised.................... -- (190) 6.52
Options canceled..................... 173 (203) 13.94
-------- --------

Balance at December 31, 1998............ 214 2,616 $ 10.69
======== ========
</TABLE>

<PAGE> 43

At December 31, 1998, 1997 and 1996, options for 981,000, 551,000 and
556,000 shares of common stock, respectively, were vested but not exercised. In
October 1997, the Company canceled 467,000 options outstanding for non-officer
employees under the option plans with exercise prices greater than $10.75, and
reissued the options with an exercise price of $10.75.

The following table summarizes information concerning outstanding and
exercisable stock options as of December 31, 1998 (shares in thousands):

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ------------------------------
WEIGHTED AVERAGE
RANGE OF NUMBER REMAINING WEIGHTED AVERAGE NUMBER WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ---------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$.25 -- $ 1.50 107 4.60 $ .84 107 $ .84
$4.00 -- $ 9.63 308 6.11 $ 6.42 300 $ 6.36
$10.38 -- $18.63 2,159 8.28 $ 11.48 544 $ 11.70
$19.19 -- $27.50 37 8.40 $ 24.07 25 $ 25.95
$45.50 -- $45.50 5 7.38 $ 45.50 5 $ 45.50
------ ------
$.15 -- $45.50 2,616 7.88 $ 10.69 981 $ 9.43
====== ======
</TABLE>

1993 Employee Stock Purchase Plan

In September 1993, the Company established the 1993 Employee Stock Purchase
Plan (the "Purchase Plan"). The Company initially reserved 200,000 shares of
Common Stock for issuance to employees under the Purchase Plan. In March 1996,
the Company's Board of Directors increased the number of shares of Common Stock
reserved for issuance under the Purchase Plan by 200,000 shares to an aggregate
of 400,000 shares. In May 1997, the Company's Board of Directors increased the
number of shares of Common Stock reserved for issuance under the Purchase Plan
by 200,000 shares to an aggregate of 600,000 shares. In May 1998, the Company's
Board of Directors increased the number of shares of Common Stock reserved for
issuance under the Purchase Plan by 200,000 shares to an aggregate of 800,000
shares. Under the Purchase Plan, an eligible employee may purchase shares of
Common Stock from the Company through payroll deductions of up to 10% of his or
her total compensation, at a price per share equal to 85% of the lesser of the
fair market value of the Company's Common Stock at the first day or last day of
each six-month offering period. Offering periods commence on August 15 and
February 15. During 1998, 1997 and 1996, the Company issued 51,265, 99,709, and
135,736 shares, respectively, of Common Stock under the Purchase Plan.

Pro Forma Disclosure

The weighted average estimated grant date fair value, as defined by FAS
123, for stock options granted under the Company's stock option plans during
1998, 1997 and 1996 was $7.73, $5.59 and $13.31 per share, respectively. The
weighted average estimated grant date fair value of stock purchase rights
granted pursuant to the Company's employee stock purchase plan during 1998, 1997
and 1996 was $4.93, $1.81 and $2.05 per share, respectively. The estimated grant
date fair value disclosed by the Company is calculated using the Black-Scholes
model. The Black-Scholes model, as well as other currently accepted option
valuation models, was developed to estimate the fair value of freely tradable,
fully transferable options without vesting restrictions, which significantly
differ from the Company's stock option and purchase awards. These models also
require highly subjective assumptions, including future stock price volatility
and expected time until exercise, which greatly affect the calculated grant date
fair value.

<PAGE> 44

The following weighted average assumptions are included in the estimated
grant date fair value calculations for the Company's stock option and purchase
awards:

<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Stock option plans:
Expected dividend yield............... 0.0% 0.0% 0.0%
Expected stock price volatility....... 92.0% 99.0% 109.8%
Risk free interest rate............... 5.07% 6.27% 6.19%
Expected life (years)................. 2.68 2.68 2.68

Stock purchase plan:
Expected dividend yield............... 0.0% 0.0% 0.0%
Expected stock price volatility....... 70.5% 64.0% 152.4%
Risk free interest rate............... 4.97% 5.63% 5.29%
Expected life (years)................. 0.5 0.5 0.5
</TABLE>

Pro Forma Net Income (Loss) and Net Income (Loss) Per Share

Had the Company recorded compensation based on the estimated grant date
fair value, as defined by FAS 123, for awards granted under its stock option
plans and stock purchase plan, the Company's net income and net income per share
would have been reduced to the pro forma amounts below for the years ended
December 31, 1998, 1997 and 1996 (in thousands, except per share amounts):

<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Net income as reported............................. $ 4,698 $ 94 $ 6,654
Pro forma net income (loss)........................ $ 1,080 $(2,474) $ 4,828

Diluted net income per share as reported........... $ 0.42 $ 0.01 $ 0.71
Pro forma diluted net income (loss) per share ..... $ 0.10 $ (0.24) $ 0.52
</TABLE>

The pro forma effect on net income and net income per share for 1998, 1997
and 1996 is not representative of the pro forma effect on net income in future
years because it does not take into consideration pro forma compensation expense
related to grants made prior to 1996.

NOTE 7 - NET INCOME PER SHARE:

The following table is a reconciliation of the numerators and denominators
of the basic and diluted net income per share calculations:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
-------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C>
BASIC NET INCOME PER SHARE:
Net income available to Common Stockholders....... $ 4,698 $ 94 $ 6,654
======== ======== ========
Weighted average common shares.................... 10,318 10,048 8,466
======== ======== ========
Basic net income per share........................ $ .46 $ .01 $ .79
======== ======== ========

DILUTED NET INCOME PER SHARE:
Net income available to Common Stockholders....... $ 4,698 $ 94 $ 6,654
======== ======== ========
Weighted average common shares.................... 10,318 10,048 8,466
Dilutive common stock equivalents................. 900 1,060 945
-------- -------- --------
Weighted average common shares and equivalents.... 11,218 11,108 9,386
======== ======== ========
Diluted net income per share...................... $ .42 $ .01 $ .71
</TABLE>

<PAGE> 45

During 1998 and 1997, options to purchase 43,184 and 94,771 shares of
Common Stock, respectively, were antidilutive and excluded from the dilutive net
income per share calculations because the options' exercise price was greater
than the average market price of the common shares.

NOTE 8 -- NON-OPERATING GAIN

During 1996, the Company entered into an agreement with DSP Communications,
Inc. ("DSPC") whereby Proxim was to merge with DSPC. In November 1996, the
merger agreement was terminated. The Company recorded a one-time non-operating
gain of $1,500,000, net of related expenses, resulting from termination fees
paid by DSPC as provided in the agreement.

NOTE 9 -- CONCENTRATION OF SALES AND CREDIT RISK

Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents,
marketable securities and trade accounts receivable. The Company places its cash
and cash equivalents and marketable securities primarily in market rate accounts
and highly rated commercial paper. The Company, by policy, limits the amount of
credit exposure to any one financial institution or commercial issuer.

The Company generally extends 30-day credit terms to its customers, which
is consistent with industry business practices. The Company performs ongoing
credit evaluations of its customers' financial condition and, generally,
requires no collateral from its customers. To date the Company has not
experienced any material credit losses. All sales transactions are denominated
in U.S. dollars.

During 1998, revenue from two customers represented 41% and 11% of total
revenue. During 1997, revenue from three customers represented 28%, 17% and 10%
of total revenue. During 1996, revenue from three customers represented 22%, 22%
and 12% of total revenue.

Revenue from shipments to customers outside the United States, primarily in
Asia Pacific, Europe and South America, represented 17%, 26% and 31% of total
revenue in 1998, 1997 and 1996, respectively. Revenue from shipments to
customers in Japan represented 4% , 17% and 22% of total revenue in 1998, 1997
and 1996, respectively.

At December 31, 1998, outstanding receivables from two customers
represented 27% and 18% of gross receivables. At December 31, 1997, outstanding
receivables from three customers represented 19%, 17% and 11% of gross
receivables.

NOTE 10 -- COMMITMENTS:

The Company occupies its facility under a non-cancelable operating lease
agreement which expires in June 2000 and which requires payment for property
taxes, insurance, maintenance and utilities. Total rental expense related to
this operating lease was $504,000, $504,000 and $456,000 for 1998, 1997 and
1996, respectively.

Future minimum lease payments under non-cancelable leases at December 31,
1998 were as follows (in thousands):

<TABLE>
<S> <C>
Year ending December 31,
1999............................................. $ 504
2000................. ........................... 252
-----
Total minimum lease payments $ 756
=====
</TABLE>

<PAGE> 46

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

10.a. Information with respect to directors is incorporated by reference from
the information under the caption "Election of Directors," in the
Registrant's Proxy Statement which will be filed with the Securities and
Exchange Commission within 120 days after December 31, 1998.

10.b. Information with respect to directors and executive officers is included
at the end of PART I, Item 1. on page 12 of this Report under the
caption "Executive Officers of the Registrant."

ITEM 11. EXECUTIVE COMPENSATION

Incorporated by reference from the information under the captions
"Executive Compensation" in the Registrant's Proxy Statement which will be filed
with the Securities and Exchange Commission within 120 days after December 31,
1998.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Incorporated by reference from the information under the caption "Security
Ownership of Certain Beneficial Owners and Management" in the Registrant's Proxy
Statement which will be filed with the Securities and Exchange Commission within
120 days after December 31, 1998.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Not Applicable.

<PAGE> 47

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)(1) Financial Statements: See Index to Financial Statements at Item 8. on
page 31 of this Report.

(2) Financial Statement Schedules: See Item 8. on page 31 of this Report.

(3) Exhibits:

<TABLE>
<CAPTION>
EXHIBIT # DESCRIPTION OF DOCUMENT
- --------- ---------------------------------------------------------------------
<S> <C>
3.1(1) Amended Articles of Incorporation.
3.2(1) Certificate of Incorporation of Registrant.
3.3(1) Restated Certificate of Incorporation.
3.4(1) Bylaws of Registrant.
3.5(6) Preferred Shares Rights Agreement.
4.1(1) Form of Common Stock Certificate.
4.2(1) Series A Preferred Stock Purchase Agreement dated May 2, 1991.
4.3(1) Registration and Information Rights and Modification Agreement
dated May 2, 1991.
10.1(1)(5) Form of Registrant's Indemnification Agreement for Officers and
Directors, Delaware.
10.2(1)(5) 1993 Employee Stock Purchase Plan and form of Subscription Agreement.
10.3(1)(5) 1986 Incentive Stock Option Plan and form of Stock Option Agreement.
10.4(1) Services Agreement dated June 17, 1992 between Proxim and Sears
Technology Services Inc.
10.5(1) Lease Agreement dated February 18, 1993 between Proxim and Vanni
Business Park Partnership.
10.6(1) Security and Loan Agreement dated August 17, 1993 between Proxim,
Inc. and Imperial Bank.
10.7(2) Amendment to Lease Agreement dated August 28, 1994 between Proxim,
Inc. and Vanni Business Park Partnership.
10.8(3)(5) 1994 Director Option Plan and form of Subscription Agreement.
10.9(4)(5) 1995 Long-Term Incentive Plan and form of Subscription Agreement.
10.10 Change of Control Severance Agreement entered into June 18, 1998
between Registrant and David C. King.
10.11 Change of Control Severance Agreement entered into June 18, 1998
between Registrant and Brian Button.
10.12 Change of Control Severance Agreement entered into June 18, 1998
between Registrant and Keith E. Glover.
10.13 Change of Control Severance Agreement entered into June 18, 1998
between Registrant and Juan Grau.
10.14 Change of Control Severance Agreement entered into October 19, 1998
between Registrant and Brian Messenger.
23.1 Consent of Independent Accountants.
27.1 Financial Data Schedule
</TABLE>

(b) Reports on Form 8-K: None.

(d) Financial Statement Schedules: See 14(a) above.
- ----------

(1) Incorporated by reference to the Registrant's Registration Statement No.
33-70712 filed with the Securities and Exchange Commission on December 15,
1993.

(2) Incorporated by reference to the Registrant's Form 10-Q for the period
ended September 30, 1994 filed with the Securities and Exchange Commission
on November 14, 1994.

(3) Incorporated by reference to the Registrant's definitive proxy materials
filed with the Securities and Exchange Commission on April 15, 1994.

(4) Incorporated by reference to the Registrant's Registration Statement No.
33-94910 filed with the Securities and Exchange Commission on July 19,
1995.

(5) Management contract or compensation plan or arrangement required to be
filed as an exhibit to this Report on Form 10-K pursuant to item 14(c) of
this Report.

(6) Incorporated by reference to the Registrant's Registration Statement filed
with the Securities and Exchange Commission on April 7, 1997.

<PAGE> 48

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Mountain View, State of California, on the 26th day of March, 1999.

PROXIM, INC.

By: /s/ KEITH E. GLOVER
-------------------------------------
(Keith E. Glover, Vice President of
Finance and Administration, and Chief
Financial Officer)

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints David C. King and Keith E. Glover,
jointly and severally, his attorneys-in-fact, each with full power of
substitution, for him in any and all capacities, to sign on behalf of the
undersigned any amendments to this Report on Form 10-K, and to file the same,
with exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, and each of the undersigned does hereby
ratify and confirm all that each of said attorneys-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.

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

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ DAVID C. KING Chairman of the Board of Directors, March 26, 1999
- ----------------------------- President and Chief Executive Officer
(David C. King) (Principal Executive Officer)

/s/ KEITH E. GLOVER Vice President of Finance and March 26, 1999
- ----------------------------- Administration, and Chief Financial
(Keith E. Glover) Officer (Principal Financial and
Accounting Officer)

/s/ RAYMOND CHIN Director March 26, 1999
- -----------------------------
(Raymond Chin)

/s/ LESLIE G. DENEND Director March 26, 1999
- -----------------------------
(Leslie G. Denend)

/s/ GREG REYES Director March 26, 1999
- -----------------------------
(Greg Reyes)

/s/ JEFFREY D. SAPER Director and Secretary March 26, 1999
- -----------------------------
(Jeffrey D. Saper)
</TABLE>

<PAGE> 49

INDEX TO EXHIBITS

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- ---------------------------------------------------------------------
<S> <C>
3.1(1) Amended Articles of Incorporation.
3.2(1) Certificate of Incorporation of Registrant.
3.3(1) Restated Certificate of Incorporation.
3.4(1) Bylaws of Registrant.
3.5(6) Preferred Shares Rights Agreement.
4.1(1) Form of Common Stock Certificate.
4.2(1) Series A Preferred Stock Purchase Agreement dated May 2, 1991.
4.3(1) Registration and Information Rights and Modification Agreement
dated May 2, 1991.
10.1(1)(5) Form of Registrant's Indemnification Agreement for Officers and
Directors, Delaware.
10.2(1)(5) 1993 Employee Stock Purchase Plan and form of Subscription Agreement.
10.3(1)(5) 1986 Incentive Stock Option Plan and form of Stock Option Agreement.
10.4(1) Services Agreement dated June 17, 1992 between Proxim and Sears
Technology Services Inc.
10.5(1) Lease Agreement dated February 18, 1993 between Proxim and Vanni
Business Park Partnership.
10.6(1) Security and Loan Agreement dated August 17, 1993 between Proxim,
Inc. and Imperial Bank.
10.7(2) Amendment to Lease Agreement dated August 28, 1994 between Proxim,
Inc. and Vanni Business Park Partnership.
10.8(3)(5) 1994 Director Option Plan and form of Subscription Agreement.
10.9(4)(5) 1995 Long-Term Incentive Plan and form of Subscription Agreement.
10.10 Change of Control Severance Agreement entered into June 18, 1998
between Registrant and David C. King.
10.11 Change of Control Severance Agreement entered into June 18, 1998
between Registrant and Brian Button.
10.12 Change of Control Severance Agreement entered into June 18, 1998
between Registrant and Keith E. Glover.
10.13 Change of Control Severance Agreement entered into June 18, 1998
between Registrant and Juan Grau.
10.14 Change of Control Severance Agreement entered into October 19, 1998
between Registrant and Brian Messenger.
23.1 Consent of Independent Accountants.
27.1 Financial Data Schedule
</TABLE>

(b) Reports on Form 8-K: None.

(d) Financial Statement Schedules: See 14(a) above.
- ----------

(1) Incorporated by reference to the Registrant's Registration Statement No.
33-70712 filed with the Securities and Exchange Commission on December 15,
1993.

(2) Incorporated by reference to the Registrant's Form 10-Q for the period
ended September 30, 1994 filed with the Securities and Exchange Commission
on November 14, 1994.

(3) Incorporated by reference to the Registrant's definitive proxy materials
filed with the Securities and Exchange Commission on April 15, 1994.

(4) Incorporated by reference to the Registrant's Registration Statement No.
33-94910 filed with the Securities and Exchange Commission on July 19,
1995.

(5) Management contract or compensation plan or arrangement required to be
filed as an exhibit to this Report on Form 10-K pursuant to item 14(c) of
this Report.

(6) Incorporated by reference to the Registrant's Registration Statement filed
with the Securities and Exchange Commission on April 7, 1997.

<PAGE> 1

EXHIBIT 10.14

PROXIM, INC.

CHANGE OF CONTROL SEVERANCE AGREEMENT

This Change of Control Severance Agreement (the "Agreement") is made and
entered into by and between Brian Messenger (the "Employee") and Proxim, Inc., a
Delaware corporation (the "Company"), effective as of October 19, 1998 (the
"Effective Date").

RECITALS

A. It is expected that the Company from time to time will consider the
possibility of an acquisition by another company or other change of control. The
Board of Directors of the Company (the "Board") recognizes that such
consideration can be a distraction to the Employee and can cause the Employee to
consider alternative employment opportunities. The Board has determined that it
is in the best interests of the Company and its stockholders to assure that the
Company will have the continued dedication and objectivity of the Employee,
notwithstanding the possibility, threat or occurrence of a Change of Control (as
defined below) of the Company.

B. The Board believes that it is in the best interests of the Company and
its stockholders to provide the Employee with an incentive to continue his
employment and to motivate the Employee to maximize the value of the Company
upon a Change of Control for the benefit of its stockholders.

C. The Board believes that it is imperative to provide the Employee with
certain severance benefits upon Employee's termination of employment following a
Change of Control which provide the Employee with enhanced financial security
and provide incentive and encouragement to the Employee to remain with the
Company notwithstanding the possibility of a Change of Control.

D. Certain capitalized terms used in the Agreement are defined in Section
6 below.

AGREEMENT

NOW, THEREFORE, in consideration of the mutual covenants contained herein,
the parties hereto agree as follows:

1. Term of Agreement. This Agreement shall terminate upon the date that
all of the obligations of the parties hereto with respect to this Agreement have
been satisfied.

2. At-Will Employment. The Company and the Employee acknowledge that the
Employee's employment is and shall continue to be at-will, as defined under
applicable law, except as may otherwise be specifically provided under the terms
of any written formal employment agreement between the Company and Employee (an
"Employment Agreement").

<PAGE> 2

3. Severance Benefits.

(a) Termination Following Change of Control. If the Employee's
employment terminates at any time within twenty-four (24) months following a
Change of Control, then, subject to Sections 4 and 5, the Employee shall be
entitled to receive the following severance benefits and no other compensation,
severance or benefits:

(i) Involuntary Termination; Not for Cause Termination. If the
Employee's employment is terminated as a result of Involuntary Termination
(whether such termination is initiated by the Company or by the Employee), or as
a result of termination by the Company other than for Cause, then the Employee
shall receive the following severance benefits from the Company:

(A) Severance Payments. Cash payments in an amount equal to
one hundred percent (100%) of the Employee's Annual Compensation (as defined
below) for a period of twelve (12) months following the date of termination of
such Employee.

(B) Continued Employee Benefits. One hundred percent (100%)
Company-paid health, dental, vision and life insurance coverage at the same
level of coverage as was provided to such employee immediately prior to the
Change of Control (the "Company-Paid Coverage"), for a period of twelve (12)
months after the date of termination of such Employee. Company-Paid Coverage
shall not include the percentage of the payment for such insurance as
contributed by the Employee immediately prior to the Employee's termination (the
"Contribution Percentage"). Company-Paid Coverage is expressly contingent upon
timely payment of the Contribution Percentage by the Employee. If Employee's
health insurance coverage included the Employee's dependents immediately prior
to the Employee's termination, then Employees' Company-Paid Coverage shall
include health insurance coverage for such dependents, subject to timely
payments of the Contribution Percentage, as above. For purposes of the
continuation health coverage required under Section 4980B of the Code ("COBRA"),
the date of the "qualifying event" giving rise to an Employee's COBRA election
period (and that of his "qualifying beneficiaries") shall be the last date on
which the Employee receives Company-Paid Coverage under this Agreement. If the
Employee obtains comparable or better coverage prior to the lapse of the
specified Company-Paid Coverage period, the Employee must inform the Company in
writing within 30 days thereof and Company-Paid Coverage will thereupon be
canceled immediately.

(C) Options; Restricted Stock. In the event that the
Employee is entitled to severance benefits pursuant to subsection 3(a)(i), then
upon such termination, in addition to any portion of the Employee's stock
options that were exercisable immediately prior to such termination, or
restricted stock that was not subject to the right of repurchase held by the
Company, such unvested options shall vest immediately upon termination, and such
restricted stock shall immediately be released from the Company's right of
repurchase.

-2-

<PAGE> 3

(D) Outplacement Assistance. Employee shall be entitled to
reasonable, pre-approved Company-paid outplacement assistance, including job
counseling and referral services, for a period of six (6) months following the
date of termination of employment, not to exceed a total of $10,000.

(b) Timing of Severance Payments. The severance payment or payments
to which Employee is entitled shall be paid by the Company to Employee as salary
continuation on the same basis and timing as in effect immediately prior to the
Change of Control. If Employee should die before all amounts payable to him or
her have been paid, such unpaid amounts shall be paid to Employee's designated
beneficiary, if living, or otherwise to the personal representative of
Employee's estate.

(c) Voluntary Resignation; Termination For Cause. If the Employee's
employment terminates by reason of the Employee's voluntary resignation (and is
not an Involuntary Termination), or if the Employee is terminated for Cause,
then the Employee shall not be entitled to receive severance or other benefits
except for those (if any) as may then be established under the Company's then
existing severance and benefits plans and practices or pursuant to other written
agreements with the Company.

(d) Disability; Death. If the Company terminates the Employee's
employment as a result of the Employee's Disability, or such Employee's
employment is terminated due to the death of the Employee, then the Employee
shall not be entitled to receive severance or other benefits except for those
(if any) as may then be established under the Company's then existing written
severance and benefits plans and practices or pursuant to other written
agreements with the Company.

(e) Termination Apart from Change of Control. In the event the
Employee's employment is terminated for any reason, either prior to the
occurrence of a Change of Control or after the twenty-four (24) month period
following a Change of Control, then the Employee shall not be entitled to any
payments, benefits, damages, awards or compensation except as provided in the
Employee=s Employment Agreement (if any) or under the Company's existing written
severance and benefits plans and practices or pursuant to any other written
agreements with the Company.

(f) Exclusive Remedy. In the event of a termination of Employee's
employment within twenty-four (24) months following a Change of Control, the
provisions of this Section 3 are intended to be and are exclusive and in lieu of
any other rights or remedies to which Employee or the Company may otherwise be
entitled, whether at law, tort or contract, in equity, or under this Agreement.
Employee shall be entitled to no benefits, compensation or other payments or
rights upon termination of employment following a Change in Control other than
those benefits expressly set forth in this Section 3, whichever shall be
applicable.

4. Limitation on Payments. In the event that the severance and other
benefits provided for in this Agreement or otherwise payable to the Employee (i)
constitute "parachute payments" within the meaning of Section 280G of the
Internal Revenue Code of 1986, as amended (the "Code") and (ii) but for this
Section 4, would be subject to the excise tax imposed by Section 4999 of the
Code, then the Employee's severance benefits under Section 3(a)(i) shall be
either

-3-

<PAGE> 4

(a) delivered in full, or

(b) delivered as to such lesser extent which would result in no
portion of such severance benefits being subject to excise tax under Section
4999 of the Code, whichever of the foregoing amounts, taking into account the
applicable federal, state and local income taxes and the excise tax imposed by
Section 4999, results in the receipt by the Employee on an after-tax basis, of
the greatest amount of severance benefits, notwithstanding that all or some
portion of such severance benefits may be taxable under Section 4999 of the
Code. Unless the Company and the Employee otherwise agree in writing, any
determination required under this Section 4 shall be made in writing by the
Company's independent public accountants immediately prior to Change of Control
(the "Accountants"), whose determination shall be conclusive and binding upon
the Employee and the Company for all purposes. In the event of a reduction in
the benefits hereunder, Employee shall be given the choice of which benefits to
reduce. For purposes of making the calculations required by this Section 4, the
Accountants may make reasonable assumptions and approximations concerning
applicable taxes and may rely on reasonable, good faith interpretations
concerning the application of Sections 280G and 4999 of the Code. The Company
and the Employee shall furnish to the Accountants such information and documents
as the Accountants may reasonably request in order to make a determination under
this Section. The Company shall bear all costs the Accountants may reasonably
incur in connection with any calculations contemplated by this Section 4.

5. Covenants Not to Compete and Not to Solicit.

(a) Covenant Not to Compete. During the period in which Employee is
entitled to severance payments pursuant to this Agreement, Employee shall not
directly or indirectly engage in (whether as an employee, consultant,
proprietor, partner, director or otherwise), or have any ownership interest in,
or participate in the financing, operation, management or control of, any
person, firm, corporation or business that engages in a "Restricted Business" in
a "Restricted Territory" (as such terms are defined in Section 6 hereof). It is
agreed that ownership of not greater than 2% of the outstanding voting stock of
a publicly traded corporation shall not constitute a violation of this
provision.

(b) Covenant Not to Solicit. Until the Employee is no longer entitled
to severance payments pursuant to this Agreement, Employee will not directly or
indirectly

(i) solicit, encourage, or take any other action which is
intended to induce any other employee, independent contractor, customer or
supplier of the Company or its parent corporation to terminate his or her
relationship with the Company or its parent corporation; or

(ii) interfere in any manner with the contractual or employment
relationship between the Company or its parent corporation and any such
employee, independent contractor, customer or supplier of the Company or its
parent corporation.

(c) Representations. The parties intend that the covenants contained
in Sections 5(a) and (b) shall be construed as a series of separate covenants,
one for each county, city and state (or

-4-

<PAGE> 5

analogous entity) and country of the Restricted Territory. Except for geographic
coverage, each such separate covenant shall be deemed identical in terms to the
covenant contained in the preceding paragraphs. If, in any judicial proceeding,
a court shall refuse to enforce any of the separate covenants (or any part
thereof) deemed included in said paragraphs, then such unenforceable covenant
(or such part) shall be deemed eliminated from this Agreement for the purpose of
those proceedings to the extent necessary to permit the remaining separate
covenants (or portions thereof) to be enforced.

(d) Reformation. In the event that the provisions of this Section 5
should ever be deemed to exceed the time or geographic limitations, or the scope
of this covenant, permitted by applicable law, then such provisions shall be
reformed to the maximum time or geographic limitations, as the case may be,
permitted by applicable laws.

(e) Reasonableness of Covenants. Employee represents that he (i) is
familiar with the covenants not to compete and not to solicit, and (ii) is fully
aware of his obligations hereunder, including, without limitation, the
reasonableness of the length of time, scope and geographic coverage of these
covenants.

6. Definition of Terms. The following terms referred to in this Agreement
shall have the following meanings:

(a) Annual Compensation. "Annual Compensation" means an amount equal
to the sum of Employee's (i) annual Company salary at the highest rate in effect
during the twelve (12) months immediately preceding the Change of Control or the
date of Involuntary Termination or termination by the Company other than for
Cause, whichever is highest and (ii) 100% of Employee's annual target bonus as
in effect immediately prior to the Change of Control or the date of Involuntary
Termination or termination by the Company other than for Cause, whichever is
highest.

(b) Cause. "Cause" shall mean (i) any act of dishonesty taken by
Employee and intended to result in substantial gain or personal enrichment of
the Employee, (ii) Employee personally engaging in knowing and intentional
illegal conduct which is injurious to the Company or its affiliates; (iii)
Employee's continued failure to substantially perform the duties and obligations
of his employment which are not remedied within thirty (30) days after written
notice thereof from the Board of Directors or Chief Executive Officer of the
Company to Employee; (iv) Employee being convicted of a felony, or committing an
act of dishonesty or fraud against, or the misappropriation of property
belonging to, the Company or its affiliates; (v) Employee's engagement in
repeated substance abuse which impairs his ability to perform the duties and
obligations of Employee's employment or impairs the reputation of the Company;
(vi) Employee personally engaging in any act of moral turpitude that impairs the
reputation of the Company; (vii) the performance by Employee of those acts
identified in Section 2924 of the California Labor Code; (viii) Employee's
commencement of employment with another employer while he is an employee of the
Company; or (ix) any material breach by Employee of any material provision of
this Agreement (or any confidentiality agreement or invention or proprietary
information agreement with the Company) which continues uncured for thirty (30)
days following notice thereof.

-5-

<PAGE> 6

(i) Any "person" (as such term is used in Sections 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended) is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under said Act), directly or
indirectly, of securities of the Company representing forty percent (40%) or
more of the total voting power represented by the Company's then outstanding
voting securities; or

(ii) A change in the composition of the Board occurring within a
two-year period, as a result of which fewer than a majority of the directors are
Incumbent Directors. "Incumbent Directors" shall mean directors who either (A)
are directors of the Company as of the date hereof, or (B) are elected, or
nominated for election, to the Board with the affirmative votes of at least a
majority of the Incumbent Directors at the time of such election or nomination
(but shall not include an individual whose election or nomination is in
connection with an actual or threatened proxy contest relating to the election
of directors to the Company); or

(iii) The stockholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) at least forty percent (40%) of the total voting power
represented by the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation, or the stockholders
of the Company approve a plan of complete liquidation of the Company or an
agreement for the sale or disposition by the Company of all or substantially all
the Company's assets.

(d) Disability. "Disability" shall mean that the Employee has been
unable to perform his Company duties as the result of his incapacity due to
physical or mental illness, and such inability, at least 26 weeks after its
commencement, is determined to be total and permanent by a physician selected by
the Company or its insurers and acceptable to the Employee or the Employee's
legal representative (such Agreement as to acceptability not to be unreasonably
withheld). Termination resulting from Disability may only be effected after at
least 30 days' written notice by the Company of its intention to terminate the
Employee's employment. In the event that the Employee resumes the performance of
substantially all of his duties hereunder before the termination of his
employment becomes effective, the notice of intent to terminate shall
automatically be deemed to have been revoked.

(e) Involuntary Termination. "Involuntary Termination" shall mean (i)
a reduction by the Company in the Base Pay of Employee as in effect immediately
prior to such reduction; (ii) without the Employee's express written consent,
the Company requires the Employee to change the location of his or her job or
office, so that he or she will be based at a location more than twenty-five (25)
miles from the location of his job or office immediately prior to the Change of
Control; (iii) the cost to the Company of Company-provided benefits to Employee,
taken as a whole, under plans, arrangements policies and procedures, materially
decreases below the cost of the Company-provided

-6-

<PAGE> 7

benefits to Employee immediately prior to the Change of Control, or the cost to
the Employee of such benefits materially increases above the cost to the
Employee immediately prior to the Change of Control; however, if such decrease
or increase results either from the Company's good faith exercise of business
judgment, a decrease that is implemented affecting the majority of Company's
employees, or in response to changes in federal or state law, such decrease or
increase shall not constitute Involuntary Termination; (iv) the significant
reduction of the Employee's duties, authority or responsibilities, relative to
the Employee's duties, authority or responsibilities as in effect immediately
prior to such reduction, or an assignment to Employee of such reduced duties,
authority or responsibilities; provided, however, that a reduction in duties
solely by virtue of the Company being acquired and made part of a larger entity
(as for example when the Chief Financial Officer of Proxim, Inc. remains as such
following a change of control and is not made the Chief Financial Officer of the
acquiring corporation) shall not constitute "Involuntary Termination"; (v) a
successor company fails or refuses to assume the Company's obligations under
this Agreement.

(f) Restricted Business. "Restricted Business" means the design,
manufacture, marketing or support of wireless local area data networking
products based on spread spectrum radio frequency technology.

(g) Restricted Territory. "Restricted Territory" means worldwide.

7. Successors.

(a) Company's Successors. Any successor to the Company (whether
direct or indirect and whether by purchase, merger, consolidation, liquidation
or otherwise) to all or substantially all of the Company's business and/or
assets shall assume the obligations under this Agreement and agree expressly to
perform the obligations under this Agreement in the same manner and to the same
extent as the Company would be required to perform such obligations in the
absence of a succession. For all purposes under this Agreement, the term
"Company" shall include any successor to the Company's business and/or assets
which executes and delivers the assumption agreement described in this Section
7(a) or which becomes bound by the terms of this Agreement by operation of law.

(b) Employee's Successors. The terms of this Agreement and all rights
of the Employee hereunder shall inure to the benefit of, and be enforceable by,
the Employee's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees.

8. Notice.

(a) General. Notices and all other communications contemplated by
this Agreement shall be in writing and shall be deemed to have been duly given
when personally delivered or when mailed by U.S. registered or certified mail,
return receipt requested and postage prepaid. In the case of the Employee,
mailed notices shall be addressed to him at the home address which he most
recently communicated to the Company in writing. In the case of the Company,
mailed notices shall be addressed to its corporate headquarters, 295 N. Bernardo
Avenue, Mountain View, California 94043, and directed to the attention of its
President.

-7-

<PAGE> 8

(b) Notice of Termination. Any termination by the Company for Cause
or by the Employee as a result of a voluntary resignation or an Involuntary
Termination shall be communicated by a notice of termination to the other party
hereto given in accordance with Section 8(a) of this Agreement. Such notice
shall indicate the specific termination provision in this Agreement relied upon,
shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination under the provision so indicated, and shall
specify the termination date (which shall be not more than 30 days after the
giving of such notice). The failure by the Employee to include in the notice any
fact or circumstance which contributes to a showing of Involuntary Termination
shall not waive any right of the Employee hereunder or preclude the Employee
from asserting such fact or circumstance in enforcing his rights hereunder.

9. Miscellaneous Provisions.

(a) No Duty to Mitigate. The Employee shall not be required to
mitigate the amount of any payment contemplated by this Agreement, nor shall any
such payment be reduced by any earnings that the Employee may receive from any
other source.

(b) Waiver. No provision of this Agreement shall be modified, waived
or discharged unless the modification, waiver or discharge is agreed to in
writing and signed by the Employee and by an authorized officer of the Company
(other than the Employee). No waiver by either party of any breach of, or of
compliance with, any condition or provision of this Agreement by the other party
shall be considered a waiver of any other condition or provision or of the same
condition or provision at another time.

(c) Entire Agreement. This Agreement constitutes the entire agreement
of the parties hereto and supersedes in their entirety all prior
representations, understandings, undertakings or agreements (whether oral or
written and whether expressed or implied) of the parties with respect to the
subject matter hereof.

(d) Choice of Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the internal substantive
laws, but not the choice of law rules, of the State of California.

(e) Severability. The invalidity or unenforceability of any provision
or provisions of this Agreement shall not affect the validity or enforceability
of any other provision hereof, which shall remain in full force and effect.

(f) Withholding. All payments made pursuant to this Agreement will be
subject to withholding of applicable income and employment taxes.

-8-

<PAGE> 9

(g) Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed an original, but all of which together will
constitute one and the same instrument.

IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the
case of the Company by its duly authorized officer, as of the day and year set
forth below.

COMPANY PROXIM, INC.

By: /s/ Keith E. Glover
---------------------------------------
Title: Vice President and CFO
------------------------------------
Date: October 19, 1998
-------------------------------------

EMPLOYEE By: /s/ Brian Messenger
---------------------------------------
Title: Vice President of Operations
------------------------------------
Date: October 19, 1998
-------------------------------------

-9-

<PAGE> 1

EXHIBIT 23.1

PROXIM, INC.
CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-94910) of Proxim, Inc. of our report dated January
25, 1999 appearing on page 32 of this Annual Report on Form 10-K.

PricewaterhouseCoopers LLP

San Jose, California
March 26, 1999

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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
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