<PAGE>   1
================================================================================

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

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

                                    FORM 10-Q

(Mark One)

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

         For the quarterly period ended March 31, 2001

                                       OR

|_|  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934.

         For the transition period from __________________ to __________________


                        Commission file number 000-31471


                               OMNISKY CORPORATION
             (Exact Name of Registrant as Specified in Its Charter)


          Delaware                                    77-0516363
(State or Other Jurisdiction of
 Incorporation or Organization)             (I.R.S. Employer Identification No.)


One Market, Steuart Tower, Suite #600, San Francisco, California     94105
         (Address of Principal Executive Offices)                  (Zip Code)


                                 (415) 764-2200
              (Registrant's Telephone Number, Including Area Code)

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

                                 Yes |X| No |_|

The number of shares of the registrant's Common Stock outstanding as of May 10,
                            2001: 68,940,410 shares


================================================================================


                                       1
<PAGE>   2


                               OMNISKY CORPORATION

                                    FORM 10-Q
                  FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001

                                TABLE OF CONTENTS


<TABLE>
<CAPTION>
                                                                                                            PAGE
<S>    <C>                                                                                                  <C>
PART I. FINANCIAL INFORMATION.................................................................................3

Item 1.   Financial Statements:...............................................................................3

       Condensed Consolidated Balance Sheets as of December 31, 2000 and March 31, 2001.......................3

       Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2000
       and 2001...............................................................................................4

       Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2000 and
       2001...................................................................................................5

       Notes to Condensed Consolidated Financial Statements...................................................6

Item 2.   Management's Discussion and Analysis of Financial Condition and Results of Operations...............9

Item 3.   Quantitative and Qualitative Disclosures About Market Risk..........................................31

PART II.  OTHER INFORMATION...................................................................................31

Item 1.   Legal Proceedings...................................................................................31

Item 2.   Changes in Securities and Use of Proceeds...........................................................31

Item 4.   Submission of Matters to a Vote of Security Holders.................................................32

Item 6.   Exhibits and Reports on Form 8-K....................................................................32

Signatures....................................................................................................33

Exhibit Index.................................................................................................34
</TABLE>


                                       2
<PAGE>   3
PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

                               OMNISKY CORPORATION

                      CONDENSED CONSOLIDATED BALANCE SHEETS
                 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                                        DECEMBER 31,     MARCH 31,
                                                                                            2000           2001
                                                                                                        (UNAUDITED)
                                          ASSETS

    Current assets:
<S>                                                                                       <C>          <C>
      Cash and cash equivalents.................................................          $  49,622    $    25,264
      Short-term investments....................................................             60,241         23,754
      Accounts receivable, net..................................................              4,295          1,387
      Inventories...............................................................             13,648          8,930
      Prepaid expenses and other current assets.................................             11,674         10,000
                                                                                          ---------    -----------
         Total current assets...................................................            139,480         69,335
                                                                                          ---------    -----------

    Restricted cash.............................................................              8,210          8,210
    Investments (available-for-sale securities).................................              3,665         20,643
    Investment in affiliate.....................................................              3,451          5,690
    Property and equipment, net.................................................             18,044         23,761
    Intangibles, net............................................................              3,953         14,791
    Other assets................................................................                 --            303
                                                                                          ---------    -----------
         Total assets...........................................................          $ 176,803      $ 142,733
                                                                                          =========      =========

                           LIABILITIES AND STOCKHOLDERS' EQUITY
    Current liabilities:
      Accounts payable..........................................................          $  23,979    $    14,232
      Accrued and other current liabilities.....................................              7,779          5,870
      Due to and advances from stockholder......................................              2,823          2,827
      Deferred revenue..........................................................              6,517          7,008
                                                                                          ---------    -----------
         Total current liabilities..............................................             41,098         29,937
                                                                                          ---------    -----------

    Deferred rent...............................................................                 --            476
                                                                                          ---------    -----------
         Total liabilities......................................................             41,098         30,413
                                                                                          ---------    -----------

    Commitments and contingencies (Note 7)

    Stockholders' equity:
      Common stock: $0.001 par value, 73,067,149 shares authorized; 66,505,137
       shares issued and outstanding in 2000; 68,893,256 shares issued and
       68,747,122 shares outstanding in 2001....................................                 67             69
      Additional paid-in capital................................................            299,870        312,373
      Treasury stock............................................................                 --           (700)
      Receivable from stockholders..............................................            (13,327)       (12,627)
      Deferred stock compensation...............................................            (25,689)       (20,330)
      Accumulated other comprehensive income (loss).............................                159            (60)
      Accumulated deficit.......................................................           (125,375)      (166,405)
                                                                                          ---------    -----------
         Total stockholders' equity.............................................            135,705        112,320
                                                                                          ---------    -----------
         Total liabilities and stockholders' equity.............................          $ 176,803    $   142,733
                                                                                          =========    ===========
</TABLE>


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


                                       3
<PAGE>   4
                               OMNISKY CORPORATION

                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                                       THREE MONTHS    THREE MONTHS
                                                                                           ENDED           ENDED
                                                                                         MARCH 31,       MARCH 31,
                                                                                           2000            2001
                                                                                        (UNAUDITED)     (UNAUDITED)

    Revenue:
<S>                                                                                       <C>           <C>
      Services............................................................................   $  --         $ 4,271
      Equipment...........................................................................      --           1,233
      Beta period.........................................................................   1,315              --
                                                                                             -----           -----
                                                                                             1,315           5,504
                                                                                             -----           -----
    Operating costs and expenses:
      Cost of revenue:
         Services.........................................................................      --           5,731
         Equipment........................................................................      --           6,473
         Beta period......................................................................   2,853              --
                                                                                             -----          ------
                                                                                             2,853          12,204
                                                                                             -----          ------

      Engineering, development and operations.............................................   1,334           4,272
      Sales and marketing.................................................................   2,261          13,772
      General and administrative..........................................................   1,936           4,764
      Amortization of deferred stock compensation (*).....................................   1,237           3,838
      Depreciation and amortization.......................................................     455           2,613
      Charge for acquired in-process research and development.............................      --           3,445
                                                                                            ------           -----
         Total operating expenses.........................................................  10,076          44,908
                                                                                            ------          ------
    Loss from operations..................................................................  (8,761)        (39,404)

    Equity in net loss of affiliate.......................................................      --          (3,846)
    Interest income and other.............................................................     175           2,220
                                                                                          --------           -----
    Net loss............................................................................. $ (8,586)       $(41,030)
                                                                                          =========      ==========

    Net loss per share -- basic and diluted.............................................. $ (11.20)         $ (0.66)
                                                                                          =========      ==========

    Shares used in computing basic and diluted net loss per share......................... 766,426       62,458,586
                                                                                          =========      ==========

    (*) Amortization of deferred stock compensation:

         Engineering, development and operations.......................................... $   579          $   814
         Sales and marketing..............................................................     451            1,349
         General and administrative.......................................................     207            1,675
                                                                                          --------            -----
                                                                                          $  1,237         $  3,838
                                                                                          ========         ========
</TABLE>



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


                                       4
<PAGE>   5
                               OMNISKY CORPORATION

                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                           THREE MONTHS   THREE MONTHS
                                                                                               ENDED          ENDED
                                                                                             MARCH 31,      MARCH, 31
                                                                                               2000           2001
                                                                                           (UNAUDITED)     (UNAUDITED)
<S>                                                                                        <C>            <C>
                Net cash used in operating activities.............................          $ (10,692)     $(30,856)
                                                                                            ---------      --------

                Cash flows from investing activities:

                  Purchase of property and equipment..............................             (1,158)       (7,072)
                  Purchases of investments........................................                 --       (40,708)
                  Sales/maturities of investments.................................                 --        60,241
                  Cash acquired in acquisition....................................                 --           579
                  Restricted cash deposit.........................................               (800)           --
                  Investment in affiliate.........................................                 --        (6,500)
                  Other...........................................................                 --           (62)
                                                                                             --------      --------
                      Net cash (used in) provided by investing activities.........             (1,958)        6,478
                                                                                             --------      --------
                Cash flows from financing activities:
                  Proceeds from issuances of Series B preferred stock, net of
                    issuance costs................................................             19,973            --
                  Exercise of common stock options................................                 --            20
                                                                                             --------      --------
                      Net cash provided by financing activities...................             19,973            20
                                                                                             --------      --------
                Net increase (decrease) in cash and cash equivalents..............              7,323       (24,358)
                Cash and cash equivalents, beginning of period....................              6,767        49,622
                                                                                             --------      --------
                Cash and cash equivalents, end of period..........................           $ 14,090      $ 25,264
                                                                                             ========      ========
                Supplemental non-cash financing activities:
                Deferred stock compensation related to common stock option
                  grants to employees.............................................           $  4,678      $ (2,397)
                                                                                             ========      ========
                Issuance of common stock related to acquisition of NomadIQ........           $     --      $ 14,882
                                                                                             ========      ========
</TABLE>

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


                                       5
<PAGE>   6
                               OMNISKY CORPORATION

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

NOTE 1  -- BASIS OF PRESENTATION:

These condensed consolidated financial statements as of December 31, 2000 and
March 31, 2001, and for the three months ended March 31, 2000 and 2001 and the
related footnote information are unaudited. In the opinion of management, the
accompanying unaudited condensed consolidated financial statements contain all
adjustments (consisting of normal recurring adjustments) which management
considers necessary to present fairly the consolidated financial position of
OmniSky Corporation and its subsidiaries (the "Company") at December 31, 2000
and March 31, 2001, and their results of operations and cash flows for the three
months ended March 31, 2000 and 2001. The operating results for the interim
periods presented are not necessarily indicative of the results to be expected
for the entire year, or any future period. These condensed consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements and the related notes to the consolidated financial
statements of the Company as of and for the year ended December 31, 2000 as
included in the Company's Annual Report on Form 10-K.

These condensed consolidated financial statements of the Company include
the results of wholly-owned subsidiaries domiciled in the United Kingdom and
Israel. All significant intercompany balances and transactions have been
eliminated. The results also include the Company's equity interest in OmniSky
International, the Company's joint venture with News Corporation.

Preparation of the accompanying condensed consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make certain estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and the reported amounts of
expenses during the reporting period. Actual results could differ from those
estimates.

NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Intangibles

Intangible assets, including goodwill, primarily arose from the acquisition of
NomadIQ. The Company reviews goodwill and other intangibles and other long-lived
assets to assess recoverability when factors indicating an impairment are
present. Impairments, if any, are measured based upon the difference between the
carrying value and fair value, which may be determined principally using
discounted cash flow analyses, and are recognized in operating results in the
period in which an impairment in value is determined.

Amortization periods are as follows:

      Type of Asset:                             Amortization Period:
      -------------                              -------------------

      Goodwill                                   Five years
      Acquired technology                        Three years
      Patents                                    Three years
      Workforce                                  Four years
      Existing OmniSky licensed technology       Four years


NOTE 3 -- NET LOSS PER COMMON SHARE:

Basic net loss per common share is computed by dividing the net loss for the
period by the weighted average number of common shares outstanding for the
period net of common shares subject to repurchase. Diluted net loss per common
share is computed by dividing the net loss for the period by the weighted
average number of common and common equivalent shares outstanding during the
period net of common shares subject to repurchase. Common equivalent shares,
composed of common shares issuable upon exercise of stock options, are included
in the diluted net loss per share computation to the extent such shares are
dilutive.



                                       6
<PAGE>   7
A reconciliation of the numerator and denominator used in the calculation of
basic and diluted net loss per common share is as follows (in thousands except
for share and per share data):

<TABLE>
<CAPTION>
                                                     THREE MONTHS     THREE MONTHS
                                                         ENDED           ENDED
                                                       MARCH 31,       MARCH 31,
                                                         2000            2001
                                                      (UNAUDITED)     (UNAUDITED)

Numerator:
<S>                                                     <C>            <C>
  Net loss..........................................        $(8,586)       $(41,030)
                                                        ============   =============
Denominator:
  Weighted average common shares -- basic...........      6,190,635      68,338,759
  Weighted average shares subject to repurchase...       (5,424,209)     (5,880,173)
                                                        -----------    -------------
  Denominator for basic and diluted calculation.....        766,426      62,458,586
                                                            =======      ==========
Net loss -- basic and diluted.......................        $(11.20)         $(0.66)
                                                           ========          =======
</TABLE>

Diluted net loss per share does not include the effect of the following
antidilutive common equivalent shares:

<TABLE>
<CAPTION>
                                                     THREE MONTHS     THREE MONTHS
                                                         ENDED           ENDED
                                                       MARCH 31,        MARCH 31,
                                                         2000            2001
                                                      (UNAUDITED)     (UNAUDITED)

<S>                                                    <C>            <C>
Common stock options                                    3,910,553     11,017,078
Convertible preferred stock                            35,859,547             --
</TABLE>


NOTE 4 -- COMPREHENSIVE LOSS:

Comprehensive loss for the periods reported was as follows (in thousands):

<TABLE>
<CAPTION>
                                                         THREE MONTHS    THREE MONTHS
                                                             ENDED           ENDED
                                                           MARCH 31,       MARCH 31,
                                                             2000            2001
                                                          (UNAUDITED)     (UNAUDITED)

<S>                                                           <C>            <C>
Net loss                                                      $(8,586)       $(41,030)

Other comprehensive income:
  Unrealized holding losses on investments                         --            (14)
  Foreign currency translation adjustment                          --           (205)
                                                               ------           -----

Comprehensive loss                                            $(8,586)       $(41,249)
                                                               =======        ========
</TABLE>

NOTE 5 -- ACQUISITION

In January 2001, the Company acquired NomadIQ a privately held provider based
in Israel of applications and services for mobile devices. Upon closing, the
Company issued 2.5 million shares of its common stock to the shareholders of
NomadIQ, including a pool of stock options granted to employees of NomadIQ. The
fair value of the options was determined using the Black-Scholes Options Model
and is included as a component of the purchase price. The Company incurred
approximately $0.6 million in acquisition-related expenses, which consist
primarily of financial advisory, accounting and legal fees. The agreement also
provides for the issuance of up to an additional 1.0 million shares of the
Company's common stock over a twelve-month period if certain performance
milestones and other conditions are met, including the continued retention of
the senior management team.

The acquisition was accounted for using the purchase method of accounting and,
accordingly, the net assets and results of operations of the acquired company
has been included in the Company's consolidated financial statements since the
acquisition date.


The purchase price of the acquisition has been allocated to assets acquired,
including intangible assets, and liabilities assumed, based on their respective
fair values at the acquisition date, as follows (in thousands):


                                       7
<PAGE>   8

<TABLE>
<CAPTION>
<S>                                                               <C>
  Fair value of stock issued and cash paid....................  $15,446
  Liabilities assumed.........................................    1,736
                                                                -------
  Fair value of assets acquired...............................  $17,182
                                                                =======
  Allocated to:
    Tangible assets received.................................   $ 1,257
    Purchased technology.....................................     2,642
    Patents..................................................       610
    Assembled workforce......................................     1,831
    In-process research and development......................     3,445
    Deferred stock-based compensation........................       877
    Goodwill.................................................     6,520
                                                                -------
                                                                $17,182
                                                                =======
</TABLE>

The fair value of the intangible assets acquired was determined using the
income approach, which discounts expected future cash flows to present value.
The discount rates used in the present value calculations were generally
derived from a weighted average cost of capital analysis and venture capital
surveys, adjusted upward to reflect additional risks inherent in the
development life cycle. The risk-adjusted discount rate for acquired in-process
research and development was 40%. In addition, the assembled workforce was
valued estimating the cost to replace the current assembled workforce,
considering such costs as recruiting and training.

Total amortization expense of intangible assets related to the acquisition
was $0.4 million for the three months ended March 31, 2001.

As part of the allocation process, the Company evaluated the acquisition and
recorded $3.4 million related to acquired in-process technologies. The
technology under development consists of a new version of NomadIQ's software
enabling wireless access to location-based information. As this acquired
in-process technology has not reached technical feasibility and has no
alternative future use, the amount of $3.4 million was immediately charged to
expense upon consummation of the acquisition. The estimated cost at the
acquisition date to complete the software was $0.8 million, with completion
expected in mid-2001. Remaining tasks at the date of acquisition included
resolving scalability issues, achieving compatibility with various handheld
operating systems, and system verification and testing.

NomadIQ was founded at the end of the first quarter of 2000, and so if the
acquisition had been consummated on January 1, 2000, the only difference on a
pro forma basis to the Company's results for the three months ended March 31,
2000 would have been an increase to net loss of $3.8 million ($5.02 per share)
resulting from the charge for acquired in-process research and development and
the additional amortization of intangible assets acquired. The difference
between actual and pro forma consolidated results for the three months ended
March 31, 2001 is insignificant as the Company acquired NomadIQ in January 2001.

NOTE 6 -- INVENTORY

<TABLE>
<CAPTION>
                                                        DECEMBER 31,   MARCH 31,
                                                            2000         2001
                                                       -------------  ---------
(in thousands)                                                        (UNAUDITED)

Inventories:
<S>                                                       <C>            <C>
  Raw materials.....................................      $ 6,870        $ 6,746
  Finished goods....................................        6,778          2,184
                                                           -------         -----
                                                          $ 13,648       $ 8,930
                                                          ========       =======
</TABLE>

The allowance for obsolete inventory was $0 and $5,051,000 at March 31, 2000 and
2001, respectively. The writedown of inventory to net realizable value charged
to operations for the three months ended March 31, 2000 and 2001, respectively,
was $0 and $4,328,000.

NOTE 7 -- COMMITMENTS AND CONTINGENCIES:

On July 6, 2000, a complaint was filed in the United States District Court for
the Northern District of California captioned "Julia Butterfly Hill v. AT&T
Corporation, a New York corporation; AT&T Wireless Services, Inc., a Delaware
corporation; OmniSky Corporation, a Delaware corporation; TWBA Chiat/Day, a
Delaware corporation; and Does I-XX, inclusive." The complaint alleges, among
other things, false endorsement and false designation of origin, false and
misleading advertising and misappropriation of likeness and image. The Company
intends to defend itself vigorously and believes that the claims alleged are
without merit. The Company does not believe that the resolution of this matter
will have a material effect on its financial condition, results of operations or
cash flows.

On February 2, 2001, a complaint was filed in the United States District Court
for the District of Delaware captioned "Leon Stambler v. RSA Security Inc.,
Verisign Inc., First Data Corporation, Openwave Systems Inc. and OmniSky
Corporation." The complaint alleges, among other things, that encryption
technology licensed from third parties and incorporated into the Company's
service infringes third party patents. The Company has received indemnification
from certain companies that it licenses technology from and intends to defend
its interests vigorously. The Company does not believe resolution of this matter
will have a material effect on its financial condition, results of operations or
cash flows.

Except as described in the previous two paragraphs, the Company is not currently
subject to any material legal proceedings. The Company may from time to time,
however, become a party to various legal proceedings arising in the ordinary
course of its business. The Company also may be indirectly affected by
administrative or court proceedings or actions in which the Company is not
involved but which have general applicability to the Internet or wireless
industries.


                                       8
<PAGE>   9
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

You should read the following discussion in conjunction with the Company's
accompanying unaudited condensed consolidated financial statements and notes
thereto, and the Company's audited consolidated financial statements, notes
thereto and management's discussion and analysis of financial condition and
results of operations as of and for the period ended December 31, 2000 included
in the Company's Annual Report on Form 10-K as filed with the Securities and
Exchange Commission on April 2, 2001.

This report on Form 10-Q contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended. For this purpose, statements
contained herein that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the foregoing, the words
"believes," "anticipates," "plans," "expects" and similar expressions are
intended to identify forward-looking statements. These forward-looking
statements involve risks and uncertainties and are not guarantees of future
performance. Actual results may differ materially from those indicated in such
forward-looking statements as a result of certain factors, including, but not
limited to, those set forth under the heading "Factors Affecting Future
Operating Results."

OVERVIEW

We are a global provider of wireless applications and services for users of
mobile devices. We offer a suite of wireless data applications and services to
wireless carriers, online service providers, hardware manufacturers, and other
third parties, enabling those companies to offer branded or customized versions
of our wireless applications and services to their own end users. We also offer
our wireless services directly to individuals and enterprises under the OmniSky
brand through more than 2,000 retail outlets across the U.S. and other direct
sales and marketing channels, including our own website.

With our applications and services, users can wirelessly:
     -    access up to six email accounts, including corporate email via
          Microsoft Outlook as well as POP3 email;
     -    search the Internet;
     -    access a broad range of Web content optimized for mobile devices; and
     -    securely conduct e-commerce transactions.

Our service is available on the Palm V and Palm Vx, Handspring Visor Platinum,
Visor Prism and Visor Edge, HP Jornada 520/540 Series Pocket PCs and the Compaq
iPAQ Pocket PC. We intend to extend our applications and services in 2001 to
support other mobile devices, including new personal digital assistants like the
Palm M505, smartphones that combine the functionality of a cellular telephone
with a personal digital assistant, and laptop computers. We recently initiated a
beta trial for the Casio E-125 Pocket PC and announced that we would provide
service for all Hewlett-Packard Pavilion notebook computers in a co-marketing
arrangement with Hewlett-Packard. We also demonstrated our service on the
Kyocera Smartphone at the Cellular Telecommunications & Internet Association's
Wireless 2001 conference in March 2001.

We support the wireless network technology known as cellular digital packet
data, or CDPD, which is used by AT&T Wireless Services and Verizon Wireless, the
two largest wireless carriers in the United States. With the launch of our
service in Europe, we also support the wireless technology known as global
system for mobile communications, or GSM, and expect to support the technology
known as general packet radio service, or GPRS, once it is commercially
launched. In the future, we also intend to support other wireless network
technologies, such as code division multiple access, or CDMA, and enhanced data
rates for global evolution, or EDGE. In our recent Kyocera Smartphone
demonstration, we delivered our service over the CDMA wireless network. Service
coverage includes over 167 major metropolitan areas within the United States,
encompassing over 172 million people.

In February 2001, OmniSky International, our joint venture with News
Corporation, launched the first integrated wireless email and Internet service
on mobile devices in the United Kingdom over BT Cellnet's GSM/GPRS network.
OmniSky International also launched its service in Germany over VIAG Interkom's
nationwide GSM network. International subscribers have access to the same rich
applications and services as U.S. subscribers, including access to localized
content.

We focus on four principal strategic initiatives:


                                       9
<PAGE>   10
Extending OmniSky's Addressable Market

We expect to continue to introduce services on new devices, including personal
digital assistants, smartphones, laptops, and on new networks including GSM,
GPRS, CDMA and others. As part of those efforts, over the past several months
we:
     -    Extended service availability for the Handspring product line to
          include Handspring's new Visor Edge;
     -    Announced commercial availability of our services for the Compaq
          iPAQ and HP Jornada 520/540 Series, both running the Pocket PC
          operating system;
     -    Demonstrated our wireless service on the Kyocera Smartphone running on
          the CDMA network;
     -    Announced support for our service on the Casio E-125 Cassiopeia which
          we anticipate launching over the summer; and
     -    Signed an agreement with Hewlett-Packard to offer our service
          in partnership with Hewlett-Packard on their Pavilion notebook
          computers.

Enhancing Technology Platforms

As the recipient of numerous industry awards, we have been consistently
recognized as one of the leading providers of wireless applications and services
for users of mobile devices.

Building upon that base and our global technology, we recently announced the
introduction of a comprehensive wireless technology platform that will enable us
to deliver all of our advanced applications and services to wireless carriers,
online service providers, hardware manufacturers and others.

We also recently launched OS CorporateLink, the first of several proprietary
corporate email solutions we expect to offer in 2001. OS CorporateLink enables
individuals and enterprises to obtain seamless and secure access to email
residing behind the corporate firewall.

At the end of our first quarter, we also initiated full-scale internal testing
of version 3.0 of our service. Version 3.0 will provide our subscribers
with:
     -    location based services, including the ability to access local
          merchants, conduct m-commerce, and obtain online restaurant
          information, movie guides, real-time directory services, and
          interactive maps;
     -    advanced compression technologies designed to increase the service
          speed and full color browsing on color handhelds using the Palm
          operating system;
     -    email document and attachment handling and viewing; and
     -    significant enhancements to OmniSky's patent-pending Os OneTap
          technology, which enables seamless two-way data transfer between
          personal information management applications and the wireless
          Internet.

Advancing Enterprise Solutions Through Strategic Partnerships

During the fourth quarter of 2000, we announced our intention to offer
enterprise solutions through strategic partnerships. We continue to advance
those initiatives, announcing strategic agreements and alliances with:
     -    AlterEgo, designed to allow enterprise users to securely access
          business-critical enterprise information and applications residing on
          their corporate intranets;
     -    Extended Systems, intended to offer corporate information technology
          managers a secure solution for wirelessly extending corporate email
          and other mission-critical business information to their employees;
     -    ThinAirApps, designed to provide our subscribers secure and direct
          access to their corporate email accounts - including Microsoft
          Exchange, Lotus Domino, and Novell GroupWise -- in both client- and
          server-side solutions; and
     -    Wireless Knowledge, a joint venture between Microsoft and QUALCOMM,
          intended to promote our wireless email and Internet service to
          Wireless Knowledge's enterprise customers.



                                       10
<PAGE>   11

Expanding Internationally

We expect to continue to expand into additional international markets
this year.

ACQUISITION

In January 2001, we acquired NomadIQ, a privately held provider, based in
Israel, of applications and services for mobile devices. Upon closing, we issued
2.5 million shares of our common stock to the stockholders of NomadIQ, including
a pool of stock options granted to employees of NomadIQ. The agreement also
provides for the issuance of up to an additional 1.0 million shares of our
common stock over a twelve-month period if certain performance milestones and
other conditions are met, including the continued retention of the senior
management team. Based on the 2.5 million shares issued at closing and the
liabilities assumed, the total value of the acquisition was approximately $17.2
million.

THREE MONTHS ENDED MARCH 31, 2001 AS COMPARED TO THE THREE MONTHS ENDED MARCH
31, 2000

RESULTS OF OPERATIONS

(All charts below are in thousands. "NM" is used in the charts to indicate
calculations which are not meaningful.)

We have a limited operating history, having formed our company in May 1999 and
launched our initial beta test in December 1999. We began shipping wireless
modems and providing wireless service to our beta test participants at the end
of December 1999. We did not recognize any revenue for the period from our
inception in May 1999 through December 31, 1999.

We have experienced cumulative losses since our inception as a result of our
efforts to develop and market our wireless service. From inception in May 1999
through March 31, 2001, our cumulative net losses totaled $166.4 million. We
expect to incur significant operating expenses over the next several years in
connection with the continued development and expansion of our business. During
2000, we focused principally on marketing our services to individual mobile
professionals, who accounted for nearly all of our subscribers as of the end of
that year. At the end of 2000, we began several initiatives to extend our
business into the enterprise market and to offer our applications and services
to wireless carriers, online service providers, hardware manufacturers, and
other third parties. That extension of our business requires that we modify in
some respects our marketing, product development and related efforts to more
properly align our resources with the needs of those potential customers. We
expect that our marketing and sales expenses will decline as a percentage of our
revenues and that our engineering, development and operating expenses will
increase over time as a percentage of our revenues as we extend our business to
those markets. While we have entered into several enterprise transactions and
strategic partnerships, we do not have any material enterprise customers at this
time. In addition, while we are actively engaged in discussions with various
third parties regarding their purchase of applications and services from us,
except for our relationship with AOL we do not, at this time, have any material
agreements with such third parties to sell our applications and services to
them. We also anticipate incurring additional expenses in connection with the
continued launch of our service, the introduction of new services, and making
our service compatible with new mobile devices, platforms and networks.

For individuals to obtain our wireless service, they can purchase a wireless
modem from us that is generally priced at $299. We currently offer a modem
rebate of $299 upon activation of an annual service plan, and we anticipate that
other offers of this nature will be made in the future. Our subscribers must
separately purchase a mobile device to receive our service; we do not provide
the mobile device. Over time, we expect revenues from the sale of wireless
modems to our subscribers as a percentage of our total revenues to decrease
significantly because modems will be available to our subscribers through
channels other than us, integrated wireless devices such as the Kyocera
Smartphone will become more prevalent, and the price of modems will decrease.

Our subscribers generally pay us a flat monthly fee to receive our wireless
service. Our service fee is lower for customers who prepay their service on an
annual basis. For enterprise customers, we may negotiate volume arrangements.
With respect to our applications and services, we offer third parties a variety
of pricing plans for all


                                       11
<PAGE>   12
or portions of our applications and services. For instance, we may provide
wireless carriers with location-based applications, advanced email platforms and
Internet content, without airtime, customer support and other services.

Due to our short operating history, we do not have meaningful statistics
available regarding an average service life for our customers. Our contracts for
services we purchase generally have a fixed element for a base service level,
but are then mostly subscriber-based and depend on the number of users on the
wireless network or the number of customers being provided with customer care,
billing or other administrative services. Our contracts with our service
providers are generally of a one-to-three year duration.

With most of our business currently derived from sales to individual mobile
professionals, we expect to experience seasonality in our business. We
anticipate sales of mobile devices, through which our subscribers receive our
branded service, to be higher in the fourth and first fiscal quarters due to
increased consumer spending patterns during the holiday season. We also expect
that equipment sales may decline during second and third quarters because of
typical decreased consumer spending patterns during this period. The timing of
the sale of equipment has an impact on when we begin to generate service revenue
from new customers. In addition, to the extent that we depend upon sales of
mobile devices to enable our subscribers to receive our wireless service,
shortages in the availability of these devices or other events that affect the
availability or desirability of these devices, could affect our business and
revenues. These seasonal variations may lead to fluctuations in our quarterly
operating results.

All of our revenues to date have been derived from operations in the United
States. As we do not consolidate the operations of our international joint
venture, their results are recorded through equity accounting. We had only one
operating segment from our inception in May 1999 through March 31, 2001.

The following comparison of results is affected by the fact that we were in a
development stage through June 2000. In the future our results may be affected
by the extension of our business into the enterprise market and by the sale of
our applications and services to wireless carriers, online service providers,
hardware manufacturers, and other third parties.

REVENUE

<TABLE>
<CAPTION>
                                             Services     Equipment      Beta     Total
<S>                                           <C>            <C>       <C>       <C>
Three Months Ended March 31, 2001             $4,271         $1,233    $ ----    $5,504
Three Months Ended March 31, 2000                ---            ---     1,315     1,315
Increase (decrease) from March 31, 2000        4,271          1,233    (1,315)    4,189
Percentage Increase from March 31, 2000           NM             NM        NM      319%
</TABLE>

We commenced shipping wireless modems to our beta subscribers in December 1999
and stopped accepting new beta orders on March 31, 2000. During our beta test,
subscribers received a bundled offering consisting of a wireless modem and our
wireless service from the date of their purchase through April 2000. Revenue
during this period was recognized as "beta" period revenue.

Revenue for 2001 is split between equipment and service revenue. Equipment
revenue is recorded net of any rebates offered to subscribers. Where we sell
equipment through retail channels, we defer the equipment revenue until units
are purchased by the final customer less a reserve for actual returns. Service
revenue is recorded ratably over the service period, with amounts billed or
received in advance of revenue recorded as deferred revenue. We defer equipment
and service revenue and the related cost of equipment revenue until completion
of any customer refund period.

Our subscribers have grown from 5,500 at March 31, 2000 to 39,000 at March 31,
2001. Our average service revenue per subscriber increased from $36.40 for the
fourth quarter of 2000 to $39.00 for the first quarter of 2001. During the first
quarter of 2001, a growing number of our subscribers signed up for annual plans
compared to previous quarters. We expect this trend to continue.

For the first quarter of 2001, our net subscriber additions were negatively
impacted by a rate of cancellation, which we call churn, that was higher than
what we had previously experienced. The average monthly churn rate of 4.5%


                                       12
<PAGE>   13
for the quarter appears to have been the result of one group of customers coming
to the end of a six-month promotional program that was offered in 2000. With a
growing percentage of annual service plans and a customer retention program that
we recently initiated, we believe our churn will return to an average monthly
rate of 3.2% or lower.

At March 31, 2001, we had recorded $3.7 million of deferred equipment revenue,
$2.0 million of equipment rebate liabilities, and $3.3 million of deferred
service revenue.

We expect our revenue to continue to shift towards service revenue and away from
equipment revenue in future quarters. We currently inventory and sell modems
associated with Palm-OS devices; however, during the first quarter of 2001 we
experienced, and expect to continue to experience, a growing number of
subscribers using non-Palm-OS devices such as the Pocket PC, integrated devices
such as the Kyocera Smartphone, and services on laptop computers. Users of these
devices do not need to purchase a modem from us to receive our service,
eliminating our need to inventory modems for those types of devices.

COST OF REVENUE

<TABLE>
<CAPTION>
                                                                                           Percentage of
                                          Services       Equipment      Beta      Total    Revenue
<S>                                         <C>            <C>      <C>        <C>           <C>
Three Months Ended March 31, 2001           $5,731         $6,473   $ -----    $12,204       222%
Three Months Ended March 31, 2000            -----          -----     2,853      2,853       217%
Increase (decrease) from March 31, 2000      5,731          6,473    (2,853)     9,351
Percentage Increase from March 31, 2000         NM             NM        NM        328%
</TABLE>

For the three months ended March 31, 2000, our cost of beta revenue comprised
the costs we incurred for equipment that we sold to our subscribers, our network
technical support, the packaging costs for our products and other fulfillment
costs.

Cost of services revenue increased for the three months ended March 31, 2001 as
a result of increased network operations costs, and increased airtime and other
subscriber-based charges related to the growth in our subscriber base. Cost of
equipment revenue of $6.5 million includes $2.2 million of expense related to
the sale of modems in 2001 to new subscribers, and $4.3 million related to
inventory write-downs. The inventory write-down relates to an adjustment made to
lower the carrying value of certain modems to their expected net realizable
value based on projections of future sales, including costs that may be
necessary to reconfigure the modems to work with new handheld devices. Based on
current projections of modem sales over the next 12 months, we do not expect to
utilize the excess inventory.

At March 31, 2001, we had recorded $3.7 million of deferred cost of equipment
revenue.

From the fourth quarter of 2000 to the first quarter of 2001, we experienced
improvements in our cost of services as a percentage of revenue related to the
implementation of new airtime contracts. We also experienced improvements in
operating costs from investments made to establish our own data and network
operations centers that are intended to improve the quality and scalability of
our service.

We expect the cost of revenue associated with network operations to increase as
we continue to add subscribers, although we would expect these costs to decline
on a per-subscriber basis as we achieve economies of scale. Our airtime costs
for use of wireless data networks increase as we add new subscribers, but are
expected to decrease on a per-subscriber basis as we achieve targeted subscriber
levels.

OPERATING EXPENSES

Engineering, Development and Operations

<TABLE>
<CAPTION>
                                                                 Percentage of
                                                Amount           Revenue

<S>                                            <C>                  <C>
Three Months Ended March 31, 2001              $4,272                78%
Three Months Ended March 31, 2000               1,334               101%
Increase from March 31, 2000                    2,938
Percentage Increase from March 31, 2000           220%
</TABLE>


                                       13
<PAGE>   14
Engineering, development and operations expenses include the salaries, fees and
related costs we incur for the design and operation of our wireless service and
for the continued development, operation and management of our technology.

Costs for the period ended March 31, 2000 included initial engineering costs to
develop and implement our beta service. For the period ended March 31, 2001, the
costs included expenses incurred to further develop our service in addition to
costs for ongoing operations, and increased due to enhancements to our service
and technology offering. Costs also increased with the addition of the
engineering staff of NomadIQ.

We expect our engineering, development and operations expenses to increase as a
percentage of revenue as we continue to develop new wireless applications and
services.

Sales and Marketing

<TABLE>
<CAPTION>
                                                                  Percentage of
                                             Amount               Revenue
<S>                                          <C>                   <C>
Three Months Ended March 31, 2001            $13,772               250%
Three Months Ended March 31, 2000              2,261               172%
Increase from March 31, 2000                  11,511
Percentage Increase from March 31, 2000         509%
</TABLE>

Sales and marketing expenses include the costs we incur to acquire and retain
subscribers, the operating expenses associated with our sales and marketing
department and other general marketing costs. These expenses also include costs
incurred in connection with media and other advertising campaigns intended to
develop consumer awareness of our brand and relate to market development funds
paid to retailers for cooperative advertising.

Sales and marketing expenses for the three months ended March 31, 2000 were
primarily associated with the costs described above plus additional internal
staff costs, consultants and trade show expenses associated with the launch of
our beta test. Advertising expenses for that period of $0.7 million were fully
offset by co-marketing credits received from one of our wireless carriers.
Expense for the three months ended March 31, 2001 were comprised of $8.8
million for advertising, $2.2 million for market development funds, tradeshows,
public relations and other consulting expenses, and $2.8 million for internal
staff and associated overhead costs for the sales and marketing groups.

Our sales and marketing expenses are expected to decrease as a percentage of
revenue as we extend our business into the enterprise and application services
markets. We also expect a decrease in overall marketing expenses as we reduce
brand marketing and emphasize cooperative advertising with our partners.

General and Administrative

<TABLE>
<CAPTION>
                                                               Percentage of
                                              Amount           Revenue
<S>                                          <C>                   <C>
Three Months Ended March 31, 2001            $4,764                87%
Three Months Ended March 31, 2000             1,936               147%
Increase from March 31, 2000                  2,828
Percentage Increase from March 31, 2000         146%
</TABLE>

General and administrative expenses include the costs we incur for employee
salaries and the related costs we incur in maintaining our executive,
administrative, finance, accounting, human resource and internal information
systems functions. General and administrative expenses also include certain of
our facility costs, professional fees and recruiting costs. In addition, we
include in general and administrative expenses the fees we pay to Convergys
Corporation for certain customer care, billing and other administrative
services.


                                       14
<PAGE>   15
General and administrative costs for the three months ended March 31, 2000 were
primarily related to the start-up of our operations. The increase for the three
months ended March 31, 2001 resulted primarily from headcount increases
associated with the expansion of our business and from consulting and
professional service fees incurred in the continued development of our corporate
infrastructure.

We expect our general and administrative expenses to increase as a percentage of
revenue as we continue to add new subscribers, which we expect will increase our
customer care and billing costs, and as we continue to add personnel and
enhanced facilities to meet the needs of our business.

Amortization of Deferred Stock Compensation

<TABLE>
<CAPTION>
                                                              Percentage of
                                          Amount              Revenue
<S>                                       <C>                   <C>
Three Months Ended March 31, 2001         $3,838                70%
Three Months Ended March 31, 2000          1,237                94%
Increase from March 31, 2000               2,601
Percentage Increase from March 31, 2000      210%
</TABLE>

We granted stock options and issued shares of restricted stock to certain of our
officers and employees at prices subsequently deemed to be below the fair value
of the underlying stock on the date of grant or issuance. From our inception in
May 1999 through September 30, 2000, we recorded aggregate deferred stock
compensation of approximately $47.9 million. We have subsequently reversed $2.4
million of this related to employee terminations, and added an additional $0.9
million related to an acquisition. With respect to employee stock-based
compensation, we are amortizing the deferred compensation expense over the
vesting period using the multiple option approach. This expense has no impact on
our cash flows. The remaining $20.3 million of unamortized deferred stock
compensation will be expensed in future periods over a three to four year
vesting period. Under our current plan, we estimate that our deferred stock
compensation expense will be $8.8 million, $7.1 million, $3.5 million, and $0.9
million for the remainder of fiscal 2001 and for the years ending December 31,
2002, 2003 and 2004, respectively.

Depreciation and Amortization

<TABLE>
<CAPTION>
                                                                Percentage of
                                             Amount             Revenue
<S>                                          <C>                   <C>
Three Months Ended March 31, 2001            $2,613                47%
Three Months Ended March 31, 2000               455                35%
Increase from March 31, 2000                  2,158
Percentage Increase from March 31, 2000         474%
</TABLE>

Because we lease wireless capacity from wireless network carriers and rely on
third parties to provide certain network operations and customer care services,
our capital expenditures through 2000 have been primarily associated with
software developed for internal use that is related to providing our wireless
services. During 2001, we have made capital expenditures related to construction
of network operations facilities and in connection with leasehold improvements
and furniture and fixtures associated with our headquarters facility.

In conjunction with the acquisition of NomadIQ in January 2001, we recorded
gross intangibles of $11.6, which we began amortizing in the first quarter of
2001.

For the three months ended March 31, 2000 and 2001, we amortized $0 and
$0.8 million of expenses, respectively, for our licensed technology and
purchased intangibles. Depreciation of fixed assets was $0.5 million and $1.8
million, respectively, for those same periods.

We expect our depreciation and amortization expense to increase as we continue
to grow our operations, begin to depreciate fixed assets related to our
headquarters facility, and as we acquire additional facilities and equipment to
meet our growth.


                                       15
<PAGE>   16
Charge for Acquired In-Process Research and Development

<TABLE>
<CAPTION>
                                                                Percentage of
                                               Amount           Revenue
<S>                                           <C>                   <C>
Three Months Ended March 31, 2001             $3,445                63%
Three Months Ended March 31, 2000                 --                --
Increase from March 31, 2000                   3,445
Percentage Increase from March 31, 2000           NM
</TABLE>

There were no acquisitions in the three months ended March 31, 2000 and our
results for that period include no charges for acquired in-process research and
development. The results for the three months ended March 31, 2001 include a
$3.4 million charge for acquired in-process research and development related to
the January 2001 acquisition of NomadIQ. The charge was based on an independent
valuation and reflects technologies acquired prior to technological feasibility
and for which there was no alternative future use. We have included a detailed
description as of the acquisition date of the specific technologies acquired,
their value, cost to complete, expected completion date and remaining tasks, in
Note 5 to our consolidated financial statements contained in Part I, Item 1 of
this Form 10-Q.

NON-OPERATING INCOME AND EXPENSES

Equity in net loss of affiliate

<TABLE>
<CAPTION>
                                                                 Percentage of
                                             Amount              Revenue
<S>                                          <C>                   <C>
Three Months Ended March 31, 2001            $3,846                70%
Three Months Ended March 31, 2000                --                 --
Increase from March 31, 2000                  3,846
Percentage Increase from March 31, 2000          NM
</TABLE>

Equity in net loss of affiliate represents our 50% share of the losses incurred
by our international joint venture with News Corporation, which was formed
during the second quarter of 2000.

Interest income and other

<TABLE>
<CAPTION>
                                                                 Percentage of
                                              Amount             Revenue
<S>                                           <C>                   <C>
Three Months Ended March 31, 2001             $2,220                40%
Three Months Ended March 31, 2000                175                13%
Increase from March 31, 2000                   2,045
Percentage Increase from March 31, 2000        1169%
</TABLE>

Interest income and other includes rental income, net of expense, on office
space not occupied for operating uses as well as gains or losses on investments.

Interest income for the three months ended March 31, 2001 was $1.6 million,
which increased from the three months ended March 31, 2000 due to the investment
of the proceeds of our issuance of convertible preferred stock in April to June
2000, and from the issuance of our common stock at the end of September 2000.
Other income for that same period of $0.6 million increased from net rental
income from the sublease of office space.

During April 2001, we moved to new office space that will significantly increase
our occupancy costs. Occupancy costs related to our operations are allocated
across our engineering, development and operations, sales and marketing and
general and administrative cost centers, which will therefore increase.
Occupancy costs related to space not occupied for operating uses is also
expected to increase because a substantial portion of our space is being offered
for sublease. To the extent we sign subleases at rates that are below the rent
we are paying, we would be required to record a non-cash sublease loss
representing the shortfall over the rent period, which we think is possible in
2001 in light of economic conditions in the San Francisco Bay area office rental
market.



                                       16
<PAGE>   17
NET LOSS

<TABLE>
<CAPTION>
                                                                  Percentage of
                                                 Amount           Revenue

<S>                                           <C>                     <C>
Three Months Ended March 31, 2001             ($41,030)               745%
Three Months Ended March 31, 2000               (8,586)               653%
Increase from March 31, 2000                   (32,444)
Percentage Increase from March 31, 2000            378%
</TABLE>

The primary reasons for the change in net loss were:
     -    The increase in negative gross margin associated with a larger
          subscriber base and the expansion of our network operations;
     -    increases in engineering, development and operations costs associated
          with the design and operation of our service;
     -    the inventory write-down;
     -    increases in sales and marketing expenses, particularly for
          advertising, market development funds, tradeshows and internal staff
          costs;
     -    increases in general and administrative expenses related to the
          expansion of our operating infrastructure;
     -    increases in amortization of deferred stock compensation;
     -    increases in depreciation and amortization of equipment, software and
          intangible assets associated with the acquisition of NomadIQ;
     -    the 2001 charge for acquired in-process research and development; and
     -    the equity in net loss of our international joint venture.

These increases were partially offset by increases in interest income and other.

We expect our gross margin to improve during 2001, but expect to continue to
have net losses as we continue to develop our operations and expand our
business.

LIQUIDITY AND CAPITAL RESOURCES

Since our inception, we have financed our operations through a combination of
private placements of our equity securities and an initial public offering of
our common stock that we completed in September 2000. The private placements
included the issuances of redeemable convertible preferred stock in August 1999,
January 2000 and during the period from April through June 2000, which resulted
in aggregate net proceeds to us of approximately $118.8 million. Our September
2000 initial public offering resulted in aggregate net proceeds to us of
approximately $114.8 million. We also received an additional $5.0 million in net
proceeds from the sale of common stock to AOL Time Warner at the time we closed
our initial public offering. Upon the closing of our initial public offering,
all of the outstanding shares of our redeemable convertible preferred stock
converted into common stock. At March 31, 2001, we had $77.9 million in cash and
cash equivalents, short-term investments, investments and restricted cash. We
have no outstanding indebtedness. We believe our cash and investments, together
with vendor, bank and partner financing that we expect to obtain, will provide
sufficient capital to fund our operations at least through March 31, 2002 if our
assumptions about our revenues and expenses are generally accurate.

Cash flows for the three months ended March 31, 2001

Cash flows used in operating activities were $30.9 million for the three months
ended March 31, 2001, primarily attributable to a net loss of $41.0 million, a
decrease in accounts payable of $10.2 million and a decrease in accrued
liabilities of $2.2 million. These uses of cash were offset by non-cash
operating items including depreciation and amortization (which includes
amortization of deferred stock compensation) of $6.5 million, a charge for
acquired in-process research and development of $3.4 million, a provision to
adjust the carrying value of inventory of $4.3 million, our equity in net loss
of affiliate of $3.8 million, and a decrease in accounts receivable of $3.2
million.

Cash flows provided by investing activities were $6.5 million. Sources of cash
included $60.2 million from the sale or maturity of investments, which were
offset by $40.7 million for purchases of investments, $7.1 million of capital
expenditures, and a $6.5 million investment in our international joint venture.


                                       17
<PAGE>   18
Cash flows provided by financing activities were minimal for the three months
ended March 31, 2001.

Cash flows for the three months ended March 31, 2000

Cash flows used in operating activities were $10.7 million for the three months
ended March 31, 2000, primarily attributable to a net loss of $8.6 million and
an increase in prepaid and other current assets of $11.8 million. These uses of
cash were offset by depreciation and amortization (including amortization of
deferred stock compensation) of $1.7 million and an increase in accounts payable
of $7.9 million.

Cash flows used in investing activities were $2.0 million, primarily
attributable to capital expenditures.

Cash flows provided by financing activities were $20.0 million, attributable to
issuances of preferred stock.

CAPITAL STRUCTURE

At March 31, 2001, our outstanding capital consisted solely of common stock, and
we had no outstanding indebtedness.

COMMITMENTS, CAPITAL EXPENDITURES AND FUTURE FINANCING REQUIREMENTS

At March 31, 2001, we had the following contractual commitments that are
described further in the following paragraphs (amounts in millions):

<TABLE>
<CAPTION>
                                                                                                                  2003-
                                                                                                 2001     2002    2011
                                                                                                 ----     ----    ----
<S>                                                                                              <C>     <C>     <C>
Noncancelable operating leases net of subleases ........................................        $4.6     $9.2    $73.8
Letter of credit for office space ......................................................         3.7       --       --
Construction and furnishing of office space less landlord contribution .................         3.3       --       --
Telesales, customer care, billing and reporting and technical support services..........         1.4      1.8       --
Airtime for customers...................................................................         1.2      1.7      1.9
Software license fees...................................................................         0.5      0.6      0.4
Advertising.............................................................................         3.0      8.0     18.4
                                                                                                ----     ----     ----
Total commitments.......................................................................       $17.7    $21.3    $94.5
                                                                                                ====     ====     ====
</TABLE>


As of March 31, 2001, our future minimum lease payments under noncancelable
operating leases through 2011 were $89.5 million, net of $1.9 million of
committed subleases.

In connection with a lease, we provided a $7.4 million irrevocable letter of
credit to the landlord in 2000, and we are obligated to provide an additional
$3.7 million irrevocable letter of credit to the landlord in 2001. For another
location, we provided an $800,000 letter of credit during 2000 that expires in
2007 to secure our obligations. These letters of credit are or will be
collateralized by a restricted investment deposit that will be reflected in
long-term assets. In conjunction with a lease, we also granted a warrant to the
landlord to purchase up to 95,901 shares of our common stock at a purchase price
of $8.91 per share.

We are in the process of completing the buildout of new office space, for which
we contracted to spend $6.8 million for construction, of which we have paid or
accrued $3.5 million as of March 31, 2001.

We entered into a three-year agreement in 1999 with a company that provides us
with telesales, customer care, billing and reporting and technical support
services. We have minimum annual payments under that agreement of $1.8 million
for each of 2001 and 2002, excluding additional subscriber-based charges of up
to $0.50 per subscriber per month.


                                       18
<PAGE>   19
We have contractual minimum airtime commitments with one of our wireless
carriers to the extent we do not meet certain minimum customer commitments.
These total $1.4 million in 2001, $1.7 million in 2002 and $1.9 million in 2003.

We license software from a vendor that requires a minimum commitment of $0.6
million in each of 2001 and 2002, and $0.4 million in 2003.

In accordance with an equity investment in us by News Corporation, we committed
to spend $30.0 million over the next five years for advertising services with
News Corporation's affiliates in the United States. As of March 31, 2001, we had
spent $0.6 million under this arrangement.

We expect that the source of funds to meet these commitments will come from cash
on hand, from working capital, and from cash flows from future operations,
together with additional funds raised through public or private financings.

Our future capital requirements will depend on a variety of factors, including
market acceptance of our wireless applications and service, the resources we
devote to develop, market, sell and support our current and future applications
and service offerings, whether mobile devices on which our wireless applications
and service operates become available through other sources or whether we need
to develop and market them ourselves and a myriad of other factors. We will
continue to make capital expenditures to support our expected growth in
operations and our related infrastructure. We believe that our cash and cash
equivalents, together with vendor, bank and partner financing that we are
seeking, will provide sufficient capital to fund our operations for at least the
next 12 months if our assumptions about our revenues and expenses are generally
accurate. Since we have a limited operating history, however, we cannot be
certain that those assumptions will prove to be accurate. We expect to devote
substantial capital resources over the next 12 to 24 months:

     -    to further develop our wireless applications and service offerings;
     -    to expand our wireless applications and services to new mobile
          devices, platforms, networks and markets;
     -    for our marketing and branding efforts;
     -    for customer support;
     -    to expand our operations internationally; and
     -    for general corporate purposes.

We anticipate requiring additional funds within the next 12 to 24 months to
continue the development and operation of our business. We do not expect to be
profitable in the next 12 months, so we will likely need to raise additional
funds in the future through public or private financings or other similar
arrangements. Additional financing may not be available on acceptable terms, if
at all, and the inability to obtain that financing could adversely affect the
continued operation of our business. Without the proceeds from future
financings, we would likely initiate material changes to our business plan to
conserve cash resources, including reduction of advertising and marketing
expenditures. If additional funds are raised through the issuance of equity
securities or securities convertible into equity, dilution to existing
stockholders may result. If insufficient funds are available, we may not be able
to introduce new services, expand our marketing efforts or compete effectively.


                                       19
<PAGE>   20
FACTORS AFFECTING FUTURE OPERATING RESULTS

The following important factors, among other things, could cause our actual
operating results to differ materially from those indicated or suggested by
forward-looking statements made in this report on Form 10-Q or presented
elsewhere by management from time to time.

     FACTORS RELATED TO OUR BUSINESS

WE HAVE A LIMITED OPERATING HISTORY, HAVING LAUNCHED OUR WIRELESS SERVICE
NATIONALLY IN MAY 2000 AFTER SEVERAL MONTHS OF BETA TESTING. IT MAY, THEREFORE,
BE DIFFICULT FOR YOU TO EVALUATE OUR BUSINESS AND FUTURE PROSPECTS.

We founded our company in May 1999 and formally launched our wireless service
nationally in May 2000. As a result of our limited operating history, your
evaluation of our business is more difficult. Since we have limited meaningful
historical data upon which to base our planned operating expenses, and since our
wireless service is still relatively new, it is difficult for us and for you to
assess whether our business will be profitable or whether we will be able to
adjust our business model to meet the demands of our users and customers over
time. When making an investment decision regarding our common stock, you should
consider the risks, expenses and difficulties that may be encountered or
incurred by us as a young company in a new and rapidly evolving market.

IF WE DO NOT HAVE SUFFICIENT CAPITAL TO FUND OUR OPERATIONS, WE MAY BE FORCED TO
DISCONTINUE PRODUCT DEVELOPMENT, REDUCE SALES AND MARKETING EFFORTS OR FOREGO
ATTRACTIVE BUSINESS OPPORTUNITIES.

We believe that our cash and cash equivalents, together with vendor, bank and
partner financing that we expect to obtain, will provide sufficient capital to
fund our operations at least through March 31, 2002 our assumptions about our
revenues and expenses are generally accurate. Since we have a limited operating
history, however, we cannot be certain that those assumptions will prove to be
accurate. Our actual funding requirements may differ materially as a result of
many factors, including the development of new products and technologies and the
continued growth of the company. We anticipate requiring additional funds within
the next 12 to 24 months to continue the development and operation of our
business. We do not expect to be profitable in the next 12 months, so we will
likely need to raise additional funds in the future through public or private
financings or other similar arrangements. Additional financing may not be
available on acceptable terms, if at all, and the inability to obtain that
financing could adversely affect the continued operation of our business. We may
also require additional capital to acquire or invest in complementary businesses
or products or obtain the right to use complementary technologies. If we issue
additional equity securities or securities convertible into equity to raise
funds, the percentage ownership of our existing stockholders will be reduced.

WE HAVE MODIFIED OUR BUSINESS STRATEGY TO FOCUS MORE ON THE ENTERPRISE AND
APPLICATION SERVICES MARKETS. PENETRATING THESE MARKETS REQUIRES MARKETING,
PRODUCT DEVELOPMENT AND OTHER EFFORTS THAT MAY BE DIFFERENT FROM THE APPROACH
THAT WE PURSUED WHEN WE WERE SOLELY SELLING OUR SERVICE DIRECTLY TO INDIVIDUALS.
OUR ABILITY TO PENETRATE THE ENTERPRISE AND APPLICATION SERVICES MARKETS IS
UNTESTED AND WE MAY BE UNABLE TO DO SO IN A PROFITABLE AND TIMELY MANNER.

We had 39,000 subscribers for our service as of March 31, 2001, nearly all of
which were mobile professionals who had purchased our service through retail
channels or from our Web site. At the end of 2000, we began several initiatives
to extend our business into the enterprise market and to offer our applications
and services to wireless carriers, online service providers, hardware
manufacturers, and other third parties. That extension of our business requires
that we modify in some respects our marketing, product development and related
efforts to more properly align our resources with the needs of those potential
customers. While we have entered into several enterprise transactions, we do not
have any material enterprise customers at this time. In addition, while we are
actively engaged in discussions with various third parties regarding their
purchase of applications and services from us, except for our relationship with
AOL Time Warner we do not, at this time, have any material agreements with such
third parties to sell our applications and services to them.



                                       20

<PAGE>   21
WE HAVE A HISTORY OF LOSSES SINCE OUR FORMATION, EXPECT TO INCUR SIGNIFICANT
OPERATING EXPENSES AND LOSSES IN THE FUTURE AS WE ROLL-OUT OUR WIRELESS
APPLICATIONS AND SERVICES AND MAY NEVER ACHIEVE OR SUSTAIN PROFITABILITY.

We have never been profitable, and if we continue to incur net losses, our stock
price will likely suffer. Through March 31, 2001, we had generated only $16.6
million of revenues and had an accumulated deficit of approximately $166.4
million. We have incurred increasing losses and had an operating loss for the
three month period ended March 31, 2001 of $39.4 million and an earnings (loss)
before interest, taxes, depreciation and amortization (including amortization of
deferred stock compensation) ("EBITDA") of $(29.5) million for that same period.
We expect to continue to incur losses and to have negative EBITDA on a quarterly
and annual basis until the end of 2002. We also anticipate that our expenses
will increase as we continue to increase our sales and marketing efforts, expand
our research and development programs, extend our wireless applications and
service to new platforms and devices and enhance our administrative operations.
Since we have only limited experience in managing our business, these efforts
may prove more expensive than we currently anticipate. We cannot predict if we
will ever achieve profitability and if we do, we may not be able to sustain or
increase our profitability.

IF WE ARE UNABLE TO INCREASE SUBSTANTIALLY THE NUMBER OF OUR SUBSCRIBERS IN THE
FUTURE, WE WILL BE UNABLE TO GENERATE THE INCREASED REVENUE NECESSARY TO ACHIEVE
PROFITABILITY.

We will have to increase substantially the number of our subscribers in order to
achieve profitability. In addition to increasing our subscriber base, we will
have to limit the number of subscribers who deactivate our service. Adding new
subscribers will depend to a large extent on the success of our marketing
campaigns and the future development by manufacturers of mobile devices that
support our wireless service and that are widely accepted by consumers. Limiting
the number of customer deactivations requires that we provide our subscribers
with a favorable and cost-effective experience in using our wireless service.
Our subscribers' experience may be unsatisfactory to the extent that our service
malfunctions or our wireless interface, customer care efforts or other aspects
of our wireless service do not meet our subscribers' expectations.

WE CONSOLIDATED OUR OPERATIONS INTO A SINGLE LOCATION IN SAN FRANCISCO IN APRIL
2001. AS A RESULT OF THIS CONSOLIDATION, WE WILL NEED TO SUBLEASE OUR EXISTING
LEASED FACILITIES. OUR INABILITY TO SUBLEASE OUR EXISTING LEASED FACILITIES IN A
TIMELY MANNER, AND ON TERMS THAT ARE FAVORABLE TO US, COULD ADVERSELY AFFECT OUR
FINANCIAL POSITION.

We consolidated all of our United States operations into a single office
location in San Francisco in April 2001. We intend to sublet a portion of this
facility and all of our former leased space in Palo Alto, California. Unless our
landlords relieve us from our obligations under those leases, we will remain
responsible for the payments on those leases. We have begun to market our leased
space, but we cannot be certain that we will be able to obtain a creditworthy
subtenant in a timely manner, or that we will be able to sublease our space on
terms that will allow us to fully cover all our of leasing costs and expenses.
If we are unable to do that, and if we are required to make lease payments for
our San Francisco office, as well as for our facilities in Palo Alto, our
financial condition would be adversely affected.

WE RELY UPON WIRELESS NETWORKS OWNED AND OPERATED BY OTHERS TO DELIVER OUR
WIRELESS SERVICE. IF WE DO NOT HAVE CONTINUED ACCESS TO SUFFICIENT CAPACITY ON
RELIABLE WIRELESS NETWORKS, WE MAY BE UNABLE TO DELIVER OUR WIRELESS SERVICE AND
OUR SALES COULD DECREASE.

We rely on wireless carriers to transmit our wireless service to our subscribers
and must purchase airtime from them for that purpose. Our ability to grow and
achieve profitability depends partly on our ability to obtain sufficient
capacity, at reasonable prices, on the networks of those carriers, including
AT&T Wireless Services and Verizon Wireless, and on the reliability,
compatibility and security of their systems. We depend on these networks to
provide uninterrupted service and would not be able to satisfy our customers'
needs if these carriers fail to provide the required capacity or needed levels
of service. In addition, our expenses would increase and our profitability could
be materially adversely affected if wireless carriers were to increase the
prices of their services and we were unable to pass along increased prices to
our customers. Some of these wireless carriers are, or could become, our
competitors and if they compete with us they may refuse to provide us with
access to their networks.

                                       21
<PAGE>   22
OUR BUSINESS DEPENDS ON THE COMPATIBILITY OF THE WIRELESS MODEMS USED TO RECEIVE
OUR WIRELESS SERVICE WITH MOBILE DEVICES. CURRENTLY, WE ONLY OFFER A WIRELESS
MODEM COMPATIBLE WITH THE PALM V AND PALM Vx AND HANDSPRING VISOR PLATINUM,
VISOR PRISM AND VISOR EDGE MOBILE DEVICES. IF THE FORMS OF THE MOBILE DEVICES ON
WHICH WE PROVIDE SERVICE OR THE METHODS BY WHICH THE MODEM CAN BE ATTACHED TO
THOSE DEVICES CHANGE, WE MAY INCUR SIGNIFICANT COSTS TO MAINTAIN THE
COMPATIBILITY OF THE WIRELESS MODEMS WITH THOSE DEVICES.

In order to use our wireless service, our subscribers must attach their mobile
device to a wireless modem. At this time, the wireless modems we offer are
compatible only with the Palm V and Palm Vx and Handspring Visor Platinum, Visor
Prism and Visor Edge mobile devices. Some manufacturers of mobile devices, such
as Hewlett-Packard and Compaq, offer their own wireless modem for their
devices. If we are unsuccessful in our efforts to become compatible with mobile
devices introduced in the future, our business may fail. We do not have an
agreement with any of the mobile device manufacturers regarding the
compatibility of the wireless modem that our subscribers use with their devices.
We have designed and developed the modems that we principally rely upon at this
time with the assistance of Novatel Wireless Inc., an independent modem
manufacturer. Mobile devices evolve quickly and can become obsolete in a short
period of time. For example, since the introduction of the Palm V and Palm Vx,
Palm has introduced the Palm VII, the m100 and the m500 series of devices and is
likely to continue to introduce new versions of its mobile devices with which
the wireless modems we currently use are not compatible. In order to make the
wireless modem compatible with devices of other mobile device manufacturers, we
will need to develop or have developed new modems and arrange for their
manufacture. To the extent that manufacturers of mobile devices, including Palm,
Handspring and Hewlett-Packard, change the form of their mobile devices or
modify the serial ports by which the modem attaches, we may need to modify the
wireless modems we use to maintain the compatibility of our wireless service
with these mobile devices. Any modification to the wireless modems we use may
involve significant research and development and production costs as well as
long lead-times resulting in lost revenue.

WE CURRENTLY RELY ON ONE SUPPLIER FOR THE WIRELESS MODEMS THAT OUR SUBSCRIBERS
NEED TO RECEIVE OUR WIRELESS SERVICE ON THE PALM V AND VX AND HANDSPRING VISOR
PLATINUM, VISOR PRISM AND VISOR EDGE. IF THAT SUPPLIER IS UNABLE TO TIMELY MEET
OUR NEEDS, OUR ABILITY TO EXPAND OUR SUBSCRIBER BASE WILL BE SEVERELY LIMITED
AND WE WILL LOSE REVENUE.

Novatel Wireless, Inc. is currently the single source of supply for the wireless
modems that our subscribers require to receive our wireless service on the Palm
V and Vx and Handspring Visor Platinum, Visor Prism and Visor Edge. Any
difficulties encountered by our supplier that result in product defects or poor
quality, production delays, cost overruns, or the inability to fulfill orders or
provision modems on a timely basis would hurt our reputation, result in loss of
revenue and limit our ability to expand our subscriber base. If we cannot obtain
an adequate supply of wireless modems, we will be unable to timely deliver our
wireless service to subscribers.

WE RELY ON LICENSED TECHNOLOGY TO PROVIDE OUR SUBSCRIBERS WITH ACCESS TO
NON-OPTIMIZED CONTENT. OUR FAILURE TO MAINTAIN THOSE LICENSES COULD CAUSE US TO
INCUR SIGNIFICANT EXPENSE AND TIME DELAYS TO FIND REPLACEMENTS FOR THOSE
TECHNOLOGIES, WHICH COULD SERIOUSLY HARM OUR BUSINESS.

We rely on technologies that we have licensed from Palm and Aether Systems, Inc.
to provide our subscribers with access to content that has not been optimized
for use on mobile devices, which we believe is an important aspect of the
wireless service that we provide. If we did not have those licenses, we would
not be able to deliver non-optimized content to our subscribers without finding
replacements for those technologies. While we believe that we could find
replacement technologies, we might not be able to obtain those technologies on
terms and conditions that are as favorable to us as our current arrangements
with Palm and Aether. Our license agreement with Palm for its technology that
helps to modify non-optimized content, which is known as its "web clipping
technology," expires in 2005, with automatic one year renewals if neither party
objects at least six months prior to the scheduled expiration date. The Palm
license may also be terminated for material breaches. Our license with Aether
for its pertinent technology is perpetual but may be terminated if a material
breach occurs which is not cured within 30 days after receipt of notice. Both of
those licenses are non-exclusive.

WE DO NOT YET SUPPORT ALL INTERNET EMAIL PROTOCOLS. POTENTIAL SUBSCRIBERS MAY
DECIDE NOT TO USE OUR SERVICE IF WE DO NOT SUPPORT THE EMAIL SYSTEM THAT THEY
ARE CURRENTLY USING, WHICH COULD LIMIT OUR SUBSCRIBER GROWTH OVER TIME.

Our subscribers have access, through our service, to "post office protocol 3,"
or POP3, email accounts that they may have with other Internet service
providers, as well as email accounts that our subscribers may have with
companies

                                       22
<PAGE>   23
such as Yahoo! and AOL. We will also support the Internet email protocol known
as "IMAP" by the second half of 2001. Individuals who rely on Internet email
protocols such as "MAPI," which is a different Internet protocol for sending and
receiving email, will not be able to access those email accounts through our
service without the benefit of additional specialized software. As a result,
potential subscribers who do not use POP3 email accounts, or, by the second half
of 2001, IMAP-based email accounts, or who do not have accounts with Yahoo! or
AOL, may be less likely to subscribe to our service. Although we expect over
time to support many Internet email protocols, our current lack of support for
some Internet email protocols could inhibit our subscriber growth and adversely
affect our revenue growth over time.

WE RELY ON THIRD PARTIES TO BILL OUR SUBSCRIBERS, TO PROVIDE A SIGNIFICANT
PORTION OF OUR CUSTOMER SUPPORT, TO PROVIDE US WITH INTERNET CONTENT AND TO
PERFORM OTHER CRITICAL BUSINESS FUNCTIONS. REPEATED FAILURES BY THOSE THIRD
PARTIES TO DELIVER THEIR PRODUCTS AND SERVICES TO US COULD HARM OUR BUSINESS.
OUR RELIANCE ON THOSE THIRD PARTIES MAY ALSO LESSEN THE CONTROL WE HAVE OVER OUR
RESULTS OF OPERATIONS.

In designing, developing and supporting our wireless service, we rely on third
parties to provide many of the products and services that are essential to
delivering our wireless service. As a result of the critical business functions
performed for us by third parties, we may have less control over our results of
operations than if we performed all of those functions by ourselves. We rely on:

         -        a third party billing and customer support company to bill our
                  subscribers and to provide a significant portion of our
                  customer support;

         -        a third party provisioning and warehouse support company to
                  provision and warehouse modems for use with our service;

         -        Aether, one of our principal stockholders, to host one of our
                  data centers and co-locate our monitoring equipment; and

         -        many content providers and content aggregators to provide us
                  with the Internet data and content that we make available, on
                  a modified basis, to our subscribers.

Repeated failures on the part of third parties to deliver and support reliable
products and services, enhance their current products and services, develop new
products and services on a timely and cost-effective basis and respond to
emerging industry standards and other technological changes could ultimately
cause a decline in our sales or an increase in deactivations. Third parties may
also experience difficulty in supplying us products or services sufficient to
meet our needs as our subscriber base grows, or they may terminate or fail to
renew contracts for supplying us these products or services on terms we find
acceptable.

OVER THE PAST SEVERAL MONTHS, WE HAVE ADDED MANY NEW EMPLOYEES, INTRODUCED NEW
SYSTEMS AND EFFECTED OTHER CHANGES TO ADDRESS OUR RAPID GROWTH. THAT GROWTH HAS
PLACED A SIGNIFICANT STRAIN ON OUR MANAGEMENT AND RESOURCES.

We have grown from 25 employees as of December 31, 1999 to 270 as of March 31,
2001. During that period, we also began to introduce new internal accounting
systems, began to prepare for the national launch of our wireless service, which
included testing various technologies and coordinating the national media
campaign for our wireless service, leased additional office space and undertook
many other initiatives in connection with the ongoing development of our
business. Our growth has placed, and any further growth is likely to continue to
place, a significant strain on our management and resources. Our ability to
achieve and maintain profitability will depend on our ability to manage our
growth effectively, implement and expand operational and customer support
systems and hire additional personnel. We may not be able to augment or improve
existing systems and controls or implement new systems and controls to respond
to any future growth. We may also face difficulties integrating and collecting
information from third-party providers that we need to manage our business
effectively. In addition, future growth may result in increased responsibilities
for our management personnel, which may limit their ability to effectively
manage our business.

                                       23
<PAGE>   24
OUR SUBSCRIBERS MUST INSTALL OUR USER INTERFACE ON THEIR MOBILE DEVICE TO
RECEIVE OUR WIRELESS SERVICE. IF THAT USER INTERFACE CONTAINS DEFECTS OR ERRORS,
OUR REPUTATION WOULD BE ADVERSELY AFFECTED.

Our wireless service depends on software in our network and a user interface
that is installed on our users' mobile devices. The technology necessary to
support our wireless service is complex and must meet stringent technical
requirements. Services that are as complex as ours are likely to contain
undetected errors or defects, especially when first introduced or when new
versions are released. In addition, our user interface may not properly operate
when integrated with the systems of our subscribers and content providers, or
when used to deliver services to a large number of our subscribers.

While we continually test our wireless service for errors and work with
subscribers through our customer support services to identify and correct bugs,
errors in the service may be found in the future. Testing for errors is
complicated in part because it is difficult to simulate or fully anticipate the
computing environments in which our subscribers use our wireless service. Our
wireless service may not be free from errors or defects even after it has been
tested, which could result in the rejection of our service and damage to our
reputation, as well as lost revenue, diverted development resources and
increased support costs.

WE HAVE EXPERIENCED AND MAY CONTINUE TO EXPERIENCE NEGATIVE GROSS MARGINS ON OUR
SUBSCRIBER REVENUE AS A RESULT OF THE FLAT MONTHLY FEE WE CHARGE OUR SUBSCRIBERS
FOR UNLIMITED USAGE.

We provide our subscribers with unlimited Internet access for a fixed monthly
fee. To the extent our cost of providing unlimited Internet access to a
subscriber exceeds the fixed monthly fee that we charge, we may experience
negative gross margins, which negatively impacts cash flows. We have
historically experienced negative gross margins to date, but because of our
limited operating history, these negative gross margins have not materially
affected our results of operations. However, if we are unable to generate
positive gross margins in the future, our cash flows from operations would be
negatively impacted, and we would be unable to achieve profitability. Our costs
depend in large part on the fees we pay to wireless carriers for transmitting
our wireless service over their networks. Wireless carriers currently charge us
based on the aggregate usage per month of our subscribers. One rate is charged
to us while our subscribers are in their home market and a significantly higher
rate is charged to us as our subscribers travel outside of their home market and
incur roaming fees. Our pricing strategy contemplates that many of our
subscribers will be usage-intensive subscribers and/or travel frequently outside
of their home market. However, our business is new, and we have limited
historical experience with which to predict usage patterns of our subscribers.
If we fail to accurately predict subscribers' usage patterns outside of their
home market, we may incur higher than expected roaming fees and increased costs
of providing our service. The operating systems that we currently use to monitor
airtime charges do not permit us to timely and effectively respond to changes in
volume and geographic location of subscriber usage. Our inability to make timely
changes in our overall use of airtime could directly affect our costs. While we
may look to acquire or develop automated control systems to help us manage our
airtime usage, we may not be able to do so in the near term on a cost-effective
basis. Even if we do obtain those systems, we still may not be able to
effectively monitor all subscriber usage or to improve our gross margins.

WE OFFER OUR SUBSCRIBERS AN UNCONDITIONAL 30-DAY CUSTOMER REFUND PERIOD DURING
WHICH THEY MAY CANCEL OUR WIRELESS SERVICE WITHOUT ANY COST TO THEM, ALTHOUGH WE
MAY STILL INCUR SHIPPING AND OTHER COSTS THAT WE CANNOT RECOVER.

We offer our subscribers an unconditional 30-day customer refund period within
which they may test our wireless service without obligation. At the end of this
period, subscribers may cancel our wireless service and receive a complete
refund of their service charge. If they purchased a modem from us they would
also be entitled to return the modem to us and receive a refund on their
purchase price. We incur a significant amount of shipping and other product
fulfillment costs in connection with such service cancellations that we will not
be able to recover. Consequently, the higher the rate of service cancellation,
the greater the adverse effect will be on our gross margins.

                                       24
<PAGE>   25
WE COMPETE WITH PALM, INC., ON WHOM WE RELY FOR TECHNOLOGY NECESSARY TO PROVIDE
OUR SUBSCRIBERS WITH ACCESS TO NON-OPTIMIZED CONTENT. LICENSING TECHNOLOGY FROM
A COMPETITOR COULD PLACE US AT A COMPETITIVE DISADVANTAGE IF, IN THE FUTURE,
PALM DOES NOT PROVIDE US ACCESS TO NEW TECHNOLOGIES AND NEW PALM DEVICES.

We compete with Palm.Net, a service provided by Palm, Inc. To provide our
subscribers with access to non-optimized content, we have licensed from Palm its
web clipping technology which is an application that assists in modifying
non-optimized content by reformatting text and automatically screening out
graphics that would be unreadable on a mobile device. Although we have a license
to use that technology for an initial five-year period, the fact that we license
that technology from a competitor could place us at a competitive disadvantage.
Palm, for instance, could develop other more effective technologies to which we
would not have access. In addition, since our business currently depends on the
compatibility of our wireless modem with the Palm V and Palm Vx mobile devices,
and since it is important that we engineer the wireless modems that we use so
that they easily attach to Palm's devices, we face a competitive disadvantage in
that we may not learn of changes to the Palm family of mobile devices, including
possibly the form of those devices, until their commercial release. That
advantage could allow Palm.Net to provide service on a device much earlier than
we otherwise might be able to do.

WE EXPECT, OVER TIME, TO DERIVE A PERCENTAGE OF OUR REVENUES FROM ADVERTISING,
SPONSORSHIPS AND MOBILE E-COMMERCE TRANSACTIONS. IF WE ARE UNABLE TO GENERATE
REVENUES FROM ADVERTISING, SPONSORSHIPS AND MOBILE E-COMMERCE TRANSACTIONS IN
THE FUTURE, OUR REVENUE GROWTH COULD BE IMPAIRED.

We expect, over time, to derive a percentage of our revenues from advertising,
sponsorships and mobile e-commerce transactions. For the three month period
ended March 31, 2001, we did not record any revenues from advertising or mobile
e-commerce. Although we expect in the future to continue to derive a substantial
portion of our revenues from our subscribers' fixed monthly fees and from fees
paid by third parties such as wireless carriers, and do not expect to be
dependent on revenues from advertising, sponsorships or mobile e-commerce
transactions to achieve profitability, we do expect that revenues from
advertising, sponsorships, and mobile e-commerce could become important to us
over time. If we are unable to generate revenues from advertising, sponsorships
and mobile e-commerce transactions in the future, our revenue growth could be
impaired, which could reduce the amount of cash that we would have available to
spend on sales and marketing, research and development programs and
administrative operations. We have not yet begun serving advertisements to our
subscribers and have not yet determined the specific advertising strategy that
we intend to adopt or whether our subscribers will be receptive to receiving
advertising through our service. The recent general decline in advertising
spending by companies is also likely to slow or materially delay our ability to
generate any revenues from these sources.

WE FACE COMPETITION FROM EXISTING AND NEW COMPETITORS AND FROM NEW PRODUCTS THAT
COULD CAUSE US TO LOSE MARKET SHARE AND CAUSE OUR REVENUE TO DECLINE.

The widespread adoption of open industry standards in the wireless data
communications market, together with the lack of exclusivity provisions in many
of our agreements, may make it easier for new market entrants and existing
competitors to introduce products that compete with our wireless service and
rapidly acquire market share. In addition, many competitors and potential
competitors have greater resources than we have, which may enable them to
penetrate the market more rapidly than we can.

We developed our wireless applications and service using mostly standard
industry development tools. Many of our agreements with wireless network
carriers and content providers, and our agreement with Palm, are non-exclusive.
Our competitors, therefore, may be able to use many of the same products and
services in competition with us. In addition, our competitors may market their
products and services more effectively than we do, which could decrease demand
for our product and cause our revenue to decline. Currently, some of our
competitors include:

         -        Research in Motion, a provider of wireless email;

         -        GoAmerica, a wireless Internet service provider; and

         -        wireless and other network service providers, such as Sprint
                  PCS.

We may also face competition in the future from established companies, including
popular web interfaces, wireless application service providers and wireless
network carriers, who have not previously entered the market for wireless
Internet and data services.

                                       25
<PAGE>   26
WE HAVE HISTORICALLY SUBSIDIZED THE PURCHASE BY OUR SUBSCRIBERS OF THE WIRELESS
MODEMS THAT ARE NECESSARY TO RECEIVE OUR WIRELESS SERVICE. THOSE SUBSIDIES HAVE
ADVERSELY AFFECTED OUR GROSS MARGINS AND MAY CONTINUE TO DO SO.

To help market our wireless service, we have historically sold wireless modems
to our subscribers at prices that were below the costs that we paid to the
manufacturer of those devices. We may continue to subsidize modem purchases to
attract new subscribers. Providing our subscribers with wireless modems at
prices below our costs would have an adverse effect on our gross margins.

WHILE WE CONTINUE TO SELL OUR SERVICE TO INDIVIDUALS THROUGH RETAIL CHANNELS, WE
EXPECT THAT OUR QUARTERLY OPERATING RESULTS WILL BE SUBJECT TO FLUCTUATIONS AND
SEASONALITY. IF WE FAIL TO MEET THE EXPECTATIONS OF SECURITIES ANALYSTS OR
INVESTORS, OUR SHARE PRICE MAY DECREASE SIGNIFICANTLY.

Our revenues may be lower in the second and third quarters of the year. This
weakness may be due to the fact that our wireless service has been highly
consumer-oriented, and consumer buying is traditionally lower in these quarters.
We also anticipate timing our marketing campaigns to coincide with relatively
higher consumer spending in the first and fourth quarters, which would
contribute to these seasonal variations. In addition, as we expand our
operations, we expect that our operating expenses, particularly our sales,
marketing and research and development costs, will continue to increase. If
revenues decrease and we are unable to reduce those costs rapidly, our operating
results would be adversely affected. Over the next several quarters we expect
expenses to grow more rapidly than revenues, which will hurt our quarterly
operating results. As a result of seasonality and increasing operating expenses,
our future quarterly operating results may fluctuate significantly and may not
meet the expectations of securities analysts or investors. If this occurs, the
price of our stock would likely decline.


WE BELIEVE THAT WE NEED TO DEVELOP MARKET AWARENESS OF OUR WIRELESS SERVICE TO
ACHIEVE PROFITABILITY. IF WE FAIL TO DEVELOP THAT MARKET AWARENESS, WE MAY NEVER
ACHIEVE PROFITABILITY.

If we are unable to develop market awareness of our wireless applications and
service, we may not be able to increase our revenues by the amount necessary to
achieve profitability. For the three month period ended March 31, 2001, we
incurred approximately $8.8 million in advertising expenses. We intend to invest
significantly in promoting our applications and services over time, which will
require us to continue to spend on sales and marketing. We have also committed
in connection with our international joint venture with News Corporation to
spend $30.0 million, in the aggregate, through 2005 for advertising services
with News Corporation's affiliates in the United States. At March 31, 2001,
approximately $0.6 million had been spent. We may not be successful in our
efforts to promote our brand.

WE MAY SEEK TO ACQUIRE TECHNOLOGIES OR COMPANIES IN THE FUTURE TO DEVELOP OUR
BUSINESS. THESE ACQUISITIONS COULD DISRUPT OUR BUSINESS AND DILUTE OUR
INVESTORS' HOLDINGS.

In January 2001, we completed the acquisition of NomadIQ Ltd, our first
acquisition. We may acquire additional technologies or companies in the future
to further develop our business. Entering into an acquisition entails many
risks, any of which could materially harm our business, including:

         -        diversion of management's attention from other business
                  concerns;

         -        failure to effectively integrate the acquired technology or
                  company into our business;

         -        the loss of key employees from either our current business or
                  the acquired business; and

         -        assumption of significant liabilities of the acquired company.

Our investors' holdings will be diluted if we issue equity securities or
securities convertible into equity in connection with any acquisition.

                                       26
<PAGE>   27
ANY OF OUR KEY EMPLOYEES COULD TERMINATE THEIR EMPLOYMENT WITH US AT ANY TIME.

We depend in large part on the continued services and performance of our senior
management team and other key personnel. The loss of any member of our senior
management team, particularly Patrick McVeigh, our Chairman and Chief Executive
Officer, would adversely affect us and impair our ability to achieve our
business objectives. We do not currently have employment agreements with any of
our officers or employees.

Any of our officers or employees could terminate their employment with us at any
time. The loss of any of those individuals could seriously interrupt our
business.

WE MAY BE SUBJECT TO LIABILITY FOR DISSEMINATING INFORMATION TO OUR SUBSCRIBERS,
AND OUR INSURANCE COVERAGE MAY BE INADEQUATE TO PROTECT US FROM THIS LIABILITY.

We may be subject to claims relating to information disseminated to our
subscribers through our wireless service. These claims could take the form of
lawsuits for defamation, negligence, copyright or trademark infringement or
other actions based on the nature and content of the materials. The law relating
to the liability of services like ours is unsettled, although some cases have
been decided which imposed liability on Internet service providers for
disseminating defamatory statements through their service. Although we carry
general liability insurance, our insurance may not cover potential claims of
this type or may not be adequate to cover all costs incurred in defense of
potential claims or to indemnify us for all liability that may be imposed.

WE DEPEND ON RECRUITING, TRAINING AND RETAINING KEY PERSONNEL WITH INTERNET,
WIRELESS DATA AND TECHNOLOGY EXPERIENCE. WE MAY NOT BE ABLE TO DEVELOP NEW
PRODUCTS OR SUPPORT EXISTING PRODUCTS IF WE CANNOT HIRE OR RETAIN QUALIFIED
EMPLOYEES.

Our future success will depend, in large part, on our ability to recruit and
retain experienced research and development, sales and marketing, customer
service and management personnel. Because of the technical nature of our
wireless service and the dynamic market in which we compete, our performance
depends on attracting and retaining highly qualified employees. Competition for
these personnel in the wireless data and technology industries is intense and
attracting personnel with experience in both industries is even more difficult,
especially in the San Francisco Bay area of California in which we are located.
We are in a relatively new market and there are a limited number of people with
the appropriate combination of skills needed to provide the services that our
subscribers demand. In addition, new employees generally require substantial
training, which requires significant resources and management attention. Even if
we invest significant resources to recruit, train and retain qualified
personnel, we may not be successful in our efforts.

A PROLONGED DEPRESSION IN OUR STOCK PRICE COULD MAKE IT DIFFICULT FOR US TO
RETAIN AND RECRUIT QUALIFIED PERSONNEL.

A major part of the compensation received by our employees is in the form of
stock option grants. We cannot assure you that we will be able to retain
existing personnel if our stock price is near or below their option exercise
prices for a prolonged period. Moreover, a prolonged depression in our stock
price may make our company less attractive to potential employees in which case
we would have difficulty recruiting additional qualified personnel. Recent
volatility in the stock markets has exacerbated these concerns.

IF OUR INTELLECTUAL PROPERTY IS NOT ADEQUATELY PROTECTED, WE MAY LOSE OUR
COMPETITIVE ADVANTAGE.

We depend on our ability to develop and maintain important proprietary aspects
of our technology. We seek to protect our software, documentation and other
written materials under trade secret and copyright laws, as well as
confidentiality provisions in contracts with our customers, all of which afford
limited protection. We have also sought protection of our proprietary technology
under patent laws.

Despite the measures we have taken to protect our intellectual property, we
cannot assure you that these steps will be adequate, that we will be able to
secure patent or trademark registrations for all of our patent applications or
trademarks in the United States or other countries, or that third parties will
not breach the confidentiality provisions in contracts or infringe or
misappropriate our copyrights, pending patents, trademarks and other proprietary
rights.

                                       27
<PAGE>   28
In the event that a third party breaches the confidentiality provisions in our
contracts or misappropriates or infringes on our intellectual property, we may
not have adequate remedies. In addition, third parties may independently
discover or invent competing technologies or reverse engineer our trade secrets,
software or other technology. Moreover, the laws of some foreign countries may
not protect our proprietary rights to the same extent as do the laws of the
United States. Therefore, the measures that we are taking to protect proprietary
rights may not be adequate.

WE HAVE BEEN SUED FOR INTELLECTUAL PROPERTY INFRINGEMENT. THIS LAWSUIT AND ANY
FUTURE LAWSUITS ALLEGING INFRINGEMENT OF THIRD PARTY INTELLECTUAL PROPERTY COULD
RESULT IN SIGNIFICANT EXPENSES FOR LITIGATION OR FOR DEVELOPING OR LICENSING NEW
TECHNOLOGY.

On February 5, 2001, we were served, along with several other technology
companies, with a complaint alleging that encryption technology we have licensed
from third parties and incorporated into our service infringes third party
patents. In addition, claims may be asserted in the future alleging that our
current or future services infringes on third party intellectual property
rights. While we believe we and the licensor of the encryption technology
incorporated into our service have meritorious defenses to the current complaint
against us, and intend to vigorously defend against the allegations, defending
these types of claims, whether they are with or without any merit or whether
they are resolved in favor of or against us or our licensors, may be costly and
divert management's attention and resources. We cannot predict whether third
parties will assert these types of claims against us or against the licensors of
technology licensed to us, or whether those claims will harm our business. As a
result of these disputes, we may have to develop costly non-infringing
technology, or enter into licensing agreements. These agreements, if necessary,
may not be available on terms acceptable to us, or at all, which could increase
our expenses or make our service less attractive to customers.

WE MAY BE SUBJECT TO LIABILITY CLAIMS THAT COULD RESULT IN SIGNIFICANT COSTS.

We may be subject to claims for damages related to any errors in our wireless
service, including hardware manufactured for us by third parties and failures to
complete m-commerce transactions over our wireless service. A major liability
claim could materially adversely affect our business because of the costs of
defending against these types of lawsuits, diversion of key employees' time and
attention from the business and potential damage to our reputation. Our license
agreements with customers contain provisions designed to limit exposure to
potential liability claims. Limitation of liability provisions contained in our
license agreements may not be effective under the laws of some jurisdictions. As
a result, we could be required to pay substantial amounts of damages in
settlement or upon the determination of any of these types of claims.

SOME OF OUR DIRECTORS AND SIGNIFICANT STOCKHOLDERS MAY HAVE CONFLICTS OF
INTEREST WITH RESPECT TO CERTAIN PROJECTS THAT WE MAY PURSUE.

In addition to serving on our board, David Oros, Janice Roberts and Thomas
Wheeler serve on the board of Aether Systems, Inc. Aether provides wireless
service to enterprises, which is similar in some respects to our service. Due to
these similarities, Mr. Oros, Ms. Roberts and Mr. Wheeler may, in the course of
their service on our board, be faced with issues that could pose a conflict of
interest for them involving transactions or opportunities that both we and
Aether might be interested in pursuing. Mr. Oros, Ms. Roberts and Mr. Wheeler
would likely recuse themselves from participating in board decisions regarding
those transactions and opportunities, which would deprive us of their experience
and judgment. In addition, Aether, 3Com Corporation and News Corporation each
hold significant amounts of our capital stock. There may be transactions which
we intend to pursue that could also be of interest to those stockholders and
which could therefore pose conflicts between those stockholders and us.

ALTHOUGH WE HAVE FORMED AN INTERNATIONAL JOINT VENTURE WITH NEWS CORPORATION TO
PURSUE INTERNATIONAL BUSINESS OPPORTUNITIES, NEITHER NEWS CORPORATION NOR
OMNISKY IS EXCLUSIVELY OBLIGATED TO PURSUE THOSE OPPORTUNITIES THROUGH THE JOINT
VENTURE.

Although we have formed an international joint venture with News Corporation to
pursue international business opportunities, our agreement with News Corporation
does not impose exclusivity obligations on either party. Consequently, News
Corporation could decide in good faith that it would be inappropriate to conduct
business through the joint venture in any market, and without liability to the
joint venture or us, News Corporation could conduct that business outside of the

                                       28
<PAGE>   29
joint venture. If that occurs, our ability to pursue business opportunities in
that market could be materially harmed and the value of the joint venture may be
adversely affected.

WE EXPECT OUR JOINT VENTURE TO EXPERIENCE MANY BARRIERS AS IT ROLLS OUT WIRELESS
SERVICE IN EUROPE AND ASIA.

To date, we have derived nearly all of our revenues from sales to subscribers in
the United States. We plan to expand our international operations in the future,
principally through a joint venture that we formed with News Corporation. The
international joint venture launched a beta service in the United Kingdom in
February 2001, and in Germany in May 2001. We expect to face many barriers when
competing in various countries in Europe and Asia, including:

         -        costs of customizing products for foreign countries;

         -        restrictions on the use of technology;

         -        dependence on local vendors;

         -        difficulties in protecting intellectual property rights;

         -        compliance with multiple, conflicting and changing
                  governmental laws and regulations and potential political
                  instability;

         -        foreign currency fluctuations;

         -        locally-based competitors who are more familiar with local
                  interests and practices;

         -        financing our international business opportunities; and

         -        import and export restrictions and tariffs.

     FACTORS RELATED TO OUR INDUSTRY

OUR BUSINESS WILL NOT GROW IF USE OF THE INTERNET AND WIRELESS TECHNOLOGIES DOES
NOT CONTINUE TO GROW OR IF CAPACITY CONSTRAINTS HINDER GROWTH IN USAGE.

Our future revenue growth is substantially dependent on continued growth in the
use of the Internet and wireless technologies. Our business may be adversely
affected if the number of users on the Internet does not increase, if commerce
over the Internet does not become more accepted and widespread or if the
adoption of wireless technologies is significantly delayed. The use and
acceptance of the Internet and wireless technologies may not increase for a
number of reasons, including the cost and availability of that Internet access
and those wireless technologies.

Published reports have also indicated that capacity constraints caused by growth
in the use of the Internet may impede further development of the Internet to the
extent that users experience delays, transmission errors and other difficulties.
If the necessary infrastructure, products, services or facilities are not
developed, or if the Internet does not become a viable and widespread commercial
medium, we will not be able to grow our business.

OUR BUSINESS WILL NOT GROW IF THE USE OF WIRELESS APPLICATIONS AND SERVICES DOES
NOT CONTINUE TO GROW.

The markets for wireless applications and services and related products are
still evolving, and continued growth in demand for, and acceptance of, these
services remains uncertain. Our product depends on the acceptance by consumers
of wireless services and Internet-enabled devices. Current barriers to market
acceptance of these services include cost, reliability, platform and
distribution channel constraints, functionality and ease-of-use. We cannot be
certain that these barriers will be overcome. Since the market for our wireless
applications and services is new and evolving, it is difficult to predict the
size of this market or its future growth rate, if any. We cannot assure you that

                                       29
<PAGE>   30
a sufficient volume of subscribers will demand wireless services on mobile
devices. If the market for wireless applications and services grows more slowly
than currently anticipated, our revenue may not grow.

     OTHER FACTORS

OUR EXISTING STOCKHOLDERS HOLD A MAJORITY OF OUR STOCK AND WILL BE ABLE TO
CONTROL MATTERS REQUIRING STOCKHOLDER APPROVAL.

As of May 10, 2001, our executive officers, directors and their affiliates
beneficially owned, in the aggregate, approximately 73.1% of our outstanding
capital stock. Aether Systems Inc., 3Com Ventures Inc., an affiliate of 3Com
Corporation, and Omni Holdings, Inc., an affiliate of News Corporation,
beneficially owned 24.2%, 21.2% and 9.8%, respectively, of our outstanding
capital stock. As a result, these stockholders are able to exercise significant
control over all matters requiring stockholder approval, including the election
of directors and approval of significant corporate transactions, which may have
the effect of delaying or preventing a third party from acquiring control over
us even if our other stockholders believe that it is desirable.

WE ARE AT RISK OF SECURITIES CLASS ACTION LAWSUITS IF OUR STOCK PRICE REMAINS
VOLATILE.

The stock market in general has recently experienced extreme price and volume
fluctuations. The market price of our common stock has recently experienced
significant volatility. In the future, the market price of our common stock may
continue to fluctuate. In the past, securities class action lawsuits alleging
fraud have often been filed against a company following periods of volatility in
the market price of its securities. We may in the future be the target of
similar lawsuits. Regardless of its outcome, securities litigation may result in
substantial costs and divert management's attention and resources, which could
harm our business and results of operations.

SHARES ELIGIBLE FOR FUTURE SALE BY OUR EXISTING STOCKHOLDERS MAY ADVERSELY
AFFECT OUR STOCK PRICE.

If our stockholders sell substantial amounts of our common stock in the public
market, including shares issued upon the exercise of outstanding options, the
market price of our common stock could fall. In addition, such sales could
create the perception to the public of difficulties or problems with our
products and services. As a result, these sales also might make it more
difficult for us to sell equity or equity-related securities in the future at a
time and price that we deem appropriate.

As of May 10, 2001, we had outstanding 68,940,410 shares of common stock. Of
these shares, 10,610,531 shares are freely tradable without restriction under
the Securities Act of 1933, as amended. The remaining 58,329,879 shares are
restricted securities under the Securities Act that are eligible for sale in the
public market subject to restrictions under the federal securities laws,
including volume limitations. In addition, 2,318,385 of such restricted shares
are subject to lock-up arrangements under which the shareholders have agreed
with us not to sell or otherwise dispose of their shares of common stock for
periods ranging from 180 to 360 days. These lock-up arrangements were entered
into in connection with our acquisition of NomadIQ Ltd. in January 2001.

PROVISIONS OF DELAWARE LAW, OUR CERTIFICATE OF INCORPORATION AND BYLAWS COULD
DELAY OR PREVENT A TAKEOVER OF US, EVEN IF DOING SO WOULD BENEFIT OUR
STOCKHOLDERS.

Provisions of Delaware law, our certificate of incorporation and bylaws could
have the effect of delaying or preventing a third party from acquiring us, even
if a change in control would be beneficial to our stockholders. These provisions
include:

         -        authorizing the issuance of preferred stock without
                  stockholder approval;

         -        providing for a classified board of directors with staggered,
                  three-year terms;

         -        requiring two-thirds of the outstanding shares to approve
                  amendments to some provisions of our certificate of
                  incorporation and bylaws; and

         -        prohibiting stockholder actions by written consent.

                                       30
<PAGE>   31
THE TERMS OF ANY FUTURE FINANCING ARRANGEMENTS MAY RESTRICT OUR OPERATIONS.

We may in the future enter into financing arrangements with equipment lessors,
financial institutions or other lenders. These financing arrangements would
likely require that we satisfy many financial covenants and could limit
our ability to incur other indebtedness, pay dividends or engage in certain
other types of transactions in the future. We may also be required to pledge
certain assets to secure some of these financing arrangements, which would allow
our lenders under those arrangements, in the event of a default, to foreclose
upon the assets securing their obligations.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

Our exposure to market risk for changes in interest rates relates primarily to
the increase or decrease in the amount of interest income we can earn on our
available funds for investments, which are comprised of commercial paper,
government securities and corporate debt securities at March 31, 2001. We
believe, however, that we are currently not subject to material interest rate
risk.

Foreign Currency Risk

In 2001, we will be transacting business in various foreign currencies through
our international joint venture and our operations in Israel, and accordingly,
we will be subject to exposure from adverse movements in foreign currency
exchange rates. However, as both the revenues and costs of this business are
primarily expected to be generated in the same currencies, we do not expect our
net exposure to be significant.

We currently do not use financial instruments to hedge operating or other
exposures in foreign currencies.

PART II.  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

On July 6, 2000, a complaint was filed in the United States District Court for
the Northern District of California captioned "Julia Butterfly Hill v. AT&T
Corporation, a New York corporation; AT&T Wireless Services, Inc., a Delaware
corporation; OmniSky Corporation, a Delaware corporation; TWBA Chiat/Day, a
Delaware corporation; and Does I-XX, inclusive." The complaint alleges, among
other things, false endorsement and false designation of origin, false and
misleading advertising and misappropriation of likeness and image. We intend to
defend ourselves  vigorously and believe that the claims alleged are without
merit. We do not believe that the resolution of this matter will have a material
effect on our financial condition, results of operations or cash flows.

On February 2, 2001, a complaint was filed in the United States District Court
for the District of Delaware captioned "Leon Stambler v. RSA Security Inc.,
Verisign Inc., First Data Corporation, Openwave Systems Inc. and OmniSky
Corporation." The complaint alleges, among other things, that encryption
technology licensed from third parties and incorporated into our service
infringes third party patents. We have received indemnification from certain
companies from which we license technology and intend to defend our interests
vigorously. We do not believe resolution of this matter will have a material
effect on our financial condition, results of operations or cash flows.

Except as described in the previous two paragraphs, we are not currently subject
to any material legal proceedings. We may from time to time, however, become a
party to various legal proceedings arising in the ordinary course of our
business. We also may be indirectly affected by administrative or court
proceedings or actions in which we are not involved but which have general
applicability to the Internet or wireless industries.

ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

(c)      RECENT SALES OF UNREGISTERED SECURITIES

From January 1, 2001 through March 31, 2001, we granted options to purchase an
aggregate of 85,500 shares of common stock to our employees at an average
exercise price of $6.11 per share. During that same period, options to purchase
59,734 shares were exercised at an average exercise price of $0.34 per share.

On January 18, 2001, we issued an aggregate of 2,328,385 shares of common stock
in connection with our acquisition of NomadIQ Ltd, an Israeli corporation.

(d)      USE OF PROCEEDS FROM SALE OF REGISTERED SECURITIES


                                       31
<PAGE>   32
On September 26, 2000, we sold 10,465,000 shares of our common stock in an
initial public offering at a price of $12.00 per share pursuant to a
Registration Statement on Form S-1 (Registration No. 333-39446) that was
declared effective by the Securities and Exchange Commission on September 20,
2000. From September 26, 2000, the closing date of our initial public offering,
to March 31, 2001, the ending date of the reporting period, the approximate
amount of net offering proceeds used was $36.9 million for general business
operations including funding of operating losses generated during the three
months ended March 31, 2001. The remainder of the net offering proceeds was
invested in restricted cash deposits, money market funds, commercial paper,
government securities and corporate debt securities.

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

No matters were submitted to a vote of security holders during the three months
ended March 31, 2001.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(a)  EXHIBITS

      Exhibit
      Number                     Description Of Document
      ------                     -----------------------

         3.1*                    Amended and Restated Certificate
                                 of Incorporation

         3.2*                    Bylaws

         4.1*                    Specimen Common Stock Certificate

        10.1+                    Handspring Inc. Software License Agreement
                                 dated as of February 21, 2001

------------
* Incorporated by reference from our Annual Report on Form 10-K filed
on April 2, 2001.

+ We are seeking confidential treatment on certain portions of this exhibit from
the Commission. The omitted portions have been filed separately with the
Commission.

(b)  REPORTS ON FORM 8-K

On February 8, 2001, we filed a Form 8-K announcing preliminary results
for our year ended December 31, 2000.

                                       32
<PAGE>   33
                                   SIGNATURES

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

<TABLE>
<CAPTION>
                      SIGNATURE                                         TITLE                            DATE
                      ---------                                         -----                            ----

<S>        <C>                                               <C>                                     <C>
           /s/    PATRICK S. MCVEIGH                         Chief Executive Officer and             May 15, 2001
          -------------------------------------------            Chairman of the Board
                  Patrick S. McVeigh                         (Principal Executive Officer)


         /s/      LAWRENCE S. WINKLER                          Chief Financial Officer               May 15, 2001
        ---------------------------------------------        (Principal Financial Officer)
                  Lawrence S. Winkler
</TABLE>

                                       33
<PAGE>   34
                                  EXHIBIT INDEX


<TABLE>
<CAPTION>
    EXHIBIT
     NUMBER                     DESCRIPTION OF DOCUMENT
     ------                     -----------------------
<S>               <C>
       3.1*       Amended and Restated Certificate of Incorporation
       3.2*       Bylaws
       4.1*       Specimen Common Stock Certificate
      10.1+       Handspring Inc. Software License Agreement dated as of February 21, 2001
</TABLE>

*    Incorporated by reference from our Annual Report on Form 10-K filed on
     April 2, 2001.
+    We are seeking confidential treatment on certain portions of this exhibit
     from the Commission. The omitted portions have been filed separately with
     the Commission.

                                       34