<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 June 30, 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)


<TABLE>
<S>                                                                    <C>
                           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)
</TABLE>


                                 (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 August
1, 2001: 72,584,356 shares

                                       1
<PAGE>   2
                               OMNISKY CORPORATION

                                    FORM 10-Q
                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001

                                TABLE OF CONTENTS


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

Item 1.   Financial Statements:                                                           3

          Consolidated Balance Sheets as of December 31, 2000 and June 30, 2001           3

          Consolidated Statements of Operations for the Three and Six Month Periods
            Ended June 30, 2000 and 2001                                                  4

          Consolidated Statements of Cash Flows for the Six Month Periods Ended
            June 30, 2000 and 2001                                                        5

          Notes to Consolidated Financial Statements                                      6

Item 2.   Management's Discussion and Analysis of Financial Condition and
            Results of Operations                                                        14

Item 3.   Quantitative and Qualitative Disclosures About Market Risk                     38

PART II.  OTHER INFORMATION                                                              39

Item 1.   Legal Proceedings                                                              39

Item 2.   Changes in Securities and Use of Proceeds                                      40

Item 4.   Submission of Matters to a Vote of Security Holders                            40

Item 6.   Exhibits and Reports on Form 8-K                                               40

Signatures

Exhibit Index
</TABLE>

                                       2
<PAGE>   3
PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

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

<TABLE>
<CAPTION>
                                                                                    DECEMBER 31,     JUNE 30,
                                                                                       2000            2001
                                                                                       ----            ----
                                                                                                    (UNAUDITED)
<S>                                                                                 <C>             <C>
                                     ASSETS
Current assets:
  Cash and cash equivalents                                                          $  49,622       $  10,761
  Short-term investments                                                                60,241          37,631
  Accounts receivable, net                                                               4,295           1,532
  Inventories                                                                           13,648           1,223
  Prepaid expenses and other current assets                                             11,674           8,635
                                                                                     ---------       ---------
     Total current assets                                                              139,480          59,782
                                                                                     ---------       ---------

Restricted cash                                                                          8,210          12,100
Investments (available-for-sale securities)                                              3,665              --
Investment in affiliate                                                                  3,451              --
Property, equipment and software, net                                                   18,044          31,604
Intangibles, net                                                                         3,953          29,629
                                                                                     ---------       ---------
     Total assets                                                                    $ 176,803       $ 133,115
                                                                                     =========       =========

                      LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable                                                                   $  23,979       $  11,034
  Accrued and other current liabilities                                                  7,779           7,959
  Due to and advances from stockholder                                                   2,823           2,028
  Deferred revenue                                                                       6,517           7,636
                                                                                     ---------       ---------
     Total current liabilities                                                          41,098          28,657
                                                                                     ---------       ---------

Deferred rent                                                                               --           1,679
                                                                                     ---------       ---------
     Total liabilities                                                                  41,098          30,336
                                                                                     ---------       ---------

Commitments and contingencies (Note 9)

Stockholders' equity:
  Preferred stock, $0.001 par value: 10,000,000 shares authorized; no shares
   issued and outstanding                                                                   --              --
  Common stock, $0.001 par value: 200,000,000 shares authorized; 66,505,137
   shares issued and outstanding at December 31, 2000; 75,756,460 shares issued
   and 72,015,709 shares outstanding at June 30, 2001                                       67              76
  Additional paid-in capital                                                           299,870         331,582
  Treasury stock                                                                            --         (11,724)
  Receivable from stockholders                                                         (13,327)            (89)
  Deferred stock compensation                                                          (25,689)        (16,921)
  Accumulated other comprehensive income                                                   159             137
  Accumulated deficit                                                                 (125,375)       (200,282)
                                                                                     ---------       ---------
     Total stockholders' equity                                                        135,705         102,779
                                                                                     ---------       ---------
     Total liabilities and stockholders' equity                                      $ 176,803       $ 133,115
                                                                                     =========       =========
</TABLE>


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


                                       3
<PAGE>   4
                               OMNISKY CORPORATION
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                 (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
                                                           THREE MONTHS ENDED JUNE 30,           SIX MONTHS ENDED JUNE 30,
                                                           ---------------------------           -------------------------
                                                             2000               2001              2000               2001
                                                             ----               ----              ----               ----
                                                         (UNAUDITED)        (UNAUDITED)        (UNAUDITED)        (UNAUDITED)
<S>                                                      <C>                <C>                <C>                <C>
Revenue:
  Services                                               $        686       $      3,836       $        686       $      8,107
  Equipment                                                       183              1,507                183              2,740
  Beta period                                                     (84)                70              1,231                 70
                                                         ------------       ------------       ------------       ------------
                                                                  785              5,413              2,100             10,917
                                                         ------------       ------------       ------------       ------------
Operating costs and expenses:
  Cost of revenue:
     Services                                                   1,747              5,102              1,747             10,833
     Equipment                                                    238              9,210                238             15,683
     Beta period                                                1,478                361              4,331                361
                                                         ------------       ------------       ------------       ------------
                                                                3,463             14,673              6,316             26,877
                                                         ------------       ------------       ------------       ------------

  Engineering, development and operations                       2,791              4,398              4,125              8,670
  Sales and marketing                                          12,885              5,827             15,146             19,599
  General and administrative                                    3,995              6,767              5,931             11,531
  Amortization of deferred stock compensation (*)               9,103              1,777             10,340              5,615
  Depreciation and amortization                                   538              4,788                993              7,401
  Charge for acquired in-process research and
    development                                                    --                 --                 --              3,445
                                                         ------------       ------------       ------------       ------------
     Total operating costs and expenses                        32,775             38,230             42,851             83,138
                                                         ------------       ------------       ------------       ------------
Loss from operations                                          (31,990)           (32,817)           (40,751)           (72,221)

Equity in net loss of affiliate                                    --             (1,544)                --             (5,390)
Interest income and other                                         723                484                898              2,704
                                                         ------------       ------------       ------------       ------------
Net loss                                                 $    (31,267)      $    (33,877)      $    (39,853)      $    (74,907)
                                                         ============       ============       ============       ============
Net loss per share - basic and diluted                   $     (16.92)      $      (0.52)      $     (30.48)      $      (1.18)
                                                         ============       ============       ============       ============
Shares used in computing basic and diluted net loss
  per share                                                 1,848,233         64,544,492          1,307,330         63,506,898
                                                         ============       ============       ============       ============

(*) Amortization of deferred stock compensation:
     Engineering, development and operations             $        756       $        665       $      1,335       $      1,479
     Sales and marketing                                        2,029                739              2,480              2,088
     General and administrative                                 6,318                373              6,525              2,048
                                                         ------------       ------------       ------------       ------------
                                                         $      9,103       $      1,777       $     10,340       $      5,615
                                                         ============       ============       ============       ============
</TABLE>

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


                                       4
<PAGE>   5
                               OMNISKY CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                           SIX MONTHS ENDED JUNE 30,
                                                                             2000            2001
                                                                             ----            ----
                                                                          (UNAUDITED)     (UNAUDITED)
<S>                                                                       <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss                                                                $ (39,853)      $ (74,907)
  Adjustments to reconcile net loss to net cash used in operating
    activities:
    Depreciation and amortization                                               993           7,401
    Non-cash compensation expense                                            10,340           7,890
    Charge for acquired in-process research and development                      --           3,445
    Provision for obsolete inventory                                             --          10,458
    Provision for doubtful accounts receivable                                  236             257
    Equity in net loss of affiliate                                              --           5,390
    Issuance of common stock options to consultants in exchange for
      services                                                                  136              --
Change in operating assets and liabilities:
  Accounts receivable                                                        (1,056)          2,648
  Inventories                                                                  (178)          1,967
  Prepaid expenses and current assets                                        (3,426)          1,578
  Accounts payable                                                           10,565         (15,199)
  Accrued and other current liabilities                                      (1,364)         (2,450)
  Due to and advances from stockholder                                          293            (795)
  Deferred revenue                                                            1,382             908
  Deferred rent                                                                  --           1,768
                                                                          ---------       ---------
Net cash used in operating activities                                       (21,932)        (49,641)
                                                                          ---------       ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase/development of property, equipment and software                   (3,464)        (15,596)
  Purchases of investments                                                  (78,082)        (48,626)
  Sales/maturities of investments                                            57,588          75,003
  Cash acquired in business combinations                                         --           9,871
  Restricted cash deposit                                                      (800)         (3,890)
  Investment in affiliate                                                        --          (6,500)
                                                                          ---------       ---------
      Net cash (used in) provided by investing activities                   (24,758)         10,262
                                                                          ---------       ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from issuances of preferred stock, net of issuance costs         103,159              --
  Exercises of common stock options                                              --             418
                                                                          ---------       ---------
      Net cash provided by financing activities                             103,159             418
                                                                          ---------       ---------

Effect of exchange rate changes on cash                                          (1)            100
                                                                          ---------       ---------

Net increase (decrease) in cash and cash equivalents                         56,468         (38,861)
Cash and cash equivalents, beginning of period                                6,767          49,622
                                                                          ---------       ---------
Cash and cash equivalents, end of period                                  $  63,235       $  10,761
                                                                          =========       =========

SUPPLEMENTAL NON-CASH FINANCING ACTIVITIES:
Issuance of common stock related to acquisitions                          $      --       $  35,242
                                                                          =========       =========
Issuance of preferred stock for notes                                     $   1,335       $      --
                                                                          =========       =========
Issuance of common stock for notes                                        $   4,185       $      --
                                                                          =========       =========
Issuance of warrants related to real estate                               $      --       $      89
                                                                          =========       =========
Increase (decrease) in deferred stock compensation related to common
  stock option grants to employees less terminations                      $  28,242       $    (852)
                                                                          =========       =========
</TABLE>


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


                                       5
<PAGE>   6
                               OMNISKY CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

NOTE 1 - BASIS OF PRESENTATION

The consolidated financial statements of OmniSky Corporation and its
subsidiaries ("the Company") as of June 30, 2001, and for the three and six
month periods ended June 30, 2000 and 2001 and the related footnote information
are unaudited. In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments (consisting of normal
recurring adjustments) which management considers necessary to present fairly
the consolidated financial position of the Company at December 31, 2000 and June
30, 2001, and its results of operations for the three and six month periods and
its cash flows for the six month periods ended June 30, 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 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.

The consolidated financial statements of the Company include the results of
wholly-owned subsidiaries domiciled in the United Kingdom, France, Germany and
Israel. Through June 3, 2001, the Company's results include its 50% interest in
OmniSky International LLC on an equity basis. From June 4, 2001 through the
remainder of the quarter, as a result of the Company's acquisition of all
outstanding interests in OmniSky International LLC, the Company's results
include OmniSky International on a consolidated basis. All significant
intercompany balances and transactions have been eliminated.

Preparation of the accompanying 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 - LIQUIDITY AND CAPITAL RESOURCES

As shown in the accompanying financial statements, the Company has a history of
losses since its formation in 1999. In addition, the Company has used
significant amounts of cash in its operations and has not generated sufficient
cash from operations to fund its business. Through June 30, 2001, the Company
had an accumulated deficit of $200.3 million, and for the six months ended June
30, 2001, had an operating loss of $72.2 million and negative cash flows from
operations of $49.6 million. During 1999 and 2000, the Company completed several
rounds of private equity financing, which generated net proceeds of $123.8
million. During September 2000, the Company completed its initial public
offering, which generated net proceeds of $114.8 million. The Company expects to
continue to incur significant operating losses and negative cash flows from
operations in the future as it continues to develop its operations and expand
its business. Management of the Company believes that its cash and investments,
together with vendor, bank and partner financing that it expects to obtain, will
provide sufficient capital to fund its operations at least through March 31,
2002 if management's assumptions about the Company's revenues and expenses are
generally accurate. Management of the Company has revised and reduced the
Company's operating requirements during the past six months, including
undertaking actions designed to reduce staffing, real estate and operational
expenses. We do not expect to achieve positive cash flows from operations until
2003, and are in the process of attempting to secure additional financing
through public or private financings or other similar arrangements which will
likely be required in order to continue operations beyond March 31, 2002.
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 the Company's business.

                                       6
<PAGE>   7
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Intangibles

Intangible assets, including goodwill, primarily arose from two acquisitions
described further in Note 6. 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:

<TABLE>
<CAPTION>
         Type of Asset:                              Amortization Period:
         --------------                              --------------------
<S>                                                  <C>
         Purchased technology licenses               Three years
         Goodwill                                    Five years
         Acquired technology                         Three years
         Patents                                     Three years
         Workforce                                   Three to four years
</TABLE>

NOTE 4 - 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 the weighted average number 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 the weighted average
number of common shares subject to repurchase. Common equivalent shares,
composed of common shares issuable upon exercise of stock options and upon
conversion of preferred stock are included in the diluted net loss per share
computation to the extent such shares are dilutive.

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 ENDED JUNE 30,        SIX MONTHS ENDED JUNE 30,
                                                      ---------------------------        -------------------------
                                                         2000             2001             2000             2001
                                                         ----             ----             ----             ----
                                                      (UNAUDITED)      (UNAUDITED)      (UNAUDITED)     (UNAUDITED)
<S>                                                  <C>                <C>                <C>                <C>
Numerator:
  Net loss                                           $    (31,267)      $    (33,877)      $    (39,853)      $    (74,907)
                                                     ============       ============       ============       ============
Denominator:
  Weighted average common shares -- basic               7,852,711         68,640,505          7,021,673         68,485,622
  Weighted average common shares subject
     to repurchase                                     (6,004,478)        (4,096,013)        (5,714,343)        (4,978,724)
                                                     ------------       ------------       ------------       ------------
  Denominator for basic and diluted calculation         1,848,233         64,544,492          1,307,330         63,506,898
                                                     ============       ============       ============       ============
Net loss - basic and diluted                         $     (16.92)      $      (0.52)      $     (30.48)      $      (1.18)
                                                     ============       ============       ============       ============
</TABLE>

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

<TABLE>
<CAPTION>
                                                                 JUNE 30,
                                                        --------------------------
                                                           2000            2001
                                                           ----            ----
                                                        (UNAUDITED)     (UNAUDITED)
<S>                                                     <C>             <C>
Common stock subject to repurchase                       5,894,408       3,082,959
Common stock options                                     6,238,105      16,469,134
Convertible preferred stock                             46,054,619              --
                                                        ----------      ----------
                                                        58,187,132      19,552,093
                                                        ==========      ==========
</TABLE>

                                       7
<PAGE>   8
NOTE 5 - COMPREHENSIVE INCOME (LOSS)

Comprehensive income (loss) for the periods reported is as follows (in thousands
of U.S. dollars):

<TABLE>
<CAPTION>
                                                THREE MONTHS ENDED JUNE 30,       SIX MONTHS ENDED JUNE 30,
                                                ---------------------------       -------------------------
                                                  2000            2001              2000           2001
                                                  ----            ----              ----           ----
                                               (UNAUDITED)      (UNAUDITED)      (UNAUDITED)     (UNAUDITED)
<S>                                            <C>              <C>              <C>              <C>
Net loss                                       $  (31,267)      $  (33,877)      $  (39,853)      $  (74,907)

Other comprehensive income:
  Unrealized holding gains (losses)                   (10)              74              (10)              60
  Foreign currency translation adjustment              (1)             123               (1)             (82)
                                               ----------       ----------       ----------       ----------
Comprehensive loss                             $  (31,278)      $  (33,680)      $  (39,864)      $  (74,929)
                                               ==========       ==========       ==========       ==========
</TABLE>

NOTE 6 - ACQUISITIONS

During 2001, the Company acquired the following businesses:

NomadIQ

In January 2001, the Company acquired NomadIQ, a privately held Israel-based
developer 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
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. During July 2001, 600,000 of those
additional shares became issuable to the former NomadIQ stockholders, as
discussed in Note 11, which will increase the overall purchase price and
allocation in the third quarter of 2001.

OmniSky International

In April 2000, the Company formed OmniSky International, a joint venture with
one of the Company's principal stockholders, News Corporation, to pursue
international opportunities for business outside of the United States. On June
4, 2001, News Corporation transferred its 50% interest in OmniSky International
to the Company in exchange for 6,578,947 shares of OmniSky common stock and
warrants entitling it to purchase 929,944 shares of OmniSky common stock at an
exercise price equal to $3.23 per share. From June 4, 2001, OmniSky
International has been reflected as a wholly-owned subsidiary of the Company.
Prior to June 4, 2001, the Company accounted for its 50% interest in OmniSky
International using the equity method.

As described further in Note 11, in July 2001 the Company effected a
restructuring of its business that resulted in global workforce reductions,
including workforce reductions at OmniSky International, and the closure of
several European offices. In the future, the Company intends to deliver its
applications and services throughout Europe in partnership with carriers, online
service providers, hardware manufacturers and others. As a result, the Company
is currently reviewing the carrying values of its European assets and expects to
record an impairment charge related to the restructuring in the third quarter of
2001.

Purchase Accounting

The Company accounts for acquisitions using the purchase method of accounting
and, accordingly, the net assets and results of operations of the acquired
company are included in the Company's consolidated financial statements from the
acquisition date. The value of common shares issued is determined based on the
average market price of the Company's common shares over the two-day trading
period before and after the terms of the acquisition are agreed to and
announced. The fair value of options or warrants issued is determined using the
Black-Scholes Options Model and is included as a component of the purchase
price. The purchase price also includes acquisition-related expenses, which
consist primarily of financial advisory, accounting and legal fees.

                                       8
<PAGE>   9
The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed at the date of acquisition, in thousands.

<TABLE>
<CAPTION>
                                                                           OmniSky
                                                          NomadIQ       International
                                                          -------       -------------
<S>                                                     <C>              <C>
Fair value of stock issued and cash paid                $    15,446      $    20,585
Balance of initial $11.5 million equity investment               --            4,328
Liabilities assumed                                           1,736            4,170
                                                        -----------      -----------
Fair value of assets acquired                           $    17,182      $    29,083
                                                        ===========      ===========

Allocated to:
Cash received                                           $       579      $     9,292
Tangible assets received                                        678            3,110
Purchased technology                                          2,642            1,192
Assembled workforce                                           1,831            1,161
Network and content relationships                                --            2,139
Patents                                                         610               --
In-process research and development                           3,445               --
Deferred stock-based compensation                               877               --
Goodwill                                                      6,520           12,189
                                                        -----------      -----------
                                                        $    17,182      $    29,083
                                                        ===========      ===========
</TABLE>

The fair value of the intangible assets in the NomadIQ acquisition were
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.

As part of the allocation process, the Company evaluated the NomadIQ acquisition
and recorded $3.4 million related to acquired in-process technologies, including
new versions of NomadIQ's location-based software. As this acquired in-process
technology had not reached technical feasibility at the acquisition date and had
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.

The fair value of the intangible assets in the OmniSky International acquisition
were determined using the cost approach, which estimates value based on the cost
of reproducing or replacing the property. The assembled workforce was valued
estimating the cost to replace the current assembled workforce, considering such
costs as recruiting and training. The Company is in the process of finalizing a
third-party valuation of certain intangible assets of OmniSky International;
thus, the allocation of the purchase price is subject to adjustment.

Total amortization expense of intangible assets related to the acquisitions was
$1.3 million and $1.7 million for the three and six month periods ended June 30,
2001.

                                       9
<PAGE>   10
Pro Forma Results of Operations

The following represents the unaudited pro forma results of operations of the
Company for the six months ended June 30, 2000 and 2001 as if the acquisitions
had been consummated at the beginning of the respective periods. The unaudited
pro forma results of operations include certain pro forma adjustments, including
the amortization of intangible assets relating to the acquisitions. The
unaudited pro forma results of operations are prepared for comparative purposes
only and do not necessarily reflect the results that would have occurred had the
acquisitions actually been consummated at January 1, 2000 or the results that
may occur in the future.

<TABLE>
<CAPTION>
                                      SIX MONTHS ENDED JUNE 30,
                                      -------------------------
                                        2000           2001
                                        ----           ----
                                     (UNAUDITED)    (UNAUDITED)
<S>                                  <C>            <C>
Revenue                               $  2,100       $ 11,027
Net loss                              $(43,769)      $(81,937)
Basic and diluted loss per share      $  (4.28)      $  (1.18)
</TABLE>

NOTE 7 -- BALANCE SHEET COMPONENTS (IN THOUSANDS)

<TABLE>
<CAPTION>
                     DECEMBER 31,   JUNE 30,
                        2000         2001
                        ----         ----
                                  (UNAUDITED)
<S>                  <C>          <C>
Inventories:
  Raw materials       $ 6,870      $    --
  Finished goods        6,778        1,223
                      -------      -------
                      $13,648      $ 1,223
                      =======      =======
</TABLE>

The allowance for obsolete inventory was $0.7 million and $11.2 million at
December 31, 2000 and June 30, 2001, respectively. The writedown of inventory to
net realizable value charged to operations was zero for the three and six month
periods ended June 30, 2000 and $6.1 million and $10.5 million, respectively,
for the three and six month periods ended June 30, 2001.

<TABLE>
<CAPTION>
                                                    DECEMBER 31,     JUNE 30,
                                                       2000           2001
                                                       ----           ----
                                                                   (UNAUDITED)
<S>                                                  <C>            <C>
Property, equipment and software, net:
  Computer                                           $  4,830       $  7,473
  Software                                             14,586         23,304
  Furniture, fixtures and equipment                       987          2,232
  Leasehold improvements                                  378          6,225
                                                     --------       --------
                                                       20,781         39,234
Less: accumulated depreciation and amortization        (2,737)        (7,630)
                                                     --------       --------
                                                     $ 18,044       $ 31,604
                                                     ========       ========
</TABLE>

<TABLE>
<CAPTION>
                                        DECEMBER 31,     JUNE 30,
                                           2000           2001
                                           ----           ----
                                                       (UNAUDITED)
<S>                                     <C>            <C>
Intangibles, net:
  Purchased technology licenses          $  6,064       $  6,064
  Acquired technology                          --          3,834
  Assembled workforce                          --          2,992
  Network and content relationships            --          2,139
  Patents                                      --            610
  Goodwill                                     --         18,709
                                         --------       --------
                                            6,064         34,348
Less: accumulated amortization             (2,111)        (4,719)
                                         --------       --------
                                         $  3,953       $ 29,629
                                         ========       ========
</TABLE>

                                       10
<PAGE>   11
NOTE 8 - COMMON STOCK

On May 14, 2001, as part of its employee retention program, the Company repriced
certain issued and outstanding options to purchase its common stock. Options
with an exercise price greater than the May 14, 2001 closing price of the
Company's common stock, as listed on The Nasdaq National Market, were repriced
at the May 14 closing price of $2.79 per share. Options to purchase
approximately 7,000,000 shares of common stock were repriced, with all other
option terms remaining the same.

The Company adopted, in May 2001, a restricted stock cashless retirement program
under which it offered, in cashless transactions, shares of common stock
acquired prior to the Company's initial public offering by certain employees
with loans from the Company. Repurchase of shares and retirement of the related
loans under this program would only be effected when the Company's stock price
on The Nasdaq National Market equaled or exceeded the original purchase price
paid by the employee. Shares repurchased were to be at a price equal to the
employee's original purchase price. During May 2001, employees elected to sell
1,863,212 shares of common stock pursuant to this program. The effect of this
was that the Company increased treasury stock and reduced the receivable from
stockholders by $4.2 million with no impact on cash or compensation expense.

Effective May 10, 2001, as a further inducement to retain employees, the Company
repurchased, in cashless transactions, shares of common stock acquired prior to
the Company's initial public offering by certain employees with loans from the
Company. These restricted shares were not subject to the program described in
the previous paragraph. All shares were repurchased on such date at a price per
share equal to $3.95, the closing price of the Company's common stock on The
Nasdaq National Market on May 10. Certain share retirements under these
circumstances resulted in taxable income to the employees participating, for
which those employees were not reimbursed by the Company. Employees elected to
retire 1,731,405 shares of common stock as a result of these transactions. The
effect of these transactions was that the Company increased treasury stock by
$6.8 million, reduced the receivable from stockholders by $8.4 million, and
recorded $1.6 million of non-cash compensation expense arising from the
forgiveness of a portion of the principal on the related stockholder notes.

In accordance with FASB Interpretation No. 44, "Accounting for Certain
Transactions Involving Stock Compensation, an interpretation of APB Opinion No.
25" ("Interpretation"), the effect of these actions is that the stock options
that were repriced, along with any options issued to those employees six months
before or six months subsequent to those dates, and are subject to variable plan
accounting treatment. Accordingly, the Company has and will continue to
remeasure compensation cost for the repriced options until they are exercised,
cancelled, or forfeited without replacement. The valuation of repriced options
has and will be based on any excess of the closing stock price at the end of the
reporting period or date of exercise, forfeiture or cancellation without
replacement, if earlier, over the fair value of the Company's common stock on
the date of issuance which equals the exercise price of these options. The
resulting compensation charge to earnings would be recorded over the remaining
vesting period, using the accelerated method of amortization discussed in FASB
Interpretation No. 28. When options are fully vested, the charge will be
recorded to earnings immediately. Depending upon movements in the market value
of the Company's common stock, this accounting treatment may result in
significant additional compensation charges in future periods.

During the three and six month periods ended June 30, 2001, the Company did not
incur charges to earnings related to stock and options subject to variable plan
accounting as the Company's stock price was below the related share or option
price. As of June 30, 2001 the Company had options outstanding and subject to
variable plan accounting amounting to 11,291,007 shares.

NOTE 9 - COMMITMENTS AND CONTINGENCIES

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; TBWA 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.

                                       11
<PAGE>   12
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
in respect of this matter from companies that license it encryption technology.

During July 2001, individuals claiming to represent purported classes of
similarly situated purchasers of the Company's securities filed actions in the
United States District Court for the Southern District of New York against the
Company and certain present officers and a director including Patrick S.
McVeigh, Lawrence S. Winkler and Michael J. Malesardi. The complaint also names
as defendants the following underwriters of the Company's initial public
offering: Credit Suisse First Boston Corporation, Chase Securities, Inc.,
Donaldson, Lufkin & Jenrette Securities Corporation and Salomon Smith Barney,
Inc. (the "Underwriter Defendants"). The plaintiffs claim that the Registration
Statement and Prospectus filed in connection with the Company's initial public
offering in September 2000 contained materially false and misleading information
and failed to disclose material information relating to the Underwriter
Defendants' allocations of shares in the Company's initial public offering to
their customers, in violation of the Securities Act of 1933 and the Securities
Exchange Act of 1934. As of August 10, 2001, the Company had not yet been
served in this action. The Company intends to tender a claim to the Underwriter
Defendants for indemnification under the Underwriting Agreement and intends to
defend itself vigorously. The Company believes that the claims alleged are
without merit.

The Company does not believe that the resolution of any of these matters will
have a material effect on its financial condition, results of operations or cash
flows. No estimate can be made of the possible loss or possible range of losses
associated with the resolution of these contingencies.

Except as described in the previous 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.

NOTE 10 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June 2001, the Financial Accounting Standards Board ("FASB") issued EITF
00-25, "Vendor Income Statement Characterization of Consideration Paid to
Reseller of the Vendor's Products", which is effective for annual or interim
financial statements for periods beginning after December 15, 2001. The issue
addresses whether consideration from a vendor to a reseller of the vendor's
products is an adjustment of the selling price and should therefore be deducted
from revenue or a cost incurred by the vendor for assets or services received.
The Company is currently assessing but has not yet determined the impact of EITF
00-25 on its statements of operations.

In July 2001, the FASB issued Statement of Financial Accounting Standards No.
141 ("SFAS 141"), "Business Combinations." SFAS 141 requires the purchase method
of accounting for business combinations initiated after June 30, 2001 and
eliminates the pooling-of-interests method.

In July 2001, the FASB issued Statement of Financial Accounting Standards No.
142 ("SFAS 142"), "Goodwill and Other Intangible Assets", which is effective for
fiscal years beginning after March 15, 2001. SFAS 142 requires, among other
things, the discontinuance of goodwill amortization. In addition, the standard
includes provisions upon adoption for the reclassification of certain existing
recognized intangibles as goodwill, reassessment of the useful lives of existing
recognized intangibles, reclassification of certain intangibles out of
previously reported goodwill and the testing for impairment of existing goodwill
and other intangibles. The Company is currently assessing but has not yet
determined the impact of SFAS 142 on its financial position and results of
operations.

                                       12
<PAGE>   13
NOTE 11 - SUBSEQUENT EVENTS

Issuance of Common Stock Related to Acquisition

The agreement related to the acquisition of NomadIQ, discussed further in Note
6, 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. Pursuant to this agreement, 600,000 of those
additional shares became issuable to the former NomadIQ stockholders during July
2001. As a result of this, the overall purchase price recorded will increase by
approximately $1.1 million with a corresponding additional allocation to
goodwill.

Restructuring

In July 2001, the Company effected a restructuring of its business, forming a
consumer unit focused on the Company's target market of mobile professionals and
an applications and services unit to market its advanced suite of applications
and services known as "OmniSky Oxygen". The restructuring included a reduction
in the Company's global workforce by nearly 100 employees, and significantly
affected OmniSky International, including reducing its European workforce and
closing several European offices. In the future, the Company intends to deliver
its applications and services throughout Europe in partnership with carriers,
online service providers, hardware manufacturers and others. As a result, the
Company is currently reviewing the carrying values of its European assets and
expects to record an impairment charge related to the restructuring in the third
quarter of 2001. This restructuring charge would include severance and shutdown
costs for the business and the write-off of the recorded intangible assets.

In order to reduce its costs, the Company is currently considering various
options regarding its office locations, including subleasing, assigning,
terminating or otherwise divesting itself of significant obligations under its
various real estate leases. We cannot, at this time, determine the likelihood
that we will pursue one or more of the options we are exploring. If we do pursue
one or more of these options, we could incur a charge against our earnings
during the remainder of 2001 in the range of zero to $85 million.

                                       13
<PAGE>   14
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 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 developer and provider of wireless data applications and
services for users of mobile devices. We offer a suite of 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.


RECENT DEVELOPMENTS

On August 10, 2001, we signed a two-year agreement with Verizon Wireless to
enable Verizon Wireless to provide wireless data applications and services to
Verizon Wireless subscribers using certain interactive wireless devices. As part
of the agreement, we will provide Verizon Wireless with designated wireless
applications and services from the OmniSky Oxygen technology platform for use
with interactive wireless devices specified by Verizon Wireless. We may also
provide Verizon Wireless with certain professional services in connection with
the delivery of those applications and services. We will receive payments from
Verizon Wireless based on the number of Verizon Wireless subscribers who
register to use the designated applications and services and the nature and
extent, if any, of the professional services that are rendered by us to Verizon
Wireless. All sales and marketing efforts related to the promotion of the
wireless applications and services will be performed by Verizon Wireless under
the agreement.

As part of our efforts to more efficiently manage our resources and to further
accelerate the deployment of our applications and services to wireless carriers,
online service providers, hardware manufacturers and others, we restructured our
business in July 2001, forming a consumer unit focused on our target market of
mobile professionals and an applications and services unit to market our OmniSky
Oxygen platform of applications and services. We reduced our global workforce by
nearly 100 as part of those efforts. We also continued to realize synergies from
our consolidation of OmniSky International, reducing our European workforce and
closing several European offices. Since the beginning of the year, our European
subsidiary had launched the first integrated wireless email and Internet service
on mobile devices in the United Kingdom and Germany. As we neared the completion
of these consumer-focused beta trials, we decided to close the trials and
assimilate information from those trials into our European product offerings.
Consistent with the course we have initiated within the United States, in the
future

                                       14
<PAGE>   15
we intend to deliver our applications and services throughout Europe in
partnership with carriers, online service providers, hardware manufacturers and
others.

OUR SERVICE

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

In the first half of 2001, we began leveraging that position by offering our
advanced applications and services, under the OmniSky Oxygen platform, to
wireless carriers, online service providers, hardware manufacturers and others.
We offer a comprehensive, end-to-end wireless solution that includes the
following modular applications and services:

    -    Messaging - We offer messaging services that include corporate and
         personal email, instant messaging, text messaging and interoperability
         with third-party messaging platforms. In support of those efforts, we
         launched one of our proprietary corporate email solutions, OS
         CorporateLink, at the end of the first quarter of 2001. OS
         CorporateLink enables individuals and enterprises to obtain seamless
         and secure access to email residing behind the corporate firewall.

    -    Content Delivery - We offer a broad range of content that has been
         optimized for viewing on many different types of mobile devices. These
         applications include a customizable, dynamically updated mobile portal,
         enhanced Web browsing, content management services and our proprietary
         OneTap technology that streamlines the exchange of data between device
         applications and the Internet.

    -    Location-based Services - We expect to offer location-based services
         that combine real-time and stored location-specific content. These
         applications enable users to access local merchants, conduct
         e-commerce, and obtain online restaurant information, movie guides,
         real-time directory services, and interactive maps as a function of
         their location. We also recently announced that we had received two
         provisional patents covering certain aspects of these location-based
         services.

As part of these applications and services, we also offer comprehensive
management and hosting services. We provide real-time provisioning, direct or
pass-through billing, connectivity services, modem procurement services and
flexible support services for all levels of customer care. We believe that our
industry leading position and experience offer our customers speed-to-market,
reduced deployment costs and risk, greater reliability and enhanced
opportunities to create and develop distinct wireless services for their own
end-users.

Our service is now available on nearly all Palm OS-based and Pocket PC-based
handheld devices, including the Palm V and Vx, Handspring Visor Platinum, Visor
Prism and Visor Edge, HP Jornada 520/540 Series Pocket PCs, Compaq iPAQ Pocket
PC and the Casio E-125. We intend to extend our applications and services in
2001 to support other mobile devices, including new personal digital assistants
like the Palm M505, devices like the Kyocera Smartphone that combine the
functionality of a cellular telephone with a personal digital assistant, and
laptop computers. We recently initiated service for all Hewlett-Packard Pavilion
notebook computers in a co-marketing arrangement with Hewlett-Packard. We also
recently demonstrated our service on the Kyocera Smartphone at the Cellular
Telecommunications & Internet Association's Wireless 2001 conference. At the
2001 PC Expo in June, we continued to extend our service to additional
platforms, delivering our service on a Palm Vx using Bluetooth technology and
adapting our service to support Wireless Application Protocol, or WAP, that we
previewed on a Sanyo SCP-5000 WAP mobile phone.

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. As a result of European beta
trials of our service that we concluded in August 2001, we have also supported
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
Kyocera Smartphone demonstration, we delivered our service over the CDMA
wireless network. Wireless coverage for the OmniSky-branded service over the
CDPD network includes

                                       15
<PAGE>   16
over 167 major metropolitan areas within the United States, encompassing over
172 million people. We expect our wireless coverage areas to increase as we
extend our applications and services to additional networks.

ACQUISITIONS

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.

In April 2000, we formed OmniSky International, a joint venture with one of our
principal stockholders, News Corporation, to pursue international opportunities
for business outside of the United States. On June 4, 2001, News Corporation
transferred its 50% interest in OmniSky International to us in exchange for
6,578,947 shares of our common stock, and 929,944 warrants entitling it to
purchase a like number of shares of our common stock at a price equal to $3.23
per share. Based on the shares issued, the balance of the initial equity
investment at the acquisition date and the liabilities assumed, the total value
of the acquisition was approximately $29.1 million.

THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2001 AS COMPARED TO THE THREE AND SIX
MONTH PERIODS ENDED JUNE 30, 2000

RESULTS OF OPERATIONS

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

We have a limited operating history, having formed our Company in May 1999 and
launched our initial beta test in the United States 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 applications and services. From
inception in May 1999 through June 30, 2001, our cumulative net losses totaled
$200.3 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
offer our applications and services both in the United States and in Europe to
wireless carriers, online service providers, hardware manufacturers and other
third parties and to extend our business into the enterprise market. That
extension of our business has required that we modify our marketing, product
development and other related efforts to more properly align our resources with
the needs of those potential customers. We expect that our sales and marketing
expenses will decline significantly both in amount and as a percentage of our
revenues and that our engineering, development and operating expenses will
remain constant in amount but decrease 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 relationships with Verizon Wireless and
America Online, we do not, at this time, have any other material agreements with
such third parties to sell our applications and services to them.

For individuals to obtain our OmniSky-branded wireless service on certain
devices, they can purchase a wireless modem from us, either directly or through
a retailer. We offer modem rebates of varying amounts from time to time that are
tied to the activation of an annual service plan, and we anticipate continuing
those types of offers 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 revenues to decrease significantly because modems will be
available to our subscribers through channels

                                       16
<PAGE>   17
other than us, integrated wireless devices such as the Kyocera Smartphone will
become more prevalent, and the price of modems will decrease. As we continue to
transition our business toward providing wireless applications and services to
wireless carriers, online service providers, hardware manufacturers and others,
we expect that our revenues from the sale of wireless modems will decrease even
more significantly.

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 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
or 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.

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 the 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.

Almost all of our revenues to date have been derived from operations in the
United States. Our results reflect our 50% equity interest in OmniSky
International through June 3, 2001. From June 4, 2001 through June 30, 2001, we
have consolidated OmniSky International as a result of our acquisition of the
other 50% interest in that entity. We had only one operating segment from our
inception in May 1999 through June 30, 2001. As a result of the completion of
our consumer-focused beta trials in Europe, we do not expect to derive any
significant revenues from our European operations in the near future.

In conjunction with the restructuring of our operations described previously
under "Recent Events", we are currently reviewing the carrying values of our
European assets and expect to record an impairment charge related to the
restructuring in the third quarter of 2001. This restructuring charge would
include severance and shutdown costs for the business and the write-off of the
recorded intangible assets.

In order to reduce our costs, we are also currently considering various options
regarding our office locations, including subleasing, assigning, terminating or
otherwise divesting ourselves of significant obligations under our various real
estate leases. We cannot, at this time, determine the likelihood that we will
pursue one or more of the options we are exploring. If we do pursue one or more
of these options, we could incur a charge against our earnings during the
remainder of 2001 in the range of zero to $85 million.

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 will likely be
affected by the sale of our applications and services to wireless carriers,
online service providers, hardware manufacturers and other third parties and by
the extension of our business into the enterprise market. As we continue to
transition our business toward providing wireless applications and services to
wireless carriers, online service providers, hardware manufacturers and others,
comparisons of our results with prior periods may be less meaningful and not
necessarily indicative of future trends or results.

                                       17
<PAGE>   18
REVENUE

<TABLE>
<CAPTION>
                                                       Services     Equipment       Beta           Total
                                                       --------     ---------       ----           -----
<S>                                                    <C>           <C>           <C>            <C>
Three Months Ended June 30, 2001                       $ 3,836       $ 1,507       $    70        $ 5,413
Three Months Ended June 30, 2000                           686           183           (84)           785
Increase from June 30, 2000                              3,150         1,324           154          4,628
Percentage Increase from June 30, 2000                     459%          723%          183%           590%

Six Months Ended June 30, 2001                         $ 8,107       $ 2,740       $    70        $10,917
Six Months Ended June 30, 2000                             686           183         1,231          2,100
Increase (Decrease) from June 30, 2000                   7,421         2,557        (1,161)         8,817
Percentage Increase (Decrease) from June 30, 2000         1082%         1397%          (94)%          420%
</TABLE>

We commenced shipping wireless modems to our United States beta subscribers in
December 1999 and stopped accepting new beta orders there on June 30, 2000. We
commenced our European beta in February 2001 and it was ongoing at June 30,
2001. During our beta tests, subscribers have received a bundled offering
consisting of a wireless modem, our wireless service from the date of their
purchase through the end of the beta, and in Europe, a handheld device. Revenue
during these periods was recognized as "beta" period 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
the equipment is 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.

At June 30, 2001, we had recorded $3.1 million of deferred equipment revenue,
$4.5 million of deferred service revenue, and $1.5 million of equipment rebate
liabilities.

Subscribers for our OmniSky-branded service have grown from 13,400 at June 30,
2000 to 42,000 at June 30, 2001. Our average service revenue per subscriber
changed from $36.40 for the fourth quarter of 2000 to $33.00 for the second
quarter of 2001. The decrease in the second quarter is due to the cancellation
or the conversion of month-to-month customers who were previously paying $39.95
per month to lower rate plans, and to a higher percentage of new customers
purchasing annual pre-payment contracts that have an average price of $29.99
per month. During the second quarter of 2001, nearly 66% of our new subscribers
signed up for annual plans. We expect an increasing percentage of new
subscribers to sign up over time for annual plans.

For the first six months of 2001, our net subscriber additions were adversely
affected by a high rate of cancellation, which we call churn. The average
monthly churn rate of 4.6% for the second quarter is consistent with the rate we
experienced in the first quarter of 2001. It is higher than the rate we
experienced in 2000, and continues 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, and the result of customers who indicated they were canceling because
their employers were reducing expenses and therefore no longer reimbursing them
for the cost of our service.

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

                                       18
<PAGE>   19
<TABLE>
<CAPTION>
                                                                                                                   Percentage
                                                       Services       Equipment        Beta            Total       of Revenue
                                                       --------       ---------        ----            -----       ----------
<S>                                                    <C>            <C>            <C>             <C>           <C>
Three Months Ended June 30, 2001                       $  5,102       $  9,210       $    361        $ 14,673          271%
Three Months Ended June 30, 2000                          1,747            238          1,478           3,463          441%
Increase (Decrease) from June 30, 2000                    3,355          8,972         (1,117)         11,210
Percentage Increase (Decrease) from June 30, 2000           192%          3770%            (76)%        324%

Six Months Ended June 30, 2001                         $ 10,833       $ 15,683       $    361        $ 26,877          246%
Six Months Ended June 30, 2000                            1,747            238          4,331           6,316          301%
Increase (Decrease) from June 30, 2000                    9,086         15,445         (3,970)         20,561
Percentage Increase (Decrease) from June 30, 2000           520%          6489%            (92)%        326%
</TABLE>

For the three and six month periods ended June 30, 2000, our cost of beta
revenue comprised the costs of our United States beta test. For the three and
six month periods ended June 30, 2001, our cost of beta revenue comprised the
costs we incurred in Europe for equipment that we sold to our subscribers, our
network technical support, the packaging costs for our products and other
fulfillment costs from June 4, 2001 to June 30, 2001.

Cost of services revenue increased for the three and six month periods ended
June 30, 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 for the three months ended June 30,
2001 of $9.2 million includes $3.1 million of expense related to the sale of
modems to new subscribers, and $6.1 million related to inventory write-downs.
Cost of equipment revenue for the six months ended June 30, 2001 of $15.7
million includes $5.2 million of expense related to the sale of modems to new
subscribers, and $10.5 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 June 30, 2001, we had recorded $3.2 million of deferred cost of equipment
revenue that is included in prepaid expenses and other current assets.

From the fourth quarter of 2000 to the first quarter of 2001, we experienced
improvements in our cost of service revenue as a percentage of total revenue
related to the implementation of new airtime contracts as well as decreases in
operating costs from the relocation of our data center.

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 June 30, 2001                 $4,398            81%
Three Months Ended June 30, 2000                  2,791           356%
Increase from June 30, 2000                       1,607
Percentage Increase from June 30, 2000              58%

Six Months Ended June 30, 2001                   $8,670            79%
Six Months Ended June 30, 2000                    4,125           196%
Increase from June 30, 2000                       4,545
Percentage Increase from June 30, 2000             110%
</TABLE>

                                       19
<PAGE>   20
Engineering, development and operations expenses include the salaries, fees and
related costs we incur for the design and operation of our wireless applications
and services and for the continued development, operation and management of our
technology.

Costs for the three and six month periods ended June 30, 2000 included initial
engineering costs to develop and implement our beta service in the United
States. For the three and six month periods ended June 30, 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.

We expect our engineering, development and operations expenses to stay constant
in amount but decrease as a percentage of revenue as we continue to develop new
wireless applications and services and aggressively market those applications
and services to wireless carriers, online service providers, hardware
manufacturers and others.

Sales and Marketing

<TABLE>
<CAPTION>
                                                              Percentage
                                             Amount           of Revenue
                                             ------           ----------
<S>                                         <C>               <C>
Three Months Ended June 30, 2001            $  5,827             108%
Three Months Ended June 30, 2000              12,885            1641%
Decrease from June 30, 2000                   (7,058)
Percentage Decrease from June 30, 2000           (55)%

Six Months Ended June 30, 2001              $ 19,599             180%
Six Months Ended June 30, 2000                15,146             721%
Increase from June 30, 2000                    4,453
Percentage Increase from June 30, 2000            29%
</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 and six month periods ended June 30,
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 in the United States. Advertising expenses for the six
months ended June 30, 2000 were $19.6 million, which were partially offset by
$9.1 million of co-marketing credits received from one of our wireless carriers.
Expenses for the three months ended June 30, 2001 were comprised of $1.4 million
for advertising, $1.7 million for market development funds, tradeshows, public
relations and other consulting expenses, and $2.7 million for internal staff and
associated overhead costs for the sales and marketing groups. Expenses for the
six months ended June 30, 2001 were comprised of $10.2 million for advertising,
$3.9 million for market development funds, tradeshows, public relations and
other consulting expenses, and $5.5 million for internal staff and associated
overhead costs for the sales and marketing groups. Expenses for the three months
ended June 30, 2001 decreased significantly as compared to the same period in
2000 because we decreased advertising as we transitioned our business to support
wireless carriers, online service providers, hardware manufacturers and others
and also as we reduced spending to conserve cash.

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

General and Administrative

                                       20
<PAGE>   21
<TABLE>
<CAPTION>
                                                              Percentage
                                               Amount         of Revenue
                                               ------         ----------
<S>                                           <C>             <C>
Three Months Ended June 30, 2001              $ 6,767             125%
Three Months Ended June 30, 2000                3,995             509%
Increase from June 30, 2000                     2,772
Percentage Increase from June 30, 2000             69%

Six Months Ended June 30, 2001                $11,531             106%
Six Months Ended June 30, 2000                  5,931             282%
Increase from June 30, 2000                     5,600
Percentage Increase from June 30, 2000             94%
</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.

General and administrative costs for the three and six month periods ended June
30, 2000 were primarily related to the start-up of our operations in the United
States. The increase for the three and six month periods ended June 30, 2001
resulted primarily from headcount increases associated with the expansion of our
business, from increases in rent expense and from consulting and professional
service fees incurred in the continued development of our corporate
infrastructure.

We expect our general and administrative expenses to remain constant in amount
and decline as a percentage of revenue as we extend and transition our business
into the application services and enterprise markets.

Amortization of Deferred Stock Compensation

<TABLE>
<CAPTION>
                                                                 Percentage
                                               Amount            of Revenue
                                               ------            ----------
<S>                                           <C>                <C>
Three Months Ended June 30, 2001              $  1,777                33%
Three Months Ended June 30, 2000                 9,103              1160%
Decrease from June 30, 2000                     (7,326)
Percentage Decrease from June 30, 2000             (80)%

Six Months Ended June 30, 2001                $  5,615                51%
Six Months Ended June 30, 2000                  10,340               492%
Decrease from June 30, 2000                     (4,725)
Percentage Decrease from June 30, 2000             (46)%
</TABLE>

Prior to our initial public offering, 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 June 30, 2001,
we recorded aggregate deferred stock compensation of approximately $44.7
million, including $0.9 million related to the acquisition of NomadIQ. With
respect to employee stock-based compensation, we are amortizing the deferred
compensation expense over the vesting period using the multiple option approach,
which has the effect of front-loading the amortization expense. This expense has
no impact on our cash flows. The remaining $16.9 million of unamortized deferred
stock compensation will be expensed over the remaining vesting period of three
to four years. Under our current plan, we estimate that our minimum deferred
stock compensation expense will be $5.4 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, before the effects of any variable
accounting charges that may arise.

On May 14, 2001, as part of our employee retention program, we repriced certain
issued and outstanding options to purchase our common stock. As part of such
retention program, we also amended outstanding promissory notes that had been
issued by certain employees to purchase shares of our capital stock prior to our
initial public offering.

                                       21
<PAGE>   22
Effective May 10, 2001, as a further inducement to retain employees, the Company
repurchased, in cashless transactions, shares of common stock acquired prior to
the Company's initial public offering by certain employees with loans from the
Company. As a result, the Company recorded $1.6 million of non-cash compensation
expense arising from the forgiveness of a portion of the principal on the
related stockholder notes.

The effect of these actions is that the stock options that were repriced, along
with any options issued to those employees six months before or six months
subsequent to those dates, are subject to variable plan accounting treatment.
Accordingly, we have and will continue to remeasure compensation cost for the
repriced options until they are exercised, cancelled, or forfeited without
replacement. The resulting compensation charge to earnings would be recorded
over the remaining vesting period, using the accelerated method of amortization
discussed in FASB Interpretation No. 28. When options are fully vested, the
charge will be recorded to earnings immediately. Depending upon movements in the
market value of our common stock, this accounting treatment may result in
significant additional compensation charges in future periods.

Depreciation and Amortization

<TABLE>
<CAPTION>
                                                             Percentage
                                              Amount         of Revenue
                                              ------         ----------
<S>                                           <C>            <C>
Three Months Ended June 30, 2001              $4,788             88%
Three Months Ended June 30, 2000                 538             69%
Increase from June 30, 2000                    4,250
Percentage Increase from June 30, 2000           790%

Six Months Ended June 30, 2001                $7,401             68%
Six Months Ended June 30, 2000                   993             47%
Increase from June 30, 2000                    6,408
Percentage Increase from June 30, 2000           645%
</TABLE>

Our capital expenditures through 2000 were limited and were primarily
associated with software developed for internal use that is related to providing
our wireless services. During 2001, we made significant capital expenditures
related to construction of network operations facilities and in connection with
leasehold improvements and furniture and fixtures associated with our
headquarters facility. We also capitalized $8.7 million of software that was
either purchased or developed for internal use. The increase in the total fixed
assets available for depreciation as well as the timing of when they were placed
in service has led to a significant increase in depreciation expense in the
three and six month periods ended June 30, 2001 as compared with the same
periods in 2000.

In conjunction with the acquisition of NomadIQ, we recorded gross intangibles of
$11.6, which we began amortizing in January 2001. In conjunction with the
acquisition of the remaining 50% interest in OmniSky International, we recorded
gross intangibles of $16.7 million, which we began amortizing in June 2001.

For the six months ended June 30, 2000 and 2001, we amortized $0.8 and $2.6
million of expenses, respectively, for our licensed technology and purchased
intangibles. Depreciation of fixed assets was $0.2 million and $4.9 million,
respectively, for those same periods.

We expect our capital expenditures to be lower in future periods than they have
been in the past. However, since many of the previously capitalized assets were
placed in service in the second quarter of 2001 or will be placed in service
during the remainder of 2001, we also expect our depreciation and amortization
expense to increase in future periods relative to what was recorded in the three
and six months ended June 30, 2001. We also expect the amortization of purchased
intangibles to increase for the remainder of 2001; however, as further described
under Recent Accounting Pronouncements, in July 2001, the Financial Accounting
Standards Board ("FASB") issued Statement on Financial Accounting Standards No.
142 ("SFAS 142"), "Goodwill and Other Intangible Assets". SFAS is effective for
fiscal years beginning after March 15, 2001 and requires, among other things,
the

                                       22
<PAGE>   23
discontinuance of goodwill amortization; in its place, SFAS 142 requires an
annual impairment test of intangible assets. As a result, while goodwill
amortization will decrease, impairment charges could increase.

Charge for Acquired In-Process Research and Development

<TABLE>
<CAPTION>
                                                            Percentage
                                              Amount        of Revenue
                                              ------        ----------
<S>                                           <C>           <C>
Three Months Ended June 30, 2001              $   --            --
Three Months Ended June 30, 2000                  --            --
Increase from June 30, 2000                       --
Percentage Increase from June 30, 2000            --

Six Months Ended June 30, 2001                $3,445            32%
Six Months Ended June 30, 2000                    --            --
Increase from June 30, 2000                    3,445
Percentage Increase from June 30, 2000            NM
</TABLE>

There were no acquisitions in the three months ended June 30, 2000 and our
results for that period include no charges for acquired in-process research and
development. The results for the six months ended June 30, 2001 include a $3.4
million charge for acquired in-process research and development recorded in the
first quarter 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 6 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
                                               Amount          of Revenue
                                               ------          ----------
<S>                                           <C>              <C>
Three Months Ended June 30, 2001              $(1,544)            (29)%
Three Months Ended June 30, 2000                   --              --
Increase from June 30, 2000                    (1,544)
Percentage Increase from June 30, 2000             NM

Six Months Ended June 30, 2001                $(5,390)            (49)%
Six Months Ended June 30, 2000                     --              --
Increase from June 30, 2000                    (5,390)
Percentage Increase from June 30, 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 from its formation in
the second quarter of 2000 through June 3, 2001. From June 4, 2001, we ceased
recording our equity interest when this became a consolidated subsidiary.

Interest income and other

<TABLE>
<CAPTION>
                                                                 Percentage
                                               Amount            of Revenue
                                               ------            ----------
<S>                                           <C>                <C>
Three Months Ended June 30, 2001              $   484                9%
Three Months Ended June 30, 2000                  723               92%
Decrease from June 30, 2000                      (239)
Percentage Decrease from June 30, 2000            (33)%
</TABLE>

                                       23
<PAGE>   24
<TABLE>
<S>                                           <C>                <C>
Six Months Ended June 30, 2001                $ 2,704               25%
Six Months Ended June 30, 2000                    898               43%
Increase from June 30, 2000                     1,806
Percentage Increase from June 30, 2000            201%
</TABLE>

Interest income and other includes interest income, rental income and expense on
office space not occupied for operating uses and other miscellaneous items.

Interest income for the three and six month periods ended June 30, 2001 was $0.9
million and $2.5 million, respectively, which increased from periods ended June
30, 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. Also included for the three months ended June 30,
2001 was an expense of $0.5 million related to the write-off of an investment
and $0.1 million of sublease income. For the six months ended June 30, 2001,
interest income and other includes the $0.5 million write-off and $0.7 million
of rental income.

During April 2001, we moved to new office space that has significantly increased
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. 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. In order to reduce our costs, we are currently considering various
options regarding our office locations, including subleasing, assigning,
terminating or otherwise divesting ourselves of significant obligations under
our various real estate leases. We cannot, at this time, determine the
likelihood that we will pursue one or more of the options we are exploring. If
we do pursue one or more of these options, we could incur a charge against our
earnings during the remainder of 2001 in the range of zero to $85 million.

NET LOSS

<TABLE>
<CAPTION>
                                                              Percentage
                                               Amount         of Revenue
                                               ------         ----------
<S>                                           <C>             <C>
Three Months Ended June 30, 2001              ($33,877)           626%
Three Months Ended June 30, 2000               (31,267)          3983%
Increase from June 30, 2000                      2,610
Percentage Increase from June 30, 2000               8%

Six Months Ended June 30, 2001                ($74,907)           686%
Six Months Ended June 30, 2000                 (39,853)          1898%
Increase from June 30, 2000                     35,054
Percentage Increase from June 30, 2000              88%
</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 of our applications and operation of our service;

    -    the inventory write-downs;

    -    increases in sales and marketing expenses for the six months but a
         decrease for the three months;

    -    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;

    -    the 2001 charge for acquired in-process research and development; and

                                       24
<PAGE>   25
    -    the equity in net loss of our international joint venture through June
         3, 2001 and the consolidation of their losses thereafter.


We expect our service 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 America Online 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 June 30, 2001, we had $60.5 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 through March 31, 2002 if our
assumptions about our revenues and expenses are generally accurate.

We have revised and reduced our operating requirements during the past six
months, including undertaking actions designed to reduce staffing, real estate
and operational expenses. We do not expect to achieve positive cash flows from
operations until 2003, and are in the process of attempting to secure additional
financing through public or private financings or other similar arrangements,
which will likely be required in order to continue operations beyond March 31,
2002. 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.

Cash flows for the six months ended June 30, 2001

Cash flows used in operating activities were $49.6 million for the six months
ended June 30, 2001, primarily attributable to a net loss of $74.9 million, a
decrease in accounts payable of $15.2 million and a decrease in accrued and
other current liabilities of $2.5 million. These uses of cash were offset by
non-cash operating items including depreciation and amortization of $7.4
million, a charge for non-cash compensation expenses of $7.9 million, a charge
for acquired in-process research and development of $3.4 million, a provision to
adjust the carrying value of inventory of $10.5 million, our equity in net loss
of affiliate of $5.4 million, a decrease in accounts receivable of $2.6 million,
a decrease in inventories of $2.0 million, a decrease in prepaid expenses and
other current assets of $1.6 million and an increase in deferred rent of $1.8
million.

Cash flows provided by investing activities were $10.3 million. Sources of cash
included $75.0 million from the sale or maturity of investments and $9.9 million
of cash acquired in business combinations, which were offset by $48.6 million
for purchases of investments, $15.6 million of capital expenditures, and $6.5
million of investments in an affiliate.

Cash flows provided by financing activities were minimal for the six months
ended June 30, 2001.

Cash flows for the six months ended June 30, 2000

Cash flows used in operating activities were $21.9 million for the six months
ended June 30, 2000, primarily attributable to a net loss of $39.9 million and
an increase in prepaid and other current assets of $3.4 million. These uses of
cash were offset by depreciation and amortization (including amortization of
deferred stock compensation) of $11.3 million and an increase in accounts
payable of $10.6 million.

Cash flows used in investing activities were $24.8 million, primarily
attributable to net purchases of investments.

                                       25
<PAGE>   26
Cash flows provided by financing activities were $103.2 million, attributable to
issuances of preferred stock.

CAPITAL STRUCTURE

At June 30, 2001, our outstanding capital consisted solely of common stock, and
we had no outstanding indebtedness.

COMMITMENTS, CAPITAL EXPENDITURES AND FUTURE FINANCING REQUIREMENTS

At June 30, 2001, we had the following contractual commitments that are
described further in the following paragraphs (amounts in millions):


<TABLE>
<CAPTION>
                                                                                      2001     2002   2003-2011
                                                                                      ----     ----   ---------
<S>                                                                                  <C>      <C>     <C>
Noncancelable operating leases net of subleases                                      $ 4.7    $ 9.2    $ 73.8
Letter of credit for office space                                                      3.7       --        --
Telesales, customer care, billing and reporting and technical support services         0.9      1.8        --
Airtime for customers                                                                  0.8      1.7       1.9
Software license fees                                                                  0.3      1.4       1.2
Advertising                                                                             --      3.4      26.0
                                                                                     -----    -----    ------
Total commitments                                                                    $10.4    $17.5    $102.9
                                                                                     =====    =====    ======
</TABLE>

As of June 30, 2001, our future minimum lease payments under noncancelable
operating leases through 2011 were $87.7 million.

In connection with our primary office lease, we provided $7.4 million of
irrevocable letters of credit to the landlord in 2000 to serve as a security
deposit, and we are currently obligated to provide an additional $3.7 million
irrevocable letter of credit to the landlord. 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 is reflected in long-term assets. In
conjunction with the 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 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.

We have contractual minimum airtime commitments with one of our wireless
carriers to the extent we don't 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 two vendors that require a minimum commitment of $1.4
million in each of 2001 and 2002, and $1.2 million in 2003.

We have committed to spend $30.0 million over the five-year period from June
2002 through June 2007 for advertising services with News Corporation's
affiliates in the United States. As of June 30, 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 that we are seeking to raise 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

                                       26
<PAGE>   27
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
through March 31, 2002 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 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 customer support; and

    -    for general corporate purposes.

We anticipate requiring additional funds within the next nine months to continue
the development and operation of our business. We do not expect to achieve
positive cash flows from operations until 2003, so we will likely need to raise
additional funds in the future through public or private financings or other
similar arrangements. The capital markets have become increasingly constrained
since the beginning of this year, which has adversely affected the ability of
many companies, in particular early stage companies like ours, to raise capital.
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 continue to implement material changes to our business plan to conserve
cash resources, including staff reductions and other spending reductions. If
additional funds are raised through the issuance of equity securities or
securities convertible into equity, dilution to existing stockholders may result
and, if our stock price remains depressed, could be significant. If insufficient
funds are available, we may not be able to continue to operate our business in
an effective manner or to compete effectively.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the FASB issued EITF 00-25, "Vendor Income Statement
Characterization of Consideration Paid to Reseller of the Vendor's Products",
which is effective for annual or interim financial statements for periods
beginning after December 15, 2001. The issue addresses whether consideration
from a vendor to a reseller of the vendor's products is an adjustment of the
selling price and should therefore be deducted from revenue or a cost incurred
by the vendor for assets or services received. We are currently assessing but
have not yet determined the impact of EITF 00-25 on our results of operations.

In July 2001, the FASB issued SFAS No. 141 ("SFAS 141"), "Business
Combinations." SFAS 141 requires the purchase method of accounting for business
combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method.

In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets", which is effective for fiscal years beginning after March 15, 2001.
SFAS 142 requires, among other things, the discontinuance of goodwill
amortization. In addition, the standard includes provisions upon adoption for
the reclassification of certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized intangibles,
reclassification of certain intangibles out of previously reported goodwill and
the testing for impairment of existing goodwill and other intangibles. We are
currently assessing but have not yet determined the impact of SFAS 142 on our
financial position and results of operations.

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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

IF WE DO NOT HAVE SUFFICIENT CAPITAL TO FUND OUR OPERATIONS, WE MAY BE FORCED TO
IMPLEMENT SIGNIFICANT REDUCTIONS IN THE MANNER IN WHICH WE CONDUCT BUSINESS,
INCLUDING WORKFORCE REDUCTIONS, AND FOREGO ATTRACTIVE BUSINESS OPPORTUNITIES.

We believe that our cash and investments, together with vendor, bank and partner
financing that we expect to obtain, will provide sufficient capital to fund our
operations through March 31, 2002 if our assumptions about our revenues and
expenses are generally accurate. Since we have a limited operating history, we
cannot be certain that those assumptions will prove to be accurate. If those
assumptions are not correct, we may require additional funding prior to that
date. 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. Even if we are successful funding our
operations through March 31, 2002, we do not expect to achieve positive cash
flows from operations until 2003, so we will likely need to raise additional
funds in the future through public or private financings or other similar
arrangements. The capital markets have become increasingly constrained since the
beginning of this year, which has adversely affected the ability of many
companies, in particular early stage companies like ours, to raise capital.
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 continue to implement material changes to our business plan to conserve
cash resources, including staff reductions and other spending reductions. If
additional funds are raised through the issuance of equity securities or
securities convertible into equity, dilution to existing stockholders may result
and, if our stock price remains depressed, could be significant. If insufficient
funds are available, we may not be able to continue to operate our business in
an effective manner or to compete effectively.

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 June 30, 2001, we had generated only $22.0
million of revenue and had an accumulated deficit of approximately $200.3
million. We have incurred increasing losses and had an operating loss for the
six month period ended June 30, 2001 of $72.2 million and an earnings (loss)
before interest, taxes, depreciation and amortization (including amortization of
deferred stock compensation) ("EBITDA") of $(55.8) million for that same period.
We do not expect to achieve positive cash flows from operations until 2003. We
also anticipate that we will continue to incur significant expenses as we
continue to 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.

WE HAVE MODIFIED OUR BUSINESS STRATEGY TO FOCUS MORE ON THE APPLICATION SERVICES
AND ENTERPRISE 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 APPLICATION SERVICES AND ENTERPRISE MARKETS IS UNTESTED
AND WE MAY BE UNABLE TO DO SO IN A PROFITABLE AND TIMELY MANNER.

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We had 42,000 subscribers for our OmniSky-branded service as of June 30, 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 offer our applications and services to wireless carriers,
online service providers, hardware manufacturers and other third parties and to
extend our business into the enterprise market. That extension of our business
requires that we modify 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 relationships with
Verizon Wireless and 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.

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 our wireless service is
still relatively new and we have limited meaningful historical data upon which
to base our planned operating expenses, and even less historical data as we
shift the focus of our business to the applications services market, 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 Company, 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 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, whether
through direct sales to consumers under the OmniSky brand or indirectly through
carriers, online service providers and others who may resell all or portions of
our service to their end-users, 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 applications and services and the future
development by manufacturers of mobile devices that support our wireless
applications and services 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 MOVED OUR OPERATIONS INTO A SINGLE LOCATION IN SAN FRANCISCO IN APRIL 2001.
WE HAVE DETERMINED WE NEED TO SUBLEASE CERTAIN OFFICE SPACE. OUR INABILITY TO
SUBLEASE THIS OFFICE SPACE IN A TIMELY MANNER, AND ON TERMS THAT ARE FAVORABLE
TO US, COULD ADVERSELY AFFECT OUR FINANCIAL POSITION.

In order to reduce our costs, we will need to attempt to sublease, assign or
otherwise divest ourselves of significant obligations under various real estate
leases. These leases represent a significant portion of our operating expenses
on an ongoing basis. If we are unable to decrease these expenses in the
anticipated time frame, it could have a material adverse effect on our business,
operating results and financial condition.

During April 2001, we moved to new office space that has significantly increased
our occupancy costs. In order to reduce our costs, we are currently considering
various options regarding our office locations, including subleasing, assigning,
terminating or otherwise divesting ourselves of significant obligations under
our various real estate leases. We cannot, at this time, determine the
likelihood that we will pursue one or more of the options we are exploring. If
we do pursue one or more of these options, we could incur a charge against our
earnings during the remainder of 2001 in the range of zero to $85 million. We
have begun to market our excess space, but we cannot be certain that

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<PAGE>   30
we will be able to obtain a creditworthy subtenant in a timely manner for any of
our space. Unless our landlords relieve us from our obligations under various
leases to which we remain subject, we will remain responsible for the payments
on those leases. This would adversely affect our financial condition.

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

We rely on wireless carriers to transmit our OmniSky-branded 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.

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 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 Vx and Handspring Visor Platinum, Visor
Prism and Visor Edge mobile devices. Some manufacturers of mobile devices, such
as Hewlett-Packard, Compaq and Casio, 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 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. We have taken
significant inventory write-offs in the past year with respect to our modem
inventory, as we describe more fully in the footnotes to our consolidated
financial statements. In order to offer our wireless service on new mobile
devices introduced in the future, we may need to develop or have developed new
modems and arrange for their manufacture. To the extent that manufacturers of
mobile devices 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

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<PAGE>   31
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, Inc. 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 such as Yahoo! and AOL. During the second half of 2001, we intend to
support the Internet email protocol known as "IMAP". 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 applications and services,
we rely on third parties to provide many of the products and services that are
essential to delivering those applications and services. 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.

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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 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 309 as of June 30,
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 and implement and expand operational and customer support
systems. 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.

SUBSCRIBERS MUST INSTALL OUR USER INTERFACE ON THEIR MOBILE DEVICE TO RECEIVE
OUR WIRELESS APPLICATIONS AND SERVICES. IF THAT USER INTERFACE CONTAINS DEFECTS
OR ERRORS, OUR REPUTATION WOULD BE ADVERSELY AFFECTED.

Our wireless applications and services depend on software in our network and a
user interface that is installed on users' mobile devices. The technology
necessary to support our wireless applications and services is complex and must
meet stringent technical requirements. Applications and 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
subscribers and content providers, or when used to deliver services to a large
number of subscribers.

While we continually test our wireless applications and services for errors and
work with customers to identify and correct bugs, errors in our applications and
services 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 subscribers use our wireless applications and services.
Our wireless applications and services may not be free from errors or defects
even after they have been tested, which could result in the rejection of our
applications and services 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
SUBSCRIBER REVENUE DERIVED FROM OUR OMNISKY-BRANDED WIRELESS SERVICE AS A RESULT
OF THE FLAT MONTHLY FEE WE CHARGE OUR SUBSCRIBERS FOR UNLIMITED USAGE.

We provide subscribers to our OmniSky-branded wireless service 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 in delivering our OmniSky-branded wireless service depend in large
part on the fees we pay to wireless carriers for transmitting that 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

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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 SUBSCRIBERS OF OUR OMNISKY-BRANDED WIRELESS SERVICE 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 subscribers of our OmniSky-branded wireless service 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.

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 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 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

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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.

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 continue to build
our business, we expect that our operating expenses 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 APPLICATIONS
AND SERVICES 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
services, we may not be able to increase our revenues by the amount necessary to
achieve profitability. For the six-month period ended June 30, 2001, we incurred
approximately $10.2 million in advertising expenses. We intend to invest
significantly in promoting our applications and services over time, although as
we transition our business toward providing applications and services to
wireless carriers, online service providers, hardware manufacturers and others
we anticipate that our sales and marketing expenses, as a percentage of our
revenues, will decline significantly as we promote our applications and service
through other more cost efficient methods. In connection with the formation of
OmniSky International, we also committed to spend $30.0 million, in the
aggregate, from June 2002 through June 2007 for advertising services with News
Corporation's affiliates in the United States. At June 30, 2001, approximately
$0.6 million had been spent, leaving us with a significant commitment that we
must satisfy over time.

                                       34
<PAGE>   35
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 and June 2001, we completed two acquisitions. 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.

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.

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. 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.

                                       35
<PAGE>   36
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.

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 have received indemnification in respect of this matter from
companies that license us their encryption technology, 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
applications and services, including hardware manufactured for us by third
parties and failures to complete e-commerce transactions over our wireless
applications and services. 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.

                                       36
<PAGE>   37
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, 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, 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 Aether and we might be
interested in pursuing. 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.

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
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 August 1, 2001, our executive officers, directors and their affiliates
beneficially owned, in the aggregate, more than a majority 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.

                                       37
<PAGE>   38
WE ARE AT RISK OF SECURITIES CLASS ACTION LAWSUITS.

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 have been named as a defendant in one
class-action lawsuit, along with the underwriters for our initial public
offering. The plaintiffs claim in that litigation that our registration
statement and related prospectus filed in connection with our initial public
offering in September 2000 contained materially false and misleading information
and failed to disclose material information relating to the underwriters'
allocations of shares in our initial public offering to their customers, in
violation of the Securities Act of 1933 and the Securities Exchange Act of 1934.
As of August [10], 2001, we had not yet been served in that action. We intend to
tender a claim to the underwriters for indemnification under the underwriting
agreement for our initial public offering and intend to defend ourselves
vigorously. 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.

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.

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 June 30, 2001. We
believe, however, that we are currently not subject to material interest rate
risk.

                                       38
<PAGE>   39
Foreign Currency Risk

In 2001, we will be transacting business in various foreign currencies through
our remaining international operations, 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 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; TBWA/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.

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.

During July 2001, individuals claiming to represent purported classes of
similarly situated purchasers of the Company's securities filed actions in the
United States District Court for the Southern District of New York against the
Company and certain present officers and a director including Patrick S.
McVeigh, Lawrence S. Winkler and Michael J. Malesardi. The complaint also names
as defendants the following underwriters of the Company's initial public
offering: Credit Suisse First Boston Corporation, Chase Securities, Inc.,
Donaldson, Lufkin & Jenrette Securities Corporation and Salomon Smith Barney,
Inc. (the "Underwriter Defendants"). The plaintiffs claim that the Registration
Statement and Prospectus filed in connection with the Company's initial public
offering in September 2000 contained materially false and misleading information
and failed to disclose material information relating to the Underwriter
Defendants' allocations of shares in the Company's initial public offering to
their customers, in violation of the Securities Act of 1933 and the Securities
Exchange Act of 1934. As of August 10, 2001, we had not yet been served in
this action. We intend to tender a claim to the Underwriter Defendants for
indemnification under the Underwriting Agreement and intend to defend our
interests vigorously. We believe that the claims alleged are without merit.

We do not believe that the resolution of any of these matters will have a
material effect on our financial condition, results of operations or cash flows.
No estimate can be made of the possible loss or possible range of losses
associated with the resolution of these contingencies.

Except as described in the previous 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.

                                       39
<PAGE>   40
ITEM 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

         (C) RECENT SALES OF UNREGISTERED SECURITIES

In connection with our acquisition of the remaining 50% interest in OmniSky
International, we issued an aggregate of 6,578,947 shares of our common stock
and a warrant to purchase 929,944 shares of our common stock at a purchase price
of $3.23 per share.

         (d) USE OF PROCEEDS FROM SALE OF REGISTERED SECURITIES

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 June 30, 2001, the ending date of the reporting period, the approximate
amount of net offering proceeds used was $65.1 million for general business
operations including funding of operating losses generated from the initial
public offering through June 30, 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

The following matters were submitted to a vote of security holders during the
three months ended June 30, 2001:



On May 23, 2001, the Company held its 2001 Annual Meeting of Stockholders. The
following matters were submitted to a vote of the stockholders:

1)   Election of directors

<TABLE>
<CAPTION>
         Name                            Votes For              Votes Withheld
         ----                            ---------              --------------
<S>                                      <C>                     <C>
         Lawrence S. Winkler             43,586,874                 45,119

         Thomas E. Wheeler               43,607,793                 24,200
</TABLE>

The terms of the following directors continued after the Company's 2001 Annual
Meeting of Stockholders: Lachlan K. Murdoch, Janice M. Roberts, Patrick S.
McVeigh and Timothy Weller.

2)   Ratification of selection of PricewaterhouseCoopers LLP as independent
     auditors for the fiscal year ended December 31, 2001

<TABLE>
<CAPTION>
         Votes For          Votes Against       Votes Abstaining
<S>                         <C>                 <C>
         43,592,343             21,048               18,602
</TABLE>

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

(A)  EXHIBITS

                                       40
<PAGE>   41
<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               Employment Letter for Patrick McVeigh

        10.2               Employment Letter for Lawrence Winkler
</TABLE>

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

* Incorporated by reference from the Company's Annual Report on Form 10-K filed
on April 2, 2001.

(B) REPORTS ON FORM 8-K

On May 15, 2001, the Company filed a Form 8-K announcing the repricing of
certain issued and outstanding options to purchase its common stock.

On June 8, 2001, the Company filed a Form 8-K announcing the completion of the
acquisition of all outstanding membership interests of OmniSky International,
LLC.

                                       41
<PAGE>   42
                                   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>
     /s/    PATRICK S. MCVEIGH                Chief Executive Officer and           August 14, 2001
--------------------------------------           Chairman of the Board
            Patrick S. McVeigh               (Principal Executive Officer)


     /s/    LAWRENCE S. WINKLER          Chief Operations and Financial Officer     August 14, 2001
--------------------------------------                and Director
                                             (Principal Financial Officer)
            Lawrence S. Winkler
</TABLE>

                                       42
<PAGE>   43
                                  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        Employment Letter for Patrick McVeigh

      10.2        Employment Letter for Lawrence Winkler
</TABLE>

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

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


                                       43