<PAGE>
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-K
       [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

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

                        COMMISSION FILE NUMBER: 000-27707

                              AETHER SYSTEMS, INC.

             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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                DELAWARE                                  52-2186634
    (State or other jurisdiction of                     (IRS Employer
     incorporation or organization)                 Identification Number)

  11460 CRONRIDGE DR. OWINGS MILLS, MD                      21117
(Address of principal executive offices)                  (Zip Code)
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      (Registrant's telephone number, including area code): (410) 654-6400

        SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE.

           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                          COMMON STOCK, PAR VALUE $.01
                     CONVERTIBLE SUBORDINATED NOTES DUE 2005

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 [ ]

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

The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of March 8, was $213,545,572.

As of March 8, 2002, 42,036,530 shares of the Registrant's common stock, $.01
par value per share, were outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

Proxy Statement for the 2002 Annual Meeting of the Registrant which will be
filed with the Commission within 120 days after the close of the fiscal year and
is incorporated by reference into Part III.


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                              AETHER SYSTEMS, INC.
                           ANNUAL REPORT ON FORM 10-K
                      FOR THE YEAR ENDED DECEMBER 31, 2001

                                      INDEX

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                                  PART I
Item 1   Business....................................................   3

Item 2   Properties..................................................   8

Item 3   Legal Proceedings...........................................   8

Item 4   Submission of Matters to a Vote of Security Holders.........   9


                                  PART II
Item 5   Market for the Company's Common Equity and Related Security
         Holder Matters..............................................  10

Item 6   Selected Financial Data.....................................  10

Item 7   Management's Discussion and Analysis of Financial Condition
         and Results of Operations...................................  13

Item 7A  Quantitative and Qualitative Disclosures About Market
         Risk........................................................  32

Item 8   Financial Statements and Supplementary Data.................  32

Item 9   Change In and Disagreements with Accountants on Accounting
         and Financial Disclosure....................................  32


                                 PART III
Item 10  Directors and Executive Officers of the Registrant..........  33

Item 11  Executive Compensation......................................  33

Item 12  Security Ownership of Certain Beneficial Owners and
         Management..................................................  33

Item 13  Certain Relationships and Related Transactions..............  33


                                  PART IV
Item 14  Exhibits, Financial Statement Schedules and Reports on Form
         8-K.........................................................  34
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THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. WHEN USED HEREIN, THE WORDS ANTICIPATE, BELIEVE,
ESTIMATE, INTEND, MAY, WILL, AND EXPECT AND SIMILAR EXPRESSIONS AS THEY RELATE
TO AETHER SYSTEMS, INC. (AETHER OR COMPANY) OR ITS MANAGEMENT ARE INTENDED TO
IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY'S ACTUAL RESULTS,
PERFORMANCE OR ACHIEVEMENTS COULD DIFFER MATERIALLY FROM THE RESULTS EXPRESSED
IN, OR IMPLIED BY, THESE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR

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CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE DISCUSSED IN MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND
BUSINESS. AETHER UNDERTAKES NO OBLIGATION TO UPDATE OR REVISE ANY
FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE
EVENTS OR OTHERWISE.

                                     PART I

ITEM 1. BUSINESS

OVERVIEW

        We provide the services, software and support necessary for businesses
to extend existing and future applications from the desktop to almost all
currently available personal digital assistant (PDA) operating systems and their
respective wireless devices. Through the Aether Fusion(TM) approach, we develop,
deploy and manage wireless solutions built on industry standard technology and
backed by our expertise in wireless hosting, software and services.

THE AETHER SOLUTION

        We believe that businesses, seeking greater productivity and
efficiencies, increasingly seek to give their workforces mobile and wireless
access to corporate applications, company data, and internal e-mail. Remote
access can be achieved either through continuous real-time communications, or by
periodically synchronizing corporate data to a handheld device. However, we have
seen many corporate information technology (IT) managers who explore wireless
and mobile data solutions quickly become overwhelmed with the complexity of the
wireless world and its frequently incompatible and changing protocols for
carrier networks, devices and applications, as well as the issues surrounding
support of such deployments. Further, as carrier networks continue to deploy
newer technologies, we are able to provide our customers with the ability to
migrate and upgrade to them.

        We provide businesses the services, software and support necessary to
extend existing and future business applications from the desktop to almost any
wireless device. The foundation of our wireless capabilities is Aether
Fusion(TM), an array of technologies, products, services, and partnerships that
improves the interoperability of wireless systems, architectures and protocols
to make even the most complex IT environments open to wireless connectivity. The
Aether Fusion(TM) technology platform is designed to enable flexible wireless
solutions that will grow and adapt as the enterprise itself grows and changes.

        Using the Aether Fusion(TM) technology foundation, we develop, deploy
and manage wireless solutions built on industry standard technology. Businesses,
systems integrators and developers could also use elements of the Aether
Fusion(TM) technology foundation on their own to quickly create, deploy and
manage wireless solutions across multiple carrier networks and types of devices.

        We complement our technology with services including wireless data
engineering and application development, wireless data hosting through our Data
Center, product fulfillment and customer support. These components can be used
separately or in various combinations to extend existing and future business
applications to any handheld device over any wireless network.

THE AETHER STRATEGY

        We believe our capabilities and experience established us as an early
market leader in providing wireless data services and systems to businesses. Our
strategy is to utilize our experiences to extend our leadership position through
our engineering expertise, our software products, our hosted solutions and our
other resources to move into growth opportunities.

        We will continue to focus resources on core areas where we either have
developed a leadership position or have recognized a clear market opportunity.
We currently are focused on the following markets:

        Transportation and Logistics. Our main products in this area are
MobileMax(2) and e-Mobile Delivery. Our solution for long haul trucking,
MobileMAX(2), allows transportation companies to increase their return on
investment through instant communication and automatic information on each
vehicle. The product allows these companies to improve the efficiency of their
drivers. Similarly, e-Mobile Delivery increases the efficiency and productivity
of delivery fleets by limiting paperwork, thus reducing the opportunity for lost
documents and inaccurate information. It also provides for delivery confirmation
through signature capture at the delivery site and raises customer service
performance through on-line order/delivery tracking. e-Mobile Delivery
streamlines a customer's payment cycle, which reduces costs and increases the
potential for profits.

        Enterprise Solutions. We are focused on providing integrated wireless
data solutions to enterprises with product development emphasis on field
service, sales force automation, distribution and delivery management, and mail
and messaging access. In addition, pursuant to our small business initiative,
through a strategic alliance with America Online, Inc. (AOL) , we are targeting
an array of businesses including real estate agents, contractors and the
automotive industry with products including real-time lead notification and
management tools that will allow the user to be alerted immediately upon an
interested customer's inquiry.

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        Mobile Government. We are a leading provider in the area of wireless
data solutions for public safety. We believe that our existing user base
positions us to help agencies address their basic requirements as well as
expanded Homeland Security needs. In particular, our solutions help address the
information sharing priority that is currently being highlighted by the federal
government. Our solutions are integrated into 47 different state databases as
well as local and federal databases to deliver real-time information in seconds
without having to involve dispatch or other resources. Our products in this area
are the PacketCluster family of products, the new handheld version of
PacketCluster Patrol called PocketBlue, and the FireRMS family of products for
fire and rescue companies.

PRODUCTS AND SERVICES

        Our products and services include:

    -   Software applications targeted to specific vertical market sectors
        (transportation and logistics, mobile government, and mobile workforce
        enablement applications) and for general wireless data management and
        infrastructure;

    -   Integration services to businesses seeking to develop and incorporate
        wireless data systems;

    -   Hosted services, including wireless integration, Internet and messaging
        services, and deployment services including product fulfillment and
        customer service; and

    -   Deployment support that includes product fulfillment and customer
        service.

Applications and Software

        We have built on our experience in developing tailored applications for
specific customers to develop an increasing number of products that are more
replicable and scalable for a range of customers. Rapid application development
on Aether Fusion(TM) has become an emphasis for us. We currently market over
twenty applications and software products. Approximately half of our engineers
are devoted to this area.

        Aether Fusion(TM) is our foundation for developing wireless solutions
for our customers. It is designed to be an expandable foundation to address a
growing set of wireless application challenges. We have developed Aether
Fusion(TM) as a framework to accommodate our existing product base and support
expansion as new applications emerge. Our product history in the wireless and
mobile computing space includes products in the web transformation, data
synchronization, device management, and wireless messaging spaces. We intend to
continue the development of Aether Fusion(TM).

        We also offers a complete set of software development tools and
technologies enabling businesses to rapidly build, deploy and manage hosted
mobile and wireless solutions. Businesses use our software products to create
their own wireless and mobile data systems. We believe our products allow these
businesses to create systems at lower cost and more efficiently than if they
developed the systems entirely on their own. Currently, Aether Fusion(TM) is
being used internally to allow our engineers to more rapidly develop and deploy
solutions. We intend to develop Aether Fusion(TM) for external use to meet the
system development needs of our customers and as a licensable product as leading
indicators demonstrate market demand within a customer's infrastructure. We
currently view this market development as a longer-term opportunity.

Integration Services

        Integration Services includes consulting and engineering, and
integration into a business's backend infrastructure for wireless data
solutions. We provide engineering services to complement our software products
and some of our hosted services and on a stand-alone basis. We also may accept
engineering assignments that might allow us to embrace technological advances or
expand into new industry sectors or services. Our engineering staff includes
wireless systems engineers, software engineers who specialize in developing
applications for handheld devices, and engineers who specialize in systems
integration and testing. Approximately 15 percent of our engineers are devoted
to integration.

Hosted Services

        We provide secure, state-of-the-art hosting facilities for businesses
that wish to outsource the operation and management of their wireless
deployments. Our hosted services offerings include wireless integration into our
Data Center for application hosting and/or wireless connectivity, and Internet
and messaging services to augment vertical market applications.

        Corporate managers require rigorous security standards when entrusting
their data to third parties. Our Data Center has numerous redundant elements and
serves as a high-security physical link between data feeds from our business
customers' and others' data systems and wireless carrier networks. We scramble
digital messages as they move along wireless networks using the latest

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encryption technologies. This relieves corporations from the burden of
constructing similar facilities. We believe our network operations center is
capable of meeting the security standards for services we developed or are
developing for our customers.

        We built a Network Operations Center (NOC), the monitoring center for
operations, and a Data Center, the facility which holds the computing elements,
that we believe are unique to the industry in that they were built specifically
for robust wireless deployments. The Data Center currently supports over 40
redundant connections to various wireless data carriers. Similarly, our Internet
connectivity consists of multiple connections through different providers. The
NOC and Data Center were built to be able to achieve greater than 99.99% uptime.
The Data Center was designed to accommodate a total of 5000 servers at full
capacity. The support systems (HVAC, electrical, backup) have all been designed
to accommodate this high-density load. Our infrastructure can be used in a
variety of ways including the hosting of the applications and/or providing
wireless connectivity for the solution. All services are done in a highly secure
environment.

Deployment Services

        Our deployment services are headquartered in Owings Mills, Maryland and
include product fulfillment and customer support, which help alleviate the
complexities associated with rolling out and supporting a solution. In today's
environment in which IT departments have limited resources yet are tasked to do
more dispersed work, we offer these services.

        Product fulfillment and provisioning facilitates the delivery of devices
to the customer/employee base. During the development process, device(s) are
chosen based on the application's use and these devices are delivered with the
application(s) already on them. For our customers we have the ability to load
and configure tailored software on mobile devices, activate wireless modems and
perform quality assurance checks. We then pack, ship and track the product until
the user receives it. For end users who already own a device, we can provide the
modem and software application only. We handle all repair and warranty issues
for devices we provide to our customers.

        Additionally, we offer post deployment customer support and customer
billing. Our customer care specialists can provide support on virtually any
issue that might arise from application troubleshooting to wireless network and
device issues. We can also handle customer billing for our customers' user fees,
device and modem purchases, and other charges. Our billing system can support
increases in our customers' end user base. Here again, we alleviate the
complexities that would otherwise be placed upon a customer's IT department.

SALES AND MARKETING

        As of March 2002, we have approximately 70 salespeople, sales engineers
for technical support during the sales cycle and marketing professionals. Our
sales and marketing staff specialize in market sectors, but also sell across the
entire product and service line. Our direct sales team covers all regions of the
U.S., plus Europe from offices in London, Hamburg and Munich. In addition to
having a vertical market focus, our salespeople focus on Fortune 1000 companies
that can benefit from field force automation applications including field
service, sales force automation, and mobile collaboration tools such as
cross-device messaging and personal information management. We are also
targeting large consulting firms to provide our wireless systems for their
clients. Our business development personnel and senior executives also assist in
developing potential strategic relationships for selling and promoting our
services.

        In addition to our sales and marketing staff, we advertise in a variety
of media. During 2001, we focused our marketing spending on increasing awareness
of the Aether brand name and promoting awareness of our products and services,
and lead generation. As part of the alliance with AOL, we will be focusing much
of our advertising resources across the family of AOL interactive brands as well
as AOL Time Warner media properties. Further details of this relationship are
discussed in Item 7 - Management's Discussion and Analysis of Financial
Condition and Results of Operations.

EUROPEAN OPERATIONS THROUGH SILA

        We address the needs of business customers abroad through Sila
Communications, Ltd., our joint venture with Reuters in which we hold a 60.0%
equity interest. Sila currently targets major corporations throughout Europe who
seek to extend their applications to handheld devices, as well as wireless
carriers seeking to outsource wireless data services. Sila, headquartered in
London, provides wireless system hosting and end user support primarily to
financial services customers via various wireless networks from the European
countries of the United Kingdom, Sweden and Spain and the region of Benelux.

        We received a 60.0% interest in Sila in exchange for $13.5 million in
cash plus 100% of the equity interests of IFX, a company we purchased in April
2000 for $85 million. Reuters holds 40.0% of the equity interests of Sila, which
it received in exchange for approximately $20.8 million in cash plus
contribution of all of its rights to Futures Pager Limited, a European paging

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company. Under a marketing and strategic agreement with Sila and Reuters, we
have agreed to give Sila sales leads and to assist its sale of our products. The
agreement also gives Sila the right to a non-exclusive license to use our
technology and requires Sila to give us an opportunity to sell its products. For
as long as we continue to own a greater than 50% equity interest in Sila, we
have the right to appoint four directors to its seven-director board. David S.
Oros, chairman of Sila, also serves as a director, chairman and chief executive
officer of Aether.

STRATEGIC RELATIONSHIPS

        We believe that partnerships are critical to the success of the company
and vital to our growth. The partnerships we have created include joint
development relationships where we are working together with firms to develop
products and/or next generation technologies to address specific vertical market
opportunities. We also have worked with various suppliers at the platform and
application level in Original Equipment Manufacturer (OEM) relationships to
embed technologies from suppliers in Aether FusionTM. Similarly, other hardware
and software manufacturers have chosen to extend their application by imbedding
our technology, Aether FusionTM. Finally, we have distribution partnerships
where we can gain the marketing capacity of other firms with greater market
presence in markets than we have today.

Distribution & Service

        We entered into an agreement with Cap Gemini Ernst & Young (CGE&Y) in
May 2001 to develop, market, and deliver mobile and wireless solutions in North
America. CGE&Y has provided a demonstration center featuring our products, and
has educated and trained consultants to deliver our solutions worldwide. Under
the agreement, CGE&Y has agreed to promote our products in connection with its
provision of consulting services and we have agreed to license use of Aether
Fusion by CGE&Y in providing services to its consulting clients.

Wireless Network Carriers

        We believe our relationships with wireless network carriers are mutually
beneficial. We believe we are among the largest buyers of wireless data network
capacity for many of the carriers we use. As a result, we are able to negotiate
favorable rates. Typically, we have one-year contracts to buy data network
capacity either for an agreed amount of kilobytes at a flat fee or on a
cents-per-kilobyte basis. We have contracts with wireless carriers including
Verizon Wireless, AT&T Wireless, Cingular Wireless, and Motient. As a result, we
can give our customers a wide variety of wireless carrier choices.

Hardware and Software Vendors

        Our services increase the usefulness of wireless handheld devices, and
we believe our solutions will increase sales of these devices. We have therefore
entered into a number of arrangements with mobile device manufacturers,
including the following:

        -       In February, 2001, we announced a strategic partnership with
                Symbol Technologies, Inc., to offer our wireless data systems
                and services with Symbol handheld devices.

        -       In December 2001, we entered a partnership with Sharp to develop
                a wireless e-mail solution based on Aether Fusion for the new
                Sharp Zaurus device. The device will carry the "Unwired by
                Aether" branding. The initial phase of deployment will provide
                an ISP (POP3 and IMAP formats) e-mail service targeted to what
                Sharp terms the "pro-sumer". This service is expected to be
                launched in the first half of 2002. The second phase of
                deployment is an Aether developed wireless e-mail solution for
                the corporate user with more stringent security (Microsoft
                Exchange and Lotus Notes back-ends). We are providing all the
                wireless integration for both today's and tomorrow's networks.

        -       In April 2000, we entered into a strategic agreement with
                Research in Motion (RIM) to market and sell RIM wireless
                devices.

COMPETITION

        The market for our solutions is competitive. We believe we offer the
broadest range of applications and services to businesses necessary to enable
the development, offering and ongoing support of wireless data communication
systems for their employees and customers. The widespread adoption of industry
standards may make it easier for new market entrants to offer some or all of the
services we offer and may make it easier for existing competitors to introduce
some or all of the applications and services they do not now provide, or improve
the quality of their services. We expect that we will compete primarily on the
basis of the functionality, breadth, quality and price of our services. Our
current and potential competitors include:

        -       wireless systems integrators and database vendors, including
                IBM, Oracle, and EDS.

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        -       mobile and/or wireless software companies, including Openwave
                Systems, Comverse Technology, Inc., AvantGo, Inc., Extended
                Systems, Inc., and Puma Technology, Inc., Everypath, Inc., and
                Brience, Inc.

        -       wireless data services providers, such as 724 Solutions Inc. and
                GoAmerica, Inc.

        -       wireless network carriers, such as Verizon Wireless, AT&T
                Wireless, Cingular Wireless, Sprint PCS Group, and Nextel
                Communications, Inc.

        Some of our existing and potential competitors have substantially
greater financial, technical, marketing and distribution resources than we do.
In the category of wireless network carriers, some of these companies may also
sell us airtime for our solutions. Additionally, many of these companies have
greater name recognition and more established relationships with our target
customers. Furthermore, these competitors may be able to adopt more aggressive
pricing policies and offer customers more attractive terms than we can.

        Notwithstanding the competitiveness of our market, we believe that our
potential competitors face substantial barriers to market entry. Development of
wireless data systems comparable to those we have already developed is time
consuming and costly.

INTELLECTUAL PROPERTY RIGHTS

        We rely on a combination of trademark, patent, copyright, service mark,
trade secret laws and contractual restrictions to establish and protect
proprietary rights in our products and services. We have applied for various
trademarks and patents.

        The following trademarks are registered with the United States Patent
and Trademark Office: ScoutSync, Cerulean, Cerulean Design, PacketCluster,
PacketCluster Patrol, PacketWriter, MobileMax2, Advantage. The following
trademarks have been published or allowed by the United States Patent and
Trademark Office: Aether, Aether Systems, Aether & Design, Unwired By Aether,
ScoutBuilder, ScoutIT, ScoutWeb, ScoutExtend, Mobile Finance By Aether, Aether
Airlead, Aether Attache, Aether Smart Agent, MobileFusion, MobileFusion &
Design, Safestop, Information For A Wireless World, PocketInvestigator, PRO2000.
There can be no assurances that our applications will be granted or that holders
of other trademarks will not claim that the published or allowed trademarks, or
other Aether pending trademark applications, infringe their trademarks.

        We have received notices of allowance for two of our patents while the
remainder are pending. There is no assurance that the patent applications will
result in patents being issued by the United States Patent and Trademark Office
or other foreign patent offices, nor is there any guarantee that any issued
patent will be valid and enforceable. Other companies may independently develop
or otherwise acquire similar technology or gain access to our proprietary
technology. Despite our precautions, there can be no assurance that we will be
able to adequately protect our technology from competitors in the future. The
enforcement of patent rights often requires the institution of litigation
against infringers. This litigation is often costly and time consuming.

        We may be subject to legal proceedings and claims from time to time
relating to the intellectual property of others, even though we take steps to
assure that neither our employees nor our contractors knowingly incorporate
unlicensed copyrights or trade secrets into our products. It is possible that
third parties may claim that our products and services may infringe upon their
trademark, patent, copyright, or trade secret rights. Any such claims,
regardless of their merit, could be time consuming, expensive, cause delays in
introducing new or improved products or services, require us to enter into
royalty or licensing agreements or require us to stop using the challenged
intellectual property. Successful infringement claims against us may materially
disrupt the conduct of our business or affect profitability. There are currently
no legal proceedings or claims for infringement of intellectual property rights
pending against us.

GOVERNMENT REGULATION

        We are not currently subject to direct federal, state or local
government regulation, other than regulations that apply to businesses
generally. The wireless network carriers we contract with to provide airtime and
some of our hardware suppliers are subject to regulation by the Federal
Communications Commission. Changes in FCC regulations could affect the
availability of wireless coverage these carriers are willing or able to sell to
us. We could also be adversely affected by developments in regulations that
govern or may in the future govern the Internet, the allocation of radio
frequencies or the placement of cellular towers. Regulations of the SEC
governing online trading could reduce the level of online trading or the demand
for wireless financial information. Also, changes in these regulations could
create uncertainty in the marketplace that could reduce demand for our services
or increase the cost of doing business as a result of costs of litigation or
increased service delivery cost or could in some other manner have a material
adverse effect on our business, financial condition or results of operations.

        We currently do not collect sales or other taxes with respect to the
sale of services or products in states and countries where we believe we are not
required to do so. We do collect sales and other taxes in the states in which we
have offices and are required by

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law to do so. Some jurisdictions have sought to impose sales or other tax
obligations on companies that engage in online commerce within their
jurisdictions. A successful assertion by one or more jurisdictions that we
should collect sales or other taxes on our products and services, or remit
payment of sales or other taxes for prior periods, could have a material adverse
effect on our business, financial condition or results of operations.

        Any new legislation or regulation, or the application of laws or
regulations from jurisdictions whose laws do not currently apply to our
business, could have an adverse effect on our business.

EMPLOYEES

        As of December 31, 2001, we and our wholly-owned subsidiaries had a
total of approximately 850 employees, excluding employees of Sila, and of these
employees over 250 were engineers. As of December 31, 2001, Sila had
approximately 45 employees. None of our employees is covered by a collective
bargaining agreement. We believe that our relations with our employees are good.
As part of our continued focus on operational efficiency, we reduced our
workforce by approximately 225 persons subsequent to December 31, 2001.

ITEM 2. PROPERTIES

        Our principal offices are located in Owings Mills, Maryland in a 92,000
square foot facility under a lease expiring in January 2005 with no renewal
option. We also lease an aggregate of approximately 454,000 square feet for our
offices in Larkspur, California; San Jose, California; San Rafael, California;
Boca Raton, Florida; Bethesda, Maryland; New York, New York; Long Island, New
York; Bethpage, New York; McLean, Virginia; Richmond, Virginia; Vienna,
Virginia; Washington, DC; Tempe, Arizona; Marlborough, Massachusetts; Chicago,
Illinois; Edina, MN; Yakima, Washington; Zillah, Washington; Olmsted, Ohio; and
Monterey, Mexico. Of the approximately 546,000 leased square feet, approximately
114,000 are used for our vertical market segment and approximately 188,000
square feet are utilized for corporate and other purposes. Sila has offices
located throughout Europe. We are currently holding approximately 244,000 square
feet of space for sublease which we plan to exit or have exited in connection
with our restructuring plans. We believe that our retained facilities are
adequate for the purposes for which they are presently used and that replacement
facilities are available at comparable cost, should the need arise.

ITEM 3. LEGAL PROCEEDINGS

        Aether and certain of our officers and directors are among the
defendants named in nine purported class action lawsuits. These actions were
filed on behalf of persons and entities who acquired our common stock after our
initial public offering in October 21, 1999. The suits seek damages on account
of alleged violations of securities laws. Among other things, the complaints
claim that prospectuses, dated October 21, 1999 and September 27, 2000 and
issued by us in connection with the public offerings of our common stock,
allegedly contained untrue statements of material fact or omissions of material
fact in violation of securities laws because the prospectuses allegedly failed
to disclose that the offerings' underwriters had solicited and received
additional and excessive fees, commissions and benefits beyond those listed in
the arrangements with certain of their customers which were designed to
maintain, distort and/or inflate the market price of Aether's common stock in
the aftermarket. The actions seek unspecified monetary damages and rescission.
We believe the following claims are without merit and plan to vigorously contest
these actions.

        1. Class Action Complaint for Violations of Federal Securities Laws,
Jury Trial Demanded, Civil Action No. 01 CV-7712, filed August 17, 2001. In the
United States District Court for the Southern District of New York, George
Murphy v. Aether Systems, Inc., Merrill Lynch, Pierce, Fenner & Smith Inc.,
FleetBoston Robertson Stephens, Inc., Credit Suisse First Boston Corp., US
Bancorp Piper Jaffray Inc., Bank of America Securities LLC, Morgan Stanley & Co.
Inc., and inds., defendants.

        2. Class Action Complaint for Violations of Federal Securities Laws,
Jury Trial Demanded, Civil Action No. 01 CV-7634, filed August 16, 2001. In the
United States District Court for the Southern District of New York, Jerry Krim
v. Aether Systems, Inc., Merrill Lynch, Pierce, Fenner & Smith Inc., BancBoston
Robertson Stephens Inc., Donaldson Lufkin & Jenrette Securities Corp., US
Bancorp Piper Jaffray Inc., Deutsche Bank Securities Inc., Friedman, Billing,
Ramsey & Co. Inc., and inds., defendants. This case has been consolidated with
CV-5570 and closed on September 4, 2001.

        3. Class Action Complaint for Violations of the Securities Exchange Act
of 1934, Jury Trial Demanded, Civil Action No. 01 CV-6029, filed July 3, 2001.
In the United States District Court for the Southern District of New York, Larry
Ackerman, On Behalf of Himself and All Others Similarly Situated, plaintiff, v.
Aether Systems, Inc., David S. Oros, David C. Reymann, Merrill Lynch, Pierce,
Fenner & Smith Incorporated, BancBoston Robertson Stephens Inc., Donaldson,
Lufkin & Jenrette Securities Corporation, U.S. Bancorp Piper Jaffray Inc.,
Deutsche Bank Securities Inc., and Friedman, Billing Ramsey & Co., Inc.,
defendants.

        4. Class Action Complaint for Violations of the Federal Securities Laws,
Civil Action No. 01 CV 6116, filed July 5, 2001. In the United States District
Court for the Southern District of New York, Henry Cole and Daniel Kucera, on
Behalf of Themselves and

                                                                               8
<PAGE>

All Others Similarly Situated, plaintiff v. Aether Systems, Inc., Merrill Lynch,
Pierce, Fenner & Smith Incorporated, BancBoston Robertson Stephens, Inc., Morgan
Stanley & Co. Incorporated, David S. Oros and David C. Reymann, defendants.

        5. Class Action Complaint for Violations of Federal Securities Laws,
Jury Trial Demanded, Civil Action No. 01 CV-6136, filed July 5, 2001. In the
United States District Court for the Southern District of New York, Bernd
Toennesmann, On Behalf of Himself and All Others Similarly Situated, plaintiffs,
v. Aether Systems, Inc., David S. Oros, David C. Reymann, Merrill Lynch, Pierce,
Fenner & Smith Inc., FleetBoston Robertson Stephens Inc., Credit Suisse First
Boston Corp., U.S. Bancorp Piper Jaffray Inc., Bank of America Securities LLC,
and Morgan Stanley Dean Witter & Co., defendants.

        6. Class Action Complaint for Violations of Federal Securities Laws,
Jury Trial Demanded, Civil Action No. 01 CV-6269, filed July 11, 2001. In the
United States District Court for the Southern District of New York, Isak
Karasik, on behalf of himself and all others similarly situated, plaintiffs vs.
Aether Systems, Inc., David S. Oros, David C. Reymann, Mark D. Ein, Rajendra
Singh, Merrill Lynch, Pierce, Fenner & Smith, Incorporated, Morgan Stanley Dean
Witter, Inc. and FleetBoston Robertson Stephens, Inc., defendants.

        7. Class Action Complaint for Violations of the Federal Securities Laws,
Jury Trial Demanded Civil Action No. 01 CV-5570, filed June 19, 2001. In the
United Stated District Court for the Southern District of New York, Adele Brody
on Behalf of Herself and All Others Similarly Situated, plaintiff v. Aether
Systems, Inc., David S. Oros, David C. Reymann, Merrill Lynch, and Jenrette
Securities Corporation, U.S. Bancorp Piper Jaffray Inc., Deutsche Bank
Securities Inc., and Friedman, Billings, Ramsey & Co., Inc., defendants.

        8. Class Action Complaint for Violations of the Federal Securities
Exchange Act of 1934, Jury Trial Demanded, Civil Action No. 01 CV-5666, filed
June 21, 2001. In the United States District Court for the Southern District of
New York, Pond Equities, On Behalf of Itself and All Others Similarly Situated,
plaintiff, v. Aether Systems, Inc., David Oros, David C. Reymann, Merrill Lynch,
Pierce, Fenner & Smith Incorporated, BancBoston Robertson Stephens Inc.,
Donaldson Securities Inc. and Friedman Billing Ramsey & Co., Inc., defendants.

        9. Class Action Complaint for Violations of the Federal Securities Laws,
Jury Trial Demanded, Civil Action No. 01 CV-5917, filed June 27, 2001. In the
United States District Court for the Southern District of New York, Edward
Cassady, on Behalf of Himself and All Others Similarly Situated, plaintiffs v.
Aether Systems, Inc., David S. Oros, David C. Reymann, Merrill Lynch, Pierce,
Fenner & Smith Incorporated, BancBoston Robertson Stephens Inc., Donaldson,
Lufkin & Jenrette Securities Corporation, U.S. Bancorp Piper Jaffray Inc.,
Deutsche Bank Securities Inc. and Friedman, Billing, Ramsey & Co., Inc.,
defendants.

        We are also a party to other legal proceedings in the normal course of
business. Based on evaluation of these matters and discussions with counsel, we
believe that liabilities arising from these matters will not have a material
adverse effect on the consolidated results of our operations or financial
position.

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

        No matters were submitted to the Company's stockholders for
consideration during the fiscal quarter ended December 31, 2001.

                                                                               9
<PAGE>

                                     PART II

ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED SECURITY HOLDER
MATTERS

(1) PRICE RANGE OF COMMON STOCK

        Our common stock has been quoted on the Nasdaq National Market under the
symbol AETH since our initial public offering on October 20, 1999. Prior to that
time, there was no public market for the common stock. The following table sets
forth, for the periods indicated, the high and low prices per share of the
common stock as reported on the Nasdaq National Market.

<TABLE>
<CAPTION>
                                                                       2001                 2000
                                                                  -------------        -------------
                       QUARTER ENDED                              HIGH      LOW        HIGH      LOW
                       -------------                              ----      ---        ----      ---
<S>                                                               <C>      <C>         <C>       <C>
March 31....................................................      $58.50   $12.19      $345.00   $73.00
June 30.....................................................      $18.95   $ 7.39      $216.00   $62.00
September 30................................................      $11.50   $ 5.60      $203.75   $99.75
December 31.................................................      $ 9.74   $ 5.25      $122.50   $28.50
</TABLE>

(2) APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS

        The number of record holders of the Company's common stock as of
December 31, 2001 was 398. The Company believes that in excess of 5,000
beneficial owners hold such shares of common stock in depository or nominee
form.

(3) DIVIDENDS

        We have never declared or paid any cash dividends on our capital stock
nor, when we were organized as a limited liability company, did we make any
distributions to our members. We currently intend to retain earnings, if any, to
support the development of our business and do not anticipate paying cash
dividends in the foreseeable future. Payment of future dividends, if any, will
be at the discretion of our board of directors after taking into account factors
such as our financial condition, operating results and current and anticipated
cash needs.

ITEM 6. SELECTED FINANCIAL DATA

        The table that follows presents portions of our consolidated financial
statements and is not complete. You should read the following selected
consolidated financial data together with our consolidated financial statements
and related notes and with Management's Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere in this Annual Report on
Form 10-K. The consolidated statement of operations data for the years ended
December 31, 1999, 2000, and 2001, and the consolidated balance sheet data as of
December 31, 2000 and 2001 are derived from our consolidated financial
statements, which are included as exhibits to this report on Form 10-K. The
consolidated statement of operations data for the years ended December 31, 1997
and 1998 and the consolidated balance sheet data as of December 31, 1997 and
1998 are derived from audited financial statements that do not appear in this
annual report on Form 10-K. The historical results presented below are not
necessarily indicative of the results to be expected for any future fiscal year.
See Management's Discussion and Analysis of Financial Condition and Results of
Operations in Item 7. The pro forma net loss per share information for the
historical periods presented gives effect to our conversion from a limited
liability company to a corporation immediately prior to our initial public
offering.

                                                                              10
<PAGE>

<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                              --------------------------------------------------
                                                1997      1998      1999       2000         2001
                                              -------   -------   -------   --------     ---------
                                                   (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                           <C>       <C>      <C>       <C>         <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue:
  Subscriber revenue........................  $   161   $   549   $ 3,617   $ 24,802      $ 44,031
  Engineering services revenue..............    1,625       963     2,594      9,444         7,860
  Software and related services revenue.....       --        --        --     17,278        36,982
  Device sales..............................       --        --       115      6,630        24,007
                                              -------   -------   -------   --------      --------
          Total revenue.....................    1,786     1,512     6,326     58,154       112,880
  Cost of subscriber revenue................      447       797     2,005     11,254        27,167
  Cost of engineering services revenue......      846       304     1,366      5,693         3,644
  Cost of software and related services
    revenue.................................       --        --        --      5,724        11,625
  Cost of device sales......................       --        --       105      7,345        38,318
                                              -------   -------   -------   --------    ----------
          Total cost of revenue.............    1,293     1,101     3,476     30,016        80,754
                                              -------   -------   -------   --------    ----------
          Gross profit......................      493       411     2,850     28,138        32,126
Operating expenses:
  Research and development (1)..............      734     1,267     2,614     30,189        63,937
  General and administrative (1)............    1,505     2,773     5,891     52,937        90,893
  Selling and marketing (1).................      333       840     2,095     54,151        66,757
  In process research and development.......       --        --        --      7,860            --
  Depreciation and amortization.............      189       265     1,089    238,074       180,724
  Option and warrant expense................       40        33    19,198     14,345        14,408
  Impairment of intangibles.................       --        --        --         --     1,121,001
  Restructuring charge......................       --        --        --         --        45,006
                                              -------   -------   -------   --------   -----------
          Total operating expenses..........    2,801     5,178    30,887    397,556     1,582,726
                                              -------   -------   -------   --------   -----------
Operating loss..............................   (2,308)   (4,767)  (28,037)  (369,418)   (1,550,600)
Interest income (expense), net..............     (295)       74      (229)    42,351         8,659
Equity in losses of investments.............     (144)       --    (2,425)   (47,886)      (57,523)
Investment loss, including impairments,
  net.......................................       --        --        --        --       (143,382)
Minority interest...........................       --        --        --     10,692        63,809
                                              -------   -------   -------   --------   ------------
Loss before income taxes, extraordinary
  item and cumulative effect of change in
  accounting principle......................  $(2,747)  $(4,693) $(30,691) $(364,261)  $(1,679,037)
Income tax benefit..........................       --        --        --      1,561        10,694
                                              -------   -------   -------   --------   -----------
Loss before extraordinary item and
  cumulative effect of change in accounting
  principle.................................   (2,747)   (4,693)  (30,691)  (362,700)   (1,668,343)
Extraordinary item (early extinguishment
  Of debt)..................................       --        --        --         --         7,684
                                              -------   -------   -------   --------   -----------
Loss before cumulative effect of change in
accounting principle........................   (2,747)   (4,693)  (30,691)  (362,700)   (1,660,659)
Cumulative effect of change in accounting
  principle relating to adoption of
  SFAS No. 133..............................       --        --        --         --        6,564
                                              -------   -------   -------   --------   -----------
Net loss....................................  $(2,747)  $(4,693) $(30,691) $(362,700)  $(1,654,095)
                                              =======   =======   =======   ========   ===========
Net loss per share -- basic and diluted
  before extraordinary item and cumulative
  effect of change in accounting principle..                               $   (9.99)  $    (40.96)
Extraordinary item..........................                                      --   $      0.19
Cumulative effect of change in accounting
  principle relating to adoption of
  SFAS No. 133..............................                                      --          0.16
                                                                            --------   -----------
Net loss per share--basic and diluted.......                               $   (9.99)  $    (40.61)
                                                                           =========   ===========
Weighted average shares used in computing
  net loss per share -- basic and diluted...                               $  36,310   $    40,732
                                                                            ========   ===========
Pro forma net loss per share -- basic and
  diluted...................................  $ (0.22)  $ (0.29)  $ (1.45)
                                              =======   =======   =======
Pro forma weighted average shares used in
  computing net loss per share -- basic and
  diluted...................................   12,656    15,916    21,207
                                              =======   =======   =======
</TABLE>

                                                                              11
<PAGE>

<TABLE>
<CAPTION>
                                                  1997    1998     1999       2000        2001
                                                 ------   -----   ------    --------   ----------
                                                                 (IN THOUSANDS)
<S>                                              <C>     <C>     <C>       <C>         <C>
CONSOLIDATED BALANCE SHEET DATA:
  Cash and cash equivalents (including
    restricted cash)...........................  $  132  $1,755  $ 78,542  $  872,747  $527,430
  Working capital (deficit)....................    (323)  7,519    83,128     819,624   503,873
  Total assets.................................     822   8,765   102,534  $2,677,375   949,420
  Total debt...................................     150      --        --     334,942   306,138
  Members' capital.............................      74   8,030        --          --        --
  Stockholders' equity.........................      --      --    98,342   2,167,698   542,527
</TABLE>

(1) Exclusive of option and warrant expense - see consolidated financial
statements.

                                                                              12
<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (MD&A)

        You should read the following description of our financial condition and
results of operations in conjunction with our Consolidated Financial Statements
and Notes thereto and other financial data appearing elsewhere in this Form
10-K.

MD&A (1) OVERVIEW

        Aether Systems, Inc. was originally formed as Aeros, L.L.C. in January
1996. We changed our name to Aether Technologies International, L.L.C. effective
August 1996 and to Aether Systems L.L.C. effective September 1999. Immediately
prior to the completion of our initial public offering of common stock on
October 26, 1999, the limited liability company was converted into a Delaware
corporation and our name was changed to Aether Systems, Inc.

        From our inception until March 1997, we primarily provided wireless
engineering services, including the development of wireless software
applications for customers. In March 1997, we began offering services that
provide the users of wireless handheld devices access to real-time financial
information. During 1997, we made a strategic decision to focus a significant
portion of our engineering resources on the development of these and other
wireless data services and systems, including our Aether Intelligent Messaging
(AIM) package of wireless messaging software and software development tools.

        In 1998 and 1999, we continued to develop financial information services
-- as well as financial transaction services -- internally and through our
acquisition of Mobeo, Inc. In 1999, we also completed our initial public
offering and began to expand our service offerings to areas other than financial
information and transactions.

        In 2000, we continued our expansion into other vertical markets,
including the transportation and logistics vertical market through our
acquisitions of LocusOne and Motient's retail transportation business unit and
the mobile government vertical market through the acquisitions of Cerulean and
SunPro. We broadened our software offerings through our purchase of Riverbed and
RTS Wireless. Also in 2000, we moved into the European marketplace with our
acquisition of IFX, and the related formation of Sila. We entered the general
wireless and Internet messaging services market through strategic relationships
with Research in Motion (RIM) and others and through our own service offerings.

        In 2001, we continued our integration strategy resulting in expense
reductions and operational efficiencies. We focused our efforts on several
growth areas including mobile government and transportation and logistics. We
created our enterprise services division to develop and sell enterprise products
to large corporations. Also in 2001, we entered into a strategic relationship
with AOL to provide wireless solutions to small and medium sized businesses.

MD&A (2) FACTORS AFFECTING COMPARABILITY

        Our results of operations in 2001 and 2000 have been affected by
acquisitions, investments, impairment charges and the formation of Sila. In
addition, a combination of factors has resulted in operating losses that we
expect will continue for some time. The factors identified below have had a
significant impact on our operations and should be considered in comparing our
results of operations in 2001 to those in 2000 and in comparing our results of
operations in 2000 to those in 1999.

(a) ACQUISITIONS

        We have acquired companies to expand our product offerings and
geographic markets and to acquire additional engineering resources to develop
products. From September 1999 through December 31, 2000, we acquired 10
businesses (or parts of businesses) for an aggregate consideration of $365.8
million in cash and equity valued at the time of acquisition of $1.284 billion,
consisting of 6,259,445 shares of our common stock and 1,093,785 replacement
options. These acquisitions included the following:

- During 1999, we acquired Mobeo for a purchase price and related expenses of
$11.5 million in cash and 46,105 options valued at $374,000.

- In early 2000, we acquired LocusOne, NetSearch, and IFX for purchase prices
aggregating approximately $160.6 million.

- On March 6, 2000, we acquired Riverbed for 4,537,281 shares of our common
stock and 862,480 options with an aggregate value of $1.136 billion. In
connection with our acquisition of Riverbed, we incurred costs totaling
approximately $16.9 million.

- In September 2000, we acquired Cerulean, SunPro and Sinope for purchase prices
and related expenses aggregating approximately $93.4 million and 462,412 shares
of our common stock and 94,952 options with an aggregate value of $69.9 million.

                                                                              13
<PAGE>

- On November 30, 2000, we acquired Motient's retail transportation business
unit for $49.2 million in cash and related expenses.

- On December 22, 2000, we acquired RTS for a purchase price of $34.2 million in
cash and related expenses plus 1,259,752 shares of our common stock and 90,248
options with an aggregate value of $78.0 million.

        Our acquisitions increase our operating revenues and expenses from the
date of acquisition. In the discussion of results below, we quantify the effects
of acquisitions on our revenues and expenses. Generally, acquisitions also
increased our depreciation and amortization expense as we amortize the value of
acquisition intangibles. However during 2001 we wrote down the value of the
intangible assets related to acquisitions significantly and as such, our
amortization expense in 2001 decreased from the prior year. See the section
entitled "Impairment Charges" below for a more detailed discussion of this write
down. Finally, acquisitions affect non-cash compensation when we issue options
to employees at the time of an acquisition.

(b) FORMATION OF SILA

        On May 4, 2000, we formed Sila with Reuters to extend our operations to
the European market. We contributed our IFX subsidiary (which we purchased for
$85.0 million shortly before forming Sila), plus $13.5 million in cash to
acquire a 60.0% interest in Sila. Reuters contributed cash of approximately
$20.8 million and Futures Pager Limited, a European paging company, for the
remaining 40.0% interest. The results of Sila are consolidated in our financial
statements.

(c) INVESTMENTS

        We have made investments through Aether Capital, L.L.C., our
wholly-owned subsidiary, to promote the development of new technologies that are
compatible with the services we offer or that we may wish to integrate into our
services. Since August 1999, we have invested approximately $196.8 million in 24
companies. These investments currently include six publicly traded and private
companies in which we exercise significant influence or have an ownership
interest greater than twenty percent. We account for these investments under the
equity method of accounting and record our proportionate share of the investee's
net income or loss.

        We currently have investments in five publicly-traded companies in which
we do not exercise significant influence or have an ownership interest greater
than twenty percent. We account for these investments at fair value based on
quoted market prices. Net unrealized gains and losses on these
available-for-sale securities are excluded from income and recorded as a
separate component of stockholders' equity unless the decline is deemed to be
other than temporary. Subsequent to our investment, the market values of these
investments have decreased significantly. In some cases we have determined the
decline in market value of our investments in publicly-traded companies to be
other than temporary, and as such have recorded realized losses on these
investments, which are included in net loss. See "Impairment Charges" below
for a more detailed discussion of this write-down.

        We also currently have investments in eleven private companies. We
account for these investments at cost unless circumstances indicate the carrying
amount of the investment may not be recoverable, at which time the carrying
value of the investment is adjusted to fair value. Subsequent to our investment,
we have written down the carrying value of our investments to fair value. See
the section entitled "Impairment Charges" below for a more detailed discussion
of this write-down.

(d) IMPAIRMENT CHARGES

        (i) Acquisitions

        From 1999 through December 31, 2001, we recorded approximately $1.718
billion in goodwill and other intangibles related to our acquisitions. In
addition, we have made investments in other businesses totaling approximately
$196.8 million during this period. We perform an on-going analysis of the
recoverability of our goodwill and other intangibles and the value of our
investments in accordance with SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and For Long-Lived Assets to be Disposed Of. Based on
quantitative and qualitative measures, we assess the need to record impairment
losses on long-lived assets used in operations when impairment indicators are
present. The impairment conditions evaluated by us may change from period to
period, given that we operate in a volatile business environment.

        A number of factors indicated that impairments may have occurred in the
year ended December 31, 2001. Consideration for some of our acquisitions was
partially or fully funded through the issuance of shares of our common stock at
a time when our stock price was at historically high prices. Our stock price
ranged from $40.81 to $266.00 per share at the time of these acquisitions. At
December 31, 2001, our stock price was $9.20 per share. Most of the companies we
acquired or invested in are start-up or newly formed entities. Most of these
companies were privately-held and their fair values are highly subjective and
not readily determinable. At the time of these acquisitions and investments,
market valuations and the availability of capital for such companies was at
historically high levels. During 2001, stock prices and market valuations in our
industry and similar industries fell substantially in response to a variety of
factors, including a general downturn in the economy, a curtailment in the
availability of capital and a general reduction in technology expenditures.

                                                                              14
<PAGE>

      Based on the factors described above, we determined during 2001 that the
goodwill and other intangibles from our acquisitions may have become impaired.
In accordance with SFAS No. 121, we performed undiscounted cash flow analyses of
our acquisitions to determine whether any impairments existed. When the
undiscounted cash flows were less than the carrying value of the related assets,
we determined a range of fair values using a combination of valuation
methodologies. The methodologies included:

        -       Discounted cash flow analysis, which is based upon converting
                expected future cash flows to present value.

        -       Changes in market value since the date of acquisition relative
                to the following:

                        -       our stock price;

                        -       comparable companies;

                        -       the NASDAQ composite index; and

                        -       a composite of companies that operate within our
                                industry.

        -       Market price multiples of comparable companies.

        -       Contribution to our market valuation.

        The methodologies used were consistent with the specific valuation
methods used when the original purchase price was determined. Our best estimate
of the fair value was determined from the range of possible values after
considering the relative performance, future prospects and risk profile of the
acquired company. In connection with the valuation of the Riverbed acquisition,
we engaged an independent third party to determine the fair value of the
acquired business, because of the magnitude of the acquisition and the
associated potential impairment.

        As a result of our review, we determined that the carrying value of
goodwill and certain other intangible assets related to our acquisitions were
not fully recoverable. Accordingly, during 2001, we recorded impairment charges
of approximately $1.121 billion, which represents the difference between the
carrying value and fair value of the goodwill and other intangible assets. The
impairment of goodwill and other intangible assets from the acquisition of
Riverbed amounted to approximately $775.0 million. We also recorded impairment
charges to goodwill and other intangibles related to the acquisitions of IFX and
related formation of Sila, LocusOne Communications, Inc., NetSearch, LLC,
Cerulean Technology, Inc., Sunpro and RTS Wireless, Inc of approximately $346.0
million.

        Because the conditions underlying the factors we use to evaluate our
acquisitions change from time to time, we could determine that it is necessary
to take additional material impairment charges in future periods.

        (ii) Investments

        We adjust the carrying value of our available-for-sale investments and
equity method investments in public companies to market and record the change in
market value to other comprehensive income. In accordance with SAB 59,
"Accounting for Noncurrent Marketable Equity Securities", we assess the decline
in market value in certain of our public company investments as other than
temporary after reviewing the following factors: length of time and extent to
which the market value of the investment has been below cost, the financial
position and the near-term prospects of the issuer, and our intent and ability
to retain our investment in the investee for a period of time sufficient to
allow for any anticipated recovery in market value.

        With respect to investments in private companies including those we
account for using the equity method, we perform on-going reviews based on
quantitative and qualitative measures. In evaluating our private company
investments, we determined a range of fair values based on a combination of the
following valuation methods where applicable:

        -       Recent funding rounds.

        -       Changes in market value since the date of investment relative to
                the following:

                        -       Our stock price;

                        -       comparable companies;

                        -       the NASDAQ composite index

                        -       a composite of companies that operate within our
                                industry.

        -       Market price multiples of comparable companies.

        The fair value was determined from the range of possible values, after
considering the strength of the investee's financial position, future prospects
and risk profile of the invested company.

        During 2001, we recorded a net charge of $143.4 million which included
$136.7 million in impairment charges related to our investments. The remainder
of the net charge related to net gains (losses) from the sales of investments,
and changes in the fair value of warrants.

        Because the conditions underlying the factors we use to evaluate
investments change from time to time, we could determine that it is necessary to
take additional material impairment charges in future periods.

                                                                              15
<PAGE>

MD&A (3) CRITICAL ACCOUNTING POLICIES

        Our critical accounting policies are as follows:

    -   Revenue recognition;

    -   Estimating the valuation allowance for sales returns and doubtful
        accounts;

    -   Estimating the realizable value of our inventory;

    -   Valuation of long-lived intangible assets, including goodwill;

    -   Valuation of investments; and

    -   Restructuring accruals

(a) REVENUE RECOGNITION

        We derive our revenue from four sources (i) subscriber revenue (ii)
engineering services (iii) software and related services, and (iv) device sales.
As described below, significant management judgments and estimates must be made
and used in connection with the revenue recognized in any accounting period. If
we made different judgments or utilized different estimates, the amount and
timing of our revenue might have differed materially from that reported.

        i.)     Subscriber revenue

        We derive subscriber revenue from the provision of real-time access to
business information integrated into existing wireless communication platforms.
For all sales, except those completed over the Internet, we obtain signed
binding contracts with our subscribers. Contracts with our wireless data
subscribers are generally for a one-year period and include a termination
penalty if cancelled by the subscriber before the one-year period expires. These
contracts are generally renewable at the option of the subscriber for additional
one-year periods or otherwise continue on a monthly basis until cancelled by the
subscriber.

        Our subscriber contracts contain provisions for elements such as
service, activation, and wireless devices. This requires us to allocate revenue
to such elements based on their relative fair values which requires significant
management judgments and estimates. We estimate the relative fair value of the
service based on contractual renewal rates. We estimate the fair value of the
equipment based on sales in which the only element of the transaction was
equipment. How we allocate revenue to the elements of the arrangement may affect
the period in which the revenue is recognized.

        Subscriber revenue consists primarily of fixed charges for usage
recognized as the service is provided and one-time non-refundable activation
fees recognized ratably over the expected life of the customer relationship.
Certain of our customers are billed in advance with revenue deferred and
recognized on a monthly basis over the term of the agreement. Also included in
subscriber revenue are market exchange fees for access to financial information
from the securities exchanges and markets, which are recognized as the service
is provided.

        ii.)    Engineering services revenue

        Engineering services revenue is derived from the provision of wireless
integration consulting under time-and-materials and fixed-fee contracts. Revenue
on time-and-materials contracts is recognized as time is spent at hourly rates,
which are negotiated with the customer. Revenue on fixed-fee contracts is
recognized on the percentage-of-completion method based on costs incurred in
relation to total estimated costs. Anticipated contract losses are recognized as
soon as they become known and estimable. Considerable judgment may be required
in determining estimates to complete a project including the scope of work to be
completed and reliance on the customer or other vendors to fulfill some tasks.
If we made different judgements or utilized different estimates of the total
amount of work we expect to be required to complete the project, the timing of
our revenue recognition from period to period, and our margins on the project in
this reporting period, may have differed materially from that reported.

        iii.)   Software and related services revenue

        Software and related services revenues are generated from licensing
software and providing services, including maintenance and technical support,
training and consulting. Software revenue consists of fees for licenses of our
software products. We recognize the revenue when the license agreement is
signed, the license fee is fixed and determinable, delivery of the software has
occurred, and when we estimate that the collectibility of the fees is probable.
At the time of the transaction, we assess whether the fee associated with our
revenue transactions is fixed and determinable and whether or not collection is
reasonably assured. If a significant portion of a fee is due after our normal
payment term, we account for the fee as not being fixed and determinable. In
these cases, we recognize revenue as the fees become due. We assess collection
based on a number of factors, including past transaction history with the
customer and credit worthiness of the customer. We do not request collateral
from our customers. If we determine that collection of a fee is not reasonably
assured, we defer the fee and recognize revenue at the time it becomes
reasonably assured, which is generally upon receipt of cash. If we assessed
collectibility differently, the timing and amount of our revenue recognition may
have differed

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materially from that reported.

        Revenue from licensing software that requires significant customization
and modification is recognized using the percentage of completion method , based
on the hours incurred in relation to the total estimated hours. If we made
different judgements or utilized different estimates of the total amount of work
we expect to be required to customize or modify the software, the timing of our
revenue recognition from period to period, and our margins on the project in
this reporting period, may have differed materially from that reported. Service
revenues consist principally of maintenance and technical support, which
consists of unspecified when-and-if available product updates and customer
telephone support services and are recognized ratably over the term of the
service period. If we allocated more or less value to these when-and-if
deliverables, the timing of our revenue recognition may have differed materially
from that reported. Other service revenues are recognized as the related
services are provided. In situations where we host the software and the customer
has the option to take possession of the software at any time during the hosting
period without significant penalty and we believe it is feasible for the
customer to either run the software on its own hardware or contract with another
party unrelated to us to host the software, the software element is accounted
for in accordance with SOP 97-2. Otherwise, such amounts are recognized ratably
over the hosting period. If our assessment of this feasibility were different,
the timing of our revenue recognition may have differed materially from that
reported.

        iv.)    Device revenue

        We derive device revenue on the sale of wireless devices used to provide
our services. Generally, revenue for device sales is recognized upon delivery.
In cases where, in our judgment, (1) the service is essential to the
functionality of the device and (2) only our ongoing service is available for
the device, we recognize the device revenue as the ongoing service is provided
over the estimated life of the customer relationship. If management were to
judge differently about 1 or 2 above, the timing of our revenue recognition may
have differed materially from that reported.

        v.)     Revenue from multiple element arrangements

        For arrangements with multiple elements, we allocate revenue to each
component of the arrangement using the residual value method. This means that we
defer revenue from the total fees associated with the arrangement equivalent to
the fair value of the element(s) of the arrangement that has (have) not yet been
delivered. The fair value of any undelivered elements is established by using
historical evidence specific to Aether Systems. For instance, the fair values
for maintenance and technical support is based on separate sales of renewals to
other customers or upon the renewal rates quoted in the contracts and the fair
value of services, such as training is based on separate sales by us of these
services to other customers. If we allocated the respective fair values of the
elements differently, the timing of our revenue recognition may have differed
materially from that reported.

        vi.)    Revenue from related parties

        Revenue from products and services sold to companies that we have also
made strategic investments in (related parties) is allocated between the
investment and revenue recognized based on the relative fair value of the
products and services sold and the investment received. We have determined the
fair value of the investments based on the fact that all of our investments were
made in participation with other unrelated financial investors at the same price
per share as the other investors. Our investment policy generally limits our
investments to companies that have completed at least two rounds of financing
and generally requires that an unrelated investor lead the round of financing
that we participate in. We have estimated the fair value of products and
services sold based on comparable sales transactions to other unrelated
companies. Sales to related parties were $11.4 million, $10.5 million and $2.2
million for the years ended December 31, 2001, 2000 and 1999, respectively. If
we estimated fair values of the products and services differently, the amount of
revenue recognized may have differed materially from that reported.

(b) ALLOWANCE FOR SALES RETURNS AND DOUBTFUL ACCOUNTS

        The preparation of financial statements requires us to make estimates
and assumptions that affect the reported amount of assets and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period.
Specifically, we must make estimates of potential product returns and the
valuation of our accounts receivables. We analyze historical returns, current
economic trends, and changes in customer demand and acceptance of our products
when evaluating the adequacy of our allowance for sales returns. We recorded
provisions for sales returns of $4.4 million during the year ended December 31,
2001. Provisions recorded for sales returns in 2000 and 1999 were not
significant. We analyze historical bad debts, customer concentrations, customer
credit-worthiness, and current economic trends when evaluating the adequacy of
the allowance for doubtful accounts. Historically, a portion of our customer
base has included customers with a limited operating history that were subject
to many of the risks and uncertainties that we are, including rapid changes in
technology, no established markets for their products, and intense competition,
among others. In addition, many of these companies required significant
infusions of capital to continue operations. The availability of such capital
has been curtailed during 2001 and some of these companies were not able to
raise sufficient funds to continue their operations. As a result, we recorded
bad debt expense of $9.8 million during the year ended December 31, 2001. As of
December 31, 2001, our net accounts receivable balance was $24.8 million, net of
allowance for sales returns and doubtful accounts of $10.6 million. Amounts
included in our accounts receivable from customers with limited

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operating history as of December 31, 2001 were not significant. We recorded bad
debt expense of approximately $1.4 million during the year ended December 31,
2000. Bad debt expense in 1999 was not significant. If we had used different
estimates and assumptions related to the amount of sales returns we would
receive, and about the collectibility of our accounts receivable, our provisions
for sales returns and allowance for doubtful accounts may have differed
materially from that reported.

(c) VALUATION OF INVENTORY

        Inventory, net of allowance for obsolete and slow-moving inventory,
consists of finished goods such as handheld and laptop computers, pagers,
wireless modems, and accessories and is stated at the lower of cost or market.
Cost is determined using a standard costing method, which approximates the
first-in, first-out method. Our inventory is subject to rapid technological
changes that could have an adverse impact on its realization in future periods.
In addition, there are a limited number of suppliers of our inventory. During
2001, we recorded an impairment charge of approximately $14.4 million to reduce
the carrying value of our inventory due to obsolescence and excess inventory. We
estimated the reduction in inventory value based on our consideration of the
following: (1) quantities and composition of inventory held; (2) sales prices of
competing vendors; (3) projected unit sales and unit pricing over subsequent
twelve month period; and (4) evaluation of remaining inventory purchase
commitments. If our projections were different, our margins on device sales may
have differed materially from that reported. If our estimates of projected units
sales and unit pricing are less than actual results, we may be required to
record additional impairment charges in the future

(d) VALUATION OF LONG-LIVED ASSETS INCLUDING INTANGIBLE ASSETS AND GOODWILL

        During 2001, we recorded significant impairment charges on our goodwill
and other intangible assets associated with our acquisitions. These charges and
our accounting policies are described in detail under "Impairment Charges"
above. In 2002, we will be required to adopt Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets". See "Recent
Accounting Pronouncements" below for further discussion.

(e) VALUATION OF INVESTMENTS

        During 2001, we recorded significant impairment charges on our strategic
investments. These charges and our accounting policies are described under
"Impairment Charges" above.

(f) ESTIMATION OF RESTRUCTURING ACCRUALS

        During 2001, we implemented an expense reduction plan as part of our
integration strategy focused on improving operational efficiencies and the
implementation of other measures in order to reduce planned expenses. These
efforts have resulted in the consolidation of excess facilities and a reduction
in our work force. As a result of this restructuring plan, we recorded charges
to earnings during 2001 of $45.0 million. These charges consisted of a charge of
$15.9 million in the second quarter, a charge of $18.2 million in the third
quarter and a charge of $10.9 million in the fourth quarter. The charge related
mainly to a workforce reduction of over 480 positions and the closing or
consolidation of twelve facilities. Employee separation benefits of $10.2
million under the restructuring plan include severance, medical, and other
benefits. Facility closure costs and other of $34.8 million include expected
losses on subleases, brokerage commissions, asset impairment charges, contract
termination costs and other costs. As of December 31, 2001, the accrued
liability related to the restructuring was $27.8 million.

        Calculation of the restructuring accrual related to expected losses on
subleases requires us to make estimates concerning: (1) the expected length of
time to sublease the facility; (2) the expected rental rates on subleases; and
(3) estimated brokerage expenses associated with executing the sublease. We used
the assistance of independent real estate brokerage firms in the making these
estimates and our estimates may be impacted by future economic trends. The
expected losses on subleases have not been discounted. If the actual results
differ from our estimates, we may be required to adjust our restructuring
accrual related to expected losses on subleases, including recording additional
losses.

MD&A (4) RECENT ACCOUNTING PRONOUNCEMENTS

(a) SFAS NO. 141

        In July 2000, the FASB issued SFAS No. 141, "Business Combinations."
SFAS No. 141 requires the purchase accounting for business combinations
initiated after June 30, 2001 and eliminates the pooling-of-interests method. We
believe that the adoption of SFAS No. 141 will not have a significant impact on
our financial statements.

(b) SFAS NO. 142

        In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets", which is effective for fiscal years beginning after December
15, 2001. SFAS No. 142 requires, among other things, the discontinuance of
goodwill amortization. In addition, the standard includes provisions upon
adoption for the reclassification of certain existing and recognized intangibles
such as goodwill, reassessment of the useful lives of existing recognized
intangibles, reclassification of certain intangibles out of previously

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<PAGE>

reported goodwill and testing for impairment of existing goodwill and other
intangibles. Upon adoption of SFAS No. 142, we will cease to amortize
approximately $171.0 million of goodwill. We had recorded approximately $117.6
million of amortization on these amounts during 2001 and would have recorded
approximately $53.0 million of amortization during 2002. In lieu of
amortization, we will be required to perform an impairment review of our
goodwill balance upon the initial adoption of SFAS No. 142. The impairment
review will involve a two-step process as follows:

-   Step 1 -- We will compare the fair value of our reporting units to the
    carrying value, including goodwill of each of those units. For each
    reporting unit where the carrying value, including goodwill, exceeds the
    unit's fair value, we will move on to step 2. If a unit's fair value exceeds
    the carrying value, no further work is performed and no impairment charge is
    necessary.

-   Step 2 -- We will perform an allocation of the fair value of the reporting
    unit to its identifiable tangible and non-goodwill intangible assets and
    liabilities. This will derive an implied fair value for the reporting unit's
    goodwill. We will then compare the implied fair value of the reporting
    unit's goodwill with the carrying amount of reporting unit's goodwill. If
    the carrying amount of the reporting unit's goodwill is greater than the
    implied fair value of its goodwill, an impairment loss must be recognized
    for the excess.

        We expect to complete Step 1 of the impairment review during the second
quarter of 2002 and must complete Step 2 prior to December 31, 2002. During the
first quarter of 2002 we will also be required to evaluate the estimated useful
lives and separability of our identifiable intangible assets. Since year end,
our business has continued to be impacted by significant negative industry and
economic trends. Additionally, our stock price has continued to decline since
December 31, 2001 and our market capitalization is below our book value.
Accordingly, we may be required to record an impairment charge based on our
adoption of SFAS No. 142. We are currently assessing the impact that the
adoption of SFAS No. 142 will have on our financial position or results of
operations.

(c) SFAS NO. 144

        In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses significant
issues relating to the implementation of SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
and develops a single accounting method under which long-lived assets that are
to be disposed of by sale are measured at the lower of book value or fair value
less cost to sell. Additionally, SFAS No. 144 expands the scope of discontinued
operations to include all components of an entity with operations that (1) can
be distinguished from the rest of the entity and (2) will be eliminated from the
ongoing operations of the entity in a disposal transaction. SFAS No. 144 is
effective for financial statements issued for fiscal years beginning after
December 15, 2001 and its provisions are to be applied prospectively. We believe
that the adoption of SFAS No. 144 will not have a significant impact on our
financial position or results of operations.

MD&A (5) COMPARISON OF RESULTS FOR YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999

(a) SUBSCRIBER REVENUE

Subscriber revenue may consist of:

- a one-time non-refundable activation fee.

- monthly per-subscriber service fees.

- monthly per-subscriber exchange fees for access to financial information from
the securities exchanges and markets.

- monthly fees for providing access to our network operations center.

        Subscriber revenue increased to $44.0 million for the year ended
December 31, 2001 from $24.8 million for the year ended December 31, 2000 and
from $3.6 million for the year ended December 31, 1999. Subscribers increased to
62,403 at December 31, 2001 from 47,273 at December 31, 2000 and from 4,565 at
December 31, 1999. Approximately $9.6 million of the increase in 2001 was due to
sales to existing and new Mobile Max customers. Additionally, approximately $9.6
million of the increase in subscriber revenue resulted from the increased number
of subscribers that signed on to our existing and new product and service
offerings such as wireless messaging and financial services products. The Mobile
Max product line was obtained in connection with an acquisition made in the
fourth quarter of 2000. The increase in 2000 from 1999 was primarily due to
sales to existing and new customers of product and service offerings obtained in
connection with acquisitions.

(b) COST OF SUBSCRIBER REVENUE

        Cost of subscriber revenue consists primarily of airtime costs,
financial data costs, and securities exchange and market fees. Our airtime costs
are determined by agreements we have with several wireless carriers. Typically,
we have one-year contracts to buy data network capacity either for an agreed
amount of kilobytes at a flat fee or on a cents-per-kilobyte basis. Cost of
subscriber revenue excludes depreciation on, and operating costs of, our network
operations center and certain costs of customer fulfillment and customer care.
Cost of subscriber revenue increased to $27.2 million for the year ended
December 31, 2001, from $11.3 million for the year ended December 31, 2000, and
from $2.0 million for the year ended December 31, 1999. Approximately $6.4
million of the increase for 2001 was from costs associated with sales to
existing and new Mobile Max customers. An additional $9.5 million of the

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growth in 2001 was from an increase in subscribers that signed on to our
existing and new product and service offerings such as wireless messaging and
financial services products. The Mobile Max product line was obtained in
connection with an acquisition made in the fourth quarter of 2000. We generally
expect the cost of subscriber revenue to increase proportionately with any
increase in subscriber revenue. During 2001, the cost of subscriber revenue
increased relative to volume of sales as a result of several factors. These
factors included the increased cost of airtime in Germany related to Sila and
incremental costs associated with providing services to non-paying customers
obtained in connection with our acquisition of Motient's retail transportation
business unit. During 2001 we converted some of these non-paying customers into
paying subscribers by repairing their non-working equipment and intend to
continue seeking to do so with others. Given these conversions, and given that
we no longer have operations in Germany, these conditions that have negatively
affected margins were temporary. The increase for 2000 was primarily from sales
to existing customers and new customers of product and service offerings
obtained in connection with our acquisitions.

(c) ENGINEERING SERVICES REVENUE

        Revenue from engineering services consists of amounts billed to our
customers for engineering time on an hourly basis or fixed fees on a per project
basis. Engineering services revenue decreased to $7.9 million for the year ended
December 31, 2001, from $9.4 million for the year ended December 31, 2000, which
was an increase from $2.6 million for the year ended December 31, 1999. The
decrease between 2001 and 2000 was primarily due to the completion of several
large engineering projects in early 2001 including OmniSky and Incisent. The
increase between 2000 and 1999 was primarily due to our engineering services
contracts with OmniSky, Merrill Lynch, Response Services, LLC and Inciscent. We
recognized $6.9 million under these contracts for the year ended December 31,
2000.

(d) COST OF ENGINEERING SERVICES REVENUE

        Cost of engineering services revenue consists of cash compensation and
related costs for engineers and other project-related costs. Cost of engineering
services revenue decreased to $3.6 million for the year ended December 31, 2001,
from $5.7 million for the year ended December 31, 2000, which was an increase
from $1.4 million for the year ended December 31, 1999. The decrease between
2001 and 2000 was primarily due to the decrease in engineering services
performed as discussed above. Margins increased in 2001 primarily due to higher
margin contracts. The increase between 2000 and 1999 was primarily due to the
cost of our engineering services contracts with OmniSky, Merrill Lynch, Response
Services and Inciscent. We recognized costs of $4.1 million under these
contracts for the year ended December 31, 2000.

(e) SOFTWARE AND RELATED SERVICES REVENUE

        We derive revenue from the licensing of software products, including
elements of the Aether Fusion(TM) platform, formerly sold as AIM and the
ScoutWare software suite, as well as from the e-Mobile software suite, the
PacketCluster software suite and the FireRMS software suite. In the future, we
may generate revenue from the licensing of newer versions of our software
foundation Aether Fusion(TM). Software and related services revenue increased to
$37.0 million for the year ended December 31, 2001 from $17.3 million for the
year ended December 31, 2000. We did not have any software and related services
revenue for the year ended December 31, 1999. The increase in 2001 over 2000 was
primarily due to sales to existing and new customers of the PacketCluster
software suite and the FireRMS software suite both of which were obtained in
conjunction with acquisitions made late in the 2000. Approximately $17.0 million
of the software and related services revenue in 2000 was generated from the sale
of licenses and services of the ScoutWare software platform, e-Mobile Delivery
platform, PacketCluster software suite and the FireRMS software suite, all of
which were obtained in conjunction with acquisitions occurring in 2000 and their
subsequent growth.

(f) COST OF SOFTWARE AND RELATED SERVICES REVENUE

        Cost of software and related services revenue consists of costs of
licensing, including royalty payments and personnel costs. Cost of software and
related services revenue was $11.6 million for the year ended December 31, 2001
and $5.7 million for the year ended December 31, 2000, relating to royalty fees
for third-party intellectual property used in the software that we sell and
personnel costs incurred in the customization of software products and the
support of those products. The increase for 2001 over 2000 relates primarily to
the increase in software revenue between periods as discussed above. We did not
have any costs of software and related services revenue for the years ended
December 31, 1999.

(g) DEVICE SALES

        Revenue from device sales increased to $24.0 million for the year ended
December 31, 2001 from $6.6 million for the year ended December 31, 2000 and
$115,000 for the year ended December 31, 1999. The increase in device sales
between 2001 and 2000 relates primarily to sales of products to new subscribers
between periods and $3.4 million of bulk sales of devices to other vendors. The
increase in device sales between 2000 and 1999 relates primarily to the increase
in subscribers between periods. We expect that bulk sales of devices will be an
insignificant part of device revenue for 2002.

(h) COST OF DEVICE SALES

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<PAGE>

        Cost of device sales consists of the cost of the hardware from the
hardware manufacturer or wholesaler. Cost of devices increased to $38.3 million
for the year ended December 31, 2001 from $7.3 million for the year ended
December 31, 2001 and from $105,000 for the year ended December 31, 1999. The
increase in the cost of device sales for 2001 relates primarily to the increase
in device sales between periods and the bulk sales of devices to other vendors.
Included in the results for 2001 are bulk sales of hardware at or below cost
made primarily to reduce inventory. Also included in cost of device sales for
2001 is an inventory write-down due to obsolescence and excess inventory of
$14.4 million. The increase in the cost of device sales in 2000 relates
primarily to the increase in device sales between periods.

(i) RESEARCH AND DEVELOPMENT EXPENSES

        Research and development expenses consist primarily of cash compensation
and related costs for engineers engaged in research and development activities
and, to a lesser extent, costs of materials relating to these activities. We
expense research and development costs as we incur them. Research and
development expenses, including in-process research and development related to
acquisitions, increased to $63.9 million for the year ended December 31, 2001,
from $38.0 million for the year ended December 31, 2000, and from $2.6 million
for the year ended December 31, 1999. The increase in 2001 from 2000 was due to
the hiring of additional engineers and consultants for increased research and
development activities associated with the development of our software products,
mobile computing platforms, including Fusion, and wireless data services and a
full year of costs associated with engineers obtained in connection with
acquisitions made during 2000 . The increase in 2000 from 1999 was primarily due
to the hiring and acquiring of additional engineers and consultants for
increased research and development activities associated with the development of
our software products, mobile computing platforms and wireless data services. In
addition, we incurred charges of $7.9 million for in-process research and
development in connection with our acquisitions of Riverbed, Cerulean, RTS
Wireless, and IFX in 2000. We anticipate that our research and development
expenses will decrease in 2002 due to reductions in personnel that have occurred
since the beginning of 2001. For more information on our restructuring efforts
refer to the section entitled "Estimation of Restructuring Accrual" above.

(j) GENERAL AND ADMINISTRATIVE EXPENSES

        General and administrative expenses consist primarily of cash
compensation and related costs for general corporate and business development
personnel, along with rent, network operations costs, and general support costs.
General and administrative expenses increased to $90.9 million for the year
ended December 31, 2001, from $52.9 million for the year ended December 31,
2000, and from $5.9 million for the year ended December 31, 1999. The increase
in 2001 was primarily due to additional personnel and consultants performing
general corporate activities, additional facilities and the full year of
operations of our acquisitions since the prior year. The increase in 2000 from
1999 was primarily due to additional personnel and consultants performing
general corporate activities, additional facilities and our acquisitions since
the prior year. The increased scope of our business required additional
personnel and other expenses, such as consulting, travel and facilities, in all
areas including: customer service, network operations, project management, legal
and accounting. We anticipate that our general and administrative expenses will
decrease in 2002 due to reductions in personnel that have occurred since the
beginning of 2001. For more information on our restructuring efforts refer to
the section entitled "Estimation of Restructuring Accrual" above.

(k) SELLING AND MARKETING EXPENSES

        Selling and marketing expenses consist primarily of advertising and
promotions, sales and marketing personnel, travel and entertainment, certain
customer fulfillment and customer care costs. Selling and marketing expenses
increased to $66.8 million for the year ended December 31, 2001, from $54.2
million for the year ended December 31, 2000, and from $2.1 million for the year
ended December 31, 1999. The increase in selling and marketing expenses in 2001
was due primarily to the increased number of sales persons obtained in
connection with acquisitions and the related salaries, commissions, and other
costs incurred as a result of increased revenue for 2001. The increase in 2000
was primarily due to an increase in advertising and promotion costs, which
increased from $933,000 to $23.1 million for the years ended December 31, 1999
and 2000, respectively, including a nationwide broadcast and print branding
campaign, as well as increases in the number of sales and marketing personnel
primarily obtained through acquisitions. We anticipate that our selling and
marketing expenses will decrease in 2002 due to reductions in personnel that
have occurred since the beginning of 2001. For more information on our
restructuring efforts refer to the section entitled "Estimation of Restructuring
Accrual" above.

(l) DEPRECIATION AND AMORTIZATION

        Depreciation and amortization expenses consist primarily of the
amortization of intangible assets obtained in connection with our acquisitions.
Depreciation and amortization expenses also include depreciation expenses
arising from equipment purchased for our network operations centers and other
property and equipment purchases. Depreciation and amortization decreased to
$180.7 million for the year ended December 31, 2001, from $238.1 million for the
year ended December 31, 2000, which represented an increase from $1.1 million
for the year ended December 31, 1999. The decrease in 2001 was mainly due to the
carrying value of the intangible assets being reduced by a $1.121 billion
impairment charge partially offset by a full year of amortization on
acquisitions

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<PAGE>

made at various times during 2000. Upon adoption of SFAS No. 142 on January 1,
2002, we will cease to amortize approximately $171.0 million of goodwill. We had
recorded approximately $117.6 million of amortization on these amounts during
2001 and would have recorded approximately $53.0 million of amortization during
2002. In lieu of amortization, we will be required to perform an impairment
review of our goodwill balance upon the initial adoption of SFAS No. 142. The
increase in 2000 over 1999 was primarily due to the amortization of intangibles
and goodwill relating to the acquisition of Riverbed, which accounted for $186.2
million of the expense in 2000, while $44.2 million related to our other
acquisitions.

(m) OPTION AND WARRANT EXPENSE

        Option and warrant expense consists of expenses recorded to account for
the difference, on the date of grant, between the fair market value and the
exercise price of stock options issued to employees, restricted stock granted to
employees and the fair value of equity-based awards to non-employees. We have in
the past issued options and/or warrants at prices below market value in
connection with our acquisitions as replacements for existing options in the
acquired company. Given our numerous acquisitions since our inception and our
restricted stock plan, we expect to continue to have substantial option and
warrant expense. Option and warrant expense increased to $14.4 million for the
year ended December 31, 2001, from $14.3 million for the year ended December 31,
2000 which was a decrease from $19.2 million for the year ended December 31,
1999. The increase for 2001 was primarily due to the fact that in January 2001,
we canceled 2.5 million options granted to employees and issued approximately
756,000 shares of restricted stock to a number of employees holding options with
exercise prices higher than our then-current market value. We recognize option
and warrant expense as these shares vest. We expect to record $9.4 million of
expense over the vesting period of the restricted stock grants. During 2001, we
recorded expense of $5.9 million related to these restricted shares. This
increase was partially offset by some restricted shares expiring as employees
were terminated throughout the year pursuant to our cost containment efforts.
The decrease between 2000 and 1999 was due to our general policy subsequent to
our initial public offering of granting shares to employees at their fair value,
partially offset by options granted in connection with acquisitions at exercise
prices less than fair value on the date of grant.

(n) IMPAIRMENT OF INTANGIBLES

        Impairment of intangibles expense consists of the amount of goodwill and
other intangibles, written down in accordance with SFAS 121, Accounting for the
Impairment of Long-Lived Assets and for Assets to Be Disposed Of. The impaired
goodwill related to our acquisitions of Riverbed Technologies, Inc., LocusOne
Communications, Inc., NetSearch, Inc. Cerulean Technology, Inc. SunPro, Inc.,
IFX and the related formation of Sila and RTS Wireless, Inc. Impairment of
intangibles increase to $1.121 billion in 2001 as a result of the write down of
goodwill and other intangibles obtained in connection with our acquisitions as
discussed in the section entitled "Impairment Charges". There was no impairment
of intangibles for 2000 or 1999.

(o) RESTRUCTURING CHARGE

        The restructuring charge consists primarily of the costs that we
estimate we will incur associated with the plan we are implementing to
consolidate excess facilities and eliminate positions primarily from integrating
the functions at acquired companies. The restructuring charge was approximately
$45.0 million in 2001 as a result of the consolidation and closure of several
facilities during 2001 along with an associated reduction in work force. There
was no restructuring charge in 2000 or 1999. We expect to record additional
restructuring charges in 2002 as we continue to implement our restructuring
plan. At December 31, 2001 we had reserved $27.8 million for future cash
payments related to our restructuring. $15.5 million of the reserve is for
expenditures expected to be paid during 2002, and $12.3 million of the reserve
is for cash we are expecting to pay out in subsequent years. Subsequent to
December 31, 2001, as part of our ongoing expense reduction efforts, we further
consolidated use of our leased space and decreased total employment by
approximately 25%, or approximately 225 positions. We expect to record a
restructuring charge of approximately $11.0 million in the first quarter of 2002
relating to these actions.

(p) INTEREST INCOME

        Interest income consists primarily of interest income from cash
equivalents and short-term investments. Net interest income decreased to $28.0
million for the year ended December 31, 2001 from $57.1 million for the year
ended December 31, 2000 which was an increase from an expense of $1.0 million
for the year ended December 31, 1999. The decrease in 2001 was primarily the
result of a decreasing cash balance over the year combined with decreased
interest rates. The increase between 2000 and 1999 was primarily due to an
increase in interest earned on cash and cash equivalents following the
completion of our secondary offering on March 17, 2000. We expect interest
income to continue to decline as our cash balance declines.

(q) INTEREST EXPENSE

        Interest expense consists primarily of debt service on our outstanding
convertible subordinated notes payable. Interest expense increased to $19.3
million for the year ended December 31, 2001 from $14.7 million for the year
ended December 31, 2000 and from $1.2 million for the year ended December 31,
1999. The increase for 2001 was primarily due to a full year of interest on our
notes in 2001 and accrued interest on a $5.2 million forward sale arrangement
entered into during 2001. The increase for 2000 over 1999 was

                                                                              22
<PAGE>

primarily due to interest payable on our convertible subordinated notes payable
issued in March of 2000. We expect our interest expense to decline in 2002 as a
result of the buy-back of debt in 2001.

(q) EQUITY IN LOSSES OF INVESTMENTS

        Equity in losses of investments consists of our proportionate share of
the net losses of OmniSky, Inciscent, MindSurf, VeriStar, Mobiya, and Spring
Wireless, which are recorded under the equity method of accounting. Equity in
losses of investments increased to $57.5 million for the year ended December 31,
2001 from $47.9 million for the year ended December 31, 2000, and from $2.4
million for the year ended December 31, 1999. The increase in 2001 was a result
of a full year of our proportionate share of the losses from Inciscent, MindSurf
and VeriStar coupled with a partial year of losses on Spring Wireless and Mobiya
which were new investments made in 2001. The increase in 2000 from 1999 related
to our proportionate share of losses from Inciscent, MindSurf, and VeriStar, in
which we invested during 2000 and a full year of proportionate share of losses
from Omnisky. We expect to continue to record equity losses in some or all of
these investments in future periods.

(r) INCOME TAX BENEFIT

        Income tax benefit consists of a foreign deferred tax benefit associated
with the losses generated by Sila. Income tax benefit increased to $10.7 million
for 2001 from $1.6 million for the year ended December 31, 2000. There was no
income tax benefit for the year ended December 31, 1999. The increase for 2001
was due to a foreign deferred tax benefit associated with the impairment of
identifiable intangibles by Sila. We do not expect to record additional tax
benefits for the foreseeable future.

(s) MINORITY INTEREST

        Minority interest consists wholly of Reuters' ownership interest in
Sila. Minority interest increased to $63.8 million for the year ended December
31, 2001 from $10.7 million for the year ended December 31, 2000, relating to
Reuters' proportional share of losses in Sila, which is consolidated into our
financial statements. The increase in 2001 was due to a full year of losses
generated by Sila which included a writeoff of Sila's goodwill and identifiable
intangibles due to impairment. There was no minority interest for the year ended
December 31, 1999.

(t) INVESTMENT LOSS, INCLUDING IMPAIRMENTS, NET

        Investment loss including impairments consists of the loss taken on
investments where the decline in market value was deemed to be other than
temporary. Investment loss also includes amounts related to the decline in the
fair value of derivative instruments, offset by realized gains from the sales of
investments. During 2001, we recorded a net charge of $143.4 million, which
included $136.7 million in impairment charges related to our investments. The
remainder of the net charge related to net gains (losses) from the sales of
investments, and changes in the fair value of warrants. We had no investment
losses in 2000 or 1999. The increase in 2001 was mainly due to overall declining
market conditions.

(u) EXTRAORDINARY ITEM

        The extraordinary item consists entirely of the gain realized from the
early extinguishment of $20.0 million in convertible subordinated notes payable.
Extraordinary item was $7.7 million for the year ended December 31, 2001
relating to the early extinguishment of $20.0 million of debt. There were no
extraordinary items in 2000 or 1999. Subsequent to December 31, 2001, we bought
back an additional $15.0 million of our convertible subordinated notes payable
and as such we expect to record an extraordinary gain on the early
extinguishment of debt in the first quarter of 2002.

(v) CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE

        Cumulative effect of change in accounting principle was $6.6 million in
2001 relating to the adoption of SFAS No.133, "Accounting for Derivatives and
Hedging Activities". The $6.6 million represented the fair value of warrants we
hold in two of our investees which met the criteria for a derivative under SFAS
No. 133. There was no cumulative effect of change in accounting principle in
2000 or 1999.

MD&A (6) SEGMENT RESULTS

        Our operating segments include Vertical Markets and European Operations.
The Vertical Markets segment provides wireless data services software and
engineering services to develop applications for the financial services, mobile
government, transportation and logistics, real estate, automobile and insurance
industries. European Operations consists of our European joint venture with
Reuters and has the majority of its customers in the European financial services
industry. Corporate and Other consists mainly of corporate assets and selling,
general and administrative expenses. We began to report our financial results by
segment as of the first quarter of 2000. During 2001 and 2000, our reportable
segments changed -- and we expect them to continue to change -- as our operating

                                                                              23
<PAGE>

structure, business and the market in which we operate evolves. In 1999, all of
our revenue was generated from what is now reported as our the Vertical Markets
Segment.

<TABLE>
<CAPTION>
                          Vertical       European      Corporate and
                          Markets       Operations         Other            Total
                       -----------     -----------     -------------     -----------
<S>                    <C>             <C>             <C>               <C>
YEAR ENDED
DECEMBER 31, 2001
------------------
Revenue                $    96,451     $    12,997     $       3,432     $   112,880
Gross Profit (loss)    $    41,868     $     5,506     $     (15,248)    $    32,126
Total Assets           $   316,746     $    18,802     $     613,872     $   949,420

YEAR ENDED
DECEMBER 31, 2000
------------------
Revenue                $    44,671     $    13,483     $           0    $     58,154
Gross Profit           $    21,818     $     6,320     $           0    $     28,138
Total Assets           $ 1,378,679     $   178,001     $   1,120,695    $  2,677,375
</TABLE>

        The type of revenue we earn in each of our segments varies from segment
to segment.

        Vertical Markets. We operate in a wide variety of vertical markets. Our
vertical markets segment can have subscriber revenue, engineering services
revenue, device sales and software and related services revenue depending on the
needs of the customer. Revenue in the vertical markets segment increased to
$96.5 million for the year ended December 31, 2001 from $44.7 million for the
year ended December 31, 2000. Gross profit in that segment increased to $41.9
million for the year ended December 31, 2001 from $21.8 million for the year
ended December 31, 2000. The increase in this segment was primarily due to an
increase of $14.0 million in revenue and $3.9 million in gross profit from sales
of our Mobile Max product line and an increase of $19.9 million in revenue and
$10.3 million in gross profit from sales of our PacketCluster software suite and
associated hardware. Mobile Max and PacketCluster were obtained in connection
with acquisitions made late in the third quarter and in the fourth quarter of
2000.

        European Operations. Our European operations segment consists of Sila
and generates revenue from subscriber and engineering services. Sila was formed
in May 2000. Sila saw a reduction in revenues from 2000 to 2001 due to the
streamlining of our operations in Europe and the overall pullback in the
financial services sector.

        Corporate & Other. Revenue in the Corporate & Other relates solely to
sales pursuant to our inventory reduction plan which provided for bulk sales of
inventory at prices below our cost. Negative gross profit in this segment was a
result both of the cost associated with the aforementioned revenue and inventory
obsolescence and excess inventory write downs of $14.4 million in 2001.

MD&A (6) LIQUIDITY AND CAPITAL RESOURCES

        Since 1999, we have financed our operations primarily through private
and public placements of our equity and debt securities. Through December 31,
2001, we have raised aggregate net proceeds of approximately $1.5 billion
including the issuance of $310.5 million of 6% convertible subordinated notes.
As of December 31, 2001, we had approximately $529.9 million in cash and
short-term investments (including restricted cash of $5.3 million) and working
capital of approximately $503.9 million.

        Net cash used in operating activities was $220.7 million, $63.8 million
and $12.1 million for the years ended December 31, 2001, 2000 and 1999,
respectively. The principal use of cash in each of these periods was to fund our
losses from operations.

        Net cash used in investing activities was $120.0 million, $512.2 million
and $12.6 million for the years ended December 31, 2001, 2000 and 1999
respectively. For the year ended December 31, 2001, we used $42.0 million for
new investments in three companies and additional investments in five companies,
$38.5 million for the purchase of property and equipment and $33.8 million for
acquisition-related costs. For the twelve months ended December 31, 2000, we
used $48.3 million for the purchase of property and equipment, $158.4 million
for investments in 20 companies and $303.7 million to acquire LocusOne,
NetSearch,

                                                                              24
<PAGE>

Cerulean, SunPro, Sinope, Motient's retail transportation unit, RTS Wireless,
IFX and for the related formation of Sila, and Sila's subsequent acquisitions.
Cash used by investing activities for the year ended December 31, 1999 was
primarily for the purchase of property and equipment and the acquisition of
Mobeo partially offset by the sale of short-term investments.

        Net cash provided by financing activities was $6.5 million for the year
ended December 31, 2001. Net cash provided by financing activities was $1.354
billion and $101.4 million for the years ended December 31, 2000 and 1999,
respectively. For the year ended December 31, 2001, we used $12.3 million to
repurchase $20.0 million of convertible subordinated notes, which was offset by
proceeds of $5.2 million from a forward sale contract for OmniSky stock, $4.9
million from an investment in Aether by AOL and $8.2 in contributions from a
minority shareholder to Sila. For the year ended December 31, 2000, cash
provided by financing activities was primarily attributable to proceeds received
from our secondary offering of common stock and convertible subordinated notes.
For the year ended December 31, 1999 cash provided by financing activities was
primarily attributable to proceeds received from our initial public offering and
the issuance of notes payable.

        While not a measure under generally accepted accounting principles,
EBITDA is a standard measure of financial performance in our industry. We define
EBITDA as earnings before interest, taxes, depreciation and amortization and
option and warrant expense. EBITDA should not be considered in isolation or as
an alternative to net income (loss), income (loss) from operations, cash flows
from operating activities, or any other measure of performance under generally
accepted accounting principles. Our definition of EBITDA may differ from that of
other companies. Cash expenditures for various long-term assets, interest
expense and income taxes have been, and will be, incurred which are not
reflected in the EBITDA presentations. EBITDA losses in 2001 fluctuated from
$52.4 million in the first quarter, to $49.4 million in the second quarter,
$55.5 million in the third quarter and $32.2 million in the fourth quarter. The
increase in the third quarter was due to an increase in operating expenses
resulting from an inventory impairment charge of $12.5 million. The decreases
from quarter to quarter were due to decreases in operating expenses as a result
of our spending reductions. We expect EBITDA to continue to improve over the
next year as throughout the year we continue to reduce our operating expenses
and as later in the year we expect revenues to increase.

        We expect to continue to use cash to fund operations as we continue to
develop our products and markets. The time at which our operating revenues will
exceed operating expenses, if ever, depends on a wide variety of factors
including general business trends, development of our markets, the progress of
and changes in our research and development activities the success of our
efforts to reduce costs and the effect of potential future acquisitions. Given
our current cash resources and our ability to control some of the factors that
will affect when operating revenues may exceed operating expenses, we believe we
have substantial flexibility to continue operations and still have funds
available for our operating and capital requirements for the next 12 months.

        For fiscal year 2002, we currently have contractual cash commitments of
approximately $56.2 million relating to RIM inventory purchase commitments,
Novatel modem purchase commitment with OmniSky, AOL Time Warner advertising
purchasing commitments, debt service and funding for Sila.  Although there can
be no assurance, we believe that actual expenditures related to these items in
2002 will be significantly less than $56.2 million due to reductions we are in
the process of negotiating and due to a reduction of debt service as a result of
a debt buyback in March of 2002. In addition to the specific expenditures
identified above, we expect to continue to invest cash on other capital
expenditures, including acquisitions and other strategic opportunities.

        The following table describes all of our contractual commitments
including our future minimum lease payments.

<TABLE>
<CAPTION>
           Year ended December 31,
<S>                                  <C>
2002................................  $  77,534
2003................................     49,008
2004................................     45,187
2005................................     29,823
2006................................     12,230
Thereafter..........................     51,813
                                     -----------
                                      $ 265,595
</TABLE>

        $64.8 million of our minimum lease payments have been subleased or are
available for sublease. Although there can be no assurance, we expect actual
expenditures related to the above commitments will be less than indicated above
due to reductions we are in the process of negotiating and due to a reduction in
debt service as a result of a debt buy-back in March of 2002.

        On November 5, 2001, we entered into a strategic alliance with AOL to
develop and market wireless solutions to small and medium sized businesses. AOL
will pay us $2.5 million in development fees to extend certain AOL functionality
to wireless platforms for the small and medium sized business market, plus
$500,000 for providing sales force automation solutions to AOL. Additionally we
may work together with AOL to develop applications that will work in conjunction
with the wireless platforms. We have agreed to share with AOL, 10% of any net
revenues we receive from our sale of these products if certain revenue targets
are met. As part of the agreement, we will pay a license fee of $10.0 million
for access to certain tangible and intangible assets of AOL including certain
intellectual property rights. In connection with the alliance, AOL agreed to
purchase, upon our request, and subject to certain conditions, up to $20.0
million of our stock over the next three years at then market values preceeding
the respective dates of purchase. On December 3, 2001 AOL made its first $5.0
million purchase of our stock. As part of the alliance, we took the opportunity
to consolidate our media purchases and committed over the next four years, to
use most of our $12.0 million per year advertising budget to promote these new
products, as well as our current and future wireless data products and services,
across the family of AOL interactive brands as well as AOL Time Warner's broad
range of media properties.

        Subsequent to December 31, 2001 we announced that we expanded our
products, services and customer base in the Transportation and Logistics market
through the acquisition of certain assets from @Track Communications, Inc. for
$3.0 million in cash plus $12.0 million in a convertible note.

MD&A (7) RISK FACTORS

        Our results of operations are affected by a variety of factors,
including those described below.

                                                                              25
<PAGE>

(a) WE HAVE HISTORICALLY INCURRED LOSSES AND THESE LOSSES MAY CONTINUE IN THE
FUTURE.

        We reported net losses of $1.7 billion, $362.7 million and $30.7 million
for the years ended December 31, 2001, 2000, and 1999, respectively. We expect
to continue to incur significant sales and marketing, systems development and
administrative expenses. Therefore, we will need to generate significant revenue
to become profitable and sustain profitability on a quarterly or annual basis.
We expect to continue to incur significant losses for the foreseeable future. As
a result, we may not be able to achieve profitability on a quarterly or annual
basis.

(b) THERE IS NO ESTABLISHED MARKET FOR OUR SERVICES; WE MAY NOT BE ABLE TO SELL
ENOUGH OF OUR SERVICES TO BECOME PROFITABLE.

        The markets for wireless data and transaction services are still
emerging. Continued growth in demand for, and acceptance of, these services
remains uncertain. Current barriers to market acceptance of these services
include cost, reliability, functionality and ease of use. We cannot be certain
that these barriers will be overcome. We are currently developing services for
some of our business customers pursuant to preliminary agreements, and expect to
develop other Aether products. We cannot assure you that these parties will
enter into contracts for our services or that products developed for future sale
will result in revenue. Our competitors may develop alternative wireless data
communications systems that gain broader market acceptance than our systems. If
the market for our services does not grow, or grows more slowly than we
currently anticipate, we may not be able to attract customers for our services
and our revenues would be adversely affected.

(c) OUR CUSTOMERS INCLUDE TECHNOLOGY COMPANIES THAT MAY BE EXPERIENCING
SHORTAGES IN CAPITAL.

        Our customers include newly formed technology-based companies that have
a limited operating history and many have reported significant losses since
inception. They are subject to many of the risks and uncertainties that we are,
including rapid changes in technology, no established markets for their
products, and intense competition, among others. In addition, many of these
companies may require significant infusions of capital to continue operations.
The availability of such capital has been curtailed and some of these companies
may not be able to raise sufficient funds to continue to operate, which could
limit our ability to generate further revenues from such companies as well as to
collect their outstanding receivables.

(d) OUR ACQUISITIONS, INVESTMENTS AND STRATEGIC ALLIANCES MAY NOT DELIVER THE
VALUE WE PAID OR WILL PAY FOR THEM.

        Excessive expenses may result if we do not successfully integrate our
acquisitions, investments and strategic alliances, or if the costs and
management resources we expend in connection with the integrations exceed our
expectations. We expect that our acquisitions, investments and strategic
alliances and any acquisitions, investments or strategic alliances we may pursue
in the future will have a continuing, significant impact on our business,
financial condition and operating results. The value of the companies that we
acquired or invested in may be less than the amount we paid and our financial
results may be adversely affected if:

        - we fail to assimilate the acquired assets with our pre-existing
        business;

        - we lose key employees of these companies or of Aether as a result of
        the acquisitions;

        - our management's attention is diverted by other business concerns; or

        - we assume unanticipated liabilities related to the acquired assets.

In addition, the companies we have acquired or invested in or may acquire or
invest in are subject to each of the business risks we describe in this section,
and if they incur any of these risks the businesses may not be as valuable as
the amount we paid. Further, we cannot guarantee that we will realize the
benefits or strategic objectives we were seeking to obtain by acquiring or
investing in these companies.

(e) WE MAY NOT ACHIEVE PROFITABILITY IF WE ARE UNABLE TO MAINTAIN, IMPROVE AND
DEVELOP THE WIRELESS DATA SERVICES WE OFFER.

        We believe that our future business prospects depend in part on our
ability to maintain and improve our current services and to develop new ones on
a timely basis. Our services will have to achieve market acceptance, maintain
technological competitiveness and meet an expanding range of customer
requirements. As a result of the complexities inherent in our service offerings,
major new wireless data services and service enhancements require long
development and testing periods. We may experience difficulties that could delay
or prevent the successful development, introduction or marketing of new services
and service enhancements. Additionally, our new services and service
enhancements may not achieve market acceptance. If we cannot effectively develop
and improve services we may not be able to recover our fixed costs or otherwise
become profitable.

(f) IF WE DO NOT RESPOND EFFECTIVELY AND ON A TIMELY BASIS TO RAPID
TECHNOLOGICAL CHANGE, OUR SERVICES MAY BECOME OBSOLETE AND WE MAY LOSE SALES.

        The wireless and data communications industries are characterized by
rapidly changing technologies, industry standards, customer needs and
competition, as well as by frequent new product and service introductions. Our
services are integrated with

                                                                              26
<PAGE>

wireless handheld devices and the computer systems of our corporate customers.
Our services must also be compatible with the data networks of wireless
carriers. We must respond to technological changes affecting both our customers
and suppliers. We may not be successful in developing and marketing, on a timely
and cost-effective basis, new services that respond to technological changes,
evolving industry standards or changing customer requirements. Our ability to
grow and achieve profitability will depend, in part, on our ability to
accomplish all of the following in a timely and cost-effective manner:

        - effectively use and integrate new wireless and data technologies;

        - continue to develop our technical expertise;

        - enhance our wireless data, engineering and system design services;

        - develop applications for new wireless networks; and

        - influence and respond to emerging industry standards and other
        changes.

(g) WE DEPEND UPON WIRELESS NETWORKS OWNED AND CONTROLLED BY OTHERS.

        If we do not have continued access to sufficient capacity on reliable
networks, we may be unable to deliver services and our sales could decrease. Our
ability to grow and achieve profitability partly depends on our ability to buy
sufficient capacity on the networks of wireless carriers such as Verizon
Wireless, Bell South Corporation, Metrocall, Motient and AT&T Wireless and on
the reliability and security of their systems. All of our services are delivered
using airtime purchased from third parties. We depend on these companies to
provide uninterrupted and bug free service and would not be able to satisfy our
customers' needs if they failed to provide the required capacity or needed level
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. Our existing agreements with the wireless carriers
generally have one-year terms. Some of these wireless carriers are, or could
become, our competitors and if they compete with us they may refuse to provide
us with their services.

(h) ONE OF OUR SUPPLIERS OF WIRELESS NETWORK CAPACITY HAS FILED FOR
REORGANIZATION UNDER CHAPTER 11, WHICH RAISES UNCERTAINTY REGARDING ITS ABILITY
TO CONTINUE TO SUPPLY US WITH ACCESS TO ITS WIRELESS DATA NETWORK. IF THE
SUPPLIER WERE UNABLE TO CONTINUE TO SUPPLY US WITH CAPACITY, REPLACING THAT
CAPACITY WOULD BE COSTLY OR IMPOSSIBLE, WHICH COULD CAUSE A MATERIAL INCREASE IN
COSTS OR LOSS IN REVENUE.

        Motient Corporation, which supplies us with wireless network capacity,
has filed for reorganization under Chapter 11. Although Motient currently is
continuing to meet its obligations to provide us with wireless network capacity,
its Chapter 11 filing creates uncertainty regarding its ability to continue to
do so. If Motient becomes unable to continue to supply us with the same level of
network capacity, we would need to replace that capacity in order to continue
meeting our obligations to our customers. The increased costs of obtaining this
capacity, or the loss of revenue if we were unable to replace the capacity or
lost customers, would increase our losses or reduce earnings.

(i) OUR FAILURE TO DEVELOP RECOGNITION FOR THE AETHER BRAND COULD PREVENT US
FROM ACHIEVING A PROFITABLE LEVEL OF SALES.

        Our expenses related to sales and marketing activities (excluding option
and warrant expense) were, $2.1 million, $54.2 million and $66.8 million for the
years ended December 31, 1999, 2000 and 2001 respectively. We intend to increase
the market presence of our brand over time and continue to focus on generating
leads and sales opportunities, which will require us to continue our spending on
sales and marketing. The following trademarks are registered with the United
States Patent and Trademark Office: ScoutSync, Cerulean, Cerulean Design,
PacketCluster, PacketCluster Patrol, PacketWriter, MobileMax2, Advantage. The
following trademarks have been published or allowed by the United States Patent
and Trademark Office: Aether, Aether Systems, Aether & Design, Unwired By
Aether, ScoutBuilder, ScoutIT, ScoutWeb, ScoutExtend, Mobile Finance By Aether,
Aether Airlead, Aether Attache, Aether Smart Agent, MobileFusion, MobileFusion &
Design, Safestop, Information For A Wireless World, PocketInvestigator, PRO2000.
However, in connection with our efforts to reduce operating expenses, we plan to
reduce our sales and marketing expenses significantly in 2002. Although we
believe we can effectively market Aether's brand with reduced costs, our efforts
may be less successful than if our expenses remained at historic levels. There
can be no assurances that holders of other trademarks will not claim that the
published or allowed trademarks, or other Aether pending trademark applications,
infringe their trademarks. We may not be able to use these names effectively or
at all if we fail to obtain such registrations due to conflicting marks or
otherwise. As a result of our recent acquisitions, we expect to market our
acquired products and services under their existing brands. We may lose existing
customers or fail to attract new customers if these brands are not well received
by our customers, if our marketing efforts are not productive, if we are
otherwise unsuccessful in increasing our brand awareness or if our competition
has greater brand recognition.

(j) AS WE IMPLEMENT OUR PLAN TO REDUCE OUR OPERATING EXPENSES, WE MAY FAIL TO
SUPPORT OUR OPERATIONS, WHICH COULD REDUCE DEMAND FOR OUR SERVICES AND
MATERIALLY ADVERSELY AFFECT OUR REVENUE.

        Our business strategy is based on the assumption that the number of
subscribers to our services, the amount of information they want to receive and
the number of services we offer will all increase. We must continue to develop
and expand our systems and operations to accommodate this growth. The expansion
and or maintenance and adaptation of our customer service and network operations
centers require substantial financial, operational and management resources. At
the same time, we have implemented plans

                                                                              27
<PAGE>

to reduce our operating expenses, which entails a reduction in operational and
management resources. While we believe that our cost reductions are targeted at
areas that are not necessary to maintain and develop our ability to serve
customers, there can be no assurance that we will succeed in lowering costs
while maintaining our ability to provide service. If we fail to maintain or
improve service levels, we may lose customers and/or the opportunity to provide
more services and products.

(k) WE DEPEND ON RECRUITING AND RETAINING KEY MANAGEMENT AND TECHNICAL PERSONNEL
WITH WIRELESS DATA AND SOFTWARE EXPERIENCE. WE MAY NOT BE ABLE TO DEVELOP NEW
PRODUCTS OR SUPPORT EXISTING PRODUCTS IF WE CANNOT HIRE OR RETAIN QUALIFIED
EMPLOYEES.

        Because of the technical nature of our products and the dynamic market
in which we compete, our performance depends on attracting and retaining key
employees. Competition for qualified personnel in the wireless data and software
industries is intense and finding qualified personnel with experience in both
industries is even more difficult. We believe there are only a limited number of
individuals with the requisite skills in the field of wireless data
communication, and it is becoming increasingly difficult to hire and retain
these persons. Competitors and others have in the past attempted, and may in the
future attempt, to recruit our employees. Each of our engineers has entered into
a non-competition agreement with us for a period of ten months after they leave
Aether. These agreements will not prevent our engineers from leaving or working
for competitors relatively soon after they leave us.

        We currently maintain a key person life insurance policy for David S.
Oros, our chairman and chief executive officer. We do not maintain insurance
policies for any of our other executive officers.

(l) WE MAY NOT HAVE ADEQUATELY PROTECTED OUR INTELLECTUAL PROPERTY RIGHTS, WHICH
COULD ALLOW COMPETITORS TO DEVELOP SIMILAR PRODUCTS USING SIMILAR TECHNOLOGY,
THUS REDUCING OUR SALES AND REVENUE.

        We have attempted to protect our technology, including the technology we
have obtained or will obtain in our acquisitions, through patent, trademark and
copyright protection, as well as through trade secret laws and non-competition
and non-disclosure agreements with all employees. Patents may infringe on valid
patents held by third parties, or patents held by third parties may limit the
scope of any patents we receive. In particular, the patent we acquired in our
acquisition of Riverbed covers a technology that is similar to other patented
technologies. In addition, we have applied for but have as yet no international
patent protection in this technology. If we are not adequately protected, other
companies with sufficient engineering expertise could develop competing products
based on our intellectual property and reduce our sales and revenue.

(m) WE MAY BE SUED BY THIRD PARTIES FOR INFRINGEMENT OF THEIR INTELLECTUAL
PROPERTY RIGHTS AND INCUR COSTS OF DEFENSE AND POSSIBLY ROYALTIES OR LOSE THE
RIGHT TO USE TECHNOLOGY IMPORTANT TO PROVIDING OUR SERVICES.

        The telecommunications and software industries are characterized by the
existence of a large number of patents and frequent litigation based on
allegations of patent infringement or other violations of intellectual property
rights. As the number of participants in our market increases, the possibility
of an intellectual property claim against us could increase. Intellectual
property claims, with or without merit, could be time-consuming and expensive to
litigate or settle, could require us to enter into costly royalty arrangements,
could divert management attention from administering our business and could
hinder us from conducting our business.

(n) WE MAY BE SUBJECT TO LIABILITY FOR TRANSMITTING INFORMATION, AND OUR
INSURANCE COVERAGE MAY BE INADEQUATE TO PROTECT US FROM THIS LIABILITY.

        We may be subject to claims relating to information transmitted over
systems we develop or operate. 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. 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.

(o) DISRUPTION OF OUR SERVICES DUE TO ACCIDENTAL OR INTENTIONAL SECURITY
BREACHES MAY HARM OUR REPUTATION, POTENTIALLY CAUSING A LOSS OF SALES AND AN
INCREASE IN OUR EXPENSES.

        A significant barrier to the growth of wireless data services or
transactions on the Internet or by other electronic means has been the need for
secure transmission of confidential information. Our systems could be disrupted
by unauthorized access, computer viruses and other accidental or intentional
actions. We may incur significant costs to protect against the threat of
security breaches or to alleviate problems caused by such breaches. If a third
party were able to misappropriate our users' personal or proprietary information
or credit card information, we could be subject to claims, litigation or other
potential liabilities that could materially adversely impact our revenue and may
result in the loss of customers.

(p) ANY TYPE OF SYSTEMS FAILURE COULD REDUCE SALES, INCREASE COSTS OR RESULT IN
CLAIMS OF LIABILITY.

        Our existing wireless data services are dependent on real-time,
continuous feeds from Reuters Selectfeed Plus and others. The ability of our
subscribers to make securities trades, receive sales leads and receive critical
business information requires timely and uninterrupted connections with our
wireless network carriers. Any disruption from our satellite feeds or backup
landline feeds could

                                                                              28
<PAGE>

result in delays in our subscribers' ability to receive information or execute
trades. We cannot be sure that our systems will operate appropriately if we
experience a hardware or software failure or if there is an earthquake, fire or
other natural disaster, a power or telecommunications failure, intentional
disruptions of service by third parties, an act of God or an act of war. A
failure in our systems could cause delays in transmitting data, and as a result
we may lose customers or face litigation that could involve material costs and
distract management from operating our business.

(q) OUR ABILITY TO SELL NEW AND EXISTING SERVICES AT A PROFIT COULD BE IMPAIRED
BY COMPETITORS.

        Intense competition could develop in the market for services we offer.
We developed our software using standard industry development tools. Many of our
agreements with wireless carriers, wireless handheld device manufacturers and
data providers are non-exclusive. Our competitors could develop and use the same
products and services in competition with us. With time and capital, it would be
possible for competitors to replicate our services. Our potential competitors
could include wireless network carriers such as Verizon Wireless and AT&T
Wireless, software developers such as Microsoft Corporation, 724 Solutions and
systems integrators such as IBM. Many of our potential competitors have
significantly greater resources than we do. Furthermore, competitors may develop
a different approach to marketing the services we provide in which subscribers
may not be required to pay for the information provided by our services.
Competition could reduce our market share or force us to lower prices to
unprofitable levels.

(r) WE MAY LOSE THE OPPORTUNITY TO PURSUE DESIRABLE PROJECTS TO INCISCENT, SILA
AND MINDSURF AND OTHER COMPANIES IN WHICH WE HOLD EQUITY INTERESTS, BECAUSE SOME
OF OUR DIRECTORS AND EXECUTIVE OFFICERS SERVE ON THE BOARDS OF DIRECTORS OF
THESE COMPANIES.

        David S. Oros, our chairman and chief executive officer, and some of our
other executive officers and directors have been appointed to the boards of
directors of companies in which we hold an equity interest, including, Sila,
MindSurf and Inciscent. These other companies may develop products that compete
with our own products. Mr. Oros and the other directors and executive officers
may learn of business opportunities that are appropriate for the boards on which
they serve and Mr. Oros and these other individuals may not be required to make
those opportunities available to us. If Sila, Inciscent, MindSurf or any other
joint ventures we may enter into pursue opportunities that we would have an
interest in pursuing, our business may fail to grow or our existing business may
suffer. Mr. Oros and these other directors and executive officers may also have
other conflicts of interest with Aether because of their positions with Sila,
Inciscent and MindSurf and Sila's, Inciscent's and MindSurf's contractual
relationships with Aether.

(s) AN INTERRUPTION IN THE SUPPLY OF PRODUCTS AND SERVICES THAT WE OBTAIN FROM
THIRD PARTIES COULD CAUSE A DECLINE IN SALES OF OUR SERVICES, AND PRODUCTS WE
PURCHASE TO AVOID SHORTAGES MAY BECOME OBSOLETE BEFORE WE CAN USE THEM.

        In designing, developing and supporting our wireless data services, we
rely on wireless carriers, wireless handheld device manufacturers, content
providers and software providers. These suppliers may experience difficulty in
supplying us products or services sufficient to meet our needs or they may
terminate or fail to renew contracts for supplying us these products or services
on terms we find acceptable. Any significant interruption in the supply of any
of these products or services could cause a decline in sales of our services
unless and until we are able to replace the functionality provided by these
products and services. We also depend on third parties to deliver and support
reliable products, enhance their current products, develop new products on a
timely and cost-effective basis and respond to emerging industry standards and
other technological changes. In addition, we rely on the ability of our content
providers -- including Reuters, the New York Stock Exchange, Inc., the Chicago
Board of Trade, the Nasdaq Stock Market, Inc. and the Options Price Reporting
Authority -- to continue to provide us with uninterrupted access to the news and
financial information we provide to our customers. The failure of third parties
to meet these criteria, or their refusal or failure to deliver the information
for whatever reason, could materially harm our business.

(t) OUR SALES CYCLE IS LONG, AND OUR STOCK PRICE COULD DECLINE IF SALES ARE
DELAYED OR CANCELLED.

        Quarterly fluctuations in our operating performance are exacerbated by
the length of time between our first contact with a business customer and the
first revenue from sales of services to that customer or end users. Because our
services represent a significant investment for our business customers, we spend
a substantial amount of time educating them regarding the use and benefits of
our services and they, in turn, spend a substantial amount of time performing
internal reviews and obtaining capital expenditure approvals before purchasing
our services. As much as a year may elapse between the time we approach a
business customer and the time we begin to deliver services to a customer or end
user. Any delay in sales of our services could cause our quarterly operating
results to vary significantly from projected results, which could cause our
stock price to decline. In addition, we may spend a significant amount of time
and money on a potential customer that ultimately does not purchase our
services.

(u) OUR SOFTWARE MAY CONTAIN DEFECTS OR ERRORS, AND OUR SALES COULD GO DOWN IF
THIS INJURES OUR REPUTATION OR DELAYS SHIPMENTS OF OUR SOFTWARE.

        Our software products and platforms are complex and must meet the
stringent technical requirements of our customers. We must develop our services
quickly to keep pace with the rapidly changing software and telecommunications
markets. Software as complex as ours is likely to contain undetected errors or
defects, especially when first introduced or when new versions are released.

                                                                              29
<PAGE>

Our software may not be free from errors or defects after delivery to customers
has begun, which could result in the rejection of our software or services,
damage to our reputation, lost revenue, diverted development resources and
increased service and warranty costs.

(v) NEW LAWS AND REGULATIONS THAT IMPACT OUR INDUSTRY COULD INCREASE OUR COSTS
OR REDUCE OUR OPPORTUNITIES TO EARN REVENUE.

        We are not currently subject to direct regulation by the Federal
Communications Commission or any other governmental agency, other than
regulations applicable to businesses in general. However, in the future, we may
become subject to regulation by the FCC or another regulatory agency. In
addition, the wireless carriers who supply us airtime and certain of our
hardware suppliers are subject to regulation by the FCC and regulations that
affect them could increase our costs or reduce our ability to continue selling
and supporting our services.

(w) WE CONDUCT OPERATIONS IN A NUMBER OF COUNTRIES THROUGH SILA AND OTHER
SUBSIDIARIES AND ARE SUBJECT TO RISKS OF INTERNATIONAL OPERATIONS.

        We currently operate outside the U.S. through Sila and other
subsidiaries, which have operations throughout Europe and Asia. We expect that
Sila's management will independently perform the day-to-day operations of our
joint venture and will not be within our day-to-day control. Any failure by Sila
and other subsidiaries to successfully implement or maintain services could
result in negative publicity and have an unfavorable impact on our ability to
expand our products and services to Europe and Asia. We face various risks in
expanding outside the U.S., including:

        - difficulty and cost of monitoring our international operations;

        - cultural differences in the conduct of business;

        - unexpected changes in regulatory requirements, including U.S. export
        restrictions on encryption technologies; and

        - recessionary or inflationary environments in foreign economies,
        particularly in Asian countries and in the financial services sector.

We cannot ensure that our international operations will contribute positively to
our business, financial condition or result of operations. Our failure to manage
international growth could result in higher operating costs than anticipated or
could delay or preclude altogether our ability to generate revenues in
international markets. In addition, our expanding operations outside the U.S.
are, in some instances, conducted in currencies other than the U.S. dollar and
fluctuations in the value of foreign currencies relative to the U.S. dollar
could cause currency exchange losses. We cannot predict the effect of exchange
rate fluctuations on our future operating results.

(x) DEBT SERVICE OBLIGATIONS MAY ADVERSELY AFFECT OUR CASH FLOW.

        As a result of the $290.5 million of 6% convertible subordinated notes
due 2005 currently outstanding, we have a substantial amount of indebtedness,
primarily consisting of the notes. As a result of this indebtedness, we are
obligated to make principal and interest payments. There is a possibility that
we may be unable to generate cash sufficient to pay the principal of, interest
on and other amounts due in respect of our indebtedness when due. We may also
obtain additional long-term debt and working capital lines of credit to meet
future financing needs. We cannot assure you that additional financing
arrangements will be available on commercially reasonable terms or at all.

(y) WE MAY NOT BE ABLE TO RECOVER THE FULL VALUE OF GOODWILL RECORDED ON SOME OF
OUR ACQUISITIONS AND INVESTMENTS.

        During 2001, 2000, and 1999, we recorded approximately $1.7 billion in
goodwill and other intangibles related to our acquisitions and made investments
in other companies of approximately $196.8 million . Consideration for some of
our acquisitions was partially or fully funded through the issuance of shares of
our common stock at a time when our stock price was at historically high prices.
Most of the companies we acquired or invested in were start-up or newly formed
entities. Most of these companies were privately held and their fair values are
highly subjective and not readily determinable. Our policy is to review the
value of all our acquisitions and investments for impairment whenever events or
circumstances indicate that the carrying amount may not be recoverable. At the
time of our acquisitions and investments, market valuations and the availability
of capital for such companies were at historically high levels. During the year
ended December 31, 2001, stock prices and market valuations in our industry and
similar industries have fallen substantially in response to a variety of
factors, including a general downturn in the economy, a curtailment in the
availability of capital and a general reduction in technology expenditures. The
market valuations of those publicly traded companies in which we have invested
and of other companies similar to those we have acquired or invested in have
declined substantially. For the year ended December 31, 2001, we recorded
impairment charges aggregating $1.258 billion on these acquisitions and
investments. If similar adverse market conditions develop in the future, we may
be required to take additional impairment charges.

                                                                              30
<PAGE>

(z) WE MAY HAVE TO TAKE ACTIONS THAT ARE DISRUPTIVE TO OUR BUSINESS STRATEGY TO
AVOID REGISTRATION UNDER THE INVESTMENT COMPANY ACT OF 1940.

        As part of our business strategy, we own minority and majority equity
interests in a number of ventures. While we believe we are not currently an
investment company, our ownership of these securities could potentially subject
us to registration under the Investment Company Act of 1940, which, absent an
applicable exclusion or exemption, requires registration for companies that are
engaged primarily in the business of investing, reinvesting, owning, holding or
trading in securities. If we were required to register as an investment company,
we would not be able to continue operating our business in accordance with our
business plan. Accordingly, we intend to take all necessary steps to avoid being
deemed an investment company. A company may be deemed to be an investment
company if it owns investment securities with a value exceeding 40% of its total
assets excluding cash items and government securities as defined in the
Investment Company Act, subject to certain exclusions and exemptions. Any
acquisition or disposition of assets, or fluctuations in the value of our assets
may require us to take steps to avoid registration under the Investment Company
Act. In particular, a write down of the value of our acquisitions such as those
that may occur as a result of the recent market downturn, could increase the
percentage of our total assets accounted for by investment securities. The steps
required to avoid registration could include buying, refraining from buying,
selling or refraining from selling securities in circumstances where we would
not take these actions except to avoid registration under the Investment Company
Act. For example, we may have to retain majority or controlling interests in our
joint ventures after their initial public offerings, which would require us to
expend significant amounts of capital that we might otherwise use to expand our
products and services in other market segments. Moreover, we may incur tax
liabilities if we are required to sell assets. We may also be unable to purchase
additional investment securities that may be important to our business strategy.
We have applied to the SEC for an exemptive order declaring that we are not an
investment company and are not required to register under the Investment Company
Act. We may not ultimately be successful in receiving such an order.

                                                                              31
<PAGE>

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        The following discussion about our market risk disclosures involves
forward-looking statements. Actual results could differ materially from those
projected in forward-looking statements. We maintain instruments subject to
interest rate and foreign currency exchange rate risk. We categorize all of our
market risk sensitive instruments as non-trading or other instruments.

(1) INTEREST RATE SENSITIVITY

        We are exposed to interest rate risk related to our cash and cash
equivalents and short-term investments. Substantially all of our excess funds
are invested in cash equivalents with maturities of less than ninety days. Our
investment policy calls for investment in short-term low risk instruments. At
December 31, 2001, we had $527.4 million (including restricted cash) invested in
money market, commercial paper and certificates of deposit. At December 31,
2001, we had $2.5 million in investments with maturities that range from less
than one year to ten years. We believe that a 10% increase or decline in
interest rates would not be material to our investment income or cash flows.

        We are exposed to interest rate risk on our fixed rate subordinated
convertible notes payable. The fair value of this fixed rate debt is sensitive
to changes in interest rates. If market rates decline, the required payments
will exceed those based on current market rates. Under our current policy, we do
not use interest rate derivative instruments to manage our risk of interest rate
fluctuations. As our long-term debt obligations bear fixed interest rates, we
have minimal cash flow exposure due to general interest rate changes associated
with our long-term debt obligations.

(2) FOREIGN RATE SENSITIVITY

        Since the acquisition of IFX and the related formation of Sila and the
commencement of U.S. sales to foreign countries, we have been exposed to foreign
currency exchange risk. All sales from the U.S. to foreign countries have been
denominated in U.S. dollars. Since the revenue and expenses of Sila generally
are denominated in local currencies, exchange rate fluctuations between such
local currencies and the U.S. dollar will subject us to currency translation
risk with respect to the reported results of Sila as well as risks sometimes
associated with international operations. The countries in which Sila has
operations have traditionally had relatively stable currencies. We do not hedge
our foreign currency exposure. We believe that a 10% increase or decline in the
British Pound exchange ratio would not be material to cash and cash equivalent
balances, interest income, or cash flows from consolidated operations.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF INDEPENDENT AUDITORS

        The financial statement and supplementary data of the Company required
by this item are filed as exhibits hereto, are listed under Item 14(a)(1) and
(2), and are incorporated herein by reference.

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

        None.

                                                                              32
<PAGE>

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

        The information required by this Item will be included in the Company's
Proxy Statement for the 2002 Annual Meeting of Shareholders under the caption
Directors and Executive Officers which will be filed with the Securities and
Exchange Commission no later than 120 days after the close of the fiscal year
ended December 31, 2001, and is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

        The information required by this Item will be included in the Company's
Proxy Statement for the 2002 Annual Meeting of Shareholders under the caption
Executive Compensation which will be filed with the Securities and Exchange
Commission no later than 120 days after the close of the fiscal year ended
December 31, 2001, and is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        The information required by this Item will be included in the Company's
Proxy Statement for the 2002 Annual Meeting of Shareholders under the caption
Security Ownership of Certain Beneficial Owners and Management which will be
filed with the Securities and Exchange Commission no later than 120 days after
the close of the fiscal year ended December 31, 2001, and is incorporated herein
by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        The information required by this Item will be included in the Company's
Proxy Statement for the 2002 Annual Meeting of Shareholders under the caption
Certain Relationships and Related Transactions which will be filed with the
Securities and Exchange Commission no later than 120 days after the close of the
fiscal year ended December 31, 2001, and is incorporated herein by reference.

                                                                              33
<PAGE>

                                     PART IV

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

(a)(1) FINANCIAL STATEMENTS

The following financial statements required by this item are submitted in a
separate section beginning on page F-1 of this report.

<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                          <C>
Independent Auditors' Report................................    38
Report of Other Independent Auditors........................    39
Consolidated Balance Sheets as of December 31, 2000 and
  2001......................................................    40
Consolidated Statements of Operations and Other
  Comprehensive Loss for the years ended December 31, 1999,
  2000, and 2001............................................    41
Consolidated Statements of Stockholders' Equity for the
  years ended December 31, 1999, 2000, and 2001.............    42
Consolidated Statements of Cash Flows for the years ended
  December 31, 1999, 2000, and 2001.........................    44
Notes to Consolidated Financial Statements..................    46
</TABLE>

(a)(2) FINANCIAL STATEMENT SCHEDULES

The following financial statement schedules required by this item are submitted
on page S-1 of this Report.

<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Schedule II -- Valuation and Qualifying Accounts............  S-2
</TABLE>

        All other schedules are omitted because they are not applicable or the
required information is shown in the Consolidated Financial Statements or the
notes thereto.

(a)(3) EXHIBITS

        The exhibit index is incorporated herein by reference.

(b) REPORTS ON FORM 8-K

        There were no reports on Form 8-K filed by the Registrant during the
fourth quarter of the fiscal year ended December 31, 2001.

(c) EXHIBITS

        The exhibits required by this Item are listed in the Index of Exhibits.

(d) FINANCIAL STATEMENTS SCHEDULES

        The financial statement schedules required by this Item are listed under
Item 14(a)(2).

                                                                              34
<PAGE>

                                   SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized on April
1, 2002.

                              AETHER SYSTEMS, INC.


                        By: /s/      DAVID S. OROS
                           ------------------------------------
                                      DAVID S. OROS
                           Chairman and Chief Executive Officer

                                POWER OF ATTORNEY

        Each person whose signature appears below under the heading Signature
constitutes and appoints David S. Oros and David C. Reymann as his or her true
and lawful attorneys-in-fact each acting alone, with full power of substitution
and resubstitution, for him or her and in his or her name, place and stead, in
any and all capacities to sign any or all amendments to this Report on Form
10-K, and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact full power and authority to do and perform each and every
act and thing requisite and necessary to be done in and about the premises, as
fully for all intents and purposes as he or she might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact, or their
substitutes, each acting alone, may lawfully do or cause to be done by virtue
hereof.

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

<TABLE>
<CAPTION>
                   SIGNATURE                                        TITLE                          DATE
                   ---------                                        -----                          ----
<S>                                                        <C>                                <C>
               /s/ DAVID S. OROS                             Chairman and Chief               April 1, 2002
------------------------------------------------             Executive Officer
                 DAVID S. OROS

              /s/ GEORGE M. DAVIS                            Vice Chairman and                April 1, 2002
------------------------------------------------                 President
                GEORGE M. DAVIS

              /s/ DAVID C. REYMANN                         Chief Financial Officer            April 1, 2002
------------------------------------------------           (Principal Financial and
                DAVID C. REYMANN                             Accounting Officer)

            /s/ J. CARTER BEESE, JR.                               Director                   April 1, 2002
------------------------------------------------
              J. CARTER BEESE, JR.

            /s/ FRANK A. BONSAL, JR.                               Director                   April 1, 2002
------------------------------------------------
              FRANK A. BONSAL, JR.

                                                                   Director                   April 1, 2002
------------------------------------------------
                GEORGE P. STAMAS

                                                                   Director                   April 1, 2002
------------------------------------------------
                 DEVIN N. WENIG

             /s/ THOMAS E. WHEELER                                 Director                   April 1, 2002
------------------------------------------------
               THOMAS E. WHEELER
</TABLE>

                                                                              35
<PAGE>

                                  EXHIBIT INDEX

  EXHIBIT
  NUMBER                          DOCUMENT AND DESCRIPTION
  -------                         ------------------------

    2.1         Agreement of Merger, dated October 18, 1999, between Aether
                Systems LLC, and Aether Systems, Inc. (1)

    2.2         Stock Purchase Agreement by and among Aether Technologies,
                International, L.L.C., Mobeo, Inc. and Peter Kibler, Winston
                Barrett and Edward Spear dated August 19, 1999. (1)

    2.3         Stock Purchase Agreement by and among Aether Systems, Inc.,
                LocusOne Communications, Inc. and the stockholders named therein
                dated January 25, 2000. (2)

    2.4         Agreement and Plan of Merger dated February 9, 2000 by and among
                Aether Systems, Inc., RT Acquisition, Inc. and Riverbed
                Technologies, Inc. (3)

    2.5         LLC Interest Purchase Agreement made effective as of April 18,
                2000 by and among Aether Systems, Inc., Net Search LLC and the
                members of Net Search, LLC and Augustine N. Esposito (4)

    2.6         Share Purchase Agreement relating to IFX Group Limited (4)

    2.7         Agreement and Plan of Merger by and among Aether Systems, Inc.
                and Cerulean Technology, Inc. (5)

    3.1         Amended and Restated Certificate of Incorporation of Aether
                Systems, Inc. (as amended) (4)

    3.2         Bylaws of Aether Systems, Inc. (1)

    4.1         Specimen Certificate for Aether Systems Common Stock. (1)

    4.2         Form of Indenture for Convertible Debt (3)

   10.1         Amended and Restated License, Marketing and Distribution
                Agreement between Reuters America, Inc. and Aether Technologies
                International, L.L.C. dated August 11, 1998. (1)

   10.2         Contract Between Morgan Stanley Dean Witter Online Direct, Inc.
                and Aether Technologies International, L.L.C. dated August 5,
                1999. (1)

   10.3         Options Price Reporting Authority Vendor Agreement between
                Aether Technologies and the American Stock Exchange, Inc. dated
                June 3, 1997. (1)

   10.4         Agreement between Aether Technologies International, L.L.C. and
                New York Stock Exchange dated July 19, 1999. (1)

   10.5         Vendor Agreement by and between Aether Technologies
                International, L.L.C. and the Nasdaq Stock Market, Inc. dated
                October 4, 1996. (1)

   10.6         Dow Jones Indexes Enterprise Distribution Agreement dated April
                23, 1999. (1)

   10.7         Employment Agreement between Aether Technologies International,
                L.L.C. and David Oros dated July 7, 1999. (1)

   10.8         Employment Agreement between Aether Systems, Inc. and David C.
                Reymann dated June 8, 2001. (7)

   10.9         Series A Preferred Stock Purchase Agreement dated August 9,
                1999. (1)

   10.10        Software License Agreement by and between Aether Technologies
                International, L.L.C. and AirWeb Corporation dated August 9,
                1999 (1)

   10.11        Strategic License Agreement between Aether Technologies
                International, L.L.C. and Riverbed Technologies, Inc. dated June
                15, 1999. (1)

   10.12        Consulting Agreement between Aether Technologies, L.L.C. and
                Orbcomm Global, L.P. dated October 26, 1998. (1)

                                                                              36
<PAGE>

  EXHIBIT
  NUMBER                          DOCUMENT AND DESCRIPTION
  -------                         ------------------------

   10.13        Credit Agreement dated September 28, 1999 among Merrill Lynch &
                Co. and the leaders named therein. (1)

   10.14        Aether Systems, Inc. 1999 Equity Incentive Plan as amended June
                22, 2001.

   10.15        Aether Systems, Inc. Senior Bonus Plan effective as of September
                29, 1999. (1)

   10.16        Aether Systems, Inc. Acquisitions Incentive Plan effective as of
                December 15, 2000. (6)

   10.17        Amended and Restated Registration Rights Agreement dated March
                3, 2000. (1)

   10.18        Form of Subscription Agreement between Aether Systems, Inc. and
                National Discount Brokers. (1)

   10.19        Series B Preferred Stock Purchase Agreement dated January 18,
                2000. (3)

   10.20        Master Agreement between Aether Systems, Inc. and Charles Schwab
                & Co., Inc., dated December 23, 1999. (3)

   10.21        Inciscent, Inc. Series A Stock Purchase Agreement (3)

   10.22        Agreement between National Discount Brokers Corporation and
                Aether Systems, Inc., dated November 4, 1999. (3)

   10.23        Development Agreement between Response Services, LLC and Aether
                Systems, Inc. dated January 12, 2000. (3)

   10.24        Shareholders Agreement dated May 5, 2000 relating to Sila
                Communications Limited. (4)

   10.25        Common Stock Purchase Agreement by and among Aether Systems,
                Inc. and America Online, Inc. dated as of November 5, 2001.

   11.1         Statement regarding computation of per share earnings.

   21.1         Subsidiaries of Aether Systems.

   23.1         Consent of KPMG LLP.

   23.2         Consent of Ernst & Young.

(1) Incorporated by reference to the Registration Statement (File No. 333-85697)
    on Form S-1 filed with the Commission on October 20, 1999, as amended.

(2) Incorporated by reference to the Form 8-K filed with the Commission on
    February 15, 2000.

(3) Incorporated by reference to the Registration Statement (File No. 333-30852)
    or Form S-1 filed with the Commission on February 22, 2000, as amended.

(4) Incorporated by reference to the Form 10-Q filed with the Commission on
    August 14, 2000.

(5) Incorporated by reference to the Registration Statement (File No.
    333-44566)on Form S-1 filed with the Commission on September 27, 2000, as
    amended.

(6) Incorporated by reference to the Registration Statement (File No. 333-52222)
    on Form S-8 filed with the Commission on December 20, 2000.

(7) Incorporated by reference to the Form 10-Q filed with the Commission on June
    30, 2001.

                                                                              37
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Aether Systems, Inc.:

We have audited the accompanying consolidated balance sheets of Aether Systems,
Inc. and subsidiaries as of December 31, 2000 and 2001, and the related
consolidated statements of operations and other comprehensive loss,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 2001. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We did
not audit the consolidated financial statements of Sila Communications Limited,
a majority-owned subsidiary, which statements reflect total assets constituting
6.7% and 2.2% and total revenues constituting 21.7% and 11.5% of the related
consolidated totals in 2000 and 2001, respectively. Those statements were
audited by other auditors whose report has been furnished to us, and our opinion
insofar as it relates to the amounts included for Sila Communications Limited,
is based solely on the report of the other auditors.

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

In our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Aether Systems, Inc. and
subsidiaries as of December 31, 2000 and 2001, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States of America.

As discussed in note 4 to the financial statements, the Company changed its
method for accounting for derivatives with the adoption of SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" in 2001.


                                  /s/ KPMG LLP

McLean, Virginia
February 5, 2002
except for Note 17 - Subsequent Events
which is as of March 18, 2002.

                                                                              38
<PAGE>
                         REPORT OF INDEPENDENT AUDITORS

To The Board of Directors and Shareholders
Sila Communications Limited

We have audited the consolidated balance sheet of Sila Communications Limited as
of December 31, 2001 and 2000 and the related consolidated statement of
operations, shareholders' equity and cash flows for the year ended December 31,
2001 and for the period from May 5, 2000 (inception) to December 31, 2000 (not
separately presented herein). These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Sila
Communications Limited at December 31, 2001 and 2000 and the consolidated
results of their operations and their consolidated cash flows for the year ended
December 31, 2001 and for the period from May 5, 2000 (inception) to December
31, 2000, in conformity with accounting principles generally accepted in the
United States.


                                ERNST & YOUNG LLP
London, England

February 5, 2002

                                                                              39
<PAGE>

                              AETHER SYSTEMS, INC.
                           CONSOLIDATED BALANCE SHEETS
                        (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                              ---------------------
                                                                2000        2001

                                                            ----------   ----------
<S>                                                         <C>         <C>
ASSETS
Current assets:
  Cash and cash equivalents.................................$  856,391   $  522,177
  Restricted cash...........................................    16,356        5,253
  Short-term investments....................................     2,648        2,490
  Trade accounts receivable, net of allowance for doubtful
     accounts of $5,695 and $10,561 at December 31, 2000
     and 2001, respectively.................................    30,263       24,802
  Inventory.................................................    19,130       27,178
  Prepaid expenses and other current assets.................    17,081       19,521
                                                            ----------   ----------
          Total current assets..............................   941,869      601,421
Property and equipment, net.................................    53,223       61,304
Investments.................................................   182,444       32,350
Intangibles, net............................................ 1,478,485      226,774
Other noncurrent assets, net................................    21,354       27,571
                                                            ----------   ----------
                                                            $2,677,375   $  949,420
                                                            ==========   ==========
LIABILITIES, MINORITY INTEREST AND STOCKHOLDERS' EQUITY
Current liabilities:
  Current portion of notes payable..........................$   13,741  $    15,493
  Accounts payable..........................................     9,747        8,560
  Accrued expenses..........................................    37,168       27,666
  Accrued employee compensation and benefits................    12,566        9,983
  Acquisitions payable......................................    29,781           --
  Deferred revenue..........................................    14,170       15,145
  Restructuring reserve (current portion)...................        --       15,452
  Accrued interest payable..................................     5,072        5,249
                                                            ----------   ----------
          Total current liabilities.........................   122,245       97,548
Convertible subordinated notes payable and other notes
  payable, less current portion.............................   321,201      290,645
Deferred tax liability......................................    10,694           --
Deferred revenue, less current portion......................        --        6,380
Restructuring reserve, less current portion.................        --       12,365
                                                            ----------   ----------
     Total liabilities......................................   454,140      406,938


Minority interest in net assets of a subsidiary.............    55,537          (45)

Stockholders' equity:
  Preferred stock, $0.01 par value; 1,000,000 shares
     authorized; 0 shares issued and outstanding at December
     31, 2000 and 2001......................................        --           --
  Common stock, $0.01 par value;1,000,000,000 shares
     authorized; 40,415,722 and 41,864,646 shares issued
     and outstanding at December 31, 2000 and 2001,
     respectively...........................................       404          419
  Additional paid-in capital................................ 2,552,016    2,579,445
  Accumulated deficit.......................................  (385,314)  (2,039,409)
  Foreign currency translation adjustment...................      (113)         487
  Unrealized gain on investments available for
     sale...................................................       705        1,585
                                                            ----------   ----------
        Total stockholders' equity.......................... 2,167,698      542,527
                                                            ----------   ----------
     Commitments and Contingencies

        Total liabilities and stockholders' equity..........$2,677,375   $  949,420
                                                            ==========   ==========
</TABLE>

See accompanying notes to consolidated financial statements.

                                                                              40
<PAGE>

                              AETHER SYSTEMS, INC.

       CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE LOSS
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                              -------------------------------
                                                               1999       2000        2001
                                                              -------   --------    ---------
<S>                                                          <C>       <C>       <C>
Subscriber revenue..........................................  $ 3,617   $ 24,802    $ 44,031
Engineering services revenue................................    2,594      9,444       7,860
Software and related services revenue.......................       --     17,278      36,982
Device sales................................................      115      6,630      24,007
                                                              -------   --------    ---------
          Total revenue.....................................    6,326     58,154     112,880
Cost of subscriber revenue..................................    2,005     11,254      27,167
Cost of engineering services revenue........................    1,366      5,693       3,644
Cost of software and related services revenue...............       --      5,724      11,625
Cost of device sales........................................      105      7,345      38,318
                                                              -------   --------    ---------
          Total cost of revenue.............................    3,476     30,016      80,754
                                                              -------   --------    ---------
          Gross profit......................................    2,850     28,138      32,126
                                                              -------   --------    ---------
Operating expenses:
  Research and development (exclusive of option and warrant
     expense)...............................................    2,614     30,189      63,937
  General and administrative (exclusive of option and
     warrant expense).......................................    5,891     52,937      90,893
  Selling and marketing (exclusive of option and warrant
     expense)...............................................    2,095     54,151      66,757
  In-process research and development related to
     acquisitions...........................................       --      7,860          --
  Depreciation and amortization.............................    1,089    238,074     180,724
  Option and warrant expense:
     Research and development...............................      150      6,233       6,767
     General and administrative.............................   18,005      6,246       4,511
     Selling and marketing..................................    1,043      1,866       3,130
  Impairment of intangibles.................................       --         --   1,121,001
  Restructuring charge......................................       --         --      45,006
                                                              -------   --------   ---------
                                                               30,887    397,556   1,582,726
                                                              -------   --------   ---------
          Operating loss....................................  (28,037)  (369,418) (1,550,600)
Other income (expense):
     Interest income........................................      996     57,075      28,013
     Interest expense.......................................    (1225)   (14,724)    (19,354)
     Equity in losses of investments........................   (2,425)   (47,886)    (57,523)
     Investment loss, including impairments, net............       --         --    (143,382)
     Minority interest......................................       --     10,692      63,809
                                                              -------    -------   ---------
Loss before income taxes, extraordinary item and
  cumulative effect of change in accounting principle.......  (30,691)  (364,261) (1,679,037)
Income tax benefit..........................................       --      1,561      10,694
                                                              -------    -------   ---------
Loss before extraordinary item and cumulative effect
  of change in accounting principle.........................  (30,691)  (362,700) (1,668,343)
Extraordinary item (early extinguishment of debt) ..........       --         --       7,684
                                                              -------    -------   ---------
Loss before cumulative effect of change in accounting
  principle....................... .........................  (30,691)  (362,700) (1,660,659)
Cumulative effect of change in accounting principle
  relating to adoption of SFAS No. 133......................       --         --       6,564
                                                              -------   --------   ---------
          Net Loss.......................................... $(30,691) $(362,700)$(1,654,095)
                                                              -------   --------   ---------
Other comprehensive loss:
     Unrealized holding gain (loss) on investments available
       for sale.............................................      (12)       775         880
     Foreign currency translation adjustment................       --       (113)        600
                                                              -------   --------   ---------
Comprehensive loss.......................................... $(30,703) $(362,038)$(1,652,615)
                                                              =======   ========   =========
Net loss per share- basic and diluted before extraordinary
     item and cumulative effect of change in accounting
     principle..............................................           $   (9.99)    $(40.96)
Extraordinary item (early extinguishment of debt)...........                  --        0.19
Cumulative effect of change in accounting principle
       relating to adoption of SFAS No. 133.................                  --        0.16
                                                                        --------   ---------
Net loss per share-basic and diluted........................           $   (9.99)    $(40.61)
                                                                        ========   =========
     Weighted average shares outstanding--basic and
       diluted..............................................              36,310      40,732
                                                                        ========   =========
Pro forma statement of operations data (unaudited):
     Loss before income taxes, as reported.................. $(30,691)
     Pro forma income tax provision (benefit)...............       --
                                                              -------
     Pro forma net loss..................................... $(30,691)
                                                              =======
     Pro forma net loss per share-basic and diluted.........  $ (1.45)
                                                              =======
     Pro forma weighted average shares outstanding-basic and
       diluted..............................................   21,207
                                                              =======
</TABLE>

See accompanying notes to consolidated financial statements.

                                                                              41
<PAGE>

                              AETHER SYSTEMS, INC.

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                        NOTES        FOREIGN
                                                          ADDITIONAL                 RECEIVABLE     CURRENCY       UNREALIZED
                                     PREFERRED   COMMON    PAID-IN      ACCUMULATED      FROM       TRANSLATION   GAIN (LOSS) ON
                                       STOCK     STOCK     CAPITAL        DEFICIT     STOCKHOLDER   ADJUSTMENT     INVESTMENTS
                                     ---------   ------   ----------   -------------   -----------   -----------   -------------
<S>                                  <C>         <C>      <C>          <C>            <C>           <C>           <C>
Balance at December 31, 1998.......     --          --            --             --          --            --
Issuance of replacement options in
  Mobeo acquisition................     --          --            --             --          --            --             --
Exercise of unit options and
  warrants.........................     --          --            --             --          --            --             --
Option and warrant expense.........     --          --            --             --          --            --             --
Net loss -- pre merger.............     --          --            --             --          --            --             --
Merger of Aether Technologies
  International, L.L.C. into Aether
  Systems, Inc. in October 1999....     --         200         2,714             --        (137)           --            (58)
Net proceeds of initial public
  offering.........................     --          69       101,045             --          --            --             --
Unrealized loss on investments
  available for sale...............     --          --            --             --          --            --            (12)
Option and warrant expense.........     --          --        16,875             --          --            --             --
Exercise of stock options..........     --           2           258             --          --            --             --
Net loss -- post merger............     --          --            --        (22,614)         --            --             --
                                        --        ----    ----------    -----------       -----         -----           ----
Balance at December 31, 1999.......     $--       $271    $  120,892    $   (22,614)      $(137)           --           $(70)
                                        --        ----    ----------    -----------       -----         -----           ----
Repayment on note receivable from
  stockholder......................     --          --            --             --         137            --             --
Gain on sales of stock by equity
  method investee..................     --          --        73,349             --          --            --             --
Proceeds from secondary offering...     --          54     1,056,872             --          --            --             --
Issuance of stock and replacement
  options in Riverbed
  acquisition......................     --          45     1,136,038             --          --            --             --
Issuance of stock and replacement
  options in Cerulean
  acquisition......................     --           5        69,944             --          --            --             --
Issuance of stock and replacement
  options in RTS acquisition.......     --          13        77,941             --          --            --             --
Exercise of options and warrants...     --          16         2,635             --          --            --             --
Option and warrant expense.........     --          --        14,345             --          --            --             --
Unrealized gain on investments
  available for sale...............     --          --            --             --          --            --            775
Foreign currency translation.......     --          --            --             --          --          (113)            --
Net loss...........................     --          --            --    $  (362,700)         --            --             --
                                        --        ----    ----------    -----------       -----         -----           ----
Balance at December 31, 2000.......     $--       $404    $2,552,016    $  (385,314)      $  --         $(113)          $705
                                        ==        ====    ==========    ===========       =====         =====           ====
Gain on sales of stock by equity
  method investee..................     --          --         6,071             --          --            --             --
Proceeds from sale of stock........     --           7         4,868             --          --            --             --
Issuance of stock for acquisition..     --           1           999             --          --            --             --
Exercise of options and warrants...     --           7         1,083             --          --            --             --
Option and warrant expense.........     --          --        14,408             --          --            --             --
Unrealized gain on investments
  available for sale...............     --          --            --             --          --            --            880
Foreign currency translation.......     --          --            --             --          --           600             --
Net loss...........................     --          --            --    $(1,654,095)         --            --             --
                                        --        ----    ----------    -----------       -----         -----           ----
Balance at December 31, 2001.......     $--       $419    $2,579,445    $(2,039,409)      $  --         $ 487         $1,585
                                        ==        ====    ==========    ===========       =====         =====           ====
</TABLE>

                                                                              42
<PAGE>

<TABLE>
<CAPTION>
                                     MEMBERS'
                                     CAPITAL      TOTAL
                                     --------   ----------
<S>                                   <C>       <C>
Balance at December 31, 1998.......    8,029         8,029
Issuance of replacement options in
  Mobeo acquisition................      374           374
Exercise of unit options and
  warrants.........................       70            70
Option and warrant expense.........    2,323         2,323
Net loss -- pre merger.............   (8,077)       (8,077)
Merger of Aether Technologies
  International, L.L.C. into Aether
  Systems, Inc. in October 1999....   (2,719)           --
Net proceeds of initial public
  offering.........................       --       101,114
Unrealized loss on investments
  available for sale...............       --           (12)
Option and warrant expense.........       --        16,875
Exercise of stock options..........       --           260
Net loss -- post merger............       --       (22,614)
                                      ------    ----------
Balance at December 31, 1999.......   $   --    $   98,342
                                      ------    ----------
Repayment on note receivable from
  stockholder......................       --           137
Gain on sales of stock by equity
  method investee..................       --        73,349
Proceeds from secondary offering...       --     1,056,926
Issuance of stock and replacement
  options in Riverbed
  acquisition......................       --     1,136,083
Issuance of stock and replacement
  options in Cerulean
  acquisition......................       --        69,949
Issuance of stock and replacement
  options in RTS acquisition.......       --        77,954
Exercise of options and warrants...       --         2,651
Option and warrant expense.........       --        14,345
Unrealized gain on investments
  available for sale...............       --           775
Foreign currency translation.......       --          (113)
Net loss...........................       --      (362,700)
                                      ------    ----------
Balance at December 31, 2000.......   $   --    $2,167,698
                                      ======    ==========
Gain on sales of stock by equity
  method investee..................       --         6,071
Proceeds from sale of stock........       --         4,875
Issuance of stock for acquisition..       --         1,000
Exercise of options and warrants...       --         1,090
Option and warrant expense.........       --        14,408
Unrealized gain on investments
  available for sale...............       --           880
Foreign currency translation.......       --           600
Net loss...........................       --    (1,654,095)
                                      ------    ----------
Balance at December 31, 2001.......   $   --    $  542,527
                                      ======    ==========
</TABLE>

                                                                              43
<PAGE>

                              AETHER SYSTEMS, INC.
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                        YEAR ENDED DECEMBER 31,
                                                                   ---------------------------------
                                                                      1999        2000       2001
                                                                   ----------  ---------   ---------
<S>                                                                <C>         <C>        <C>
Cash flows from operating activities:
  Net loss......................................................    $(30,691)  $(362,700) (1,654,095)
  Adjustments to reconcile net loss to net cash used by
    operating activities:
    Depreciation and amortization...............................       1,089     238,074     180,724
    Provision (recovery) for doubtful accounts..................         (59)      1,391       9,801
    Provision (recovery) for inventory obsolescence.............         (54)         83      14,381
    Equity in losses of investments.............................       2,425      47,886      57,523
    Option and warrant expense..................................      19,198      14,345      14,408
    Minority interest...........................................          --     (10,692)    (63,809)
    Deferred income tax benefit.................................          --      (1,561)    (10,694)
    In process research and development related to
       acquisitions.............................................          --       7,860          --
    Extraordinary item..........................................          --          --      (7,684)
    Cumulative effect of change in accounting principle.........          --          --      (6,564)
    Impairment of intangibles...................................          --          --   1,121,001
    Realized losses on long-term investments, including
       impairments..............................................          --          --     143,382
    Changes in assets and liabilities, net of acquired
       assets and liabilities:
       Increase in trade accounts receivable....................      (1,732)    (17,177)    (5,540)
       Increase in inventory....................................        (491)    (10,019)   (25,286)
       Increase in prepaid expenses and other assets............      (3,616)     (9,186)    (3,955)
       Decrease in accounts payable.............................        (377)     (3,479)    (1,187)
       Increase (decrease) in accrued expenses, accrued
         employee compensation and benefits, interest
         payable and acquisitions payable.......................       2,052      36,180    (15,189)
       Increase in restructuring reserve........................          --          --     27,817
       Increase (decrease) in deferred revenue..................         176       5,156      4,273
                                                                    --------    --------   ---------
         Net cash used by operating activities..................     (12,080)    (63,839)  (220,693)
                                                                    --------    --------  ---------
Cash flows used by investing activities:
  Sales and maturities of short-term investments................      12,640       7,731      3,286
  Purchases of short-term investments...........................      (8,722)     (5,618)    (3,411)
  Acquisitions, net of cash acquired............................     (11,548)   (303,741)   (33,835)
  Purchases of property and equipment...........................      (2,447)    (48,346)   (38,468)
  Investments...................................................      (2,500)   (158,412)   (41,504)
  Sale of long-term investments.................................          --          --      5,689
  Increase in other intangible assets...........................          --      (1,800)    (4,653)
  Increase in other assets......................................          --      (2,053)    (7,078)
                                                                    --------    --------  ---------
         Net cash used in investing activities..................     (12,577)   (512,239)  (119,974)
                                                                    --------    --------  ---------
Cash flows provided by financing activities:
  Proceeds from issuance of common stock........................     101,114   1,056,926      4,875
  Proceeds from issuance of convertible debt....................          --     300,294         --
  Repayment of notes payable including buyback of
     convertible debt...........................................          --          --    (12,316)
  Proceeds from note payable/credit facility....................      14,830          --      5,160
  Repayments on notes payable/credit facility...................     (14,830)         --       (583)
  Repayment of notes receivable from stockholder................          --         137         --
  (Increase) decrease in restricted cash........................          --     (26,899)        --
  Contributions from minority shareholder of a subsidiary.......          --      20,818      8,227
  Exercise of options and warrants..............................         330       2,651      1,090
                                                                    --------    --------   ---------
         Net cash provided by financing activities..............     101,444   1,353,927      6,453
                                                                    --------    --------   ---------
         Net increase (decrease) in cash and cash equivalents...      76,787     777,849   (334,214)
Cash and cash equivalents, at beginning of period...............       1,755      78,542    856,391
                                                                    --------    --------   ---------
Cash and cash equivalents, at end of period.....................    $ 78,542    $856,391  $ 522,177
                                                                    ========    ========   =========
Supplemental disclosure of cash flow information:
  Cash paid during the year for interest........................    $  1,027     $ 9,327  $  18,030
                                                                    ========    ========   =========
</TABLE>

See accompanying notes to consolidated financial statements.

                                                                              44
<PAGE>

Supplemental disclosure of non-cash investing and financing activities:

        In 1999, 2000 and 2001, the Company incurred unrealized holding gains
(losses) associated with its investments available for sale totaling $(12), $775
and $880, respectively. These amounts have been reported as increases
(decreases) in members' capital and stockholders' equity.

        In September 1999, the Company issued 18,442 unit options (46,105
shares) valued at $374 as part of the cost to acquire Mobeo, Inc. This amount
has been reported as an increase in members' capital.

        In October 1999, approximately $1,100 of trade receivables owed to the
Company by OmniSky, Corp. were settled against amounts due in connection with
the purchase of 20,000 modems from OmniSky, Corp.

        In January 2000, approximately $600 of trade receivables owed to the
Company by OmniSky, Corp. were offset by the Company's additional investment
made in OmniSky, Corp.

        In March 2000, the Company acquired Riverbed Technologies, Inc. for
4,537,281 shares of the Company's common stock and converted existing options
held by Riverbed employees into options to acquire 862,480 shares of the
Company's common stock. The value of the common stock and replacement options of
$1,136,083 has been allocated to the fair value of the assets purchased and
liabilities assumed with a corresponding increase in stockholders' equity.

        In connection with the acquisition of IFX and the related formation of
Sila and the acquisitions made by Sila, the Company established a deferred tax
liability of $12,255. Such amount was offset by an equal increase in goodwill.

        In September 2000, the Company acquired Cerulean for cash of $75,000,
462,412 shares of the Company's common stock and converted existing options held
by Cerulean employees into options to acquire 94,275 shares of the Company's
common stock. The value of the common stock and vested replacement options of
$69,949 has been allocated to the fair value of the assets purchased and the
liabilities assumed with a corresponding increase in stockholders' equity.

        In December 2000, the Company acquired RTS Wireless for cash of $34,000,
1,259,752 shares of the Company's common stock and converted existing options
held by RTS employees into options to acquire 90,248 shares of the Company's
common stock. The value of the common stock and vested replacement options of
$77,954 has been allocated to the fair value of the assets purchased and
liabilities assumed with a corresponding increase in stockholders' equity.

        In connection with the acquisitions of Cerulean, Sinope, RTS and
Motient, the Company has accrued $29,800 as of December 31, 2000 for the
remaining portion of the purchase price. Such amount has been allocated to the
fair value of the assets purchased and the liabilities assumed.

        In 2000 and 2001, the Company recorded gains through stockholders'
equity of $73,349 and $6,071, respectively, from the sale of stock by OmniSky,
Inc. to third parties at per share amounts in excess of the book value per
share.

        In June 2001, the Company acquired certain completed technology from
SmartPoint, Inc. in exchange for 70,852 shares of the Company's common stock.
The value of the common stock of $1,000 has been allocated to the fair value of
the assets purchased with a corresponding increase in stockholders' equity.

        In July 2001, approximately $1,200 of trade receivables owed to the
Company by Spring Wireless,Ltd. was offset by the Company's additional
investment in Spring Wireless.

        In connection with the agreement with America Online Inc. ("AOL"), the
Company has accrued $2,500 as of December 31, 2001 for the remaining portion of
a license payment due to AOL. Such amount has been allocated to the fair value
of the assets purchased.

See accompanying notes to consolidated financial statements.

                                                                              45
<PAGE>

                              AETHER SYSTEMS, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE (1) ORGANIZATION AND DESCRIPTION OF THE BUSINESS

        Aether Systems, Inc. (the Company) was originally formed as Aeros,
L.L.C. in January 1996. The Company changed its name to Aether Technologies
International, L.L.C. effective August 1996 and to Aether Systems L.L.C.
effective September 1999. Immediately prior to the completion of its initial
public offering of common stock on October 26, 1999, the limited liability
company was converted into a Delaware corporation and the Company's name was
changed to Aether Systems, Inc.

        From its inception until March 1997, the Company primarily provided
wireless engineering services, including the development of wireless software
applications for customers. In March 1997, the Company began offering services
that provide the users of wireless handheld devices access to real-time
financial information. During 1997, the Company made a strategic decision to
focus a significant portion of its engineering resources on the development of
these and other wireless data services and systems, including Aether Intelligent
Messaging (AIM) package of wireless messaging software and software development
tools.

        In 1998 and 1999, the Company continued to develop financial information
services -- as well as financial transaction services -- internally and through
its acquisition of Mobeo, Inc. In 1999, the Company also completed its initial
public offering and began to expand its service offerings to areas other than
financial information and transactions.

        In 2000, the Company continued its expansion into other vertical
markets, including: the transportation and logistics vertical market through its
acquisitions of LocusOne and Motient's retail transportation business unit and
the mobile government vertical market through the acquisitions of Cerulean and
SunPro. The Company broadened its software offerings through its purchase of
Riverbed and RTS Wireless. Also in 2000, the Company moved into the European
marketplace with its acquisition of IFX, and the related formation of Sila
Communications, Ltd (Sila). The Company entered the general wireless and
Internet messaging services market through strategic relationships with Research
in Motion (RIM) and others and through its own service offerings.

        In 2001, the Company continued its integration strategy. The Company
focused its efforts on several growth areas including mobile government and
transportation and logistics. The Company created its enterprise services
division to develop and sell enterprise products to large corporations. Also in
2001, the Company entered into a strategic relationship with America Online,
Inc. (AOL) to provide wireless solutions to small and medium sized businesses.

NOTE (2) MERGER AND INITIAL PUBLIC OFFERING

        The Company is the successor to the business formerly conducted by
Aether Systems, L.L.C. (Aether) (previously Aether Technologies International,
L.L.C.), which was formed in January 1996. Effective October 26, 1999, in
connection with the Company's initial public offering of common stock, Aether
merged with and into Aether Systems, Inc. The Company is the surviving company
in the merger, and the Company and its stockholders own all of the assets and
rights and the Company is subject to all of the obligations and liabilities of
Aether. Immediately prior to the merger, each member contributed its membership
units in Aether Systems, L.L.C. to Aether Systems, Inc., a newly formed Delaware
corporation, in exchange for two and one-half shares of common stock of Aether
Systems, Inc. Effective with the merger, the Company converted to a Subchapter C
Corporation under the Internal Revenue Code of 1986, as amended.

        On October 26, 1999, the Company completed its initial public offering,
which involved the sale of 6,900,000 shares of common stock at $16.00 per share,
including 900,000 shares from the exercise of the underwriters' over-allotment
option. Net proceeds to the Company after deducting underwriting discounts,
commissions and other expenses of the offering were approximately $101.1
million.

NOTE (3) SECONDARY PUBLIC OFFERINGS

        On March 17, 2000, the Company completed a secondary offering for the
sale of 5,411,949 shares of common stock, including the sale of 825,000 shares
from the exercise of the underwriters' over-allotment option, at $205.00 per
share. The net proceeds after deduction of underwriting discounts and offering
expenses were approximately $1.06 billion. Concurrently with this offering, the
Company completed an offering for the sale of an aggregate $310.5 million of 6%
convertible subordinated notes (the Notes) due in 2005, including $40.5 million
in principal amounts from the exercise of the underwriters' over-allotment. The
net proceeds after deduction of underwriting discounts and offering expenses
were approximately $300.6 million. The underwriting discounts and expenses of
the Notes offering of $9.8 million have been included in other assets as
deferred financing fees. The Notes are convertible, at the option of the holder,
at any time prior to maturity, into shares of common stock of Aether at a
conversion price of $243.95 per share, which is equal to a conversion rate of
4.0992 shares per $1,000 principal amount of notes, subject to adjustment.

                                                                              46
<PAGE>

On September 27, 2000, certain of the Company's stockholders sold 5,000,000
shares of common stock, in an underwritten offering at $105.00 per share. No new
shares were issued in the offering and, as such, the Company received no
proceeds from the sale.

NOTE (4) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) PRINCIPLES OF CONSOLIDATION

        The consolidated financial statements include the accounts of the
Company and its majority-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation. Minority
interest consists wholly of Reuters PLC's ownership interest in Sila
Communications Limited ("Sila").

(b) REVENUE RECOGNITION

        The Company derives revenue from four sources (i) subscriber revenue
(ii) engineering services (iii) software and related services, and (iv) device
sales. As described below, significant management judgments and estimates must
be made and used in connection with the revenue recognized in any accounting
period.

        i.)     Subscriber revenue

        The Company derives subscriber revenue from the provision of real-time
access to business information integrated into existing wireless communication
platforms. For all sales, except those completed over the Internet, the Company
obtains signed binding contracts with its subscribers. Contracts with its
wireless data subscribers are generally for a one-year period and include a
termination penalty if cancelled by the subscriber before the one-year period
expires. These contracts are generally renewable at the option of the subscriber
for additional one-year periods or otherwise continue on a monthly basis until
cancelled by the subscriber.

        The Company's subscriber contracts contain provisions for elements such
as service, activation, and wireless devices. This requires the Company to
allocate revenue to such elements based on their relative fair values which
requires significant management judgments and estimates. The Company estimates
the relative fair value of the service based on contractual renewal rates. The
Company estimates the fair value of the equipment based on sales in which the
only element of the transaction was equipment.

        Subscriber revenue consists primarily of fixed charges for usage
recognized as the service is provided and one-time non-refundable activation
fees recognized ratably over the expected life of the customer relationship.
Certain of the Company's customers are billed in advance with revenue deferred
and recognized on a monthly basis over the term of the agreement. Also included
in subscriber revenue are market exchange fees for access to financial
information from the securities exchanges and markets, which are recognized as
the service is provided. The Company also recognizes fees for managing data
through its network operations center. Such fees are recognized ratably over the
contract period.

        ii.)    Engineering services revenue

        Engineering services revenue is derived from the provision of wireless
integration consulting under time-and-materials and fixed-fee contracts. Revenue
on time-and-materials contracts is recognized as time is spent at hourly rates,
which are negotiated with the customer. Revenue on fixed-fee contracts is
recognized on the percentage-of-completion method based on costs incurred in
relation to total estimated costs. Anticipated contract losses are recognized as
soon as they become known and estimable.

        iii.)   Software and related services revenue

        Software and related services revenues are generated from licensing
software and providing services, including maintenance and technical support,
training and consulting. Software revenue consists of fees for licenses of the
Company's software products. The Company recognizes revenue when the license
agreement is signed, the license fee is fixed and determinable, delivery of the
software has occurred, and collectibility of the fees is considered probable. At
the time of the transaction, the Company assesses whether the fee associated
with its revenue transactions is fixed and determinable and whether or not
collection is reasonably assured. If a significant portion of a fee is due after
the normal payment term, the Company accounts for the fee as not being fixed and
determinable. In these cases, the Company recognizes revenue as the fees become
due. The Company assesses collection based on a number of factors, including
past transaction history with the customer and credit worthiness of the
customer. The Company does not request collateral from its customers. If the
Company determines that collection of a fee is not reasonably assured, it defers
the fee and recognizes revenue at the time it becomes reasonably assured, which
is generally upon receipt of cash.

        Revenue from licensing software that requires significant customization
and modification is recognized using the percentage of completion method, based
on the hours incurred in relation to the total estimated hours. Service revenues
consist principally of maintenance and technical support, which consists of
unspecified when-and-if available product updates and customer telephone support
services and are recognized ratably over the term of the service period. Other
service revenues are recognized as the related

                                                                              47
<PAGE>

services are provided. In situations where the Company hosts the software and
the customer has the option to take possession of the software at any time
during the hosting period without significant penalty and it believes it is
feasible for the customer to either run the software on its own hardware or
contract with another party unrelated to the Company to host the software, the
software element is accounted for in accordance with SOP 97-2. Otherwise, such
amounts are recognized ratably over the hosting period.

        iv.)    Device revenue

        The Company derives device revenue from the sale of wireless devices
used to provide its services. Generally, revenue for device sales is recognized
upon delivery. In cases where in management's judgment, i.) the service is
essential to the functionality of the device and ii.) only the Company's ongoing
service is available for the device, the Company recognizes the device revenue
as the ongoing service is provided over the estimated term of the customer
relationship.

        v.)     Revenue from multiple element arrangements

        For arrangements with multiple elements, the Company allocates revenue
to each component of the arrangement using the residual value method. This means
that the Company defers revenue from the total fees associated with the
arrangement equivalent to the fair value of the element(s) of the arrangement
that has not yet been delivered. The fair value of any undelivered elements is
established by using historical evidence specific to the Company.

        vi.)    Revenue from related parties

        Revenue from products and services sold to companies that the Company
has also made strategic investments in (related parties) is allocated between
the investment and revenue recognized based on the relative fair value of the
products and services sold and the investment received. The Company has
determined the fair value of the investments based on the fact that all of its
investments were made in participation with other unrelated financial investors
at the same price per share as the other investors. The Company's investment
policy generally limits its investments to companies that have completed at
least two rounds of financing and generally requires that an unrelated investor
lead the round of financing that the Company participates in. The Company
estimates the fair value of products and services sold based on comparable sales
transactions to other unrelated companies. Sales to related parties were $11.4
million, $10.5 million and $2.2 million for the years ended December 31, 2001,
2000 and 1999, respectively.

(c) COST OF REVENUES

        Cost of subscriber revenue consists primarily of airtime costs,
financial data costs, and securities and market exchange fees and excludes
depreciation on and operating costs of the Company's network operations centers
and certain costs of customer fulfillment and customer care. When the
subscribers' monthly fee includes the use of a wireless device, the Company
depreciates the cost of the device over its expected useful life or the expected
term of the customer relationship. Cost of engineering services revenue consists
of cash compensation and related costs for engineering personnel and materials.
Cost of software and related services revenue consists of third party royalties
and personnel costs related to the cost of maintenance, consulting and support.
Cost of device sales consists primarily of the cost of the device and expensed
when delivery occurs. When the service is considered essential to the
functionality of the device, the cost of the device is expensed over the
expected term of the customer relationship.

(d) CASH AND CASH EQUIVALENTS

        Cash equivalents include all highly liquid investments purchased with
original maturities of three months or less. Cash and cash equivalents consisted
of the following:

<TABLE>
<CAPTION>
                                                          DECEMBER 31,       DECEMBER 31,
                                                             2000               2001
                                                        ----------------   ----------------
<S>                                                     <C>                <C>
Cash..................................................     $ 37,581            $ 33,586
Money market accounts.................................     $767,876            $469,868
Municipal Bonds.......................................     $     --            $  5,285
Commercial paper......................................     $ 40,934            $    998
Certificates of deposit...............................     $ 10,000            $ 12,440
                                                           --------            --------
          Total.......................................     $856,391            $522,177
                                                           ========            ========
</TABLE>

                                                                              48
<PAGE>

(e) RESTRICTED CASH

        Restricted cash consists of cash held by the Company for which use of
the funds is contractually restricted. At December 31, 2001, the Company has
restricted cash of $5.3 million relating to its agreement with AOL. The escrow
is available to AOL in the event of the Company's non-payment of short
term advertising liabilities to AOL.

(f) SHORT-TERM INVESTMENTS

        Short-term investments consist of highly liquid investments with
original maturities greater than three months and less than one year and those
longer-term investments that the Company expects to liquidate within twelve
months. The Company has classified its short-term investments as available for
sale and carries such investments at fair value. Unrealized gains (losses) are
excluded from earnings (loss) and are reported as a separate component of other
comprehensive income (loss) until realized. Realized gains and losses from the
sale of these investments are determined on a specific identification basis. As
of December 31, 2000 and 2001, short-term available-for-sale investments
consisted mainly of U.S. treasury securities and corporate debt securities.

(g) FAIR VALUE OF FINANCIAL INSTRUMENTS

        The carrying amounts of the Company's financial instruments, which
include cash equivalents, short-term investments, accounts receivable, accounts
payable, accrued expenses and notes payable (excluding the Notes) approximate
their fair value due to the relatively short duration of the instruments.

        The fair value of the Notes at December 31, 2000 and 2001 was $177.6
million and $170.3 million, respectively, based on quoted market prices.

(h) CONCENTRATION OF CREDIT RISK

        Financial instruments which potentially subject the Company to credit
risk consist primarily of cash, cash equivalents and trade receivables.

        The Company invests cash not immediately needed for operations in money
market securities of various financial institutions, commercial paper,
treasuries and certificates of deposit. The money market securities represent
underlying investments in commercial paper issued by financial institutions and
other companies with high credit ratings and securities issued by or backed by
the U.S. Government. The amounts invested in some cases exceed the F.D.I.C.
limits. The Company has not experienced any losses in its cash and cash
equivalents and believes it is not exposed to any significant credit risk on
these amounts.

        Trade accounts receivable subject the Company to the potential for
credit risk. The Company extends credit to customers on an unsecured basis in
the normal course of business. In the past, a portion of the Company's customer
base has included companies with a limited operating history that were subject
to many of the risks and uncertainties that the Company is, including rapid
changes in technology, no established markets for their products, and intense
competition, among others. In addition, many of these companies required
significant infusions of capital to continue operations. The availability of
such capital has been curtailed during 2001 and some of these companies were not
able to raise sufficient funds to continue their operations. The Company's
policy is to perform an analysis of the recoverability of its trade accounts
receivable at the end of each reporting period and to establish allowances for
those accounts considered uncollectible. The Company analyzes historical bad
debts, customer concentrations, customer credit-worthiness, and current economic
trends when evaluating the adequacy of the allowance for doubtful accounts. As a
result, the Company recorded bad debt expense of $9.8 million during the year
ended December 31, 2001. If market conditions for these companies continue to
deteriorate, the Company may be required to record additional allowances for
doubtful accounts in the future. The Company believes that its allowance for
doubtful accounts at December 31, 2001 is adequate.

(i) INVENTORY

        Inventory, net of allowance for obsolete and slow-moving inventory,
consists of finished goods such as handheld and laptop computers, pagers,
wireless modems, and accessories and is stated at the lower of cost or market.
Cost is determined using a standard costing method, which approximates the
first-in, first-out method. The Company's inventory is subject to rapid
technological changes that could have an adverse impact on its realization in
future periods. In addition, there are a limited number of suppliers of the
Company's inventory. During 2001, the Company recorded an impairment charge of
approximately $14.4 million to reduce the carrying value of its inventory due to
obsolescence and excess inventory. The Company estimated the reduction in
inventory value based on consideration of the following: (1) quantities and
composition of inventory held; (2) sales prices of competing vendors; (3)
projected unit sales and unit pricing over subsequent periods; and, (4)
evaluation of remaining inventory purchase commitments. If the Company's
estimates of projected units sales and unit pricing differ from actual results,
the Company may be required to record additional impairment charges in the
future.

                                                                              49
<PAGE>

(j) PROPERTY AND EQUIPMENT

        Property and equipment are stated at cost. Depreciation is calculated
using the straight-line method over the estimated useful lives of the assets,
which range from three to ten years. The costs of leasehold improvements are
capitalized and amortized using the straight-line method over the shorter of the
lease term or the estimated useful life of the asset. For constructed assets,
all costs that are necessary to bring such assets to the condition and location
necessary for their intended use are initially capitalized as
construction-in-progress and are subsequently transferred to equipment.

(k) INVESTMENTS

        The Company accounts for those investments in which it exercises
significant influence or has an ownership interest greater than twenty percent
under the equity method. For equity method investments, the Company records its
proportionate share of the investee's net income or loss. Generally, the Company
accounts for its investments in which the Company has an ownership interest less
than twenty percent under the cost method for its private investments.
Investments in marketable equity securities, if not considered equity method
investments, are considered available-for-sale securities.

        Investments carried at cost or on the equity method are written down if
circumstances indicate the carrying amount of the investment may not be
recoverable. Investments available for sale are carried at fair value based on
quoted market prices. Net unrealized holding gains and losses are excluded from
income and are reported as a separate component of stockholders' equity unless a
decline in market value is considered other than temporary. Realized gains and
losses are included in income.

(l) DERIVATIVES

        The Company adopted SFAS No. 133, "Accounting for Derivatives
Instruments and Hedging Activities", as amended, on January 1, 2002. The
standard requires the Company to recognize all derivatives on the balance sheet
at fair value. Derivatives that are not hedges must be adjusted to fair value
through the statement of operations. If the derivative is a hedge, depending on
the nature of the hedge, changes in fair value of derivatives will either be
offset against the change in fair value of the hedged assets, liabilities or
firm commitments through earnings, or recognized in other comprehensive income
(loss) until the hedged item is recognized in earnings. The ineffective portion
of a derivative's change in fair value will be immediately recognized in
earnings. The Company's use of derivative financial instruments is discussed in
Note 6 to these Notes to the Consolidated Financial Statements. The Company
recognized a $6.6 million gain on the adoption of SFAS No. 133.

(m) INTANGIBLES AND RECOVERY OF LONG-LIVED ASSETS

        Cost in excess of the fair value of tangible and identifiable intangible
net assets acquired is amortized on a straight-line basis over three to seven
years. Identifiable intangible assets consist of completed technology, assembled
workforce, trademarks, and acquired subscribers. Identifiable intangible net
assets are amortized on a straight-line basis over two to seven years.

        The Company's policy is to review its long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. In accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" the
Company recognizes an impairment when the sum of the expected future
undiscounted cash flows is less than the carrying amount of the asset. The
measurement of the impairment losses to be recognized is based upon the
difference between the fair value and the carrying amount of the assets. See
Note 6.

(n) STOCK OPTIONS AND WARRANTS

        The Company accounts for equity-based employee compensation arrangements
in accordance with the provisions of Accounting Principle Board (APB) Opinion
No. 25, "Accounting for Stock Issued to Employees", and related interpretations
including FIN 44, and complies with the disclosure provisions of Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation". Under APB No. 25, compensation expense is based upon the
difference, if any, on the date of grant, between the fair value of the
Company's stock and the exercise price. All equity-based awards to non-employees
are accounted for at their fair value in accordance with SFAS No. 123.

(o) PRO FORMA INCOME (LOSS) DATA (UNAUDITED) AND NET INCOME (LOSS) PER SHARE

        The accompanying unaudited pro forma statement of operations information
has been prepared as if the Company were treated as a Subchapter C Corporation
for Federal and state income tax purposes from January 1, 1999. The Company has
provided no income taxes on a pro forma basis due to the loss incurred in 1999.

        The Company computes net income (loss) per share in accordance with SFAS
No. 128, "Earnings Per Share", and SEC Staff Accounting Bulletin No. 98 (SAB
98). Under the provisions of SFAS No. 128 and SAB 98, basic net income (loss)
per share is

                                                                              50
<PAGE>

computed by dividing the net income (loss) available to common stockholders for
the period by the weighted average number of common shares outstanding during
the period. Diluted net income (loss) per share is computed by dividing the net
income (loss) for the period by the weighted average number of common and
dilutive common equivalent shares outstanding during the period. Pro forma basic
and diluted net loss per share (unaudited) has been calculated assuming that the
capital structure established at the date of the initial public offering was in
effect during the periods presented. As the Company has had a net loss in each
of the periods presented, pro forma and historical basic and diluted net loss
per share are the same.

(p) RESEARCH AND DEVELOPMENT

        Research and development costs are expensed as incurred.

(q) ADVERTISING EXPENSE

        Advertising costs are expensed as incurred. Production costs for
advertising are expensed the first time the related advertisement takes place.
Advertising expense was approximately $933,000, $23.1 million and $8.1 million
for the years ended December 31, 1999, 2000 and 2001, respectively.

(r) INCOME TAXES

        The Company recognizes income taxes using the asset and liability
method, in accordance with Statement of Financial Accounting Standards (SFAS)
No. 109. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect of a tax rate change on deferred tax assets and
liabilities is recognized in income in the period that includes the enactment
date.

        Prior to October 26, 1999, Aether had elected limited liability status
and, as such, was not directly subject to Federal and state income taxes.
Rather, the members were responsible for income taxes on their proportionate
share of taxable income and entitled to their proportionate share of tax
deductions and tax credits.

(s) USE OF ESTIMATES

        The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the consolidated
financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates. Estimates
are used in accounting for, among other things, long-term contracts, allowances
for uncollectible receivables, inventory obsolescence, recoverability of
long-lived assets and investments, depreciation and amortization, employee
benefits, restructuring accruals, taxes and contingencies. Estimates and
assumptions are reviewed periodically and the effects of revisions are reflected
in the consolidated financial statements in the period they are determined to be
necessary.

(t) OTHER COMPREHENSIVE LOSS

        Comprehensive income, as defined, includes changes in equity of a
business during a period from transactions and other events and circumstances
from non-owner sources. Other comprehensive income refers to revenue, expenses,
gains and losses that under generally accepted accounting principles are
included in comprehensive income, but excluded from net income.

        For the years ended December 31, 1999, 2000 and 2001, other
comprehensive income (loss) consists of unrealized gains (losses) on investments
available for sale and foreign currency translation gains (losses).

(u) FOREIGN CURRENCY TRANSLATION

        For operations outside the U.S. that prepare financial statements in
currencies other than the U.S. dollar, results of operations and cash flows are
translated at average exchange rates during the period, and assets and
liabilities are translated at end-of-period exchange rates. Translation
adjustments are included as a separate component of accumulated other
comprehensive income (loss) in stockholders' equity.

(v) RECENT ACCOUNTING PRONOUNCEMENTS

        (i)     SFAS No. 141

                                                                              51
<PAGE>

        In July 2000, the FASB issued SFAS No. 141, "Business Combinations."
SFAS No. 141 requires use of the purchase method of accounting for business
combinations initiated after June 30, 2001 and eliminates the
pooling-of-interests method. The Company believes that the adoption of SFAS No.
141 will not have a significant impact on its financial position or results of
operations.

        (ii)    SFAS No. 142

        In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other
Intangible Assets", which is effective for fiscal years beginning after December
15, 2001. SFAS No. 142 requires, among other things, the discontinuance of
goodwill amortization. In addition, the standard includes provisions, upon
adoption, of the reclassification of certain existing and recognized intangibles
as goodwill, reassessment of the useful lives of existing recognized
intangibles, reclassification of certain intangibles out of previously reported
goodwill and testing for impairment of existing goodwill and other intangibles.
Upon adoption of SFAS No. 142, the Company will cease to amortize approximately
$171.0 million of goodwill. The Company recorded approximately $117.6 million of
amortization on these amounts during 2001 and would have recorded approximately
$53.0 million of amortization during 2002. In lieu of amortization, the Company
will be required to perform an impairment review of its goodwill balance upon
the initial adoption of SFAS No. 142. The impairment review will involve a
two-step process as follows:

-   Step 1 -- The Company will compare the fair value of its reporting units to
    the carrying value, including goodwill of each of those units. For each
    reporting unit where the carrying value, including goodwill, exceeds the
    unit's fair value, the Company will move on to step 2. If a unit's fair
    value exceeds the carrying value, no further work is performed and no
    impairment charge is necessary.

-   Step 2 -- The Company will perform an allocation of the fair value of the
    reporting unit to its identifiable tangible and non-goodwill intangible
    assets and liabilities. This will derive an implied fair value for the
    reporting unit's goodwill. The Company will then compare the implied fair
    value of the reporting unit's goodwill with the carrying amount of reporting
    unit's goodwill. If the carrying amount of the reporting unit's goodwill is
    greater than the implied fair value of its goodwill, an impairment loss must
    be recognized for the excess.

        The Company expects to complete Step 1 of the impairment review during
the second quarter of 2002 and must complete Step 2 prior to December 31, 2002.
During the first quarter of 2002, the Company will also be required to evaluate
the estimated useful lives and separability of its identifiable intangible
assets. Since year end, the Company's business has continued to be impacted by
significant negative industry and economic trends. Additionally, the Company's
stock price has continued to decline since December 31, 2001 and the Company's
market capitalization is below the Company's book value. Accordingly, the
Company may be required to record an impairment charge based on the adoption of
SFAS No. 142. The Company is currently assessing the impact that the adoption of
SFAS No. 142 will have on its financial position or results of operations.

        (iii)   SFAS No. 144

        In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses significant
issues relating to the implementation of SFAS No. 121 and develops a single
accounting method under which long-lived assets that are to be disposed of by
sale are measured at the lower of book value or fair value less cost to sell.
Additionally, SFAS No. 144 expands the scope of discontinued operations to
include all components of an entity with operations that (1) can be
distinguished from the rest of the entity and (2) will be eliminated from the
ongoing operations of the entity in a disposal transaction. SFAS No. 144 is
effective for financial statements issued for fiscal years beginning after
December 15, 2001 and its provisions are to be applied prospectively. The
Company believes that the adoption of SFAS No. 144 will not have a significant
impact on its financial position or results of operations.

NOTE (5) ACQUISITIONS

(a) PURCHASE CONSIDERATION FOR ACQUISITIONS

<TABLE>
<CAPTION>
                                                                                      PURCHASE PRICE
                                                     -----------------------------------------------------------------------------
                                                         CASH
                                                       INCLUDING
                                                        RELATED
          NAME                  ACQUISITION DATE        EXPENSES                             EQUITY ISSUED
-----------------------------  ------------------    -------------    ------------------------------------------------------------
<S>                            <C>                   <C>              <C>                 <C>
Mobeo, Inc.                    August 19, 1999       $11.5 million    $    0.4 million    consisting of 46,105 options
LocusOne Communications, Inc.  February 3, 2000      $40.2 million                        --
Riverbed Technologies, Inc.    March 6, 2000         $16.9 million    $1,136.0 million    consisting of 4,537,281 shares of common
                                                                                          stock and 862,480 options
IFX Group Plc                  April 6, 2000         $85.0 million                        --
NetSearch, LLC                 April 20, 2000        $35.4 million                        --
Cerulean Technology, Inc.      September 14, 2000    $79.8 million    $   69.9 million    consisting of 462,412 shares of common
                                                                                          stock and 94,952 options
SunPro, Inc.                   September 18, 2000    $10.8 million                        --
Sinope, Inc.                   September 25, 2000    $ 2.8 million                        --
Retail transportation
division of Motient Corp.      November 30, 2000     $49.2 million                        --
RTS Wireless, Inc.             December 20, 2000     $34.2 million    $   78.0 million    consisting of 1,259,752 shares of common
                                                     ---------------------------------    stock and 90,248 options

Total                                                $365.8 million   $1,284.3 million    consisting of 6,259,445 shares of common
                                                     =================================    stock and 1,093,785 options.
</TABLE>

                                                                              52
<PAGE>

        On May 5, 2000, the Company, in conjunction with Reuters PLC, formed
Sila Communications (Sila). The Company contributed IFX Group Plc and $13.5
million in cash for a 60% interest in Sila, while Reuters contributed cash of
approximately $20.8 million and a paging company for the remaining 40% interest.
During 2000, Sila acquired four companies for an aggregate purchase price of
$21.4 million. Sila is consolidated in the accompanying consolidated financial
statements.

(b) ALLOCATION OF PURCHASE CONSIDERATION

        These acquisitions have been accounted for under the purchase method of
accounting and, accordingly, the assets acquired and liabilities assumed have
been recorded at their estimated fair value as of the acquisition date. The
allocation of the total purchase price for these acquisitions is summarized as
follows:

<TABLE>
<CAPTION>
                                                                1999        2000
                                                              --------   -----------
                                                              (AMOUNTS IN THOUSANDS)
<S>                                                           <C>        <C>
Current assets..............................................  $   391    $   27,628
Property and equipment......................................      372         8,196
Current liabilities.........................................   (1,606)      (36,781)
Deferred tax liability......................................       --       (12,255)
In-process research and development.........................       --         7,860
Identifiable intangibles....................................    6,600       175,725
Goodwill....................................................    6,165     1,516,819
Minority interest...........................................       --       (45,411)
                                                              -------    ----------
          Total consideration...............................  $11,922    $1,641,781
                                                              =======    ==========
</TABLE>

        In 2001, the Company recorded additions to goodwill and intangible of
approximately $21.5 million, which included $8.0 million relating to acquisition
of license rights from AOL and $12.6 million relating to the finalization of the
allocation of the purchase prices for acquisitions made in 2000.

        The following summary, prepared on a pro forma basis, presents the
results of the Company's operations (unaudited) as if the acquisitions had been
completed as of January 1, 2000:

<TABLE>
<CAPTION>
                                                                       (UNAUDITED)
                                                                    -----------------
                                                                    DECEMBER 31, 2000
                                                                    -----------------
                                                         (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                                     <C>
Revenue..............................................                   $  107,811
Net loss.............................................                   $ (506,480)
Net loss per share -- basic and diluted..............                   $   (13.13)
</TABLE>

(c) ACQUIRED INTANGIBLES

        The identifiable intangibles are being amortized between two and seven
years and the goodwill was being amortized between three and seven years. On
January 1, 2002 the Company discontinued the amortization of goodwill due to
its implementation of SFAS No. 142.

        Intangible assets consists of the following (amounts in thousands):



                                                                              53
<PAGE>

<TABLE>
<CAPTION>
                                            ESTIMATED        DECEMBER 31,  DECEMBER 31,
                                           USEFUL LIVES         2000          2001
                                          ------------       ------------   ----------
<S>                                       <C>                <C>            <C>
Goodwill................................  3 - 7 Years        $1,522,984     $  473,908
Completed technology....................  3 - 7 Years           127,770         68,577
Assembled workforce.....................  2 - 4 Years            29,968         16,943
Trademarks..............................  5 - 7 Years             8,590          4,302
Acquired subscribers....................  3 - 7 Years            15,997          6,400
Other non-acquisition intangibles.......  3 - 5 Years             4,159         12,779
                                                              ---------     -----------
Total intangible assets.................                      1,709,468        582,909
Less accumulated amortization...........                       (230,983)      (356,135)
                                                              ---------     -----------
Intangible assets net of accumulated
    amortization........................                     $1,478,485     $  226,774
                                                              =========     ===========
</TABLE>

(d) IMPAIRMENT CHARGES -- ACQUISITIONS

        The Company performs an on-going analysis of the recoverability of its
goodwill and other intangibles in accordance with SFAS No. 121. Based on
quantitative and qualitative measures, the Company assesses the need to record
impairment losses on long-lived assets used in operations when impairment
indicators are present. The impairment conditions evaluated by management may
change from period to period, given that the Company operates in a volatile
business environment.

        A number of factors indicated that impairments may have occurred in the
period ended December 31, 2001. Consideration for some of the Company's
acquisitions was partially or fully funded through the issuance of shares of the
Company's common stock at a time when its stock price was at historically high
prices. The Company's stock price ranged from $40.81 to $266.00 per share at the
time of these acquisitions. At December 31, 2001, the Company's stock price was
$9.20 per share. Most of the companies the Company acquired were start-up or
newly formed entities. Most of these companies were privately-held and their
fair values are highly subjective and not readily determinable. At the time of
these acquisitions, market valuations and the availability of capital for such
companies was at historically high levels. During 2001, stock prices and market
valuations in the Company's industry and similar industries fell substantially
in response to a variety of factors, including a general downturn in the
economy, a curtailment in the availability of capital and a general reduction in
technology expenditures.

        Based on the factors described above, the Company determined during 2001
that the goodwill and other intangibles related to certain of its acquisitions
had become impaired. In accordance with SFAS No. 121, the Company performed an
undiscounted cash flow analysis of its acquisitions to determine whether an
impairment existed. When the undiscounted cash flows for an acquired company was
less than the carrying value of the net assets, management determined a range of
fair values using a combination of valuation methodologies. The methodologies
included:

        -       Discounted cash flow analysis, which is based upon converting
                expected future cash flows to present value.

        -       Changes in market value since the date of acquisition relative
                to the following:

                        -       the Company's stock price;

                        -       comparable companies;

                        -       the NASDAQ composite index; and

                        -       a composite of companies that operate with in
                                the Company's industry.

        -       Market price multiples of comparable companies.

        -       Contribution to the Company's market valuation.

        The methodologies used were consistent with the specific valuation
methods used when the original purchase price was determined. The Company's best
estimate of the fair value was determined from the range of possible values
after considering the relative performance, future prospects and risk profile of
the acquired company. In connection with the valuation of the Riverbed
acquisition, the Company engaged an independent third party to determine the
fair value of the acquired business, because of the magnitude of the acquisition
and the associated potential impairment.

        As a result of its review, the Company determined that the carrying
value of goodwill and certain other intangible assets related to its
acquisitions were not fully recoverable. Accordingly, during 2001, the Company
recorded impairment charges of approximately $1.121 billion, which represents
the difference between the carrying value and fair value of its goodwill and
other intangible assets. The impairment of goodwill and other intangible assets
from the acquisition of Riverbed amounted to approximately $775.0 million.

                                                                              54
<PAGE>

        The Company also recorded impairment charges to goodwill and other
intangibles related to the acquisitions of IFX and the related formation of
Sila, LocusOne, NetSearch, Cerulean, Sunpro and RTS Wireless of approximately
$346.0 million.

        Because the conditions underlying the factors the Company uses to
evaluate its acquisitions change from time to time, the Company could determine
that it is necessary to take additional material impairment charges in future
periods.

NOTE (6) INVESTMENTS

(a) INVESTMENTS

        From August 1999 to December 31, 2001, the Company has made investments
of $196.8 million in 24 companies.

        The Company currently has investments in six companies that are recorded
using the equity method of accounting: Omnisky, Inc. (22.6% interest as of
December 31, 2001), Inciscent, Inc. (27.5% interest) as of December 31, 2001),
VeriStar Corp. (25.3% interest as of December 31, 2001), MindSurf Networks, Inc.
(49.8% interest as of December 31, 2001), Spring Wireless, Ltd. (28.6% interest
as of December 31, 2001) and Mobiya Co, Ltd. (40.0% interest as of December 31,
2001). The Company recorded approximately $2.4 million, $47.8 million and $57.5
million in expenses for the years ended December 31, 1999, 2000 and 2001, to
reflect its proportionate share of the losses in these companies based on
preliminary unaudited financial information provided by the investee. During the
years ended December 31, 2000 and 2001, the Company recorded gains of
approximately $73.3 million and $6.1 million in stockholders' equity resulting
from sale by Omnisky of its equity to third party investors, and to the public.

        At December 31, 2001, the Company has investments in five publicly
traded companies which are accounted for as available-for-sale and eleven
private companies which are accounted for at cost. The Company sold two of its
investments in 2001 which resulted in a net realized loss of $6.0 million.

        For the years ended December 31, 1999, 2000 and 2001, the Company
generated approximately $2.2 million, $10.5 million and $11.4 million,
respectively, in revenue from products or services provided to these investees.
In addition, the Company had approximately $4.9 million and $1.8 million in
accounts receivable, net of reserves, at December 31, 2000 and 2001,
respectively, due from these investees. See Note 13.

(b) IMPAIRMENT CHARGES

        The Company adjusts the carrying value of its available-for-sale
investments in public companies to market and records the change in market value
to other comprehensive income. In accordance with SAB 59, "Accounting for
Noncurrent Marketable Equity Securities." During 2001, the Company assessed the
decline in market value in certain of its public company investments as other
than temporary after reviewing the following factors: length of time and extent
to which the market value of the investment has been below cost, the financial
position and the near-term prospects of the issuer, and the intent and ability
of the Company to retain its investment in the investee for a period of time
sufficient to allow for any anticipated recovery in market value.

        With respect to investments in non-public companies, the Company's
management performs on-going reviews based on quantitative and qualitative
measures. In evaluating its non-public company investments, management
determined a range of market values based on a combination of the following
valuation methods where applicable:

        -       Recent funding rounds.

        -       Changes in market value since the date of investment relative to
                the following:

                        -       the Company's stock price;

                        -       comparable companies;

                        -       the NASDAQ composite index

                        -       a composite of companies that operate with in
                                the Company's industry.

        -       Market price multiples of comparable companies.

        The fair value was determined from the range of possible values, after
considering the strength of the investee's financial position, future prospects
and risk profile of the invested company.

        During 2001, the Company recorded a net charge of $143.4 million, which
included $136.7 million in impairment charges related to its investments. The
remainder of the net charge related to net gains (losses) from the sales of
investments, and changes in the fair value of warrants.

        Because the conditions underlying the factors the Company uses to
evaluate its investments change from time to time, the Company could determine
that it is necessary to take additional material impairment charges in future
periods.

(d) DERIVATIVES

                                                                              55
<PAGE>

        The Company's derivatives include stock purchase warrants obtained in
connection with two of the Company's investments. Such warrants are classified
as derivatives since they include provisions which allow for net settlement. The
Company has recognized an investment loss of $6.4 million in 2001 related to the
decline in the fair value of the warrants.

        Additionally, the Company entered into a forward sale contract which
provides for the Company to deliver no more than 2,439,100 shares of Omnisky
stock on June 5, 2002 to the counterparty. In return, the Company received $5.2
million which has been recorded as a note payable in the accompanying
consolidated balance sheet. The Company has recorded a gain of approximately
$5.7 million on the forward sale contract due to the decline in the fair
value of Omnisky during 2001.

        The warrants and the forward sale contract do not qualify for hedge
accounting and, accordingly, are marked to market at the end of each reporting
period with any unrealized gain or loss recognized in the consolidated statement
of operations.

NOTE (7) RESTRUCTURING CHARGES

        During 2001, the Company implemented an expense reduction plan as part
of the Company's integration strategy focused on improving operational
efficiencies and the implementation of other measures intended to reduce planned
expenses. These efforts have resulted in the consolidation of excess facilities
and a reduction in the Company's work force. As a result of this restructuring
plan, the Company recorded charges to earnings during 2001 of $45.0 million. The
charge related mainly to a workforce reduction of over 480 positions and the
closing or consolidation of twelve facilities. Employee separation benefits of
$10.2 million under the restructuring plan include severance, medical, and other
benefits. Facility closure costs of $34.8 million include expected losses on
subleases, brokerage commissions, asset impairment charges, contract termination
costs and other costs. As of December 31, 2001, the accrued liability related to
the restructuring was $27.8 million.

        Calculation of the restructuring accrual related to expected losses on
subleases requires us to make estimates concerning: (1) the expected length of
time to sublease the facility; (2) the expected rental rates on subleases; and,
(3) estimated brokerage expenses associated with executing the sublease. The
Company used the assistance of independent real estate brokerage firms in
developing these estimates and the Company's estimates may be impacted by future
economic trends. The expected losses on subleases have not been discounted. If
the actual results differ from the Company's estimates, the Company may be
required to adjust its restructuring accrual related to expected losses on
subleases, including recording additional losses.

A rollforward of the restructuring accrual is as follows:

<TABLE>
<CAPTION>
                                                  EMPLOYEE
                                                 SEPERATION       FACILITY CLOSURE
2001 RESTRUCTURING:                               BENEFITS        COSTS AND OTHER          TOTAL
                                              ----------------    -----------------  ----------------
<S>                                            <C>                <C>                <C>
Second quarter .....................                    4,870               10,989            15,859
Third quarter ......................                    4,070               14,528            18,598
Third quarter adjustments ..........                     (147)                (220)             (367)
Fourth quarter .....................                    1,435                6,386             7,821
Fourth quarter adjustments .........                       -                 3,095             3,095
                                              ----------------     ----------------  ----------------
  Total restructuring charge .......                   10,228               34,778            45,006
Second quarter reclassification
  from acquisition accounts ........                       -                 1,643             1,643
Cash Payments ......................                   (4,765)             (14,067)          (18,832)
                                              ----------------     ----------------  ----------------
Restructuring liability as of
  December 31, 2001 ................                    5,463               22,354            27,817
                                              ================    =================  ================
</TABLE>

NOTE (8) PROPERTY AND EQUIPMENT

Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
                                                                                    DECEMBER 31,
                                                              ESTIMATED       -----------------------
2001 RESTRUCTURING:                                         USEFUL LIVES         2000            2001
                                                         ----------------     --------       --------
<S>                                                        <C>               <C>            <C>
Furniture and fixtures................................            7 Years      $ 2,500         $2,886
Computer and equipment................................       3 - 10 Years        9,425         22,208
Software..............................................            3 Years       25,096         20,964
Leasehold improvements................................      Term of Lease        5,582          8,687
Airplane..............................................           10 Years       11,765         11,765
Network operations centers............................            3 Years        6,002         24,580
Construction in progress..............................                -              -          2,822
                                                                             ---------      ---------
Total property and equipment..........................                          60,370         93,912
Less depreciation and amortization....................                          (7,147)       (32,608)
                                                                             ---------      ---------
Property and equipment net of depreciation and
amortization..........................................                         $53,223        $61,304
                                                                             =========      =========
</TABLE>
<PAGE>

NOTE (9) DEBT

        Notes payable at December 31, 2000 and 2001 consists of $310.5 million
and $290.5 million of 6% convertible subordinated notes (the Notes) due in 2005.
During 2001, the Company bought back $20.0 million of the outstanding Notes and
recognized an extraordinary gain of $7.7 million on the early extinguishment of
debt. The Notes are convertible, at the option of the holder, at any time prior
to maturity into shares of common stock of Aether at a conversion price of
$243.95 per share, which is equal to a conversion rate of 4.0992 shares per
$1,000 principal amount of notes, subject to adjustment.

        Also included in notes payable at December 31, 2000 and 2001 is $10.3
million of notes payable to certain former shareholders of Synamic Limited.
Synamic Limited was acquired by Sila, a majority owned subsidiary of the
Company, in August 2000. The note is payable between August 15, 2002 and August
15, 2003 at the former shareholders' discretion and bore interest at a rate of
6.15% through April 15, 2001, at which time the rate was adjusted to 5.9% and
will remain there through August 15, 2002 at which time it will be adjusted to
then current rate.

        Notes payable as of December 31, 2000 include amounts placed in escrow
to cover all remaining obligations in connection with the acquisition of
LocusOne on February 3, 2000. This non-interest bearing note became due and
payable on December 31, 2000. On January 2, 2001, the Company paid this
obligation in full in the amount of $13.6 million.

        The aggregate maturities of debt for each of the five years subsequent
to December 31, 2001 are as follows (amounts in thousands):

<TABLE>
<S>                                                           <C>
2002........................................................  $ 15,493
2003........................................................       115
2004........................................................        17
2005........................................................   290,513
Thereafter..................................................        --
                                                              --------
                                                              $306,138
                                                              ========
</TABLE>

NOTE (10) INCOME TAXES

        Effective October 26, 1999, in connection with the Company's initial
public offering of common stock, Aether merged with and into Aether Systems,
Inc. and the merged entity became a Subchapter C Corporation under the Internal
Revenue Code of 1986.

        The Company has provided no current income taxes due to the losses
incurred in all periods. The income tax benefit for 2000 and 2001 consists of a
foreign deferred tax benefit associated with the amortization of identifiable
intangible assests acquired by Sila.

A reconciliation of the statutory Federal income tax rate and the effective
income tax rate for the year ended December 31, 2000 and 2001 follows:

<TABLE>
<CAPTION>
                                                  2000           2001
                                                  ----           ----
<S>                                              <C>            <C>
Statutory Federal income tax rate                (35.0)%        (35.0)%
Effect of:
     Nondeductible goodwill amortization          18.9           21.2
     Foreign                                       1.1            1.9
     Other                                        (1.0)           0.2
     Valuation allowance                          15.6           11.1
                                                  ----           ----
Effective income tax rate                         (0.4)%         (0.6)%
                                                  ====           ====
</TABLE>

        The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 2000 and
2001, are presented below (amounts in thousands):

                                                                              57
<PAGE>

<TABLE>
<CAPTION>
                                                     DECEMBER 31, 2000    DECEMBER 31, 2001
                                                     -----------------    -----------------
<S>                                                  <C>                  <C>
Deferred tax assets:
  Net operating loss carryforwards.................      $149,989             $ 232,755
  Investments......................................            --                53,359
  Capital loss carryforwards.......................            --                14,213
  Stock related compensation.......................            --                 4,998
  Allowance for doubtful accounts..................         2,196                 4,321
  Accrued compensation.............................         2,951                 4,036
  Reserves and other...............................           432                16,259
  Tax credit carryforwards.........................         2,291                 3,337
                                                          -------             ---------
Gross deferred tax assets..........................      $157,859             $ 333,278
Valuation allowance for deferred tax assets........      (105,593)             (331,729)
                                                          -------             ---------
Net deferred tax assets............................        52,266                 1,549
                                                          -------             ---------
Deferred tax liabilities:
  Depreciation and amortization....................         2,408                   506
  Investments......................................         9,121                    --
  Intangibles......................................        51,431                 1,403
                                                          -------             ---------
Net deferred tax liabilities.......................        62,960                 1,549
                                                          -------             ---------
Deferred income tax liability, net.................       $10,694             $      --
                                                          =======             =========
</TABLE>

        The net change in the valuation allowance for deferred tax assets was an
increase of $97.9 million in 2000 and $226.1 million in 2001. The increase in
2001 consists of an increase of $219.6 million related to continuing operations
and an increase of $6.5 million related to amounts booked directly to
stockholders' equity. The increase in 2000 consists of an increase of $67.6
million related to continuing operations, an increase of $54.1 million related
to amounts booked directly to stockholders' equity, and a decrease of $23.8
million related to the establishment of deferred tax liabilities for acquired
indentifiable intangible assets.

        In addressing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent on the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income and tax planning strategies in making this assessment. Based upon
the level of historical taxable income and projected future taxable income over
the periods in which the deferred tax assets are deductible, management
has determined that a valuation allowance of $105.6 million and $331.7 million
is required as of December 31, 2000 and 2001, respectively.

        As of December 31, 2001, the Company had Federal and State net operating
loss carryforwards of approximately $557.8 million that expire between 2012 and
2021. In addition, the Company has capital loss carryforwards of approximately
$40.6 million that expire in 2006. As a result of changes in common stock
ownership, the future realization of net operating loss carryforwards, capital
loss carryforwards and certain other tax credits may be limited.

NOTE (11) PENSION PLANS

        The Company has two defined contribution plans under Section 401(k) of
the Internal Revenue Code that provide for voluntary employee contributions of 1
to 15 percent of compensation for substantially all employees. The Company
contributed $4,000, $636,000 and $2.2 million to the plans for the
years ended December 31, 1999, 2000 and 2001, respectively.

NOTE (12) STOCK OPTIONS AND WARRANTS

        In 1996, the Company adopted a Unit Option Plan. In September 1999, the
Company adopted the 1999 Equity Incentive Plan (the Plan) to replace the Unit
Option Plan. Under the 1999 Equity Incentive Plan, the Company has the ability
to grant options to acquire up to 20% of the outstanding shares of common stock
to its employees, directors, and service providers. Options under the Plan
generally expire after ten years and normally vest over a period of up to four
years. Options are generally granted at an exercise price equal to the fair
value on the grant date. Effective December 15, 2000, the Company adopted the
Acquisitions Incentive Plan (the 2000 Plan) to provide options or direct grants
to employees and other service providers of the Company and its related
companies with respect to the Company's common stock. The Company has the
ability to grant options to acquire up to an additional 5% of the outstanding
shares of common stock under the 2000 Plan. All employees (except directors and
officers of the Company and any

                                                                              58
<PAGE>

eligible affiliates) are eligible for the awards under the 2000 Plan. Options
are generally granted at an exercise price equal to the fair value on the grant
date.

        In June 1999, the Company entered into an employment agreement with its
Chief Executive Officer (Executive). As part of this agreement, the Executive
was granted 350,000 unit options (875,000 shares) at an exercise price of $4.00
per unit ($1.60 per share) and the right to grant an additional 50,000 unit
options (125,000 shares) at an exercise price of $4.00 per unit ($1.60 per
share) to other key executives. These options expire in June 2009. In September
1999, the Company granted the Executive an additional 70,000 unit options
(175,000 shares) at an exercise price of $10.00 per unit ($4.00 per share).
These options expire in September 2009. Both grants of options became fully
vested in October 1999, as a result of the completion of the Company's initial
public offering. In October 1999, the Company recorded option and warrant
expense of $16.5 million, which is equal to the difference between the fair
value of the shares of the Company's common stock and the exercise price
measured at the date of the initial public offering, times the number of
options.

        In January 2001, the Company's employees were offered the right to
exchange existing options for shares of restricted stock. 567 employees agreed
to have their options canceled in exchange for approximately 756,000 shares of
restricted stock. The Company expects to record up to $26.6 million of expense
over the next five years associated with the issuance of the restricted stock.

        The Company recorded total option and warrant expense of $19.2 million,
$14.3 million and $14.4 million in 1999, 2000 and 2001, respectively. The
Company applies APB 25 and related interpretations in accounting for its stock
option plans. Had compensation cost been recognized consistent with the fair
value method prescribed by SFAS No. 123, the Company's net loss would have
increased by $4.2 million, $53.2 million and $81.4 million for 1999, 2000, and
2001, respectively.

        The per share weighted-average value of options granted by the Company
during 1999, 2000 and 2001 was $9.21, $113.35 and $7.11, respectively, on the
date of grant using the Black-Scholes option-pricing model. These amounts were
calculated using an expected option life of four years and volatility of 70
percent for options granted in 1999, 2000 and 2001. In addition, the
calculations assumed a risk-free interest rate of 4.60 percent to 6.11 percent
in 1999, 5.08 percent to 6.38 percent in 2000 and 3.70 percent to 4.71 percent
in 2001. A summary of the stock option activity, as adjusted for the exchange of
unit options for stock options, is as follows:

<TABLE>
<CAPTION>
                                        1999                            2000                            2001
                            -----------------------------   ------------------------------   -----------------------------
                                              WEIGHTED-                         WEIGHTED                        WEIGHTED
                                               AVERAGE                          AVERAGE                         AVERAGE
                                               EXERCISE                         EXERCISE                        EXERCISE
                                NUMBER          PRICE           NUMBER           PRICE           NUMBER          PRICE
                              OF SHARES      (PER SHARE)       OF SHARES      (PER SHARE)      OF SHARES      (PER SHARE)
                            --------------   ------------   ---------------   ------------   --------------   ------------
                            (IN THOUSANDS)                  (IN THOUSANDS)                   (IN THOUSANDS)
<S>                         <C>              <C>            <C>               <C>            <C>              <C>
Outstanding at beginning
  of year.................      1,545           $0.85            3,933           $ 4.48           6,957          $64.61
Options and warrants
  granted.................      2,763           $6.19            4,982           $91.69           3,825          $12.72
Options and warrants
  exercised...............       (365)          $0.54           (1,612)          $ 3.01            (529)         $ 2.47
Options and warrants
  canceled................        (10)          $1.49             (346)          $56.40          (4,002)         $92.83
                                -----           -----            -----           ------          --------       --------
Outstanding at end of
  year....................      3,933           $4.48            6,957           $64.61           6,251          $19.22
                                =====           =====            =====           ======          ========       ========
Options and warrants
  exercisable at
  year-end................      2,451           $2.13            1,435           $ 4.38           2,336          $ 9.31
                                =====           =====            =====           ======          ========       ========
</TABLE>

The following table summarizes information about stock options at December 31,
2001:

                                                                              59
<PAGE>

<TABLE>
<CAPTION>
                                   OPTIONS OUTSTANDING                         OPTIONS EXERCISABLE
                   ---------------------------------------------------   -------------------------------
                     NUMBER AT     WEIGHTED-AVERAGE    WEIGHTED-AVERAGE    NUMBER AT     WEIGHTED-AVERAGE
    RANGE OF        DECEMBER 31,       REMAINING        EXERCISE PRICE    DECEMBER 31,    EXERCISE PRICE
 EXERCISE PRICES        2001       CONTRACTUAL LIFE      (PER SHARE)          2001         (PER SHARE)
-----------------   ------------   -----------------   ----------------   ------------   ----------------
                       (IN           (IN YEARS)                              (IN
                    THOUSANDS)                                            THOUSANDS)
<S>                   <C>                  <C>            <C>               <C>             <C>
Restricted Stock        497,272              -            $  0.00                   -       $  0.00
$  0.24--$  1.60      1,193,285            6.9            $  1.42           1,153,389       $  1.45
$  1.61--$  4.80        735,603            6.5            $  3.11             607,754       $  3.38
$  4.81--$  8.53        240,379            5.8            $  7.83             172,220       $  7.88
$  8.54--$ 34.75      2,720,569            8.7            $ 12.94             243,642       $ 21.70
$ 34.76--$ 75.38        575,445            8.2            $ 66.50             112,999       $ 56.50
$ 75.39--$ 92.00        155,638            6.8            $ 84.90              19,288       $ 84.57
$ 92.01--$235.00        133,188            7.5            $135.70              26,537       $126.61
                      ---------            ---            ---------         ---------       ---------
                      6,251,379            7.8            $ 19.22           2,335,829       $  9.31
</TABLE>

NOTE (13) OTHER RELATED PARTY TRANSACTIONS

(a) NOTES RECEIVABLE FROM STOCKHOLDER

        As of December 31, 1999, the Company had amounts due from a stockholder
under short-term promissory notes of approximately $137,000. The Company
classified the notes as a reduction of stockholders' equity in the accompanying
consolidated statements of stockholders' equity. The notes were callable by the
Company at any time and bore interest at a rate of 7.5 percent per annum. The
notes and accrued interest were repaid in February 2000.

(b) RELATED PARTY REVENUE AND RECEIVABLES

        In the ordinary course of business, the Company has entered into sales
arrangements with entities in which the Company has equity interests. For the
years ended December 31, 1999, 2000 and 2001, the Company had sales to these
related parties aggregating approximately $2.2 million, $10.5 million and $11.4
million, respectively. As of December 31, 2000 and 2001, the Company had
accounts receivable from these related entities aggregating approximately, $4.9
million and $1.8 million, respectively.

(c) RELATED PARTY EXPENSES

        In 2000 and 2001, the Company received services from stockholders and
other related entities, such as benefits coordinators, investment banking firms,
and a financial information company. These companies are considered related
parties due to the fact that they are significant stockholders or entities
related to significant stockholders of the Company. For the year ended December
31, 2001, the Company incurred costs of approximately $2.2 million from these
related entities associated with the services received. For the year ended
December 31, 2000, the Company incurred costs of approximately $5.7 million from
these related entities related to these services received.

(d) AOL INVESTMENT IN AETHER

        On November 5, 2001, the Company and AOL entered into a strategic
alliance to develop and market wireless solutions to small and medium sized
businesses. The Company will be paid $2.5 million in engineering fees to extend
certain AOL functionality to wireless platforms for the small and medium sized
business market plus $500,000 for providing sales force automation solutions to
AOL. Additionally the Company and AOL may work together to develop applications
that will work in conjunction with the wireless platforms. The Company has
agreed to share with AOL, any net revenues the Company receives from its sale of
these products if certain revenue targets are met. As part of the agreement
Aether will pay a license fee of $10.0 million for access to certain tangible
and intangible assets of AOL including certain intellectual property rights. In
connection with the alliance AOL agreed to purchase, upon the Company's request,
and subject to certain conditions, up to $20.0 million of Aether stock over the
next three years at then market values preceding the respective dates of
purchase. On December 3, 2001 AOL made it's first $5.0 million purchase of
Aether stock. As part of the alliance Aether consolidated its media purchases
and committed over the next four years to spend approximately $12.0 million per
year of its advertising budget to promote these new products, as well as
Aether's current and future wireless data products and services, across the
family of AOL interactive brands as well as AOL Time Warner, Inc.'s broad range
of media properties.

NOTE (14) COMMITMENTS AND CONTINGENCIES

                                                                              60
<PAGE>

(a) LEGAL PROCEEDINGS

        Aether and certain of its officers and directors are among the
defendants named in nine purported class action lawsuits. These actions were
filed on behalf of persons and entities who acquired the Company's common stock
after its initial public offering in October 21, 1999. The suits seek damages on
account of alleged violations of securities laws. Among other things, the
complaints claim that prospectuses, dated October 21, 1999 and September 27,
2000 and issued by the Company in connection with the public offerings of common
stock, allegedly contained untrue statements of material fact or omissions of
material fact in violation of securities laws because the prospectuses allegedly
failed to disclose that the offerings' underwriters had solicited and received
additional and excessive fees, commissions and benefits beyond those listed in
the arrangements with certain of their customers which were designed to
maintain, distort and/or inflate the market price of Aether's common stock in
the aftermarket. The actions seek unspecified monetary damages and rescission.
The Company believes the claims are without merit and plans to vigorously
contest these actions.

        The Company is also a party to other legal proceedings in the normal
course of business. Based on evaluation of these matters and discussions with
counsel, the Company believes that liabilities arising from these matters will
not have a material adverse effect on the consolidated results of its operations
or financial position.

(b) CONTRACTUAL COMMITMENTS

        For fiscal year 2002, the Company has contractual commitments of
approximately $56.2 million relating to RIM inventory purchase commitments,
Novatel modem purchase commitment with OmniSky, AOL Time Warner advertising
purchasing commitments, debt service and funding for Sila. Although there can be
no assurance, the Company believes that actual expenditures related to these
items in 2002 will be less than $56.2 million due to reductions
the Company is currently in the process of negotiating and due to a reduction of
debt service as a result of a debt buy-back in March of 2002. See Note 17.

        In connection with the acquisition of Motient's retail transportation
segment, the Company currently has airtime purchase commitments with Motient in
the amount of $10 million over the next two years.

        In a joint venture with Sylvan Learning Systems, Inc. (Sylvan), the
Company agreed to fund up to $32.9 million in MindSurf, subject to certain
conditions being met. At December 31, 2001, the Company has contributed $18.8
million to this joint venture. The company believes it is unlikely that the
conditions for additional funding will be met in 2002. The joint venture
agreement allowed for the Company and Sylvan to at any time agree not to
continue funding MindSurf under any conditions.

(c) LEASES

        The Company is obligated under noncancelable operating leases for office
space that expire at various dates through 2010. Future minimum lease payments
under noncancelable operating leases are approximately as follows: (in
thousands)

<TABLE>
<CAPTION>
                  YEAR ENDING DECEMBER 31,
                  ------------------------
<S>                                                           <C>
2002........................................................   $16,334
2003........................................................    16,078
2004........................................................    15,257
2005........................................................    12,965
2006........................................................    12,230
Thereafter..................................................    51,813
                                                              --------
          Total minimum lease payments......................  $124,677
                                                              ========
</TABLE>

        Rent expense under operating leases was approximately $282,000, $4.5
million and $13.7 million for the years ended December 31, 1999, 2000 and 2001,
respectively. Facilities representing approximately $64.8 million of the
Company's minimum lease payments have been subleased or are available for
sublease. There can be no assurance that the Company will successfully sublease
these facilities.

(d) LETTERS OF CREDIT

        During the normal course of operations, the Company has also entered
into various letter of credit agreements. As of December 31, 2001, the Company
had outstanding $9.9 million in letters of credit which expire at various times
over the following five years.


                                                                              61
<PAGE>

NOTE (15) SEGMENT INFORMATION

(a) SEGMENTS

        The Company's operating segments include Vertical Markets and European
Operations. The Vertical Markets segment provides wireless data services
software and engineering services to develop applications for the financial
services, mobile government, transportation and logistics, real estate,
automobile and insurance industries. The European Operations Segment consists of
Sila, the Company's European joint venture with Reuters and has the majority of
its customers in the European financial services industry. Corporate and Other
consists mainly of corporate assets and SG&A expenses.

        The Company began to report its financial results by segment as of the
first quarter of 2000. During 2000 and 2001, the Company's reportable segments
have changed -- and the Company expects them to continue to change -- as its
operating structure, business and the market in which it operates evolves. In
1999, all of the Company's revenue was generated from what is now reported as
the vertical market segment.

Segment detail is summarized as follows:

<TABLE>
<CAPTION>
                          Vertical       European      Corporate and
                          Markets       Operations         Other            Total
                       -----------     -----------     -------------     -----------
<S>                    <C>             <C>             <C>               <C>
YEAR ENDED
DECEMBER 31, 2001
------------------
Revenue                $    96,451     $    12,997     $       3,432     $   112,880
Gross Profit (loss)    $    41,868     $     5,506     $     (15,248)    $    32,126
Total Assets           $   316,746     $    18,802     $     613,872     $   949,420

YEAR ENDED
DECEMBER 31, 2000
------------------
Revenue                $    44,671     $    13,483     $           0    $     58,154
Gross Profit           $    21,818     $     6,320     $           0    $     28,138
Total Assets           $ 1,378,679     $   178,001     $   1,120,695    $  2,677,375
</TABLE>

(b) GEOGRAPHICAL REGIONS

        The Company derives revenue primarily from the U.S. and Europe.
Information regarding the Company's revenues in different geographic regions is
as follows (in thousands):

<TABLE>
<CAPTION>
                                                              TWELVE MONTHS ENDED
                                                                  DECEMBER 31,
                                                              ---------------------
                                                                 2000        2001
                                                              ----------  ---------
<S>                                                           <C>          <C>
Revenue:
  U.S.......................................................  $   43,766   $ 95,697
  Aggregate Foreign.........................................      14,388     17,183
                                                              ----------  ---------
                                                              $   58,154   $112,880
                                                              ==========  =========
Long-Lived Assets...........................................
  U.S.......................................................  $1,566,741   $341,441
  Aggregate Foreign.........................................     168,765     11,811
                                                              ----------  ---------
                                                              $1,735,506   $353,252
                                                              ==========  =========
</TABLE>

                                                                              62
<PAGE>

NOTE (16) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

<TABLE>
<CAPTION>
                                QUARTER ENDED   QUARTER ENDED   QUARTER ENDED   QUARTER ENDED    YEAR ENDED
                                  MARCH 31,        JUNE 30,      SEPTEMBER 30,   DECEMBER 31,    DECEMBER 31,
                                    2001             2001            2001            2001            2001
                                -------------   -------------   -------------   -------------   -------------
<S>                             <C>             <C>             <C>             <C>             <C>
Revenue.......................  $   30,659      $    32,084     $     24,948    $     25,189    $   112,880
Gross profit (loss)...........      10,826           13,484           (2,623)         10,439         32,126
Net loss......................  (1,200,300)        (103,640)        (243,379)       (106,776)    (1,654,095)
Net loss per common share --
  basic and diluted...........      (29.67)           (2.55)           (5.98)          (2.59)        (40.61)
</TABLE>

<TABLE>
<CAPTION>
                                QUARTER ENDED   QUARTER ENDED   QUARTER ENDED   QUARTER ENDED    YEAR ENDED
                                  MARCH 31,       JUNE 30,      SEPTEMBER 30,   DECEMBER 31,    DECEMBER 31,
                                    2000            2000            2000            2000            2000
                                -------------   -------------   -------------   -------------   -------------
<S>                             <C>             <C>             <C>             <C>             <C>
Revenue.......................    $  5,401        $ 10,755        $  16,222       $  25,776       $  58,154
Gross profit..................       2,377           5,128            8,262          12,371          28,138
Net loss......................     (33,271)        (89,914)        (107,261)       (132,254)       (362,700)
Net loss per common share--
  basic and diluted...........       (1.13)          (2.36)           (2.80)          (3.37)          (9.99)
</TABLE>

NOTE (17) SUBSEQUENT EVENTS

(a) RESTRUCTURING CHARGE

        On March 4, 2002, as part of the Company's ongoing expense reduction
efforts, the Company announced that it would decrease total employment by
approximately 25%, or 225 positions. The Company also announced it would
further reduce other expenses, consolidate facilities and further streamline
Sila Communications. The Company expects to record a restructuring charge of
approximately $11.0 million in the first quarter of 2002 relating to these
actions.

(b) ASSET PURCHASE

        On March 18, 2002, the Company announced that it had acquired certain
assets from @Track Communications, Inc. ("@Track") for $3.0 million in cash plus
$12.0 million in a convertible note. @Track is a provider of wireless-based
vehicle fleet management and intelligent moblie-asset-tracking solutions.

(c) DEBT BUY-BACK

        On March 1, 2002, the Company repurchased $15.0 million of its
convertible subordinated notes payable for $8.4 million in cash.

                                                                              63
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

The Board of Directors
Aether Systems, Inc.:

Under date of February 5, 2002, except as to footnote 17 which is as of
March 18, 2002, we reported on the consolidated balance sheets of Aether
Systems, Inc. and subsidiaries as of December 31, 2000 and 2001, and the related
consolidated statements of operations and other comprehensive loss,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2001, which are included in this Annual Report on Form
10-K. We did not audit the consolidated financial statements of Sila
Communications Limited, a majority-owned subsidiary, which statements reflect
total assets constituting 6.7% and 2.2% and total revenues constituting 21.5%
and 11.5% of the related consolidated totals in 2000 and 2001, respectively.
Those statements were audited by other auditors, whose report has been furnished
to us, and our opinion insofar as it relates to the amounts included for Sila
Communications Limited is based solely on the report of the other auditors. In
connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedule. This consolidated financial statement schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion on this
consolidated financial statement schedule based on our audits.

In our opinion, based on our audits and the report of the other auditors, such
consolidated financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.


                                          /s/ KPMG LLP

                McLean, Virginia
                February 5, 2002

                                                                              64
<PAGE>

                                   SCHEDULE II
                        VALUATION AND QUALIFYING ACCOUNTS
                  YEARS ENDED DECEMBER 31, 1999, 2000 AND 2001
                             (AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                               BALANCE AT      ACQUIRED   CHARGED TO COSTS  CHARGED TO               BALANCE AT
         DESCRIPTION        BEGINNING OF YEAR  BALANCES     AND EXPENSES   OTHER ACCOUNTS DEDUCTIONS END OF YEAR
         -----------        ----------------- ----------  ---------------- -------------- ---------- -----------
<S>                              <C>        <C>            <C>              <C>              <C>        <C>
1999
  Allowance for doubtful
     accounts..............      $157       $      --      $     (60)       $     --         $ 41       $  56
2000
  Allowance for doubtful
     accounts..............        56           4,478          1,391              --          230       5,695
2001
  Allowance for doubtful
     accounts..............     5,695              --          9,801           4,363        9,298      10,561
</TABLE>

                                                                              65