**UNITED STATES****SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,DC 20549**

 

**FORM 10-K**

 
| **ý****ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES  EXCHANGE ACT OF 1934** |
|------------------------------------------------------------------------------------------------------|
|                                                                                                 |
| **FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003**                                                      |
|                                                                                                 |
| **OR**                                                                                               |
|                                                                                                 |
| **o****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)                                              |

 

| **DELAWARE**                                                                    |   | **52-2186634**                        |
|---------------------------------------------------------------------------------|--------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization)                 |   | (IRS Employer  Identification Number) |
|                                                                            |   |                                  |
| **11500 CRONRIDGE DR., SUITE 110, OWINGS  MILLS, MD**                           |   | **21117**                             |
| (Address of principal executive offices)                                        |   | (Zip Code)                            |
|                                                                            |   |                                  |
| (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 theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90days. Yes ý No o

 

Indicate by check mark if disclosure ofdelinquent filers pursuant to Item 405 of regulation S-K is not containedherein, and will not be contained, to the best of the registrant’s knowledge,in definitive proxy or information statements incorporated by reference in PartIII of the Form 10-K or any amendment of this Form 10-K. o

 

Indicate by check mark whether the registrantis an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ý No o

 

The aggregate market value of the votingstock held by nonaffiliates of the registrant was $174,941,429 ($4.14 pershare) as of June 30, 2003.

 

As of March 5, 2004, 43,380,380 shares of theregistrant’s common stock, $.01 par value per share, were outstanding.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

Proxy Statement for the 2004 Annual Meetingof the registrant, which will be filed with the Commission within 120 daysafter the close of the fiscal year, is incorporated by reference into Part III.

 

 

----

 

**AETHERSYSTEMS, INC.**

**ANNUALREPORT ON FORM 10-K**

**FORTHE YEAR ENDED DECEMBER 31, 2003**

 

**INDEX**

 
| PART I    |                                                                                        |
|-----------|---------------------------------------------------------------------------------------------|
|      |                                                                                        |   |
| Item  1   | Business                                                                                    |   |
|      |                                                                                        |   |
| Item 2    | Properties                                                                                  |   |
|      |                                                                                        |   |
| Item 3    | Legal Proceedings                                                                           |   |
|      |                                                                                        |   |
| Item 4    | Submission of Matters to a Vote of Security  Holders                                        |   |
|      |                                                                                        |   |
| PART II   |                                                                                        |
|      |                                                                                        |   |
| Item 5    | Market for the Company’s Common Equity and  Related Security Holder Matters            |   |
|      |                                                                                        |   |
| Item 6    | Selected Financial Data                                                                     |   |
|      |                                                                                        |   |
| Item 7    | Management’s Discussion and Analysis of Financial  Condition and Results of Operations |   |
|      |                                                                                        |   |
| Item 7A   | Quantitative and Qualitative Disclosures  About Market Risk                                 |   |
|      |                                                                                        |   |
| Item 8    | Financial Statements and Supplementary Data                                                 |   |
|      |                                                                                        |   |
| Item 9    | Change In and Disagreements with  Accountants on Accounting and Financial Disclosure        |   |
|      |                                                                                        |   |
| Item 9A   | Controls & Procedures                                                                   |   |
|      |                                                                                        |   |
| PART  III |                                                                                        |
|      |                                                                                        |   |
| Item 10   | Directors and Executive Officers of the  Registrant                                         |   |
|      |                                                                                        |   |
| Item 11   | Executive Compensation                                                                      |   |
|      |                                                                                        |   |
| Item 12   | Security Ownership of Certain Beneficial  Owners and Management                             |   |
|      |                                                                                        |   |
| Item 13   | Certain Relationships and Related  Transactions                                             |   |
|      |                                                                                        |   |
| Item 14   | Principal Accounting Fees and Services                                                      |   |
|      |                                                                                        |   |
| PART IV   |                                                                                        |
|      |                                                                                        |   |
| Item 15   | Exhibits, Financial Statement Schedules and  Reports on Form 8-K                            |   |

 

2

----

 

**FORWARD-LOOKING STATEMENTS**

 

This Annual Report on Form 10-K containsforward-looking statements that involve risks and uncertainties.  When used in this Report, the words“anticipate,” “believe,” “estimate,” “intend,” “may,” “will,” “expect” andsimilar expressions as they relate to our company or our management areintended to identify a statement as a “forward-looking statement.”  Our actual results, performance or achievementscould differ materially from the results expressed in, or implied by, theseforward-looking statements.  Factorsthat could cause or contribute to such differences include those discussed inItem 7 of this Report under the heading “Risk Factors.” Forward-lookingstatements reflect our reasonable beliefs and expectations as of the time wemake them, and we have no obligation to update or revise any forward-lookingstatements, whether as a result of new information, future events or otherwise.

 

3

----

 

**PART I**

 

**ITEM 1. BUSINESS**

 

INTRODUCTION

 

Our Company has undergonesignificant change, and we expect additional changes to occur during 2004.  Despite a substantial restructuring of ourorganization and the elimination of significant expenses since 2001, we havenot achieved profitability.  While wehave continued to work to improve the operational and the financial performanceof our wireless and mobile data businesses,  we have also actively explored a range of strategic options in an effortto achieve two basic objectives:

 

•                  becomeprofitable as quickly as possible, and

•                  enhance thevalue of our assets for our stockholders.

 

In January 2004, we sold ourEnterprise Mobility Solutions (“EMS”) segment. Although the EMS segment accounted for nearly 50% of our revenue, it wasnot generating a profit and required substantial investment.  We concluded that selling the EMS segmentwas more consistent with achieving our objectives than continuing to own thatbusiness and seeking to improve its financial performance.

 

Having sold our EMS segment, wenow have two operating segments:  MobileGovernment and Transportation.  We donot believe that we can achieve our objectives by simply continuing to operatethese two business segments in their current forms. We expect that we will haveto pursue one of several courses:

 

•                  augment  both of these business segments throughacquisitions of complementary businesses,

•                  augment one ofthese business segments through acquisitions of complementary businesses andeither sell or maintain the other business segment,

•                  keep ourexisting business segments and expand our operating activities by acquiringother, distinct businesses, or

•                  sell both ofthese business segments and implement a very different operating strategy.

 

We may not succeed inimplementing any of these approaches or in achieving our objectives.  However, we are continuing to evaluatestrategic options, and we anticipate that this process will result insignificant additional changes to our business during 2004.  If we are not able to implement a strategythat we believe is likely to achieve our objectives, we will consider otheralternatives.

 

CurrentDevelopments

 

In February 2004, we engagedFriedman, Billings, Ramsey & Co. Inc. (“FBR”) to advise us on strategicoptions.  FBR is assisting managementand our Board of Directors in evaluating potential strategies.   Among the options that we are reviewingwith FBR are the following:

 

•                  Potentialacquisitions;

•                  A sale of one orboth of our existing business segments;

•                  Expansion of oneor both of our existing business segments through strategic relationships,joint ventures or acquisitions;

•                  Diversificationinto new businesses; and

•                  Alternativestrategies for investing our cash.

 

We also may consider other,different options.

 

In reviewing strategic options,FBR is also assisting us in exploring alternatives for realizing value from oursubstantial net operating loss carryforwards. To realize this value, we need to generate taxable income.

 

We are actively exploring anumber of the options listed above.  Oneresult is that we have received expressions of interest from several partiesabout our existing business segments, and as of the date of this Report, wewere negotiating with one interested party. We cannot yet predict whether the current negotiations, or other optionsthat we are exploring, will result in transactions that we will decide topursue.  Consequently, while we areseeking to conclude our strategic activities as promptly as possible, we cannotyet predict the timing of additional strategic decisions.

4

----

 

As was the case in the laterpart of 2003, the strategic evaluation process and the uncertainty about ourfuture direction may negatively affect the operating results of our existingbusinesses in the near term.  We alsowill incur additional expenses for the fees of our professional advisers,including our financial advisor and our legal counsel.

 

About ThisReport

 

In this Report, in describingour Company’s operations we will discuss our Mobile Government andTransportation business segments.  Ourhistorical financial results, which we review in detail in this Report, reflectthe operations of these two business segments as “continuing operations.”  The financial results of our EMS segment arereported as “discontinued operations.”

 

Because we expect our businessto change during 2004, we do not expect our historical financial results to beindicative of our future results.  Forexample, if we reach an agreement to sell an additional portion of ourbusiness, the financial results of the business to be sold will be reported as“discontinued operations.”  As requiredby GAAP, to ensure period-to-period comparability, we also will restate ourprior period results to reflect this reclassification of that business as“discontinued operations.” If we begin or acquire any new or additionalbusinesses, our results from continuing operations will be affected.

 

Our financial condition alsomay change significantly as we implement additional strategic options:

 

•                  We may spendcash, incur additional debt or issue additional shares of our stock to financeacquisitions or to implement new business strategies;

•                  If we sellassets or businesses, we would expect to receive cash as a result of thosesales;

•                  We may berequired to repay all or a portion of the $154.9 million of our outstanding 6%convertible subordinated notes due March 2005 before maturity, which wouldreduce our cash on hand; and

•                  Changes to ouroperations will alter our organization and our financial results.

 

Because we have not yetfinalized a comprehensive business strategy for the future, we cannot forecasthow our operating results or our financial condition may change, as compared toprior years.

 

A sale of a significant portionof our existing business could result in us having to repay all or a portion ofour $154.9 million of outstanding 6% convertible subordinated notes due March2005 before their maturity.  Repaymentof these notes would reduce our cash on hand, even after including cash wereceive in any sale of additional portions of our business.  A holder of these notes can demand that wepurchase the notes upon a “change in control,” which is defined in theindenture that governs the notes to include, among other things, theacquisition of more than 50% of our outstanding voting stock by any person orgroup, a significant change in the composition of our Board of Directors and asale of all or substantially all of our assets.  We expect that at least some holders of these notes will view thesale of a significant portion of our existing business as resulting in a“change in control.”  We do not intendto repay any notes prior to maturity to the extent we are not asked to do so bythe holders.

 

OVERVIEW OF OUR MOBILEGOVERNMENT SEGMENT

 

In our Mobile Governmentsegment, we provide wireless data solutions for use by public safetyorganizations, primarily state and local police, fire and rescue and emergencymedical services organizations.  Our public safety solutions areintegrated into 50 different state databases, as well as local and federaldatabases.  Our products****deliver real-time information in seconds,without the need for human dispatchers or other resources.

 

Our Mobile Governmentproducts are:

 

•                  ThePacketCluster® family of products, which are open, standards-based wirelessinformation software products that provide police officers in the field withdirect access to motor vehicle and warrant information and other criticalinformation;

 

•                  The handheld version ofPacketCluster® PatrolTM (called PocketBlueTM), which is a handheld applicationfor mobile law enforcement that is part of a fully integrated mobile datasystem, providing criminal database queries, secure messaging and alarm capabilitiesfor all connected mobile users;

 

•                  PacketWriterTM, which is a mobilefield reporting solution that allows for mobile data collection, data sharingwith PacketCluster® and work-flow management;

 

•                  The FireRMSTM family of products forfire and rescue companies, which are compliant incident reporting productsspecifically developed to cut report completion time for front-line emergencyresponse personnel; and

 

5

----

 

•                  Handheld applications for fire andrescue companies (called PocketFDTM and PocketCluster RescueTM), which allow fireservices personnel to wirelessly access and update records in the field andextends computer aided dispatch, fire records management systems and otherin-house data sources to a mobile environment.

 

We believe that our Mobile Government segment is well-positioned tohelp government agencies address certain aspects of ongoing homeland securityconcerns.  Because our products serveboth law enforcement and asset tracking needs, we can, for example, integrateour asset tracking products with law enforcement notifications in certainsituations.  We are seeking to addcustomers involved in homeland security operations, particularly at the federallevel, but we have not yet made any significant sales to such customers forhomeland security activities.

 

OVERVIEW OF OURTRANSPORTATION SEGMENT

 

Our Transportationsegment provides mobile and wireless solutions to the transportationindustry.  Our customers are primarilythe owners and operators of truck and other vehicle fleets, including US XpressEnterprises, Inc., TRL Inc. and Contract Freighters, Inc.  Our products offer wireless data and assettracking and vehicle positioning features. Our customers use these products to monitor the location, movement andstatus of their vehicles.  Our productsenable them to reduce trailer to tractor ratios and improve their operationalefficiency.

 

Our primary Transportationproducts are:

 

•                  MobileMaxTM,which is a vehicle location and multi-mode messaging product

•                  Three assetmonitoring products — GeoLogicTM, TrailerMaxTM, and 20/20VTM

•                  Aether PlatinumServiceTM

 

We also offer the HighwayMaster 5000 (HM 5000) product, which is similar to our MobileMaxTM product buthas voice solutions and is limited to only terrestrial-based service.  We acquired the HM 5000 service andcustomers as part of an acquisition in 2002. We have gradually been phasing out HM 5000 and converting as many customersas possible to MobileMaxTM.

 

SALE OF OUR EMS SEGMENT

 

Prior to January 18, 2004, wehad a third business segment:  theEnterprise Mobility Solutions (EMS) segment. It was our largest operating segment. The EMS segment served customers in large business organizations and itsproducts were primarily related to wireless mail messaging, wireless access tofinancial market data and distribution and delivery management.  The EMS segment also included ourinternational operations, Aether Systems Ltd. (formerly known as SilaCommunications).

 

In January 2004, we sold ourEMS segment to Telecommunication Systems, Inc. (TCS) for $18.0 million in cashand a $1.0 million promissory note payable in August 2004.  We also received 204,020 shares of TCS ClassA common stock valued as of the closing of the transaction at approximately $1million.  As of March 10, 2004, theseshares were worth approximately $1.2****million,based on the last reported sale price for TCS stock on that date.  These shares are being registered for resaleby TCS, and we expect them to become freely tradable in the first half of2004.  The total consideration issubject to adjustment following a post-closing review of the working capital ofthe EMS segment as of the closing.

 

As part of this sale, we soldthe Aether FusionTM technology platform, as well as our Blackberry by Aether andAether Attache products, among others.

 

As a result of the sale of thissegment, we no longer have any operations outside of the United States,although we continue to sell products and provide services to customers inCanada.

 

HISTORY AND OTHER INFORMATIONFOR INVESTORS

 

Our Company was originallyformed as Aeros, L.L.C. in January 1996. We changed our name to Aether Technologies International, L.L.C. inAugust 1996 and to Aether Systems L.L.C. in September 1999.  Immediately prior to completing our initialpublic offering of common stock on October 21, 1999, we converted from alimited liability company to a Delaware corporation and changed our name toAether Systems, Inc.

 

Our Internet address iswww.aethersystems.com. We make available free of charge, on or through ourwebsite, our annual report on Form 10-K, quarterly reports on Form 10-Q,current reports on Form 8-K, and amendments to those reports filed or furnishedto the Securities and Exchange Commission (the “SEC”) pursuant to Section 13(a)or Section 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) assoon as reasonably practicable after we electronically file such material with,or furnish it to, the SEC.  We areproviding the address of our internet website solely for the information ofinvestors.  We do not intend theinternet address to be an active link, and the contents of the website is not apart of this report.

 

6

----

 

We have adopted a code of ethics that appliesto our principal executive officer, principal financial officer, principalaccounting officer, controller and persons performing similar functions.  The Board of Directors is responsible forreviewing and authorizing any waivers from this code of ethics and we will fileany waivers from, or amendments to, this code with the SEC.  Our code of ethics for senior financialofficers is available on Aether’s website, www.aethersystems.com.

 

We have also adopted procedures for ourstockholders to communicate with our Board of Directors.  Stockholders who wish to contact the Boardof Directors, or an individual director, should contact the Board of Directorsor individual director at

shareholder_inquiries @aethersystems.com orin writing at 11500 Cronridge Drive, Suite 110, Owings Mills, MD  21117. The Secretary will compile all communications and submit them to theBoard of Directors, or individual directors, on a periodic basis.

 

OPERATIONS

 

Mobile Government Segment

 

The goal of our Mobile Government segment is to transform the securityand effectiveness of our government workforce through real time data collectionand communications and seamless data sharing and interoperability acrossgovernment agencies.

 

Through our Mobile Government segment, we currently provide mobile andwireless data solutions to approximately 3,000 public safety agencies at thefederal, state and local level.

 

We market the PacketCluster® family of products, the handheld versionof PacketCluster®PatrolTM called PocketBlueTM, the FireRMSTM family of products for fire and rescuecompanies, and the handheld application for this community, calledPocketRescueTM.

 

•                  PacketCluster®PatrolTM is an open, standards-based wireless information software product thatprovides police officers in the field with direct access to motor vehicle andwarrant information and allows real-time silent communication between policeheadquarters and mobile units. PocketFDTM is a wireless handheld application for mobile fire services.and allows fire services personnel to wirelessly access and update records inthe field. It provides fire services personnel with instant, wireless access tooccupancy data, on-duty rosters, certifications and hydrants as well asincident information.

 

•                  PocketBlueTM is ahandheld application for mobile law enforcement that is part of a fullyintegrated mobile data system, providing criminal database queries (NCIC, NLETSand DMV), secure messaging and alarm capabilities for all connected mobileusers.

 

•                  PacketWriterTM isa field data collection application designed to support report generation andsubmission to field incidents, accidents and interviews.  PacketWriterTM can be integrated withback-office records management systems for long-term data storage and is fullyintegrated with PacketCluster® PatrolTM for exchange of data betweenapplications.

 

•                  FireRMSTM  is a SQL-based Fire Records ManagementSystem (RMS) that includes NFIRS 5.0, a compliant incident reporting systemspecifically developed to cut report completion time for front-line emergencyresponse personnel.  FireRMSTM allowsfire personnel to manage fire prevention procedures, supplies and inventory,pre-planning for emergency response, training, EMS reporting and certificationin a more efficient manner.

 

In 2003, we continued to make inroads in the state and local police andfire agencies and began performing under contracts with two of our largestcustomers to date.  Under our agreementwith Hamilton County, Ohio, we will install our PacketCluster® PatrolTM andPacketWriterTM technologies in over 650 patrol vehicles throughout the county’slaw enforcement agencies.  We are alsoinstalling our PacketCluster® PatrolTM and PacketWriterTM technologies inapproximately 1,600 trooper vehicles for the Pennsylvania State PoliceDepartment.  We anticipate that we willcontinue to generate revenue from these clients until 2007.

 

TransportationSegment

 

Through our Transportationsegment, we are the only company to offer the trucking industry both an in-cabmobile communications solution and a wireless solution for monitoring andmanaging trailer fleets.  In addition,our MobileMaxTM product is the only solution to offer multi-mode capabilities tothe trucking industry.  Ourtransportation segment primarily markets Mobile MaxTM, a vehicle location andmessaging solution for long-haul trucks, and a number of asset monitoringproducts, including GeoLogicTM, TrailerMaxTM and 20/20VTM.

 

7

----

 

MobileMaxTM providestransportation companies with the least-cost-routing capability of multi-modetechnology (terrestrial and satellite connectivity) to deliver two-way data anddispatch messaging and automatic, instantly communicated information on eachvehicle, typically trucks.  Least-costrouting refers to MobileMaxTM’s capability to use the less costlyterrestrial-based wireless connectivity whenever possible.  Otherwise, MobileMaxTM is connected usingsatellite connectivity.  The optionalenhancements for MobileMaxTM include a collection of geopositioning featuressuch as automatic state-line crossing information, arrival/departurenotifications, and certain geo-fencing capabilities.  Geo-fencing is the ability to define geographic areas andboundaries upon which exception reporting, which is the ability to alert theappropriate personnel, can be based. Once a geo-fence is established, users can be automatically notified, asa result of exception reporting, if a vehicle enters or leaves the defined area.  This functionality can be used for territorymanagement, route verification, arrival/departure notification and prohibitedlocations.  Exception reporting can alsobe applied to a wide variety of additional events, such as arrivals,departures, deliveries, pick-ups, illegal entries and unauthorized movement.

 

We market GeoLogicTM,TrailerMaxTM, 20/20VTM and Aether Platinum ServiceTM, four products for trailersand other mobile assets, that incorporate a variety of geo-fencing andexception reporting features.

 

•                  GeoLogicTM is amanagement and satellite-based tracking solution that allows fleet managers tomonitor thousands of trailers in the field by utilizing a unique,user-configurable event-driven and exception- based alert reportingsystem.  It incorporates the use of geo-fencesand pre-determined events such as arrivals, departures, entry to the trailer,and disconnection from the truck to help with mission critical and secure loadplanning.  Its target market is largetrucking fleets.

 

•                  TrailerMaxTM is an asset monitoringsolution that is targeted towards for-hire truck fleets and private truckfleets.  As compared to GeoLogicTM,TrailerMaxTM is a lower cost, terrestrial-based solution.

 

•                  20/20VTM is a nationwide vehiclelocation and management solution targeting commercial fleets.  The product, which allows delivery tracking,signature capture and process automation, is often used to track private fleetssuch as those used for field service, sales, and delivery organizations.  Location and status information is deliveredin real-time to an internet-based host, providing anywhere, anytime managementof fleets.  We expect 20/20VTM to appealto a broad marketplace including service fleets, sales teams and truckingcompanies.

 

•                  Aether PlatinumServiceTM is a full service fleet management software solution that interfaceswith mobile applications to provide a comprehensive trucking package.  We expect Aether Platinum ServiceTM to appealto a broad marketplace.

 

In 2003, six of the top fiftytrucking companies in the United States expressed interest in potentiallybecoming customers of our Transportation segment.  Some of these companies are currently performing trialevaluations of our products.  We haveentered contracts with major trucking companies including U.S. Xpress, Inc.,which agreed to equip its entire fleet of 5,500 trucks with MobileMaxTM; TRLInc., which will install MobileMaxTM in its entire fleet of 600 trucks; andContract Freighters Inc., which plans to equip its entire fleet of 2,400 truckswith our MobileMaxTM system and also plans to integrate our ADV MonitorTM andProximity AlertTM features.

 

Additional Services

 

Our primary activity is sale, development and support of the softwareproducts and applications described above. Approximately 48 percent of our 83 engineers devoted their timeprimarily to development and support of these software products andapplications.

 

We also provide the following services to assist customers and tosupport our software products and applications:

 

**Integration Services. **Integration Services includesconsulting, engineering, and integration into the backend infrastructure ofbusinesses and government agencies for wireless data solutions.  We provide services to complement oursoftware products on a stand-alone basis. We also may accept assignments that might allow us to embrace technologicaladvances or expand into new industry sectors or services.  Our staff includes wireless systemsengineers, software engineers who specialize in developing applications forhandheld devices, and engineers who specialize in systems integration andtesting.

 

**Deployment Services. **Our deployment services for theMobile Government segment are located in Marlborough, Massachusetts and for theTransportation segment, deployment services are located in Pennsylvania andTexas.  These services include productfulfillment and customer support, which help alleviate the complexitiesassociated with implementing and supporting a solution.  We offer product fulfillment andprovisioning to facilitate the delivery of devices to the customer/employeebase.  During the development process,device(s) are chosen based on the application’s use, and these devices aredelivered 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 productuntil the user receives it.  For endusers who already own

 

8

----

 

a device, we can provide the modem and software application only.  If we deliver a defective product, we handleall repair and warranty issues for such device.

 

Additionally, we offerpost-deployment customer support and customer billing.  Our customer care specialists can providesupport on virtually any issue that might arise from applicationtroubleshooting to wireless network and device issues.  We can also handle customer billing for ourcustomers’ user fees, device and modem purchases, and other charges.  Our billing system can support increases inour customers’ end user base.  Wealleviate the complexities that would otherwise be placed upon a customer’s ITdepartment.

 

SALES AND MARKETING

 

As of December 31, 2003, ourcontinuing operations had 44 salespeople, sales engineers for technical supportduring the sales cycle and marketing professionals.  Our sales and marketing staff generally specialize in eithertransportation or mobile government.  19were dedicated solely to marketing and sales of our Mobile Government productsand 21 were dedicated solely to marketing and sales of our Transportationproducts.  Our direct sales teams coverall regions of the U.S.  Our businessdevelopment personnel and senior executives also assist in developing potentialstrategic relationships, for selling and promoting our products and services.

 

WIRELESS NETWORK CARRIERS

 

Our Transportation segment has contracts with a limited number ofwireless carriers.  We obtainterrestrial network services from Motient Communications Company and MinorPlanet Systems USA.  Our satelliteservices are provided by Mobile Satellite Ventures.

 

COMPETITION

 

The market for our solutions is competitive.  We encounter competition in all areas of our business activityand our competitors range from some of the country’s largest corporations tomany smaller specialized companies.  Thewidespread adoption of industry standards may make it easier for new marketentrants to offer some or all of the services we offer and may make it easierfor existing competitors to introduce some or all of the applications andservices they do not currently provide, or improve the quality of theirservices.  We expect that we willcompete primarily on the basis of the technology, functionality, breadth,reputation, quality, price of our services, security and availability of ourapplication software.

 

Our current and potential competitors for the products and services weoffer through our Mobile Government segment include mobile and/orwireless software companies such as Sybase, Inc., Motorola, Inc., Qualcomm,Inc., Minor Planet Systems USA Inc., and Terrion.

 

Our current and potentialcompetitors for the products we offer through out Transportation segmentinclude: mobile and/or wireless software companies such as Qualcomm, Inc, andwireless data service providers such as Bot Mobilicom and TransCommunicationSystems, Inc.

 

Some of our existing and potential competitors have substantiallygreater financial, technical, marketing and distribution resources than wedo.  Furthermore, these competitors maybe able to adopt more aggressive pricing policies and offer customers moreattractive terms than we can.

 

INTELLECTUAL PROPERTY RIGHTS

 

Our success and competitive position dependsin large part upon our ability to develop and maintain the proprietary aspectsof our technology.  We rely on acombination of trademark, patent, copyright, service mark, trade secret lawsand contractual restrictions to establish and protect proprietary rights in ourproducts and services.  We have appliedfor various trademarks and patents.

 

The following trademarks have been registeredor published with or allowed by the United States Patent and Trademark Office:

 

Mobile Government segment:

•                  PacketWriterTM

•                  PacketCluster®

•                  PacketCluster®PatrolTM

•                  PocketBlueTM

•                  PocketEMS

•                  PocketInspector

•                  PocketRescueTM

•                  PocketInvestigator

 

9

----

 

•                  CeruleanTM

•                  Cerulean Design

 

Transportation segment:

•                  MobileMaxTM

•                  HM 5000

•                  GeologicTM

•                  Trackware

•                  20/20VTM

•                  Aether PlatinumServiceTM

•                  TrailerMaxTM

•                  Pro2000

 

We also own:

•                  Advantage

•                  Aether &Design

•                  Aether

•                  Aether Systems

•                  Aether Design

•                  Unwired ByAether

•                  The Power BehindMobile Workers

 

There can be no assurances that ourapplications will be granted or that holders of other trademarks will not claimthat the published or allowed trademarks, or other Aether pending trademarkapplications, infringe their trademarks.

 

It is our general policy to seek patent protectionfor those inventions and improvements likely to be incorporated into ourproducts and services.  We currentlyhave patent applications pending, but there is no assurance that the patentapplications will result in patents being issued by the United States Patentand Trademark Office or other foreign patent offices, nor is there anyguarantee that any issued patent will be valid and enforceable.  Other companies may independently develop orotherwise acquire similar technology or gain access to our proprietarytechnology.  Despite our precautions,there can be no assurance that we will be able to adequately protect ourtechnology from competitors in the future. The enforcement of patent rights often requires the institution oflitigation against infringers.  Thislitigation is often costly and time consuming.

 

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

 

GOVERNMENT REGULATION

 

We are subject generally to government regulations that apply topublicly traded Delaware corporations of similar size that are headquartered inMaryland.  Through sales and licenseagreements with federal, state and local entities, we are sometimes subject toregulations concerning the acquisition of goods and services by such entities.

 

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

 

CommunicationsRegulation

 

Thewireless network carriers we contract with to provide airtime and some of ourhardware suppliers may be subject to regulation by the Federal CommunicationsCommission.  Changes in FCC regulationscould affect the availability of wireless service these carriers are willing orable to sell to us.  We could also beadversely affected by developments in regulations that govern or may in thefuture govern the Internet, data privacy, the allocation of radio frequenciesor the placement of cellular towers. Also, changes in these regulations could create uncertainty in themarketplace that could reduce demand for our services or increase the cost ofdoing business as a result of costs of litigation or increased service deliverycost or could in some other manner have a material adverse effect on ourbusiness, financial condition or results of operations.

 

Sales Tax

 

We currently do not collect sales or other taxes with respect to thesale of services or products in states and countries where we believe we arenot required to do so.  We do collectsales and other taxes in the states in which we have offices and are requiredby law to do so.  Some jurisdictionshave sought to impose sales or other tax obligations on companies that engagein online commerce within their

 

10

----

 

jurisdictions.  A successfulassertion by one or more jurisdictions that we should collect sales or othertaxes on our products and services, or remit payment of sales or other taxesfor prior periods, could have a material adverse effect on our business,financial condition or results of operations.

 

Government Contracting

 

Throughour Mobile Government segment, we act as a prime contractor or subcontractor ona variety of federal, state and local government programs that are subject tothe availability of government funding, government audit rights, andtermination at the convenience of the government.  These contracts and subcontracts may contain detailedrequirements, warranties and software and data rights licenses.  Profit on these contracts may be limited andmay be subject to audit and recovery rights by governmental agencies.  Our contracts with these governmentalentities are typically obtained on a fixed price basis, and as a result we maybenefit from cost savings but may also be adversely impacted if there are costoverruns.  In addition, we are oftenrequired to post an escrow, bond, letter of credit or similar guarantee toensure our performance on these contracts, which restricts our cash flow.   Based on the terms of these contracts andapplicable laws, our operations may also be subject to restrictions andrequirements applicable to government procurements, including rules pertainingto relationships with government officials and the accuracy of informationprovided to government agencies.  Ourfailure to comply with such restrictions and requirements could lead to oursuspension or debarment from contracting or subcontracting on governmentalprograms for a period of time which could adversely affect our business.

 

EMPLOYEES

 

As of December 31, 2003, our continuingoperations had a total of 287 employees, 83 of whom are engineers.  Of our employees, 99 were employed in ourMobile Government segment and 127 were employed by our Transportationsegment.  The remaining employees alsosupport these segments and general corporate activities.  None of our employees is covered by acollective bargaining agreement.  Webelieve that our relations with our employees are good.

 

**ITEM2****.  PROPERTIES**

 

Our principal offices arelocated in Owings Mills, Maryland.  Aspart of the sale of the EMS segment, we transferred the lease for 11460Cronridge Drive, Owings Mills, Maryland to TCS and now sublease half of thatbuilding from TCS.  In addition, welease another 36,831 square feet of leased space in Owings Mills, Maryland(11445 and 11500 Cronridge Drive) where we perform general corporateoperations.  We also lease an aggregateof approximately 40,000 square feet for our offices in Larkspur, California;Bethesda, Maryland; New York, New York (which is being sublet); and Monterey,Mexico; none of which are sites with active business operations.  We share space among our segments and forcorporate and other purposes.  Webelieve that our retained facilities are adequate for the purposes for whichthey are presently used and that replacement facilities are available atcomparable cost, should the need arise.

 

Our Transportation segment isbased in Herndon, Virginia and has offices in Owings Mills, Maryland, Joplin,Missouri  and Richardson, Texas.

 

Our Mobile Government segmentis based in Marlborough, Massachusetts.

 

**ITEM 3. LEGAL PROCEEDINGS**

 

Aether is among the hundreds ofdefendants named in nine class action lawsuits seeking damages on account ofalleged violations of securities law. The case is being heard in the United States District Court for theSouthern District of New York.  Thecourt has consolidated the actions by all of the named defendants that actuallyissued the securities in question.  Nowthere are approximately 310 consolidated cases before Judge Scheindlin,including the Aether Systems action, under the caption In Re Initial PublicOfferings Litigation, Master File 21 MC 92 (SAS).

 

These actions were filed onbehalf of persons and entities that acquired our common stock after our initialpublic offering in October 20, 1999. Among other things, the complaints claim that prospectuses, dated October20, 1999 and September 27, 2000 and issued by Aether in connection with thepublic offerings of common stock, allegedly contained untrue statements ofmaterial fact or omissions of material fact in violation of securities lawsbecause 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 certainof their customers which were designed to maintain, distort and/or inflate themarket price of Aether’s common stock in the aftermarket.  The actions seek unspecified monetarydamages and rescission.  Aether believesthe claims are without merit and is vigorously contesting these actions.

 

11

----

 

Initial motions to dismiss thecase were filed and the court held oral argument on the motions to dismiss onNovember 1, 2002.  On February 19, 2003,the court issued an Opinion and Order on defendants’ motions to dismiss, whichgranted the motions in part and denied the motions in part.  As to Aether, the motion to dismiss theclaims against it was denied in its entirety. Discovery is now commencing against the underwriter defendants.  The plaintiffs voluntarily dismissed withoutprejudice the officer and director defendants of Aether.  On June 26, 2003, the Plaintiff’s ExecutiveCommittee in this case announced a proposed settlement with the issuers.  The proposed settlement provides that thecases against the more than 300 IPO’s between 1998 and 2000 will end.  Aether has agreed to support thesettlement.  Under terms of the proposedsettlement, Aether would not incur any material financial or otherliability.  The proposed settlement wouldnot involve the cases against the 55 investment bank underwriter defendants,which would continue.  Final approval ofthe proposed settlement will be required by the Court following notice to classmembers and a fairness hearing.  Therecan be no assurance such approval will be granted.

 

Aether is also a party to otherlegal proceedings in the normal course of business.  Based on evaluation of these matters and discussions withcounsel, Aether believes that liabilities arising from these matters will nothave a material adverse effect on the consolidated results of its operations orfinancial position.

 

**ITEM4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

No matters were submitted toAether’s stockholders for consideration during the fourth quarter of the fiscalyear ended December 31, 2003.

 

12

----

 

**PART II**

 

**ITEM 5. MARKET FOR AETHER’S’S COMMON EQUITYAND RELATED SECURITY HOLDER MATTERS**

 

PRICE RANGE OF COMMON STOCK

 

Our common stock has been quoted on theNasdaq National Market under the symbol AETH since our initial public offeringon October 20, 1999.  Prior to thattime, there was no public market for the common stock.  The following table sets forth, for theperiods indicated, the high and low prices per share of the common stock asreported on the Nasdaq National Market.

 
|              |   | **2003** |   | **2002** |   |
|-------------------|--------|----------|--------|----------|--------|
| **QUARTER ENDED** |   | **HIGH** |   | **LOW**  |   | **HIGH** |   | **LOW** |   |
| March  31         |   | $        | 3.98   |     | $      | 2.85 |   | $ | 11.09 |   | $ | 4.10 |   |
| June  30          |   | $        | 5.67   |     | $      | 3.09 |   | $ | 4.77 |   | $ | 2.50 |   |
| September  30     |   | $        | 6.47   |     | $      | 4.25 |   | $ | 4.15 |   | $ | 2.52 |   |
| December  31      |   | $        | 5.50   |     | $      | 4.30 |   | $ | 4.18 |   | $ | 2.25 |   |

 

APPROXIMATE NUMBER OF EQUITY SECURITY HOLDERS

 

The number of record holders of Aether’scommon stock as of December 31, 2003 was 585.

 

DIVIDENDS

 

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

 

SECURITIES AUTHORIZED FOR ISSUANCE UNDEREQUITY COMPENSATION PLANS

 
| **Plan Category**                                           |   | **Plan Name**              |   | **Number of securities  to  be issued upon  exercise  of outstanding  options,  warrants and rights** |   | **Weighted-average  exercise price of  outstanding  options,  warrants and  rights** |   | **Number of  securities  remaining  available for  future  issuance under  equity  compensation  plans** |      |
|-------------------------------------------------------------|--------|----------------------------|--------|-------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------|-----------|
|                                                        |   |                       |   |                                                                                                  |   |                                                                                 |   |                                                                                                     |      |
| Equity compensation plans approved by  security holders     |   | 1999 Equity Incentive Plan |   | 4,770,977                                                                                             |   | $                                                                                    | 8.33   |                                                                                                     | 3,812,685 |   |
|                                                        |   |                       |   |                                                                                                  |   |                                                                                 |   |                                                                                                     |      |
| Equity compensation plans not approved by  security holders |   | Acquisition Incentive Plan |   | 277,115                                                                                               |   | 0.00                                                                                 | (1)    | 1,622,885                                                                                                |      |
|                                                        |   |                       |   |                                                                                                  |   |                                                                                 |   |                                                                                                     |      |
| Total                                                       |   |                       |   | 5,048,092                                                                                             |   | $                                                                                    | 8.33   |                                                                                                     | 5,435,570 |   |

 

----

(1) All of the securities issued to dateunder this plan have been shares of restricted stock that vest over variousperiods.

 

13

----

 

**ITEM 6. SELECTED FINANCIAL DATA**

 

The table that follows presents portions ofour consolidated financial statements and is not a complete presentation inaccordance with accounting principles generally accepted in the United States.  You should read the following selectedconsolidated financial data together with our consolidated financial statementsand related notes and with “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” included elsewhere in this Report.  The historical results presented below arenot necessarily indicative of the results to be expected for any future fiscalyear.

 

The results of operationsin the following Selected Financial Data, as well as in our consolidatedfinancial statements, have been reclassified to present the results of our EMSsegment, which we sold in January 2004, as discontinued operations.  Loss from continuing operations does notinclude any financial results of the EMS segment.

 

14

----

 
|                                                                                                                                                                            |   | **YEAR ENDED DECEMBER 31,**                   |    |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------------|---------|
|                                                                                                                                                                            |   | **1999**                                      |    | **2000** |   | **2001** |   | **2002** |   | **2003** |   |
|                                                                                                                                                                            |   | **(IN  THOUSANDS, EXCEPT PER SHARE AMOUNTS)** |    |
| CONSOLIDATED STATEMENT OF OPERATIONS DATA:                                                                                                                                      |   |                                          |    |   |   |   |   |   |   |   |   |
| Revenue:                                                                                                                                                                        |   |                                          |    |   |   |   |   |   |   |   |   |
| Subscriber revenue                                                                                                                                                              |   | $                                             | —  |   | $ | 863 |   | $ | 10,420 |   | $ | 31,302 |   | $ | 25,972 |   |
| Software and related services revenue                                                                                                                                           |   | —                                        |    | 6,287 |   | 22,521 |   | 19,550 |   | 19,382 |   |
| Device sales                                                                                                                                                                    |   | —                                        |    | 671 |   | 7,395 |   | 8,469 |   | 10,196 |   |
| Total revenue                                                                                                                                                                   |   | —                                        |    | 7,821 |   | 40,336 |   | 59,321 |   | 55,550 |   |
| Cost of subscriber revenue                                                                                                                                                      |   | —                                        |    | 815 |   | 6,825 |   | 15,846 |   | 11,759 |   |
| Cost of software and related services  revenue                                                                                                                                  |   | —                                        |    | 1,693 |   | 7,982 |   | 6,150 |   | 4,507 |   |
| Cost of device sales                                                                                                                                                            |   | —                                        |    | 183 |   | 6,787 |   | 7,441 |   | 10,774 |   |
| Total cost of revenue                                                                                                                                                           |   | —                                        |    | 2,691 |   | 21,594 |   | 29,437 |   | 27,040 |   |
| Gross profit                                                                                                                                                                    |   |                                          |    | 5,130 |   | 18,742 |   | 29,884 |   | 28,510 |   |
| Operating expenses:                                                                                                                                                             |   |                                          |    |   |   |   |   |   |   |   |   |
| Research and development (1)                                                                                                                                                    |   | —                                        |    | 2,972 |   | 14,983 |   | 10,296 |   | 10,282 |   |
| General and administrative (1)                                                                                                                                                  |   | 2,818                                         |    | 23,101 |   | 52,550 |   | 41,569 |   | 29,092 |   |
| Selling and marketing (1)                                                                                                                                                       |   | —                                        |    | 4,165 |   | 18,956 |   | 11,007 |   | 7,799 |   |
| In process research and development                                                                                                                                             |   | —                                        |    | 3,900 |   | — |   | — |   | — |   |
| Depreciation and amortization                                                                                                                                                   |   | —                                        |    | 10,804 |   | 38,377 |   | 13,103 |   | 9,986 |   |
| Option and warrant expense                                                                                                                                                      |   | 18,508                                        |    | 5,220 |   | 4,689 |   | 3,132 |   | 1,315 |   |
| Impairment of intangibles                                                                                                                                                       |   | —                                        |    | — |   | 76,536 |   | 33,655 |   | 2,036 |   |
| Restructuring charge                                                                                                                                                            |   | —                                        |    | — |   | 1,770 |   | 1,703 |   | 372 |   |
| Loss on disposal of assets                                                                                                                                                      |   | —                                        |    | — |   | — |   | — |   | 744 |   |
| Total operating expenses                                                                                                                                                        |   | 21,326                                        |    | 50,162 |   | 207,861 |   | 114,465 |   | 61,626 |   |
| Operating loss from continuing operations                                                                                                                                       |   | (21,326                                       | )       | (45,032 | ) | (189,119 | ) | (84,581 | ) | (33,116 | ) |
| Interest income (expense), net                                                                                                                                                  |   | —                                        |    | 40,023 |   | 7,230 |   | (5,339 | ) | (3,171 | ) |
| Gain on early extinguishment of debt                                                                                                                                            |   | —                                        |    | — |   | 7,684 |   | 42,765 |   | — |   |
| Equity in losses of investments                                                                                                                                                 |   | —                                        |    | (47,886 | ) | (57,523 | ) | (4,744 | ) | (97 | ) |
| Investment gain (loss), including  impairments, net                                                                                                                             |   | —                                        |    | — |   | (143,384 | ) | (14,412 | ) | 587 |   |
| Loss from continuing operations before  income taxes, discontinued operations and cumulative effect of change in  accounting principle                                          |   | $                                             | (21,326 | ) | $ | (52,895 | ) | $ | (375,112 | ) | $ | (66,311 | ) | $ | (35,797 | ) |
| Income tax benefit                                                                                                                                                              |   | —                                        |    | — |   | — |   | 618 |   | — |   |
| Loss from continuing operations before  cumulative effect of change in accounting principle                                                                                     |   | (21,326                                       | )       | (52,895 | ) | (375,112 | ) | (65,693 | ) | (35,797 | ) |
| Loss from discontinued operations, net of  tax expense (benefit) of $0, ($1.6 million), ($10.7 million), $83,000 and  $75,000 for 1999, 2000, 2001, 2002 and 2003, respectively |   | (9,365                                        | )       | (309,805 | ) | (1,285,547 | ) | (225,853 | ) | (13,655 | ) |
| Cumulative effect of change in accounting  principle relating to adoption of SFAS No. 133 in 2001 and SFAS No. 142 in  2002                                                     |   | —                                        |    | — |   | 6,564 |   | (33,876 | ) | — |   |
| Net loss                                                                                                                                                                        |   | $                                             | (30,691 | ) | $ | (362,700 | ) | $ | (1,654,095 | ) | $ | (325,422 | ) | $ | (49,452 | ) |
| Net loss per share from continuing  operations before discontinued operations and cumulative effect of change in  accounting principle                                          |   | (1.01                                         | )       | (1.46 | ) | (9.21 | ) | (1.56 | ) | (0.84 | ) |
| Net loss per share from discontinued  operations                                                                                                                                |   | (0.44                                         | )       | (8.53 | ) | (31.56 | ) | (5.36 | ) | (0.32 | ) |
| Cumulative effect of change in accounting  principle                                                                                                                            |   | —                                        |    | — |   | 0.16 |   | (0.81 | ) | — |   |
| Net loss per share – basic and diluted                                                                                                                                     |   | $                                             | (1.45   | ) | $ | (9.99 | ) | $ | (40.61 | ) | $ | (7.73 | ) | $ | (1.16 | ) |
| Weighted average shares outstanding                                                                                                                                             |   | 21,207                                        |    | 36,310 |   | 40,732 |   | 42,117 |   | 42,616 |   |
|                                                                                                                                                                            |   |                                          |    |   |   |   |   |   |   |   |   |
| CONSOLIDATED BALANCE SHEET DATA:                                                                                                                                                |   |                                          |    |   |   |   |   |   |   |   |   |
| Cash and cash equivalents (including  restricted cash) (2)                                                                                                                      |   | $                                             | 78,542  |   | $ | 852,518 |   | $ | 521,352 |   | $ | 65,150 |   | $ | 39,682 |   |
| Investments available for sale                                                                                                                                                  |   | 2,092                                         |    | 2,648 |   | 2,490 |   | 255,825 |   | 220,869 |   |
| Total assets (2)                                                                                                                                                                |   | 102,534                                       |    | 1,286,999 |   | 726,825 |   | 446,929 |   | 383,886 |   |
| Total debt (2)                                                                                                                                                                  |   | —                                        |    | 310,724 |   | 295,788 |   | 154,912 |   | 154,912 |   |
| Stockholders’ equity                                                                                                                                                       |   | $                                             | 98,342  |   | $ | 2,167,698 |   | $ | 542,527 |   | $ | 227,400 |   | $ | 179,301 |   |

 

15

----

 

----

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

(2)          Exclusiveof net assets from discontinued operations.

 

16

----

 

**ITEM7.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The following discussion and analysis shouldbe read in conjunction with our consolidated financial statements and therelated notes, which appear later in this Report.

 

INTRODUCTION

 

As discussed in Part I of this Report, ourbusiness continues to undergo substantial change.  Because we expect our business to change during 2004, we do notexpect our historical financial results to be indicative of our futureresults.  For example, if we reach anagreement to sell an additional portion of our business, the financial resultsof the business to be sold will be reported as “discontinued operations.”  As required by GAAP, to ensureperiod-to-period comparability, we also will restate our prior period resultsto reflect this reclassification of that business as “discontinuedoperations.  If we begin or acquire anynew or additional businesses, our results from continuing operations will beaffected.

 

Our financial condition alsomay change significantly as we implement additional strategic options:

 

•                  We may spendcash, incur additional debt or issue additional shares of our stock to financeacquisitions or to implement new business strategies;

•                  If we sellassets or businesses, we would expect to receive cash as a result of thosesales;

•                  We may berequired to repay all or a portion of the $154.9 million of our outstanding 6%convertible subordinated notes  beforetheir March 2005 maturity, which would reduce our cash on hand; and

•                  Changes to ouroperations will alter our organization and our financial results.

 

Because we have not yet finalizeda comprehensive business strategy for the future, we cannot forecast how ouroperating results or our financial condition may change, as compared to prioryears.

 

Historical Results

 

**Results of Continuing Operations.**   In reviewing the discussion and analysis ofthe Results of Operations of our continuing operations that follows, you shouldconsider the following:

 

Our revenue comes from three sources:  (1) payments from our subscribers for thewireless services we provide; (2) payments for licensing or selling software toour customers that they need to use our services, together with relatedpayments for maintenance, support, training, and consulting services; and (3)payments for hardware needed to use our services, which we sell or lease to ourcustomers.

 

To generate that revenue, we incur variousdirect costs, which we report as our “cost of revenue.”  These costs include primarily (1) theamounts we pay to purchase airtime, software, and hardware that we resell, license,or lease to our customers; and  (2)certain personnel expenses for employees who provide specific services to ourcustomers or develop products that we sell or license (such as engineers).  We exclude certain costs of customerfulfillment and customer care from our cost of revenue and report these costsas operating expenses.  Our “grossprofit” is the difference between our revenue and the cost of our revenue.  Our “gross margin” is the percentage of ourrevenue that is left as gross profit, after deducting the cost of our revenue.

 

The other costs of operating our business areour operating and our non-operating expenses. Most of these expenses require us to spend cash to pay them.  These include salaries, bonuses and benefitsfor our employees, rental payments for our offices, legal, accounting and otherprofessional fees and expenses, and other similar costs required to operate ourbusinesses

We also report our non-operating income.Principally, this is interest income from our cash balances and our investmentsin United States Government Agency-sponsored securities.

 

Our critical accounting policies, which wediscuss below, affect the amount of revenue and expense we record in eachperiod.  In applying these criticalaccounting policies to the results of our business operations, we must makejudgments that, if made differently, would have a positive or negative effecton our financial results.  We believethat our judgments are both reasonable and appropriate, in light of therelevant accounting rules.

 

As a result of acquisitions, dispositions andrestructuring activities, our business has changed significantly from year toyear.  In addition, in certain periodswe have been required to take significant charges to reflect declines in thevalue of our investments in other businesses and the value of some of ourbusiness assets.  As a result, ourfinancial results have changed significantly from one year to the next and cansometimes be difficult to compare.  Wediscuss the factors that affect comparability in more detail below.

 

17

----

 

**Financial Condition. **In reviewing thediscussion and analysis of the Financial Condition of our continuing operationsthat follows, you should consider the following:

 

Our business has nevergenerated a profit.  Consequently, wehave required funding from sources other than our business operations to runour business.  This funding has comeprincipally from selling securities.  InOctober 1999, we completed our initial public offering, in which we sold stockand received net proceeds for us of $101.1 million (after paying underwritingdiscounts, commissions and other expenses of the offering).  In March 2000, we completed an additionalsale of our stock that generated net proceeds for us of approximately $1.06billion.  In 2001, we sold $310.5million of our 6% convertible subordinated notes due 2005 (“Notes”) andreceived net proceeds of $300.6 million. We have not borrowed money from banks, and we currently do not have anyagreements with banks that would allow us to borrow money.

 

In 2000, 2001 and 2002, we usedcash from our sales of stock and our convertible subordinated notes, and wealso issued additional shares of stock, to pay for the purchase of assets andbusinesses that allowed us to significantly expand the products and theservices we offered in all of our segments. We also used cash to fund our operating losses and to repurchaseapproximately 50% of the Notes at a discount during 2001 and 2002.  We now have cash balances and liquidinvestments (including our investments in United States GovernmentAgency-sponsored securities) of approximately $247.1 million (excludingrestricted cash), and we have $154.9 million of outstanding Notes, which wewill be required to repay on March 22, 2005. We also have various other obligations that we are required to pay overtime under various contracts and agreements, as discussed in more detail below.

 

Since our inception in 1996, wehave accumulated substantial net operating losses that would be a valuable assetif we become profitable in the future and start to generate income that wouldbe subject to income tax.  Under federaland state tax laws, we are permitted to use these losses to reduce the incometaxes we otherwise would have to pay on future income.  As a result, we could have little or noincome tax liability for a period of time. We have accumulated federal net operating losses totaling approximately$722.5 million that we can “carry forward” as potential tax deductions untilthey expire between 2012 and 2023.  Inaddition, we have incurred capital losses of approximately $100.6 million thatwe can “carry forward” as potential tax deductions (but only against capitalgains) until they expire between 2006 and 2008.  Our ability to realize value from these accumulated losses, inthe form of lower future income taxes, may be limited by applicable tax rules,and we will only be able to realize value from the accumulated losses if webecome profitable.  See the discussionunder the heading “Risk Factors” below for more information on the risksassociated with the use of these accumulated losses.

 

Impact ofRestructuring

 

In late 2001, a precipitousdrop in the price of technology stocks, slow market adoption of wirelesstechnology and a generally poor economic environment, began to have a negativeeffect on mobile data businesses like ours. Among other things, businesses reduced their spending on technology andcapital equipment.  This slowed thegrowth of our revenue and ultimately contributed to declines in ourrevenue.  In response, we focused onmanaging costs and streamlining our operations to reduce expenses and lower ourlosses.  We undertook this strategy toreduce our use of cash to fund our operations and in an effort to achieveprofits more quickly.  Although we haveachieved significant cost savings, we have not yet achieved profitability.  Our losses have declined, but our revenuehas also declined, and our business continues to consume cash.

 

We believe that the disruptiveimpact of the restructuring process had a negative effect on our revenue, asemployees were distracted from their jobs and as reductions in staff requiredremaining employees to assume new and different responsibilities.  In addition, we believe that the strategicevaluation process that we have undertaken, which has resulted in the sale ofour largest business and has involved an exploration of other potentialdivestitures, possible acquisitions and other possible significant changes toour business, also has led to some distraction from normal business operationsand has negatively effected our efforts to attract new customers and increaserevenue.  In the near term, it also hasresulted in some additional expenses for legal and other professional fees.

 

We do not expect to be able toachieve profitability through further cost reductions.  Also, we likely will incur some additionalexpenses in the future (at least periodically) to complete the strategicprocess that we are pursuing.

 

Other Notable Items

 

Transportation

 

•                  In 2003, theTransportation segment began providing services to U.S. Xpress Enterprises,Inc., its largest contract to date.

 

•                  In 2003 six ofthe top fifty trucking companies in the United States expressed interest inpotentially becoming customers of our Transportation segment.  As our Transportation segment continues toincrease its market share, the possibility exists that a larger competitor mayseek to compete more vigorously for our potential and existing customers.  To the

 

18

----

 

extent that a competitor is successful in limiting our access to futurecustomers and/or winning over our current customers, our business could benegatively impacted.

 

•                  Our MobileMaxTMunits have experienced warranty issues requiring repairs, which havecontributed to a decline in gross profit and gross margin in our Transportationsegment.  Although we have taken actionto address these issues, we cannot be certain that we will not experiencesimilar problems in the future.  As ofDecember 31, 2003, we have reserved $360,000 for potential future warrantyclaims.

 

Mobile Government

 

•                  In 2003, theMobile Government segment began service under its contract with Hamilton County,Ohio to provide the Hamilton County Sheriff’s Office and 42 other agencieswithin Hamilton County with PacketCluster® PatrolTM and PacketWriterTM.

 

FACTORSAFFECTING COMPARABILITY

 

Our results of operations in2001, 2002 and 2003 have been affected by acquisitions, investments, impairmentcharges, and restructuring charges.  Thefactors identified below have had a significant impact on our operations andshould be considered in comparing our results of operations in 2003 to those in2002 and in comparing our results of operations in 2002 to those in 2001.  As discussed above, we expect additionalchanges in our business in 2004, which will further affect our results and maymake period-to-period comparisons more difficult.

 

Acquisitions

 

From September 1999 throughDecember 2002, we acquired 11 businesses for aggregate stock and cashconsideration in excess of $1.666 billion.

 

Our acquisitions have increasedour operating revenues and expenses from the date of acquisition.  In the discussion of our results below, wequantify the effects of acquisitions on our revenues and expenses.  Generally, acquisitions also increased ourdepreciation and amortization expense as we amortized the value of acquiredassets.  However during each of 2001 and2002, we significantly wrote down the value of certain of the intangible assetsthat we had acquired.  As a result, ouramortization expenses have decreased significantly since 2001.  Also, we adopted SFAS No. 142 on January 1,2002, which further affected our amortization expenses.  SFAS No. 142 required that we ceaseamortizing goodwill, thus reducing our amortization expense in 2002.  See the discussion under the heading“Impairment Charges” below for a more detailed discussion of these subjects.

 

Investments

 

We made numerous investments through AetherCapital, L.L.C., our wholly-owned subsidiary, to promote the development of newtechnologies that are compatible with the services we offer or that we may wishto integrate into our services.  FromAugust 1999, we invested approximately $196.8 million in 24 companies.  We recorded significant impairment chargesand reductions in the value of our investments during 2001 and 2002.

 

Overall, we have written down the carryingvalue of our remaining six investments to fair value, which was approximately$2.3 million as of December 31, 2003. See the discussion under the heading “Impairment Charges - Investments”below for a more detailed discussion of the charges related to these investments.

 

Impairment Charges

 

*Acquisitions*

 

**SFAS No. 121 impairments**.  Through December 31, 2001, we recordedapproximately $204.3 million in goodwill and other intangibles in continuingoperations related to our acquisitions and $1.514 billion in goodwill and otherintangible assets relating to our discontinued operations.  During 2001, we performed on-going analysisof the recoverability of our goodwill and other intangibles and the value ofour investments in accordance with SFAS No. 121, “Accounting for the Impairmentof Long-Lived Assets and For Long-Lived Assets to be Disposed Of.”  Based on quantitative and qualitativemeasures, we assessed the need to record impairment losses on long-lived assetsused in operations when impairment indicators were present.

 

Based on a variety of indicators, we determinedduring 2001 that the goodwill and other intangibles from our acquisitions mayhave become impaired.  As a result ofour review, we determined that the carrying value of goodwill and certain otherintangible assets related to our acquisitions were not fully recoverable.  Accordingly, during 2001, we recordedimpairment charges in continuing

 

19

----

 

operations of approximately $76.5 million,which represents the difference between the carrying value and fair value ofthe goodwill and other intangible assets. Also during 2001, we recorded impairment charges in discontinuedoperations of approximately $1.042 billion, which represents the differencebetween the carrying value and fair value of the goodwill and other intangibleassets.  See Notes 3 and 4 to theconsolidated financial statements for a more detailed discussion of thesesubjects.

 

**Goodwill***.* We adopted the provisions of SFAS No. 142, “Goodwill and OtherIntangible Assets,” as of January 1, 2002.  Goodwill and intangible assets acquired in a purchase businesscombination and determined to have an indefinite useful life are notamortized.  Instead, they are tested forimpairment at least annually in accordance with the provisions of SFASNo. 142.  SFAS No. 142also requires that intangible assets with estimable useful lives be amortizedover their respective estimated useful lives to their estimated residualvalues, and reviewed for impairment in accordance with SFAS No. 144,“Accounting for Impairment or Disposal of Long-Lived Assets.”

 

 As a result of the adoption of SFAS No. 142, we recorded animpairment charge of $33.9 million related to continuing operations in 2002,which was recorded as cumulative effect of change in accounting principle in theaccompanying consolidated statements of operations.  Of this charge, $32.0 million and $1.9 million was in our MobileGovernment and Transportation segments, respectively.  An additional $95.4 million was recorded as an impairment chargewith respect to discontinued operations.

 

SFAS No. 142 also requires that we repeat thetwo-step impairment analysis each year, beginning with a recurring annualmeasurement date chosen by us in 2002. We chose September 30, 2002 to be 2002’s measurement date, and we will continueto perform annual impairment reviews as of September 30th eachsubsequent year.  The September 30, 2002review resulted in an additional impairment charge of $20.8 million related tocontinuing operations, which was recorded as impairment of intangibles andother assets in our consolidated statements of operations.  Of this charge, $3.1 million and $17.7million was in our Mobile Government and Transportation segments, respectively.  An additional $6.0 million was recorded asan impairment charge with respect to discontinued operations. ** **Weperformed this analysis again in September 2003 with the help of a third partyappraiser and determined that there was no further impairment of goodwill atthat time.  See Note 2 to theconsolidated financial statements for a more detailed discussion of thesesubjects.

 

**Intangiblesand Other Long-Lived Assets***. *SFAS No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets,” provides asingle accounting model for long-lived assets to be disposed of.  SFAS No. 144 also changes the criteriafor classifying an asset as held for sale; and broadens the scope of businessesto be disposed of that qualify for reporting as discontinued operations andchanges the timing of recognizing losses on such operations.  We adopted SFAS No. 144 onJanuary 1, 2002.

 

During 2002 and 2003, weassessed the fair value of certain of our long-lived assets, includingsoftware, computer equipment, other tangible assets and identifiable intangibleassets obtained in connection with acquisitions.  This assessment resulted in impairment charges of $12.8 millionand $2.0 million in 2002 and 2003, respectively.  These charges are recorded in impairment of intangibles and otherassets in our consolidated statements of operations.   See Note 2 to the consolidated financial statements for a moredetailed discussion of these subjects.

 

*Investments*

 

As discussed above, from 1999 through 2001,we made approximately $196.8 million of investments in other businesses.  During 2001, we recorded a net charge of$143.4 million, which included $136.7 million in impairment charges related toour investments.  The remainder of thenet charge related to net gains and losses from the sales of investments, andchanges in the fair value of warrants. During 2002, we recorded a net charge of $14.4 million, which included$14.1 million in impairment charges related to our investments.  The remainder of the charge related to netgains and losses from the sales of investments, and changes in the fair valueof warrants.  During 2003, we recorded anet gain of $587,000, which included $71,000 in impairment charges related toour investments.  The remainder of ourcharge related to the net gain from sales of investments.  See Note 8 to the consolidated financial statementsfor a more detailed discussion of these subjects.

 

Restructuring Charges

 

See the section under the heading“Restructuring” in the discussion of “Critical Accounting Policies” below for amore detailed discussion of these subjects.

 

CRITICAL ACCOUNTING POLICIES

 

Our critical accounting policies are asfollows:

 

•                  Revenuerecognition;

•                  Estimating thevaluation allowance for sales returns and doubtful accounts;

 

20

----

 

•                  Estimating therealizable value of our inventory;

•                  Valuation oflong-lived intangible assets and goodwill; and

•                  Restructuringaccruals

 

Revenue Recognition

 

As discussed above, we derive our revenuefrom three sources: (1) subscriber revenue, (2) software and related services,and (3) device sales.  As describedbelow, significant management judgments and estimates must be made and used inconnection with the revenue recognized in any accounting period.  If we made different judgments or utilizeddifferent estimates, the amount and timing of our revenue might have differedmaterially from that reported.  We mightreport more or less revenue in any particular period, if we made judgments thatled us to accelerate or defer the recognition of various parts of our revenue,as compared to the judgments we currently make.  We believe that our current judgments and estimates arereasonable, appropriate for our businesses and consistent with currentaccounting rules.

 

*Subscriber revenue*

 

We derive subscriber revenue from theprovision of comprehensive business solutions designed to meet the mobilemanagement needs of truckload, less-than-truckload and private carriers.  For all sales, we obtain signed bindingcontracts with our subscribers. Contracts are generally for a three to five year period and include atermination penalty if cancelled by the subscriber before the term of thecontract expires.  These contracts aregenerally renewable at the option of the subscriber for additional periods orotherwise continue on a monthly basis until cancelled by the subscriber.  Subscriber revenue is recognized monthly asthe service is provided.  Activationfees are deferred and recognized ratably over the expected life of the customerrelationship.

 

*Software and related services revenue*

 

Software and related services revenues aregenerated from licensing software and providing services, including maintenanceand technical support, training and consulting.  Software revenue consists of fees for licenses of our softwareproducts.  We recognize the revenue whenthe license agreement is signed, the license fee is fixed and determinable,delivery of the software has occurred, and when we estimate that thecollectibility of the fees is probable. At the time of the transaction, we assess whether the fee associatedwith our revenue transactions is fixed and determinable and whether or notcollection is reasonably assured.  If asignificant portion of a fee is due after our normal payment term, we accountfor 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 offactors, including past transaction history with the customer and creditworthiness of the customer.  We do notrequest collateral from our customers. If we determine that collection of a fee is not reasonably assured, wedefer 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 ourrevenue recognition may have differed materially from that reported.

 

Revenue from licensing software that requiressignificant customization and modification is recognized using the percentageof completion method, based on the hours incurred in relation to the totalestimated hours.  If we made differentjudgments or utilized different estimates of the total amount of work we expectto be required to customize or modify the software, the timing of our revenuerecognition from period to period, and our margins on the project in thereporting period, may differ materially from amounts reported.  Service revenues consist principally ofmaintenance and technical support, which consists of unspecified when-and-ifavailable product updates and customer telephone support services and arerecognized ratably over the term of the service period.  If we allocated more or less value to thesewhen-and-if deliverables, the timing of our revenue recognition may havediffered materially from that reported. Other service revenues are recognized as the related services areprovided.

 

*Device revenue*

 

We derive device revenue fromthe sale of wireless devices used to provide our services.  We have assessed the interoperability of thetypes of hardware that we sell, and when customers can obtain similar equipmentfrom other parties to receive services we offer, or customers can use equipmentpurchased from us with services provided by other service providers, werecognize equipment revenue, including the related shipping, installation andactivation services, when collectibility is probable and the equipment andrelated services are provided to the customer. When the equipment is not deemed to be interoperable (i.e., it can onlybe used by a customer to acquire our services), the equipment revenue,including the related shipping and activation fees, and related costs aredeferred and recognized over the shorter of the life of the equipment or theestimated term of the subscriber.  Inthese situations, we allocate amounts to the device and subscriber categoriesbased on the relative fair values.  Whenwe sell hardware and software, and the hardware is considered essential to thefunctionality of the software, we account for the two elements as one unit ofaccounting.  In reporting revenues, weallocate amounts between software and device revenue based on their relativefair values.

 

21

----

 

*Revenue from multiple element arrangements*

 

For arrangements with multiple elements, weallocate revenue to each component of the arrangement using the residual valuemethod.  This means that we deferrevenue from the total fees associated with the arrangement equivalent to thefair value of the element(s) of the arrangement that has (have) not yet beendelivered.  The fair values of anyundelivered elements are established by using historical evidence specific toAether.  For instance, the fair valuesfor maintenance and technical support is based on separate sales of renewals toother customers or upon the renewal rates quoted in the contracts and the fairvalue of services, such as training, is based on separate sales by us of theseservices to other customers.  If weallocated the respective fair values of the elements differently, the timing ofour revenue recognition may have differed materially from that reported.

 

Allowance For Sales Returns and DoubtfulAccounts

 

The preparation of financial statements requires us tomake estimates and assumptions that affect the reported amount of assets anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereported period.  Specifically, we mustmake estimates of potential product returns and the valuation of our accountsreceivable.  We analyze historicalreturns, current economic trends, and changes in customer demand and acceptanceof our products when evaluating the adequacy of our allowance for salesreturns.

 

During 2002, we recorded provisions for sales returnsfor continuing operations of $202,000, which reduced revenue.  During 2003, we recorded a reduction in theprovision for sales returns of $128,000, which increased revenue.  We analyze historical bad debts, customerconcentrations, customer credit-worthiness, and current economic trends whenevaluating the adequacy of the allowance for doubtful accounts.  As a result, we recorded bad debt expensefor continuing operations of $2.5 million and $170,000 during the years endedDecember 31, 2002 and 2003, respectively. As of December 31, 2003, our net accounts receivable balance was $15.0million, net of allowance for sales returns and doubtful accounts of $2.7million.  Bad debt expense is includedin selling and marketing expense.  If wehad used different estimates and assumptions related to the amount of salesreturns we would receive, and about the collectibility of our accountsreceivable, our provisions for sales returns and allowance for doubtfulaccounts may have differed materially from that reported

 

Valuation of Inventory

 

Inventory, net of allowance for obsolete andslow-moving inventory, consists of finished goods such as MobileMaxTM  units, network hardware and accessories andis stated at the lower of cost or market. Cost is determined using a standard costing method, which approximatesthe first-in, first-out method.  Thereare a limited number of suppliers of our inventory, which could have an adverseimpact on our ability to meet potential future increases in customer demand forour products.

 

Valuation ofLong-Lived Assets Including Intangible Assets and Goodwill

 

During 2001, we recordedsignificant impairment charges on our goodwill and other intangible assetsassociated with our acquisitions.  Thesecharges are described in detail under the heading “Impairment Charges,” whichappears above.  In 2002, we recordedsignificant impairment charges on our goodwill and other intangible assetsassociated with our acquisitions pursuant to our adoption of SFAS No. 142,“Goodwill and Other Intangible Assets” (including our annual impairment test inaccordance with SFAS No. 142) and SFAS No. 144 “Accounting for the Impairmentor Disposal of Long-Lived Assets.”   Seethe discussion under the heading “Impairment Charges – Acquisitions” for a moredetailed discussion of these subjects.

 

Restructuring

 

As discussed above, during 2001 through 2003,we implemented expense reduction plans as part of our integration strategyfocused on improving operational efficiencies and the implementation of othermeasures in order to reduce planned expenses. These efforts have resulted in the consolidation of excess facilitiesand a significant reduction in our workforce. Employee separation benefits under the restructuring plans includeseverance, medical, and other benefits. Facility closure costs and other costs included expected losses onsubleases, brokerage commissions, asset impairment charges, contracttermination costs and other costs.

 
| **Continuing  Operations**        |   | **2001** |   | **2002** |   | **2003** |   |
|-----------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Charge                            |   | $        | 1,770  |     | $      | 1,523    |   | $ | 643 |   |
| Adjustments                       |   | —   |   | 180      |   | (271     | )      |
| Total                             |   | $        | 1,770  |     | $      | 1,703    |   | $ | 372 |   |
|                              |   |     |   |     |   |     |   |
| Positions eliminated              |   | 109      |   | 117      |   | 14       |   |
| Facilities closed or consolidated |   | 2        |   | —   |   | —   |   |

 

22

----

 
| **Discontinued  Operations**      |   | **2001** |   | **2002** |   | **2003** |   |
|-----------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Charge                            |   | $        | 40,508 |     | $      | 27,156   |   | $ | 6,125 |   |
| Adjustments                       |   | 2,728    |   | 8,885    |   | (340     | )      |
| Total                             |   | $        | 43,236 |     | $      | 36,041   |   | $ | 5,785 |   |
|                              |   |     |   |     |   |     |   |
| Positions eliminated              |   | 443      |   | 207      |   | 98       |   |
| Facilities closed or consolidated |   | 10       |   | 2        |   | —   |   |

 

As of December 31, 2003, the accruedliability related to all restructuring activities was $1.5 million, themajority of which related to outstanding lease obligations that will besubstantially paid off during 2004.

 

Calculation of the restructuring accrualrelated to facilities requires us to make estimates concerning our ability tosublease the properties involved, including: (1) the expected length of time it will take us to sublease thefacility; (2) the expected rental rates on subleases; and (3) estimatedbrokerage expenses associated with executing the sublease.  We used the assistance of independent realestate brokerage firms in making these estimates, and our estimates may beimpacted by future economic trends.  Theexpected losses on subleases have not been discounted.  If we had made different estimates of ourexpected restructuring costs, our restructuring charges might have been higheror lower.  To the extent actual chargesdiffer from the accrual that results from our estimates, we may be required toadjust our restructuring accrual, and may also have to record additionalcharges on our consolidated statement of operations.  We do not expect that actual results with respect to the itemscovered by the remaining, small restructuring accrual, will differ materiallyfrom the amount of the accrual which we developed based on estimates.

 

RESULTSOF CONTINUING OPERATIONS

 

Inthis section, when we discuss the results of our operations, we will be talkingabout our Mobile Government and Transportation segments, which we refer to as “continuingoperations”.

 

From 2001 to 2002, our resultswere significantly affected by the @Track transaction in March 2002.  Excluding the effect of this acquisition,****2002 revenue would havedecreased slightly from 2001, although gross profit would have still increased. During this period, we also began to see the impact on our expenses ofour restructuring activities, which we began in 2001.  Our operating expenses declined significantly, although werecorded a large restructuring charge in 2001 and also recorded substantialimpairment charges relating to our operating assets and our investments inother businesses, as a slowdown in the economy and in the mobile data businessgenerally negatively affected our business and our investments.  These charges contributed to our significantnet loss from continuing operations in 2001. Our net loss from continuing operations improved significantly in 2002for several reasons, particularly:

 

•                  the @Track acquisition increased our revenueand gross profit;

•                  our restructuring program significantlyreduced our operating expense;

•                  we had significantly smaller impairmentcharges relating to our assets and investments;

•                  losses from our investments in otherbusinesses declined significantly; and

•                  we recorded a substantial gain from therepurchase of a portion of our 6% convertible subordinated notes due 2005 at adiscount, which more than offset a large accounting charge that we recorded asa result of implementing a new accounting principle relating to how we value ourassets.  See the discussion under theheading “Impairment Charges — Acquisitions,” which appears above, for a moredetailed discussion of this subject.

 

From2002 to 2003, our business experienced a decline in revenue and a significantdecline in both operating and non-operating expenses.  With respect to operating expenses, we saw the benefits of ourrestructuring efforts.  Our gross marginincreased only slightly from 2002 to 2003, and as a result our gross profitdeclined, reflecting the decline in revenue during this period.  Our operating loss declined significantly,as a result of the substantial decline in our expenses, including significantdeclines in charges recorded to reflect impairments of our operating assets andour investments.  In 2001 and 2002, thesubstantial gain we recorded as a result of our repurchase of a portion of our6% convertible subordinated notes due 2005 at a discount offset a portion ofthe impairment charges.

 

23

----

 

**Revenue:**

 
|                          |   | **Mobile Government** |   | **Transportation** |   | **Total** |   |
|-------------------------------|--------|-----------------------|--------|--------------------|--------|-----------|--------|
|                          |   | **2001**              |   | **2002**           |   | **2003**  |   | **2001** |   | **2002** |   | **2003** |   | **2001** |   | **2002** |   | **2003** |   |
| Subscriber                    |   | $                     | — |               | $      | 312       |   | $ | 676 |   | $ | 10,420 |   | $ | 30,990 |   | $ | 25,296 |   | $ | 10,420 |   | $ | 31,302 |   | $ | 25,972 |   |
| Software and Related Services |   | 22,521                |   | 19,550             |   | 19,382    |   | — |   | — |   | — |   | 22,521 |   | 19,550 |   | 19,382 |   |
| Hardware                      |   | 3,812                 |   | 628                |   | 876       |   | 3,583 |   | 7,841 |   | 9,320 |   | 7,395 |   | 8,469 |   | 10,196 |   |
| Total                         |   | $                     | 26,333 |               | $      | 20,490    |   | $ | 20,934 |   | $ | 14,003 |   | $ | 38,831 |   | $ | 34,616 |   | $ | 40,336 |   | $ | 59,321 |   | $ | 55,550 |   |

 

*Mobile Government*

 

The MobileGovernment segment’s revenue is derived primarily from software licensing feesand related services, including customization, installation, training, programmanagement and maintenance.  The endusers of these software systems are usually state or municipal law enforcement,fire and rescue and emergency medical services organizations.  On certain software projects, we may alsoprovide network and other hardware as part of the solution.

 

Mobile Government revenuedecreased $5.8 million, or approximately 22%, from 2001 to 2002, reflectingdeclines in both hardware revenue and software and related services revenue,slightly offset by a $312,000 increase in subscriber revenue.  Software and related services and hardwarerevenue declined primarily because we substantially completed two largeprojects in 2001, and we did not have an increase in revenue from new projectsin 2002 to offset the impact of these completions.  Two projects, together accounted for approximately 20% of 2001revenue.

 

Mobile Government revenue increased $400,000,or approximately 2%, from 2002 to 2003. Increases in subscriber revenue and revenue from hardware sales werepartially offset by a slight decline in revenue from software sales and relatedservices.   Although software and relatedservices revenue was relatively flat year to year, the 2003 revenue stream wasgenerally characterized by larger projects, including the Pennsylvania StatePolice and Hamilton County, OH projects.

 

*Transportation*

 

The Transportation segment’s revenue isderived primarily from the provision of comprehensive business solutionsdesigned to meet the mobile management needs of truckload, less-than-truckloadand private carriers.  The revenuestreams associated with providing these solutions are monthly service fees andthe sale of hardware on which these solutions operate.  The hardware sales are deferred at the timeof delivery and generally recognized over contract terms of three to fiveyears.

 

**TransportationSubscribers:**

 
| **Product**     |   | **2001** |   | **2002** |   | **2003** |   |
|-----------------|--------|----------|--------|----------|--------|----------|--------|
| MobileMaxTM |   | $        | 19,826 |     | $      | 21,706   |   | $ | 29,442 |   |
| GeoLogicTM  |   | —   |   | —   |   | 1,313    |   |
| HM 5000         |   | —   |   | 23,397   |   | 7,482    |   |
| Trackware       |   | —   |   | 1,184    |   | 1,641    |   |
| 20/20VTM    |   | —   |   | 200      |   | 385      |   |
| Total           |   | $        | 19,826 |     | $      | 46,487   |   | $ | 40,263 |   |

 

We acquired the HM 5000 subscribers in ouracquisition of certain assets and licenses from @Track in 2002.  At that time, our plan was to graduallyconvert as many of these subscribers as possible from that legacy system to ourMobileMaxTM product.  As expected in2003, we experienced a decrease in our HM 5000 subscribers as they migrated toour products as well as our competitors’ products.

 

The addition of the HM 5000 subscribers had asignificant impact on our Transportation segment.  The segment’s revenue increased by $24.8 million from 2001 to 2002, primarily because of the newsubscribers.  Then, during 2003, revenuedecreased $4.2 million, or approximately 11%, primarily as a result of HM 5000subscribers declining at a faster rate than MobileMaxTM subscribers wereadded.  Certain HM 5000 customers have notelected to convert to MobileMaxTM.  Thosecustomers that do convert typically enter longer  multi-year contracts with lower monthly fees than they werepaying for HM 5000 service.  The overalldecline in revenue reflects this decline in subscriber revenue, partiallyoffset by an increase in revenue from hardware sales (which is a much smallercomponent of the Transportation segment’s total revenue).

 

24

----

 

While revenue from our MobileMaxTM productcontinues to grow, both from the addition of new customers and the migration ofHM 5000 customers to MobileMaxTM, revenue growth from MobileMaxTM and the otherproducts and services our Transportation segment sells has not been, and in thenear term may not be, sufficient to offset the effect of the decline in revenuefrom HM 5000 customers.

 

During 2003, subscriber revenue decreased $5.7 million, or approximately 18%,primarily due to decreased HM 5000 fees. Higher MobileMaxTM subscriber revenue only partially offset thisreduction in HM 5000 subscriber fees. The MobileMaxTM product generates a lower yet more consistent monthlyfee.  During the same period, hardwarerevenue increased $1.5 million, or approximately 19%, primarily due toincreased sales of the MobileMaxTM product, including those customers convertingfrom HM 5000 to MobileMaxTM.

 

Transportation deferred revenue primarilyrelates to hardware sales that are recognized evenly over the service life ofthe customer.  As of December 31, 2002and 2003, deferred Transportation revenue was $16.0 and $26.5 million.  This growth in deferred revenue represents asource of future revenue.

 

**GrossProfit and Gross Margin:**

 
|         |   | **Mobile Government** |   | **Transportation** |   | **Total** |   |
|--------------|--------|-----------------------|--------|--------------------|--------|-----------|--------|
|         |   | **2001**              |   | **2002**           |   | **2003**  |   | **2001** |   | **2002** |   | **2003** |   | **2001** |   | **2002** |   | **2003** |   |
| Gross Profit |   | $                     | 14,802 |               | $      | 13,534    |   | $ | 15,114 |   | $ | 3,940 |   | $ | 16,350 |   | $ | 13,396 |   | $ | 18,742 |   | $ | 29,884 |   | $ | 28,510 |   |
| Gross Margin |   | 56.2                  | %      | 66.0               | %      | 72.2      | %      | 28.1 | % | 42.1 | % | 38.7 | % | 46.5 | % | 50.4 | % | 51.3 | % |
|              |        |                       |        |                    |        |           |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

*Mobile Government*

 

Mobile Government gross margin percentage increased****from 56.2%  in 2001 to 66.0% in 2002 primarily because hardware revenue(which has a low margin) became a much smaller proportion of the revenuemix.  Gross margin percentage increasedto 72.2% in 2003, primarily due to more effective tracking and management ofthe various project cost components of our business.

 

*Transportation*

 

Our HM 5000product has a higher gross margin than our MobileMaxTM mobile messaging product,to which some of our HM 5000 customers are converting.

 

Transportationgross margin percentage increased from 28.1% in 2001 to 42.1% in 2002,primarily due to the addition of the HM 5000 subscribers, which carried ahigher gross margin than our MobileMaxTM subscribers.

 

Gross margin percentagedecreased to 38.7% in 2003 due to a combination of the decrease inhigher-margin HM 5000 subscribers and an increase in the proportion of lowmargin hardware in the revenue mix. Additionally, increased warranty repair costs for our MobileMaxTMproducts also contributed to the decline in gross margin percentage.    Our MobileMaxTM units have experiencedwarranty issues requiring repairs, which have contributed to a decline in grossprofit and gross margin in our Transportation segment.  Although we have taken action to address theissues, we cannot be certain that we will not experience similar problems inthe future.  As of December 31, 2003, wehave reserved $360,000 for potential future repairs.

 

We believe wehave the ability to sustain, and potentially increase, our subscriber grossmargin percentage during 2004 due to the recent reductions in our satellitecommunications costs and realized efficiencies from our MobileMaxTM product.

 

OperatingExpenses

 

Our operating expenses declinedsignificantly from 2001 to 2002 and to 2003, primarily due to the results ofour restructuring efforts, in which we streamlined our organization and reducedour workforce.  In addition, we have notcontinued to experience significant impairment charges on our intangible andother assets, after incurring significant impairment charges in 2001 and2002  As discussed below, we do notexpect our operating expenses to continue to decline at the same rate in thefuture.

 

25

----

 

**OperatingExpenses:**

 
|                                                                  |   | **2001** |    | **2002** |   | **2003** |   |
|-----------------------------------------------------------------------|--------|----------|---------|----------|--------|----------|--------|
| Research and  development (exclusive of option and warrant expense)   |   | $        | 14,983  |     | $      | 10,296   |   | $ | 10,282 |   |
| General and  administrative (exclusive of option and warrant expense) |   | 52,550   |    | 41,569   |   | 29,092   |   |
| Selling and marketing  (exclusive of option and warrant expense)      |   | 18,956   |    | 11,007   |   | 7,799    |   |
| Depreciation and  amortization                                        |   | 38,377   |    | 13,103   |   | 9,986    |   |
| Option and warrant  expense                                           |   | 4,689    |    | 3,132    |   | 1,315    |   |
| Impairment of  intangibles and other assets                           |   | 76,536   |    | 33,655   |   | 2,036    |   |
| Restructuring charge                                                  |   | 1,770    |    | 1,703    |   | 372      |   |
| Loss on disposal of assets                                            |   | —   |    | —   |   | 744      |   |
|                                                                  |   |     |    |     |   |     |   |
| Total Operating Expenses                                              |   | $        | 207,861 |     | $      | 114,465  |   | $ | 61,626 |   |

 

*Research andDevelopment Expenses*

 

Research and development expenses consistprimarily of cash compensation and related costs for engineers engaged inresearch and development activities and, to a lesser extent, costs of materialsrelating to these activities.  We expenseresearch and development costs as we incur them.

 

Research and development (R&D) expensesdecreased $4.7 million, or approximately 31% from 2001 to 2002, primarily dueto reductions in facilities, outside services, personnel, travel and recruitingexpense; reflecting the impact of our restructuring efforts.  R&D expenses were relatively flat from2002 to 2003.  We currently believe thatwe have the appropriate amount of research and development staffing and do notanticipate research and development expenses increasing or decreasingsignificantly during 2004.

 

*General and Administrative Expenses*

 

General and administrative (G&A) expensesconsist primarily of cash compensation and related costs for general corporatepersonnel, along with rent, network operations costs, and general supportcosts.  These expenses also include thecosts of outside professionals,****includinglegal counsel, accountants and investment bankers.

 

G&A expenses decreased $11.0 million, orapproximately 21% from 2001 to 2002.  Ofthe decrease, $5.4 million is primarily due to reductions in personnel costs asa result of our reduction in workforce. In addition, reductions in professional fees of $4.1 million, andfacility expense of $1.4 million also contributed to the decrease betweenperiods.

 

G&A expenses decreased $12.5 million, orapproximately 30%, from 2002 to 2003. Of the decrease, $7.0 million is primarily due to reductions inpersonnel costs as a result of our reduction in workforce.  In addition, decreases in travel, outsideservices (primarily contractors), telecommunications, software, and taxes of$1.6 million, $1.4 million, $1.2 million, $700,000 and $700,000, respectively,also contributed to the decrease between periods.

 

Professional fees (accounting, legal andinvestment banking) were essentially flat between 2002 and 2003.  However, the 2003 fees includedapproximately $1.5 million that Aether incurred during the fourth quarter of2003 in pursuing potential strategic transactions that, as of the end of thefiscal year, management did not expect would be completed.

 

Professional fees are reported as part ofAether’s G&A expenses and are generated, partly, by the costs of being apublic company.  These costs are partlyassociated with the corporate governance under the Sarbanes-Oxley Act of 2002and Nasdaq National Market reforms.  In the future, we expect to incur additionalcosts associated with accounting fees related to the internal control overfinancial reporting attestation report required by all public companies underSection 404 of the Sarbanes-Oxley Act of 2002.

 

*Selling and Marketing Expenses*

 

Selling andmarketing expenses consist primarily of advertising and promotions, sales andmarketing personnel, bad debt expense and travel and entertainment.

 

26

----

 

Selling andmarketing expenses decreased $7.9 million, or approximately 42% from 2001 to2002.  Of the decrease, $3.0 million wasdue to reductions in personnel costs as a result of our reduction in workforce.   In addition, we experienced reductions intravel of $1.3 million, facilities expense of $1.1 million, and advertising of$0.6 million related to the impact of restructuring and reduced spending onadvertising.

 

Selling andmarketing expenses decreased $3.2 million, or approximately 30%, from 2002 to2003.  Of the decrease, $2.3 million wasdue to decreased bad debt expense.  Thedecline in bad debt expense is primarily attributable to improved historicalbad debts and a decline in credit concentrations in higher-risk customers.  In addition, reductions in personnel costsof approximately $700,000 as a result of our reduction in workforce anddecreased spending on outside services of approximately $600,000 also contributedto the decrease between periods.

 

*Depreciation and Amortization*

 

Depreciation and amortization expenses consist primarily of theamortization of intangible assets obtained in connection with ouracquisitions.  Depreciation andamortization expenses also include depreciation expenses arising from equipmentpurchased for our data centers and other property and equipment purchases.

 

Depreciation and amortization decreased $25.3million from 2001 to 2002.  The decreasewas primarily a result of the impairment charges recorded during 2001 and 2002,which significantly reduced the carrying value of the goodwill and otherintangibles, and from the adoption of SFAS No. 142 on January 1, 2002,requiring us to cease amortizing approximately $25.4 million of goodwill andassembled workforce.  For more informationon our adoption of SFAS No. 142, please refer to the discussion under theheading  “Impairment Charges –Acquisitions,” which appears above.

 

Depreciation and amortization decreased $3.1 million from 2002 to2003.  The decrease was primarily a resultof the impairment charges recorded during 2002 and 2003, which significantlyreduced the carrying value of other intangibles and other long-livedassets.   Given the reduction of the netbook value of our assets as a result of impairment charges, we expectdepreciation and amortization expense to decrease in the short term.

 

*Option andWarrant Expense*

 

Option and warrant expense decreased $1.6million from 2001 to 2002 and $1.8 million from 2002 to 2003.  The decreases in 2002 and 2003 wereprimarily the result of the cancellation of options as we reduced our workforce.  For additional information aboutoption grants and other equity awards, see Note 14 to the consolidatedfinancial statements.

 

*Impairmentof Intangibles and Other Assets*

 

For a detailed discussion ofthe impairment of intangibles and other assets, see the discussion under theheading “Impairment Charges,” which appears above.

 

*Restructuring Charge*

 

See thediscussion under the heading “Restructuring,” which appears above, for a moredetailed discussion of these subjects.

 

*Loss on Disposal of Assets*

 

Loss ondisposal of assets was approximately $744,000 for 2003.  The loss on disposal of assets relatesprimarily to the disposal of our corporate jet.

 

27

----

 

**OtherIncome (Expense):**

 
|                                                |   | **2001** |     | **2002** |   | **2003** |   |
|-----------------------------------------------------|--------|----------|----------|----------|--------|----------|--------|
| Interest income                                     |   | $        | 27,658   |     | $      | 10,504   |   | $ | 7,222 |   |
| Interest expense                                    |   | (20,428  | )        | (15,843  | )      | (10,393  | )      |
| Gain on early  extinguishment of debt               |   | 7,684    |     | 42,765   |   | —   |   |
| Equity in losses of  investments                    |   | (57,523  | )        | (4,744   | )      | (97      | )      |
| Investment gain  (loss), including impairments, net |   | (143,384 | )        | (14,412  | )      | 587      |   |
| Total                                               |   | $        | (185,993 | )        | $      | 18,270   |   | $ | (2,681 | ) |

 

Interest Income

 

Interest income consistsprimarily of interest income from cash equivalents and from investments with amaturity of less than 12 months. Interest income decreased from 2001 through 2003 as the result of adecreasing cash  and investment balanceover the years (as we continued to consume cash to fund our business), combinedwith decreased interest rates.  Weexpect interest income to continue to decline as our cash and investmentbalances decline.

 

Interest Expense

 

Interestexpense consists primarily of debt service on our outstanding 6% convertiblesubordinated notes due 2005.  Interestexpense decreased $4.6 million from 2001 to 2002 and $5.5 million from 2002 to2003, primarily due to a decrease in interest expense as the result of thebuy-back of debt in 2001 and 2002.  As aresult of these repurchases, the total principal amount of our outstandingnotes has declined to $154.9 million. We do not expect to repurchase additional notes prior to their maturity.

 

Gain on Early Extinguishment of Debt

 

During 2001and 2002, we realized gains of $7.7 million and $42.8 million, respectivelyfrom repurchasing $20.0 million and $135.6 million of our 6% convertiblesubordinated notes due 2005 at a discount to their face amount (includingaccrued interest).

 

Equity in Losses of Investments

 

Equity inlosses of investments consists of our proportionate share of the net losses inour investments over which we exercise significant influence and as suchaccount for under the equity method of accounting.  Equity in losses of investments decreased to $4.7 million for2002 from $57.5 million for 2001.  Thedecrease from 2001 to 2002 reflects a decrease in the number of equityinvestments in our portfolio in addition to decreased losses from thoseinvestments.  During 2003, our equity inlosses of investments decreased to $97,000. The decrease from 2002 to 2003 primarily relates to the fact that mostof our equity investments were written off during 2002.

 

Investment Gain or Loss, IncludingImpairments, Net

 

See the discussion under the heading“Impairment Charges - Investments,” above for a more detailed discussion ofthese subjects.

 

CumulativeEffect of Change in Accounting Principle

 

The 2001amount related to the adoption of SFAS No. 133, “Accounting for Derivatives andHedging Activities.”  The $6.6 millionrepresented the fair value of warrants we held in two of our investees, whichmet the criteria for a derivative under SFAS No. 133.

 

The $33.9 million charge in 2002 related tothe adoption of SFAS No. 142, “Goodwill and Other Intangible Assets” andrepresented a decrease in the value of certain intangible assets obtained inconnection with acquisitions made in 2000 and prior as discussed in the sectionentitled “Impairment Charges” above.

 

28

----

 

LIQUIDITYAND CAPITAL RESOURCES

 

Since 1999, we have financed our operations primarilyfrom the proceeds of public offerings and private placements of our equity anddebt securities. Through December 31, 2003, we have raised aggregate netproceeds of approximately $1.5 billion, net of underwriters’ discounts,including the issuance in March 2000 of $310.5 million of 6% convertiblesubordinated notes due 2005.  AtDecember 31, 2002, cash and investments available for sale were $312.1 millionand working capital was **$**335.5million.  As of December 31, 2003, wehad approximately $26.2 million in cash and investments available for sale andworking capital of approximately $40.2 million.  The significant changes in cash and investments available forsale and working capital from 2002 to 2003 results from a change during thethird quarter of 2003 in management’s intention with regard to the liquidationof investments with maturities of more than 12 months.  In view of market conditions that resultedin an increase in the trading price of Aether’s outstanding 6% convertiblesubordinated notes and Aether’s ongoing evaluation of strategic alternatives(as discussed above under the heading “Introduction”), in the third quarter of2003 management concluded it no longer had an intention to liquidate suchinvestments within a 12-month period to fund debt repurchases or otherstrategic activities.  Accordingly,while the types of investments have not changed, such investments (totalingapproximately $220.8****million as ofDecember 31, 2003)  are now classifiedas non-current assets.  The aggregateoutstanding balance of our 6% convertible subordinated notes due 2005,including accrued and unpaid interest, was $157.4 million as of December 31,2003.  The foregoing amounts exclude thenet assets of our discontinued operations, which were $26.5 million and $14.2million as of December 31, 2002 and December 31, 2003, respectively.

 

The following table reflects use of net cash for operations, investing,and financing:

 
|                                                              |   | **2002** |     | **2003** |   |
|-------------------------------------------------------------------|--------|----------|----------|----------|--------|
| Net  cash used by operating activities from continuing operations |   | $        | (42,068  | )        | $      | (54,697 | ) |
| Net  cash used by discontinued operations                         |   | (47,624  | )        | (6,663   | )      |
| Net  cash used by operating activities                            |   | (89,692  | )        | (61,360  | )      |
| Net  cash provided by (used in) investing activities              |   | (268,997 | )        | 34,814   |   |
| Net  cash used in financing activities                            |   | (93,849  | )        | (3,459   | )      |
| Net  decrease in cash and cash equivalents                        |   | $        | (452,538 | )        | $      | (30,005 | ) |

 

Our operations have never generated positive cashflow.  Net cash used in operatingactivities was $89.7 million and $61.4 million for 2002 and 2003,respectively.   Of the net cash used by operatingactivities,  $42.1 million and $54.7million was from continuing operations for 2002 and 2003, respectively.  The principal use of cash in each of theseperiods was to fund our losses from operations.  The amount of cash used to support our operating activities hasdeclined significantly as a result of our restructuring efforts.

 

The amount of cash provided by or used in ourinvesting activities fluctuates primarily based on the timing of our sales andpurchases of investments available for sale. In managing our cash balances, we buy and sell investments available forsale (both those that we classify as current assets and those that we classifyas non-current assets) primarily to maximize returns based upon current marketconditions.  Accordingly, we may sell aninvestment to realize a gain (or limit a loss) in response to changes in marketconditions.  During 2003, we used only asmall portion of our cash to purchase assets used in the operations of ourbusiness.  Accordingly, our investingactivities have not materially increased or decreased the aggregate amount ofcash and investments available for sale that we have to meet our liquidityneeds.

 

Net cash used in investing activities was$269.0 million for 2002.  During 2002,we used $3.8 million for the purchase of property and equipment, a net of$252.7 million for the purchases and sales of short-term and non-currentinvestment instruments (primarily United States Government Agency-sponsoredsecurities) and $15.8 million in acquisition-related activities.  Net cash provided by investing activitieswas $34.8 million for 2003.  During2003, we used $921,000 for the purchase of property and equipment and $2.3million for the purchase of intellectual property.  Additionally, we received a net of $33.1 million from the salesand purchases of short-term and non-current investment instruments (primarilyUnited States Government Agency-sponsored securities) and approximately$443,000 from sales of certain property and equipment.  The primary difference between 2002 and 2003is that in 2002 we began to invest our cash in United States GovernmentAgency-sponsored securities.

 

Net cash used by financing activities was $93.8million and $3.4 million for 2002 and 2003, respectively.  During 2002, we used $92.9 million torepurchase a portion of our 6% convertible subordinated notes.  During 2003, financing activities includedthe investment of approximately $4.5 million of cash in certificates ofdeposit, which are used as collateral against certain letters of creditestablished to support facility leases and the performance of certain customercontracts.  This amount is reported onour balance sheet as restricted cash.

 

We believe that we have sufficientresources to cover our operating expenses and material commitments for at leastthe next 12 months, including expenses associated with our evaluation ofstrategic options.  Our contractualobligations are summarized below, under the heading “ContractualObligations.”  Although our businesscontinues to generate net losses that we must fund with our cash resources, wehave significantly reduced the amount of our net losses, and our consumption ofcash, as a result of our restructuring efforts, which have greatly reduced ourexpenses.  To conserve our cash whileour business continues to operate at a loss, we have limited our spending onnew technology and product enhancements. This may place us at a competitive disadvantage in seeking to retain existingcustomers and win new customers, particularly where we are competing againstcompanies with greater resources to spend on technology and productdevelopment.

 

29

----

 

We will be required to repay our 6%convertible subordinated notes in March 2005, which will consume a substantialportion of our existing cash resources. It is possible that, as a result of our strategic activities, theholders of the notes will become entitled to demand repayment at an earlierdate, as discussed under the heading “Introduction,” which appears above, inPart I of this Report.

 

To the extent that we decide, as aresult of our ongoing strategic evaluation process, to expand or substantiallyalter our business, we may require additional third-party funding, which we mayseek through the sale of equity or debt securities, or from bankborrowings.  There is no assurance thatwe will be able to obtain such additional funding on favorable terms or at all.

 

Letters of Credit

 

During the normal course ofoperations, we have entered into various letters of credit.  These generally serve as collateral tosecure the performance of our obligations to government agencies that arecustomers of our Mobile Government segment. As of December 31, 2003, we had outstanding $11.5 million in letters ofcredit, which expire at various times over the next eight years.  These letters of credit would not be drawnunless we fail to perform our obligations to our customers or become involvedin performance disputes with our customers. At December 31, 2003, there were no pending or threatened claims againstany of the outstanding letters of credit.

 

Guaranteesand Warranties

 

We have certain guarantees requiring disclosure underFIN 45 as follows:

 

•                  Wehave guaranteed the payment to our landlord on several properties we havesublet.  The maximum guarantee on theseproperties is $1.1 million.

•                  Inour Mobile Government segment, we may have to pay liquidated damages in somecases if our subcontractors do not perform on time.  In addition, we sometimes indemnify certain of our customersagainst damages, if any, they might incur as a result of a claim broughtagainst them related to third party software imbedded in our products.  We are unable to estimate the maximumexposure of such indemnifications due to the inherent uncertainty and thevarying nature of contractual terms.

•                  Wegenerally warrant our products against certain manufacturing and otherdefects.  These product warranties areprovided for specific periods of time and/or usage of the product depending onthe nature of the product and other factors. As of December 31, 2002 and 2003, we had accrued approximately $788,000and $847,000, respectively, for estimated product warranty claims.  The accrued product warranty costs are basedprimarily on historical experience of actual warranty claims as well as currentinformation on repair cost.

 

The following table provides the changes in ourproduct warranty accrual:

 
|                                                                                          |   | **2002** |   | **2003** |   |
|-----------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|
| Warranty liability balance at beginning of  year                                              |   | $        | 1,943  |     | $      | 788 |   |
| Liabilities accrued for warranties issued  during the period                                  |   | 493      |   | 944      |   |
| Changes in liability for warranties during  the period, including claims paid and expirations |   | (1,648   | )      | (885     | )      |
| Warranty liability balance at end of year                                                     |   | $        | 788    |     | $      | 847 |   |

 

Contractual Obligations

 

The following table reflects our contractualcommitments, including our future minimum lease payments:

 
|                                                                                     |   | **Payments  due by period** |       |
|------------------------------------------------------------------------------------------|--------|-----------------------------|------------|
| **Contractual Obligations**                                                              |   | **Total**                   |       | **Less than  1 year** |   | **1-3 years** |   | **3-5 years** |   | **More  than  5 years** |   |
|                                                                                     |   |                        | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Long-Term Debt Obligations                                                               |   | $                           | 166,531    |   | $ | 9,295 | (1) | $ | 157,236 | (1) | $ | — |   | $ | — |   |
| Operating Lease Obligations                                                              |   | 9,768                       | (2)        | 4,235 |   | 4,533 |   | 1,000 |   | — |   |
| Purchase Obligations                                                                     |   | 8,033                       |       | 6,855 |   | 1,178 |   | — |   | — |   |
| Other Long-Term Liabilities Reflected on  the Registrant’s Balance Sheet under GAAP |   | —                      | (3)        | — |   | — |   | — |   | — |   |
| **Total**                                                                                |   | $                           | 184,332    |   | $ | 20,385 |   | $ | 162,947 |   | $ | 1,000 |   | $ | — |   |

 

30

----

 

----

(1) Long-term debt obligations includeinterest of approximately $11.6 million through March 2005.  These 6% convertible subordinated notes aredue in March 2005.  However, a holder ofthese notes can demand that we purchase the notes upon a “change in control”which is defined in the indenture that governs the notes to include, amongother things, the acquisition of more than 50% of our outstanding voting stockby any person or group, a significant change in the composition of the Board ofDirectors and a sale of all or substantially all of our assets.  To the extent that we complete additional divestituresor engage in other strategic transactions, a “change in control” may occur, orholders of the notes may claim that one had occurred.  In such event, they may require us to repay their notesimmediately.  This would reduce theamount of cash we have to operate our business.

 

(2) Facilitiesrepresenting $1.2 million of our minimum lease payments have been subleased orare available for sublease.  Althoughthere can be no assurance, we expect actual expenditures related to the abovecommitments will be less than indicated above due to reductions we are in theprocess of negotiating.

 

(3) Aether does not have any otherlong-term liabilities requiring cash payment (deferred rent and deferredrevenue do not require a cash outlay) that are not already included in thecategories above.  For instance, theentire long term portion of our restructuring reserve relates to our operatinglease obligations which are already quantified in the second line of the abovetable.

 

We have not included contracts for maintenancesupport on hardware or software that we own since we generally pay in advancefor these services and have the option of choosing whether or not to renewthese services each year.  We have alsonot included in this table potential contingent liabilities that we may have tothe buyer of our EMS segment, under the terms of the purchase agreement withthe buyer.  We are not aware of any suchliabilities, and we cannot readily estimate the potential amount of liabilitiesthat might arise in the future, if any. As discussed under the heading “Risk Factors,” which appears below, ourtotal liability under the Purchase Agreement for breaches of ourrepresentations and warranties is capped at $7.6 million, except for claimsrelating to fraud and for matters covered by certain specific representations,such as those relating to taxes owed for periods prior to the date of thetransaction.  We also remain fullyliable for matters that relate to our ownership and operation of the EMSsegment prior to the sale of that business.

 

RISK FACTORS

 

You should consider eachof the following factors as well as the other information in this annualreport, including the financial statements and related notes, in evaluating ourbusiness and our prospects.  The risksand uncertainties described below are not the only ones we face.  Additional risks and uncertainties notpresently known to us or that we currently consider immaterial may also impairour business operations.  If any of thefollowing risks actually occur, our business and financial results couldsuffer.

 

Risks of OurStrategic Activities

 

The following discussionaddresses risks and uncertainties that may affect our efforts to identify andimplement strategic options that we believe will enable us to achieve our businessobjectives, as described in Part I of this Report under the heading“Introduction.”  These risks anduncertainties may cause us to be unable to implement a desired strategy or mayresult in a strategic option failing to achieve its expected results.

 

WE MAY NOT BE ABLE TO IMPLEMENTA BUSINESS STRATEGY THAT WILL ACHIEVE OUR OBJECTIVES.

 

We are currently exploringvarious business strategies designed to achieve profitability as quickly aspossible in the near term and enhance the value of our assets for ourstockholders over the longer term.  Weare continuing to evaluate and actively explore a range of possible options,including additional divestitures, the acquisition or commencement ofcomplementary businesses or new lines of business, the negotiation of alliancesor joint ventures with customers or strategic partners, alternative strategiesfor investing our cash balances and other alternatives that we believe willhelp us to achieve our announced objectives. We may not be able to effect any of these strategic options on favorableterms or at all.  In pursuing thesestrategies and alternatives, the Company is likely to spend money, resourcesand time that would otherwise have been dedicated to the operation of ourbusiness segments.  This may negativelyimpact the value of our existing business.

 

WE MAY BE UNABLE TO SECUREADDITIONAL FINANCING TO IMPLEMENT A BUSINESS STRATEGY THAT WE WOULD LIKE TOPURSUE.

 

31

----

 

We do not currently have anyagreements or credit facilities under which we can obtain funds, ifnecessary.  We believe that existingcash and cash equivalents, together with our liquid investments, will beadequate to fund our operating plans for at least the next 12 months.  However, we may need additional debt orequity financing in order to implement a new business strategy.  Additional financing may not be availablewhen needed or, if available, such financing may not be on terms favorable tous. If additional funds are raised through the issuance of equity securities,our existing stockholders may experience significant dilution.

 

WE MAY NOT BE ABLE TO REALIZEVALUE FROM OUR ACCUMULATED NET OPERATING****ANDNET CAPITAL****LOSSES.

 

Our ability to use our accumulated netoperating losses to reduce future income tax payments may be limited.  As of December 31, 2003, we hadapproximately $722.5 million of accumulated net operating losses for federalincome tax purposes, which are available to offset future federal taxableincome for a defined period of time, until they expire between 2012 and2023.  These losses will only bevaluable if we are able to generate significant taxable income in futureyears.  Because we have never generateda profit, we may not be able to realize value from these losses.  We have also incurred capital losses ofapproximately $100.6 million that we can carryforward as potential taxdeduction (but only against capital gains) until they expire between 2006 and2008.  In addition, under complexprovisions of the federal income tax laws, our ability to use these losses(both net operating loss carryforwards and capital loss carryforwards) in thefuture may be limited if it is determined that a “ownership change” occurredwith respect to the ownership of shares of our Company.  Generally speaking, an “ownership change”will be deemed to occur if, over any three-year cumulative period, there hasbeen a increase in ownership of our shares by 5-percent stockholders, andcertain other persons, of more than 50 percentage points.  While we do not believe that a “ownershipchange” has occurred as of the current date, the Internal Revenue Servicemight, in the future, contest this conclusion and seek to impose a limit on ouruse of these accumulated net operating losses and accumulated capital losses.  If the Internal Revenue Service weresuccessful in such a challenge, and if the net operating losses and capitallosses would be valuable to us absent any such limitation on their use, theresult of such a challenge would be a significant loss of value to our Companyand our stockholders.

 

AS A RESULT OF UNCERTAINTYABOUT OUR LONG-TERM BUSINESS STRATEGY, WE MAY BE UNABLE TO ATTRACT NEWCUSTOMERS OR RETAIN EXISTING CUSTOMERS. WE ALSO MAY LOSE EMPLOYEES.

 

We have not yet adopted acomprehensive business strategy and we cannot yet determine what our operationswill look like in the future.  We arecontinuing to evaluate various strategic alternatives that we believe willaccelerate our ability to become profitable and allow us to realize greatervalue for our stockholders.  In January2004, we sold our EMS segment and our business has gone through a significantchange.  Going forward, as part of thisstrategic process, we may pursue additional divestitures, acquisitions or otherbusiness opportunities, none of which may be successful.  Because of this uncertainty, existing andpotential customers may have concerns about our long-term viability and may behesitant to commit to a long-term relationships with us.  Our employees may also have concerns abouttheir continued employment with the Company, may be distracted from their jobresponsibilities and even may seek employment with another company (possibly acompetitor). Prospective employees may also be hesitant to accept employmentwith the Company because of uncertainty over the future of such position.  While we believe we have been able to retainour employees and our existing customers during 2003, potential customers maybe reluctant to invest in our products if they do not believe that we will continueto support, enhance or update them. Therefore, until we settle on and announce a comprehensive strategy, ourrelationships with existing and potential customers as well as our employeesand prospective employees may be adversely affected.

 

DEBT SERVICE OBLIGATIONS,PARTICULARLY IF WE ARE REQUIRED TO REPAY OUR 6% NOTES PRIOR TO THEIR MATURITY,MAY ADVERSELY OUR ABILITY TO FUND OUR EXISTING OPERATIONS AND PURSUE STRATEGICOPTIONS.

 

We have a substantial amount ofdebt, consisting primarily of $154.9 million of 6% convertible subordinatednotes due 2005.  A holder of these notescan demand that we purchase the notes upon a “change in control” which isdefined in the indenture that governs the notes to include, among other things,the acquisition of more than 50% of Aether’s outstanding voting stock by anyperson or group, a significant change in the composition of the Board ofDirectors and a sale of all or substantially all of Aether’s assets.  To the extent that we pursue a businessstrategy that constitutes a “change in control,” we may be required to repaysome or all of the notes immediately. We do not intend to repay any notes prior to maturity unless demanded bythe note holder.  Any repayment of thesenotes would reduce the amount of cash we have to operate our business.  If we use our available cash to repay thenotes prior to 2005, there will be a significant reduction in the amount ofcash available to pay other obligations and support our operating losses andour financial condition may change significantly.  In any event, these notes will mature and become payable in March2005.

 

WE MAY BE SUBJECT TOLIABILITIES RELATING TO ASSETS THAT WE SELL AFTER WE CEASE TO OWN THEM.

 

We may be required to indemnify TCS forcertain breaches of representations and warranties and other covenants that wegave to TCS with respect to the sale of the EMS segment.  This liability is limited to $7.6 million,other than in the case of fraud and with respect to a small number of specificrepresentations, such as those relating to taxes owed for period prior to theclosing of the sale of the EMS

 

32

----

 

segment.  In addition, we remain fully liable for any claims that may ariserelating to our operation of the EMS business prior to the date on which TCSacquired that business from us. Although we are not currently aware of any potential claims that wewould expect to be significant, claims may arise in the future that couldimpose substantial liabilities on us. In addition, we could have continuing liability for our past sales ofthe blackberry devices manufactured by Research In Motion (“RIM”).  Currently, RIM is engaged in legalproceedings with Inpro II that alleges that certain RIM products infringed onpatents held by Inpro.  Under the PatentAct, we could be liable for six years for “making, using, selling or offeringto sell” the RIM devices.  In addition,in the spring and summer of 2003, a federal district court awarded substantialmoney damages against RIM and granted (and then immediately stayed, pendingappeal) an injunction against RIM that would prohibit RIM from selling variousBlackberry devices, software or services, in the United States.  The case involves claims that RIM’sBlackBerry technology infringes the patents of another company, NTP, Inc.  RIM has said it is appealing this decision,and the U.S. Patent and Trademark Office (“PTO”) is reexamining the validity ofcertain of NTP’s patent claims.  Wecannot assess the likelihood that RIM will succeed in any appeal or that thePTO will narrow or find any of these patent claims invalid, or that RIM will beable to negotiate a license with the company that holds the patents atissue.  Ultimately, RIM might beprohibited from selling Blackberry devices or might raise its prices to offsetlicensing fees or damage payments.  Thelikelihood that we may have liability to Inpro or NTP, Inc. if it isestablished that RIM’s Blackberry in fact infringes Inpro’s patents is unclear,and the extent of any liability unknown.

 

In additional divestitures, we expect to havepotential liabilities for past events as well as for any breaches ofrepresentations that we make in any sale agreement.  The terms of such potential liabilities are likely to differsomewhat from those that were agreed to by TCS.  They may be broader or narrower in scope, may last a longer orshorter period of time, and may be subject to different monetary limits.

 

Risks of OurExisting Businesses

 

The following discussionaddresses risks and uncertainties associated with the operation of our existingMobile Government and Transportation businesses.  If we sell either of these businesses, these risks may diminishin significance, particularly if we acquire or commence other businesses.

 

AS A RESULT OF OUR ORGANIZATIONALRESTRUCTURING AND EXPENSE REDUCTION PROGRAM, WE MAY NOT HAVE SUFFICIENTSTAFFING TO SUPPORT OUR OPERATIONS, WHICH COULD REDUCE DEMAND FOR OUR SERVICESAND ADVERSELY AFFECT OUR REVENUE.

 

Our business strategy is based on theassumption that the number of subscribers to our services, the amount ofinformation they want to receive and the number of services we offer will allincrease.  We must continue to developand expand our systems and operations to accommodate this growth.  At the same time, we have significantlystreamlined our organization and reduced our operating expenses.  These efforts have included a reduction inoperational and management resources and a consolidation of our facilities.  While we believe that our cost, personneland facilities reductions have targeted areas that are not necessary tomaintain and develop our ability to serve customers, there can be no assurancethat the changes will not have a negative impact on our ability to provideservice.  If we fail to maintain or improveservice levels, we may lose customers and/or the opportunity to provide moreservices and products.

 

THE SUCCESS OF OUR MOBILEGOVERNMENT SEGMENT DEPENDS ON OUR ABILITY TO ACCESS DECISION-MAKERS ATTHOUSANDS OF LOCAL GOVERNMENT AGENCIES BEFORE THEY CHOOSE THEIR PREFERREDWIRELESS DATA VENDOR.

 

The Mobile Government segment targets thepolice and fire departments of local governments, of which there are tens ofthousands across the United States.  Itis our experience that the local governments are not under any state mandate toacquire wireless data technology in a particular way or at a particulartime.  As a result, it is time consumingand expensive to target all local governments, or to know when they are makingthe decision to purchase mobile data devices. If we miss an opportunity to bid to provide services, it is unlikelythat we will be given an opportunity at a later time.

 

OUR MOBILE GOVERNMENT SEGMENT MAY NEED TOMAKE ADDITIONAL INVESTMENT TO REMAIN COMPETITIVE IN THE MARKETPLACE.

 

The public safety industry has experiencedgrowing demand for computer aided design (CAD) and record management system(RMS) functionality in tailored solutions. Our existing product suite does not currently include these features.  To the extent our potential customers desirethis functionality, the growth of our business could be limited.

 

AS WE SEEK TO SERVE LARGERFLEET OWNERS, WE FACE COMPETITION FROM BUSINESSES WITH GREATER FINANCIALRESOURCES, AND WE MAY BE UNABLE TO COMPETE EFFECTIVELY WITH THESE BUSINESSES.

 

33

----

 

The existing market forwireless and mobile data solutions for the transportation industry iscompetitive.  Competition isparticularly vigorous for larger fleet owners, which is a customer segment wehave worked to serve.  We expectcompetition to increase further as companies develop new products and/or modifytheir existing products to compete directly with ours.  These competitors may have better namerecognition, better product lines, greater sales, marketing and distributioncapabilities, significantly greater financial resources, and existingrelationships with some of our potential customers.  We may not be able to effectively compete with these companies.  Greater financial resources and productdevelopment capabilities may allow our competitors to respond more quickly tonew or emerging technologies and changes in customer requirements that mayrender our products obsolete.  Inaddition, these companies may reduce costs to customers and seek to obtain ourcustomers through cost-cutting and other measures. To the extent thesecompanies compete effectively with us, our business could be adverselyaffected.

 

OUR PRODUCTS MAY CONTAINDEFECTS OR ERRORS, AND OUR SALES COULD DECREASE IF THIS INJURES OUR REPUTATIONOR DELAYS SHIPMENTS OF OUR PRODUCTS.

 

We subcontract all of the manufacturing andassembly to third parties and rely on these third parties to deliver andsupport reliable products.  Our relianceon sole or limited-source vendors involves risks.  These risks include product performance shortfalls, manufacturingcapability, quality assurance, quantity and costs.  We have in the past and may in the future, encounter problemswith certain of the products that we purchase from third parties.  In certain cases, we have agreements withthe device manufacturer for indemnity in the event of a defect in thecraftsmanship or operation of such product. Recently, our MobileMaxTM product has experienced some warranty repairissues.  As of December 31, 2003, wehave reserved approximately $360,000****forsuch warranty claims.  We may incuradditional repair or replacement costs in the future in excess of the amount wehave reserved for, which would increase our expenses and reduce ourearnings.  In addition, we are unable toquantify the impact, if any, on our reputation and customer goodwill.  Also, defective products such as the ones wehave experienced recently and other defects we may experience in the future mayresult in customer dissatisfaction and customer attrition.

 

OUR SOFTWARE MAY CONTAINDEFECTS OR ERRORS, AND OUR SALES COULD DECREASE IF THIS INJURES OUR REPUTATIONOR DELAYS SHIPMENTS OF OUR SOFTWARE.

 

Our software products andplatforms are complex and must meet the stringent technical requirements of ourcustomers.  Because of such complexity,our products and platforms may contain defects and errors that are detectedonly when the products are in use. Further, because our products perform critical functions in ourcustomers’ products and networks, such defects or errors could have a seriousimpact on our customers, which could damage our reputation, harm our customerrelationships and potentially expose us to liability.  We may also experience component or software failures or defectswhich could require significant product recalls, reworks and/or repairs whichare not covered by warranty reserves and which could consume a substantialportion of the capacity of our third-party manufacturers or those of ourcustomers.  Resolving any defect orfailure related issues could consume financial and/or engineering resourcesthat could affect future product release schedules.

 

WE MAY INCUR COSTS PARTICULAR TO BEING AGOVERNMENT CONTRACTOR.

 

In our Mobile Government segment, we act as aprime contractor or subcontractor on a variety of federal, state and localgovernment programs that are subject to the availability of government funding,government audit rights, and termination at the convenience of thegovernment.  These contracts andsubcontracts may contain detailed requirements, warranties and software anddata rights licenses, and may provide us access to confidential informationmaintained by federal, state and local security agencies.  Profit on these contracts may subject tolimitations and may be subject to audit and recovery rights by governmentalagencies.  Our contracts are typicallyobtained on a fixed price basis, and as a result we benefit from cost savingsand carry the burden of cost overruns. Based on the terms of these contracts and applicable laws, our businessoperations may be subject to restrictions and requirements applicable togovernment procurements, including rules pertaining to relationships withgovernment officials and the accuracy of information provided to governmentagencies.  Failure to comply with suchrestrictions and requirements could lead to our suspension or debarment for cause,from contracting or subcontracting on governmental programs for a period oftime.  Under some of these contracts, weare also required to maintain security clearances and compliance with thePrivacy Act of 1974, as amended.

 

34

----

 

WE DEPEND UPON WIRELESSNETWORKS OWNED AND CONTROLLED BY OTHERS.

 

If we do not have continued access tosufficient capacity on reliable networks, we may be unable to deliver servicesand our sales could decrease.  Ourability to grow and achieve profitability partly depends on our ability to buysufficient capacity on the networks of wireless carriers such as MotientCommunications Company (“Motient”), Minor Planet Systems USA (“Minor Planet”)and Mobile Satellite Ventures, (“MSV”) Inc. and on the reliability and securityof their systems.  All of our servicesare delivered using airtime purchased from third parties.  We depend on these companies to provideuninterrupted and defect-free service and would not be able to satisfy ourcustomers’ needs if they failed to provide the required capacity or neededlevel and quality of service.  Inaddition, our expenses would increase and our profitability could be materiallyadversely affected if wireless carriers were to increase the prices of theirservices.  Our Transportation segment isdependent on MSV for its satellite communications and on Motient for itsterrestrial radio-based data communications network service.  If Motient ceased performing under itsobligations under the Terrestrial Network Reseller Agreement and we were unableto find a replacement provider on similar terms and conditions, our businesswould be materially adversely affected. In addition, Minor Planet our network services supplier for our HM 5000customers, recently filed a petition for relief under Chapter 11 of theBankruptcy Code.  Although we believeMinor Planet will continue to fulfill its obligations under its agreement withAether and provide HM 5000 Airtime Services, the possibility exists that MinorPlanet will seek authority from the bankruptcy court to reject the TransitionServices Agreement and cease performing. If Minor Planet successfully rejects the Transition Services Agreementand fails to perform its obligations, we will seek other means of supplyingservice to our Highway Master customers, but there is no guarantee that we willbe able to obtain such replacement services.

 

ANY TYPE OF SYSTEMS FAILURECOULD REDUCE SALES, INCREASE COSTS OR RESULT IN CLAIMS OF LIABILITY.

 

Any disruption from our satellite feeds orbackup landline feeds could result in delays in our subscribers’ ability toreceive information.  We cannot be surethat our systems will operate appropriately if we experience a hardware orsoftware failure or if there is an earthquake, fire or other natural disaster,a power or telecommunications failure, intentional disruptions of service bythird parties, an act of God or an act of war. A failure in our systems could cause delays in transmitting data, and asa result we may lose customers or face litigation that could involve materialcosts and distract management from operating our business.

 

35

----

 

NEW LAWS AND REGULATIONS THATIMPACT OUR INDUSTRY COULD INCREASE OUR COSTS OR REDUCE OUR OPPORTUNITIES TOEARN REVENUE.

 

We are not currently subject to directregulation by the Federal Communications Commission or any other governmentalagency, other than regulations applicable to publicly traded Delawarecorporations of similar size that are headquartered in Maryland.  However, in the future, we may becomesubject to regulation by the FCC or another regulatory agency.  In addition, the wireless carriers thatsupply us airtime and certain of our hardware suppliers are subject toregulation by the FCC and regulations that affect them could increase our costsor reduce our ability to continue selling and supporting our services.

 

COMPLIANCE WITH CHANGINGREGULATION OF CORPORATE GOVERNANCE AND PUBLIC DISCLOSURE MAY RESULT INADDITIONAL EXPENSES.

 

Changing laws,regulations and standards relating to corporate governance and publicdisclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations andNasdaq National Market rules, have required most public companies, includingour Company, to devote additional internal and external resources to variousgovernance and compliance matters. Because we have a relatively small corporate staff, we rely heavily onoutside professional advisers to assist us with these efforts.  As a result, we incurred additionaloperating expenses in 2003 and will incur further expenses in the future.  These future costs will include increasedaccounting related fees associated with preparing the attestation report on ourinternal controls over financial reporting as required under Section 404 of theSarbanes-Oxley Act of 2002.  These costshave offset a portion of the savings we realized through our expense reductionprogram.  In addition, these new orchanged laws, regulations and standards are subject to varying interpretations,as well as modifications by the government and Nasdaq.  The way in which they are applied andimplemented may change over time, which could result in even higher costs toaddress and implement revisions to compliance (including disclosure) and governancepractices.

 

We are committed to maintaining highstandards of corporate governance and public disclosure. As a result, we intendto invest resources to comply with evolving laws, regulations and standards,and in addition to increased general and administrative expenses, this investmentwill require management to devote time and attention that will not be availablefor other matters.  If our efforts tocomply with new or changed laws, regulations and standards differ from theactivities intended by regulatory or governing bodies due to ambiguitiesrelated to practice, our reputation may be harmed and we could be exposed topotential liability.

 

**ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

The following discussion about our marketrisk disclosures involves forward-looking statements.  Actual results could differ materially from those projected inthese forward-looking statements.

 

We maintain instruments subject to interestrate risk.  We categorize all of ourmarket risk sensitive instruments as non-trading or other instruments.

 

Interest Rate Sensitivity

 

We are exposed to interest rate risk relatedto our cash and cash equivalents and investments available for sale.  Our investment policy calls for investmentin short-term low risk instruments.  Allinvestments in securities with maturities greater than one year are held asavailable-for-sale, in compliance with our investment policy.  At December 31, 2003, we had $39.7 million(including restricted cash) invested in money market, commercial paper andcertificates of deposit.  At December31, 2003, we had $220.8 million invested in U.S. Government Agency-sponsoredsecurities with maturities that range from less than one year to threeyears.  We believe that a 10% increaseor decline in interest rates would not be material to our investment income orcash flows.

 

We are exposed to interest rate risk on ourfixed rate subordinated convertible notes payable.  The fair value of this fixed rate debt is sensitive to changes ininterest rates.  If market ratesdecline, the required payments will exceed those based on current marketrates.  Under our current policy, we donot use interest rate derivative instruments to manage our risk of interestrate fluctuations.  As our long-termdebt obligations bear fixed interest rates, we have minimal cash flow exposuredue to general interest rate changes associated with our long-term debtobligations.

 

As a result of our sale of the EMS segment inJanuary 2004, we ceased to have any operations outside of the UnitedStates.  Consequently, neither ourresults of operations nor our financial condition is subject to any ongoingforeign exchange rate risks.

 

**ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

 

TABLE OF CONTENTS

 

The following financialstatements required by this item are included in the Report beginning on page **38**.

 

36

----

 
| Independent Auditors’ Report                                                                                   |   |
|---------------------------------------------------------------------------------------------------------------------|--------|
| Report of Other Independent Auditors                                                                                |   |
| Consolidated Balance Sheets as of December 31, 2002 and  2003                                                  |   |
| Consolidated Statements of Operations and  Comprehensive Loss for the years ended December 31, 2001, 2002, and 2003 |   |
| Consolidated Statements of Stockholders’  Equity for the years ended December 31, 2001, 2002 and 2003          |   |
| Consolidated Statements of Cash Flows for  the years ended December 31, 2001, 2002 and 2003                         |   |
| Notes to Consolidated Financial Statements                                                                          |   |

 

37

----

 

**INDEPENDENTAUDITORS’ REPORT**

 

The Board ofDirectors and Stockholders

 

AetherSystems, Inc.:

 

We haveaudited the accompanying consolidated balance sheets of Aether Systems, Inc.and subsidiaries as of December 31, 2002 and 2003, and the related consolidatedstatements of operations and comprehensive loss, stockholders’ equity and cashflows for each of the years in the three-year period ended December 31,2003.  In connection with our audits, we have also audited theaccompanying financial statement Schedule II – Valuation and QualifyingAccounts for the years ended December 31, 2001, 2002 and 2003.  These consolidated financial statements andfinancial statement schedule are the responsibility of the Company’smanagement.  Our responsibility is to express an opinion on theseconsolidated financial statements and financial statement schedules based onour audits.  We did not audit the consolidated financial statements ofSila Communications Limited, a majority-owned subsidiary during 2001, whichstatements reflect total revenues constituting 18% of the total revenues ofdiscontinued operations in 2001.  Those statements were audited by otherauditors whose report has been furnished to us, and our opinion insofar as itrelates to the amounts included for Sila Communications Limited, is basedsolely on the report of the other auditors.

 

We conductedour audits in accordance with auditing standards generally accepted in theUnited States of America.  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation.  We believe thatour audits provide a reasonable basis for our opinion.

 

In ouropinion, based on our audits and the report of the other auditors, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of Aether Systems, Inc. andsubsidiaries as of December 31, 2002 and 2003, and the results of theiroperations and their cash flows for each of the years in the three-year periodended December 31, 2003, in conformity with accounting principles generallyaccepted in the United States of America. Also, in our opinion, the related financial statement schedule for theyears ended December 31, 2001, 2002 and 2003, when considered in relation tothe basic consolidated financial statements taken as a whole, presents fairlyin all material respects the information set forth therein.

 

As discussedin note 2 to the financial statements, the Company changed its method foraccounting for derivatives with the adoption of SFAS No. 133 “Accounting forDerivative Instruments and Hedging Activities” in 2001, changed its method ofaccounting for intangible assets with the adoption of SFAS No. 142, “Goodwilland Other Intangible Assets” in 2002, and changed its method of accounting forgains from the early extinguishment of debt with the adoption of SFAS No. 145,“**Rescission of FASB Statements No. 4, 44, and 64,Amendment of FASB Statement No. 13, and Technical Corrections***.*”

 

 

*McLean, Virginia*

 

*March 4, 2004*

 

38

----

 

**REPORTOF INDEPENDENT AUDITORS**

 

The Board ofDirectors and Shareholders

 

SilaCommunications Limited

 

We haveaudited the consolidated statements of operations, shareholders’ equity andcash flows of Sila Communications Limited for the year ended December 31,2001  (not separately presentedherein).  These financial statements are the responsibility of theCompany’s management.  Our responsibility is to express an opinion onthese financial statements based on our audit.

 

We conductedour audit in accordance with auditing standards generally accepted in the UnitedStates.  Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financialstatements.  An audit also includes assessing the accounting principlesused and significant estimates made by management, as well as evaluating theoverall financial statement presentation.  We believe that our auditprovides a reasonable basis for our opinion.

 

In ouropinion, the consolidated financial statements referred to above presentfairly, in all material respects, the consolidated results of operations andconsolidated cash flows of Sila Communications Limited for the year endedDecember 31, 2001, in conformity with accounting principles generally acceptedin the United States.

 

ERNST &YOUNG LLP

 

London,England

 

Febuary 5, 2002

 

39

----

 

**AETHERSYSTEMS, INC.**

**CONSOLIDATEDBALANCE SHEETS**

(IN THOUSANDS,EXCEPT SHARE DATA)

 
|                                                                                                                                                                  |   | **DECEMBER 31,** |    |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------|---------|
|                                                                                                                                                                  |   | **2002**         |    | **2003** |   |
| ASSETS                                                                                                                                                                |   |             |    |   |   |
| Current assets:                                                                                                                                                       |   |             |    |   |   |
| Cash and cash equivalents                                                                                                                                             |   | $                | 56,227  |   | $ | 26,222 |   |
| Investments available for sale                                                                                                                                        |   | 255,825          |    | 20 |   |
| Trade accounts receivable, net of allowance  for doubtful accounts of $4,644 and $2,652 at December 31, 2002 and 2003,  respectively                                  |   | 13,928           |    | 15,014 |   |
| Inventory, net of reserve for inventory  obsolescence of $85 and $108 at December 31, 2002 and 2003, respectively                                                     |   | 15,997           |    | 10,162 |   |
| Assets held for sale                                                                                                                                                  |   | 5,250            |    | — |   |
| Net assets from discontinued operations                                                                                                                               |   | 26,480           |    | 14,219 |   |
| Net investment in sales-type leases  (current)                                                                                                                        |   | 1,655            |    | 2,636 |   |
| Prepaid expenses and other assets (current)                                                                                                                           |   | 14,901           |    | 16,338 |   |
| Total current assets                                                                                                                                                  |   | 390,263          |    | 84,611 |   |
|                                                                                                                                                                  |   |             |    |   |   |
| Restricted cash                                                                                                                                                       |   | 8,923            |    | 13,460 |   |
| Investments available for sale                                                                                                                                        |   | —           |    | 220,849 |   |
| Property and equipment, net                                                                                                                                           |   | 9,290            |    | 9,335 |   |
| Investments                                                                                                                                                           |   | 2,228            |    | 2,273 |   |
| Goodwill                                                                                                                                                              |   | 25,369           |    | 25,369 |   |
| Intangibles, net                                                                                                                                                      |   | 15,854           |    | 12,171 |   |
| Net investment in sales-type leases  (non-current)                                                                                                                    |   | 6,691            |    | 8,765 |   |
| Other assets (non-current), net                                                                                                                                       |   | 14,791           |    | 21,272 |   |
|                                                                                                                                                                  |   | $                | 473,409 |   | $ | 398,105 |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                             |   |             |    |   |   |
| Current liabilities:                                                                                                                                                  |   |             |    |   |   |
| Accounts payable                                                                                                                                                      |   | $                | 513     |   | $ | 388 |   |
| Accrued expenses                                                                                                                                                      |   | 11,915           |    | 12,220 |   |
| Accrued employee compensation and benefits                                                                                                                            |   | 4,825            |    | 2,796 |   |
| Restructuring reserve (current portion)                                                                                                                               |   | 8,651            |    | 1,407 |   |
| Deferred revenue                                                                                                                                                      |   | 10,638           |    | 15,373 |   |
| Net liabilities from discontinued  operations                                                                                                                         |   | 15,694           |    | 9,687 |   |
| Accrued interest payable                                                                                                                                              |   | 2,529            |    | 2,529 |   |
| Total current liabilities                                                                                                                                             |   | 54,765           |    | 44,400 |   |
|                                                                                                                                                                  |   |             |    |   |   |
| Convertible subordinated notes payable and  other notes payable                                                                                                       |   | 154,912          |    | 154,912 |   |
| Deferred revenue (less current portion)                                                                                                                               |   | 11,789           |    | 18,799 |   |
| Restructuring reserve (less current portion)                                                                                                                          |   | 23,801           |    | 70 |   |
| Deferred rent                                                                                                                                                         |   | 742              |    | 623 |   |
| Total liabilities                                                                                                                                                     |   | 246,009          |    | 218,804 |   |
|                                                                                                                                                                  |   |             |    |   |   |
| Commitments and Contingencies                                                                                                                                         |   |             |    |   |   |
|                                                                                                                                                                  |   |             |    |   |   |
| Stockholders’ equity:                                                                                                                                            |   |             |    |   |   |
| Preferred stock, $0.01 par value; 1,000,000  shares authorized; 0 shares issued and outstanding at December 31, 2002 and  2003                                        |   | —           |    | — |   |
| Common stock, $0.01 par value;  1,000,000,000 shares authorized; 42,249,280 and 42,918,408 shares issued and  outstanding at December 31, 2002 and 2003, respectively |   | 422              |    | 429 |   |
| Additional paid-in capital                                                                                                                                            |   | 2,586,613        |    | 2,589,608 |   |
| Accumulated deficit                                                                                                                                                   |   | (2,364,831       | )       | (2,414,283 | ) |
| Foreign currency translation adjustment                                                                                                                               |   | 3,722            |    | 3,830 |   |
| Unrealized gain (loss) on investments  available for sale                                                                                                             |   | 1,474            |    | (283 | ) |
| Total stockholders’ equity                                                                                                                                       |   | 227,400          |    | 179,301 |   |
| Total liabilities and stockholders’ equity                                                                                                                       |   | $                | 473,409 |   | $ | 398,105 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

40

----

 

**AETHERSYSTEMS, INC.**

### **CONSOLIDATEDSTATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS**

(IN THOUSANDS,EXCEPT PER SHARE DATA)

 
|                                                                                                                                                             |   | **YEAR ENDED  DECEMBER 31,** |       |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|------------|
|                                                                                                                                                             |   | **2001**                     |       | **2002** |   | **2003** |   |
| Subscriber revenue                                                                                                                                               |   | $                            | 10,420     |   | $ | 31,302 |   | $ | 25,972 |   |
| Software and related services revenue                                                                                                                            |   | 22,521                       |       | 19,550 |   | 19,382 |   |
| Device sales                                                                                                                                                     |   | 7,395                        |       | 8,469 |   | 10,196 |   |
| Total revenue                                                                                                                                                    |   | 40,336                       |       | 59,321 |   | 55,550 |   |
| Cost of subscriber revenue                                                                                                                                       |   | 6,825                        |       | 15,846 |   | 11,759 |   |
| Cost of software and related services  revenue                                                                                                                   |   | 7,982                        |       | 6,150 |   | 4,507 |   |
| Cost of device sales                                                                                                                                             |   | 6,787                        |       | 7,441 |   | 10,774 |   |
| Total cost of revenue                                                                                                                                            |   | 21,594                       |       | 29,437 |   | 27,040 |   |
| Gross profit                                                                                                                                                     |   | 18,742                       |       | 29,884 |   | 28,510 |   |
| Operating expenses:                                                                                                                                              |   |                         |       |   |   |   |   |
| Research and development (exclusive of  option and warrant expense)                                                                                              |   | 14,983                       |       | 10,296 |   | 10,282 |   |
| General and administrative (exclusive of  option and warrant expense)                                                                                            |   | 52,550                       |       | 41,569 |   | 29,092 |   |
| Selling and marketing (exclusive of option  and warrant expense)                                                                                                 |   | 18,956                       |       | 11,007 |   | 7,799 |   |
| Depreciation and amortization                                                                                                                                    |   | 38,377                       |       | 13,103 |   | 9,986 |   |
| Option and warrant expense:                                                                                                                                      |   |                         |       |   |   |   |   |
| Research and development                                                                                                                                         |   | 876                          |       | 1,086 |   | 256 |   |
| General and administrative                                                                                                                                       |   | 2,537                        |       | 1,394 |   | 905 |   |
| Selling and marketing                                                                                                                                            |   | 1,276                        |       | 652 |   | 154 |   |
| Impairment of intangibles and other assets                                                                                                                       |   | 76,536                       |       | 33,655 |   | 2,036 |   |
| Loss on disposal of assets                                                                                                                                       |   | —                       |       | — |   | 744 |   |
| Restructuring charge                                                                                                                                             |   | 1,770                        |       | 1,703 |   | 372 |   |
|                                                                                                                                                             |   | 207,861                      |       | 114,465 |   | 61,626 |   |
| Operating loss                                                                                                                                                   |   | (189,119                     | )          | (84,581 | ) | (33,116 | ) |
| Other income (expense):                                                                                                                                          |   |                         |       |   |   |   |   |
| Interest income                                                                                                                                                  |   | 27,658                       |       | 10,504 |   | 7,222 |   |
| Interest expense                                                                                                                                                 |   | (20,428                      | )          | (15,843 | ) | (10,393 | ) |
| Gain on early extinguishment of debt                                                                                                                             |   | 7,684                        |       | 42,765 |   | — |   |
| Equity in losses of investments                                                                                                                                  |   | (57,523                      | )          | (4,744 | ) | (97 | ) |
| Investment gain (loss), including  impairments, net                                                                                                              |   | (143,384                     | )          | (14,412 | ) | 587 |   |
| Loss from continuing operations before  income taxes, discontinued operations and cumulative effect of change in  accounting principle                           |   | (375,112                     | )          | (66,311 | ) | (35,797 | ) |
| Income tax benefit                                                                                                                                               |   | —                       |       | 618 |   | — |   |
| Loss from continuing operations before  discontinued operations and cumulative effect of change in accounting  principle                                         |   | (375,112                     | )          | (65,693 | ) | (35,797 | ) |
| Discontinued operations, net of tax expense  (benefit) of ($10.7 million), $83,000 and $75,000 for 2001, 2002 and 2003,  respectively                            |   | (1,285,547                   | )          | (225,853 | ) | (13,655 | ) |
| Loss before cumulative effect of change in  accounting principle                                                                                                 |   | (1,660,659                   | )          | (291,546 | ) | (49,452 | ) |
| Cumulative effect of change in accounting  principle relating to adoption of SFAS No. 133 in 2001 and SFAS No. 142 in  2002                                      |   | 6,564                        |       | (33,876 | ) | — |   |
| Net loss                                                                                                                                                         |   | $                            | (1,654,095 | ) | $ | (325,422 | ) | $ | (49,452 | ) |
| Other  comprehensive loss:                                                                                                                                       |   |                         |       |   |   |   |   |
| Foreign currency  translation adjustment                                                                                                                         |   | 600                          |       | 3,235 |   | 108 |   |
| Unrealized  holding gain (loss) on investments available for sale                                                                                                |   | 880                          |       | (111 | ) | (1,757 | ) |
| Comprehensive  loss                                                                                                                                              |   | $                            | (1,652,615 | ) | $ | (322,298 | ) | $ | (51,101 | ) |
| Net loss per share – basic and diluted from  continuing operations before discontinued operations and cumulative effect of  change in accounting principle. |   | (9.21                        | )          | (1.56 | ) | (0.84 | ) |
| Net loss per share from discontinued  operations                                                                                                                 |   | (31.56                       | )          | (5.36 | ) | (0.32 | ) |
| Cumulative effect of change in accounting  principle relating to adoption of SFAS No. 133 in 2001 and SFAS No. 142 in  2002                                      |   | 0.16                         |       | (0.81 | ) | — |   |
| Net loss per  share – basic and diluted                                                                                                                     |   | $                            | (40.61     | ) | $ | (7.73 | ) | $ | (1.16 | ) |
| Weighted average shares outstanding-basic  and diluted                                                                                                           |   | 40,732                       |       | 42,117 |   | 42,616 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

41

----

 

**AETHERSYSTEMS, INC.**

**CONSOLIDATEDSTATEMENTS OF STOCKHOLDERS’ EQUITY**

(DOLLARS INTHOUSANDS)

 
|                                               |   | **PREFERRED  STOCK** |   | **COMMON  STOCK** |   | **ADDITIONAL  PAID-IN  CAPITAL** |   | **ACCUMULATED  DEFICIT** |      | **FOREIGN  CURRENCY  TRANSLATION  ADJUSTMENT** |   | **UNREALIZED  GAIN (LOSS)  ON  INVESTMENTS** |   |
|----------------------------------------------------|--------|----------------------|--------|-------------------|--------|----------------------------------|--------|--------------------------|-----------|------------------------------------------------|--------|----------------------------------------------|--------|
| 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 |   |
| Exercise of  options and warrants                  |   | —               |   | 3                 |   | 626                              |   | —                   |      | —                                         |   | —                                       |   |
| Option and warrant  expense                        |   | —               |   | —            |   | 6,542                            |   | —                   |      | —                                         |   | —                                       |   |
| Unrealized gain on  investments available for sale |   | —               |   | —            |   | —                           |   | —                   |      | —                                         |   | (111                                         | )      |
| Foreign currency  translation                      |   | —               |   | —            |   | —                           |   | —                   |      | 3,235                                          |   | —                                       |   |
| Net loss                                           |   | —               |   | —            |   | —                           |   | (325,422                 | )         | —                                         |   |                                         |   |
| Balance at  December 31, 2002                      |   | $                    | — |              | $      | 422                              |   | $                        | 2,586,613 |                                           | $      | (2,364,831                                   | )      | $ | 3,722 |   | $ | 1,474 |   |
| Exercise of  options and warrants                  |   | —               |   | 7                 |   | 1,071                            |   | —                   |      | —                                         |   | —                                       |   |
| Option and warrant  expense                        |   | —               |   | —            |   | 1,924                            |   | —                   |      | —                                         |   | —                                       |   |
| Unrealized gain on  investments available for sale |   | —               |   | —            |   | —                           |   | —                   |      | —                                         |   | (1,757                                       | )      |
| Foreign currency  translation                      |   | —               |   | —            |   | —                           |   | —                   |      | 108                                            |   | —                                       |   |
| Net loss                                           |   | —               |   | —            |   | —                           |   | (49,452                  | )         | —                                         |   | —                                       |   |
| Balance at  December 31, 2003                      |   | $                    | — |              | $      | 429                              |   | $                        | 2,589,608 |                                           | $      | (2,414,283                                   | )      | $ | 3,830 |   | $ | (283 | ) |

 

See accompanying notes to consolidatedfinancial statements.

 

42

----

 
|                                               |   | **TOTAL**  |      |
|----------------------------------------------------|--------|------------|-----------|
| 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   |   |
| Exercise of options  and warrants                  |   | 629        |      |
| Option and warrant  expense                        |   | 6,542      |      |
| Unrealized gain on  investments available for sale |   | (111       | )         |
| Foreign currency  translation                      |   | 3,235      |      |
| Net loss                                           |   | (325,422   | )         |
| Balance at December  31, 2002                      |   | $          | 227,400   |   |
| Exercise of options  and warrants                  |   | 1,078      |      |
| Option and warrant  expense                        |   | 1,924      |      |
| Unrealized gain on  investments available for sale |   | (1,757     | )         |
| Foreign currency  translation                      |   | 108        |      |
| Net loss                                           |   | (49,452    | )         |
| Balance at December  31, 2003                      |   | $          | 179,301   |   |

 

43

----

 

**AETHERSYSTEMS, INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

(DOLLARS INTHOUSANDS)

 
|                                                                                                     |   | **YEAR ENDED  DECEMBER 31,** |     |
|----------------------------------------------------------------------------------------------------------|--------|------------------------------|----------|
|                                                                                                     |   | **2001**                     |     | **2002** |   | **2003** |   |
| Cash  flows from operating activities:                                                                   |   |                         |     |   |   |   |   |
| Net  loss from continuing operations before cumulative effect of change in  accounting principle         |   | $                            | (375,112 | ) | $ | (65,693 | ) | $ | (35,797 | ) |
| Adjustments  to reconcile net loss from continuing operations to net cash used by  operating activities: |   |                         |     |   |   |   |   |
| Depreciation  and amortization                                                                           |   | 38,377                       |     | 13,103 |   | 9,986 |   |
| Amortization  of loan fees                                                                               |   | 1,983                        |     | 1,170 |   | 1,119 |   |
| Provision  for doubtful accounts                                                                         |   | 2,829                        |     | 2,497 |   | 170 |   |
| Depreciation  on leased devices                                                                          |   | —                       |     | — |   | 1,006 |   |
| Provision  for inventory obsolescence                                                                    |   | —                       |     | 263 |   | — |   |
| Equity  in losses of investments                                                                         |   | 57,523                       |     | 4,744 |   | 97 |   |
| Option  and warrant expense                                                                              |   | 4,689                        |     | 3,132 |   | 1,315 |   |
| Loss  on disposal of assets                                                                              |   | —                       |     | — |   | 744 |   |
| Gain  on early extinguishment of debt                                                                    |   | (7,684                       | )        | (42,765 | ) | — |   |
| Impairment  of intangibles and other assets                                                              |   | 76,536                       |     | 33,655 |   | 2,036 |   |
| Realized  (gains) losses on long-term investments, including impairments                                 |   | 143,384                      |     | 14,412 |   | (587 | ) |
| Changes  in assets and liabilities, net of acquired assets and liabilities:                              |   |                         |     |   |   |   |   |
| Trade  accounts receivable                                                                               |   | (6,272                       | )        | (2,754 | ) | (1,256 | ) |
| Inventory                                                                                                |   | (8,931                       | )        | (683 | ) | 242 |   |
| Prepaid  expenses and other assets                                                                       |   | (6,187                       | )        | (935 | ) | (9,521 | ) |
| Investment  in sales-type leases                                                                         |   | —                       |     | (8,347 | ) | (3,054 | ) |
| Accounts  payable                                                                                        |   | 764                          |     | (5,068 | ) | (125 | ) |
| Accrued  expenses, accrued employee compensation and benefits and interest payable                       |   | 3,149                        |     | 114 |   | (1,736 | ) |
| Restructuring  reserve and other long term liabilities                                                   |   | 27,817                       |     | 5,020 |   | (31,081 | ) |
| Deferred  revenue                                                                                        |   | 4,314                        |     | 6,067 |   | 11,745 |   |
| Net  cash used by operating activities from continuing operations                                        |   | (42,821                      | )        | (42,068 | ) | (54,697 | ) |
| Net  cash used by discontinued operations                                                                |   | (229,339                     | )        | (47,624 | ) | (6,663 | ) |
| Net  cash used by operating activities                                                                   |   | (272,160                     | )        | (89,692 | ) | (61,360 | ) |
|                                                                                                     |   |                         |     |   |   |   |   |
| Cash  flows from investing activities:                                                                   |   |                         |     |   |   |   |   |
| Sales  and maturities of investments available for sale                                                  |   | 3,286                        |     | 352,675 |   | 530,829 |   |
| Purchases  of investments available for sale                                                             |   | (3,411                       | )        | (605,367 | ) | (497,654 | ) |
| Acquisitions,  net of cash acquired                                                                      |   | (6,699                       | )        | (15,800 | ) | — |   |
| Purchases  of property and equipment                                                                     |   | (11,734                      | )        | (3,783 | ) | (921 | ) |
| Proceeds  from the sale of property and equipment                                                        |   | —                       |     | — |   | 4,412 |   |
| Investments                                                                                              |   | (41,504                      | )        | (535 | ) | — |   |
| Sale  of long-term investments                                                                           |   | 5,689                        |     | 3,991 |   | 443 |   |
| Increase  in other intangible assets                                                                     |   | (394                         | )        | (178 | ) | (2,295 | ) |
| Increase  in other assets                                                                                |   | (5,448                       | )        | — |   | — |   |
| Net  cash provided by (used in) investing activities                                                     |   | (60,215                      | )        | (268,997 | ) | 34,814 |   |
| Cash  flows from financing activities:                                                                   |   |                         |     |   |   |   |   |
| Proceeds  from issuance of common stock                                                                  |   | 4,875                        |     | — |   | — |   |
| Repayment  of notes payable including buyback of convertible debt                                        |   | (12,316                      | )        | (92,888 | ) | — |   |
| Proceeds  from note payable/credit facility                                                              |   | 5,160                        |     | — |   | — |   |
| Repayments  on notes payable/credit facility                                                             |   | (97                          | )        | — |   | — |   |
| Increase  in restricted cash                                                                             |   | (2,135                       | )        | (1,590 | ) | (4,537 | ) |
| Exercise  of options and warrants                                                                        |   | 1,090                        |     | 629 |   | 1,078 |   |
| Net  cash used in financing activities                                                                   |   | (3,423                       | )        | (93,849 | ) | (3,459 | ) |
| Net  decrease in cash and cash equivalents                                                               |   | (335,798                     | )        | (452,538 | ) | (30,005 | ) |
| Cash  and cash equivalents, at beginning of period                                                       |   | 844,563                      |     | 508,765 |   | 56,227 |   |
| Cash  and cash equivalents, at end of period                                                             |   | $                            | 508,765  |   | $ | 56,227 |   | $ | 26,222 |   |
| Supplemental  disclosure of cash flow information:                                                       |   |                         |     |   |   |   |   |
| Cash  paid during the year for interest                                                                  |   | $                            | 18,030   |   | $ | 16,524 |   | $ | 9,295 |   |

 

See accompanying notes to consolidatedfinancial statements.

 

44

----

 

Supplemental disclosure of non-cash investingand financing activities:

 

In 2001, 2002, and 2003, the Company incurredunrealized holding gains (losses) associated with its investments available forsale totaling $880, ($111), and ($1,757), respectively. These amounts have beenreported as increases (decreases) in members’ capital and stockholders’ equity.

 

In 2001, the Company recorded gains throughstockholders’ equity of $6,071, from the sale of stock by OmniSky, Inc. tothird parties at per share amounts in excess of the book value per share.

 

In June 2001, the Company acquired certaincompleted technology from SmartPoint, Inc. in exchange for 70,852 shares of theCompany’s common stock.  The value ofthe common stock of $1,000 was allocated to the fair value of the assetspurchased (within discontinued operations), with a corresponding increase instockholders’ equity.

 

In July 2001, approximately $1,200 of tradereceivables (within discontinued operations) owed to the Company by SpringWireless, Ltd. was offset by the Company’s additional investment in SpringWireless, Ltd.

 

In 2003, the Company transferred $5,593 ofequipment under operating leases from inventory to property and equipment.

 

See accompanying notes to consolidatedfinancial statements.

 

45

----

 

**AETHERSYSTEMS, INC.**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

 

**(1) ORGANIZATION, DESCRIPTION OF THEBUSINESS, AND BASIS OF PRESENTATION**

 

Aether Systems, Inc. (the“Company” or “Aether”) was originally formed in January 1996.  The Company operates in two businesssegments:  Mobile Government andTransportation.  The Mobile Governmentsegment provides wireless data solutions for use by public safetyorganizations, primarily state and local police, fire and rescue and emergencymedical services organizations.  TheTransportation segment provides mobile and wireless solutions to the transportationindustry.  Its customers are primarilythe owners and operators of truck and other vehicle fleets.

 

The financial statements forall periods presented have been restated to present the results of operationsof the Company’s Enterprise Mobility Solutions (“EMS”) segment in discontinuedoperations, as discussed in Note 3.

 

**(2) SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES**

 

(a) PRINCIPLES OF CONSOLIDATION

 

The consolidated financial statements includethe accounts of the Company and its majority-owned subsidiaries.  All significant intercompany transactionsand balances have been eliminated in consolidation.

 

In December 2002, the Company purchased fromReuters PLC (“Reuters”) their 40% interest in Sila Communications Limited(“Sila”), a European joint venture the Company formed with Reuters in 2000.  As a result of this acquisition, allminority interests have been eliminated and all of the Company’s subsidiariesare now wholly owned.  The results ofSila’s operations are consolidated with the Company’s results in 2001, 2002 and2003, as they were part of EMS, and are included in discontinued operations inthe accompanying consolidated financial statements.

 

(b) RECLASSIFICATIONS

 

Certain fiscal year 2001 and 2002 amountshave been reclassified to conform to the current year presentation.  None of these reclassifications had amaterial effect on the Company’s consolidated financial statements.

 

(c) REVENUE RECOGNITION

 

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

 

i.) Subscriber revenue

 

The Company derives subscriber revenue fromthe provision of comprehensive business solutions designed to meet the mobilemanagement needs of truckload, less-than-load, and private carriers.  For all sales, the Company obtains signedbinding contracts with its subscribers. Contracts are generally for a three to five year period and include atermination penalty if cancelled by the subscriber before the term of thecontract expires.  These contracts aregenerally renewable at the option of the subscriber for additional periods orotherwise continue on a monthly basis until cancelled by the subscriber.  The Company recognizes subscriber revenue ona monthly basis as the service is provided. Activation fees are deferred and recognized ratably over the expectedlife of the customer relationship.

 

ii.) Software and related services revenue

 

Software and related services revenues aregenerated from licensing software and providing services, including maintenanceand technical support, training and consulting.  Software revenue consists of fees for licenses of the Company’ssoftware products.  The Companyrecognizes revenue when the license agreement is signed, the license fee isfixed and determinable, delivery of the software has occurred, andcollectibility of the fees is considered probable.  At the time of the transaction, the Company assesses whether thefee associated with its revenue transactions is fixed and determinable andwhether or not collection is reasonably assured.  If a significant portion of a fee is due after the normal paymentterm, the Company accounts for the fee as not being fixed anddeterminable.  In these cases, theCompany 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 ofthe customer.  The Company does not

 

46

----

 

request collateral from its customers.  If the Company determines that collection ofa fee is not reasonably assured, it defers the fee and recognizes revenue atthe time it becomes reasonably assured, which is generally upon receipt ofcash.

 

Revenue from licensing software that requiressignificant customization and modification is recognized using the percentageof completion method, based on the hours incurred in relation to the totalestimated hours.  Service revenuesconsist principally of maintenance and technical support, which consists ofunspecified when-and-if available product updates and customer telephonesupport services and are recognized ratably over the term of the serviceperiod.  Other service revenues arerecognized as the related services are provided.

 

iii.) Device revenue

 

The Company derives device revenue from thesale of wireless devices used to provide its services.  The Company has assessed the interoperabilityof the types of hardware that it sells, and when customers can obtain similarequipment from other parties to receive services the Company offers, orcustomers can use equipment purchased from the Company with services providedby other service providers, the Company recognizes equipment revenue, includingthe related shipping, installation and activation services, when collectibilityis probable and the equipment and related services are provided to thecustomer.  When the equipment is not deemed to be interoperable (i.e., itcan only be used by a customer to acquire our services), the equipment revenue,including the related shipping and activation fees, and related cost aredeferred and recognized over the shorter of the life of the equipment or theestimated life of the subscriber relationship.  In these situations, theCompany allocates amounts to the device and subscriber categories based on therelative fair values.  When the Company sells hardware and software, andthe hardware is considered essential to the functionality of the software, theCompany accounts for the two elements as one unit of accounting.  Inreporting revenues, the Company allocates amounts between software and devicerevenue based on their relative fair values.

 

iv.) Revenue from multiple elementarrangements

 

For arrangements with multiple elements, theCompany allocates revenue to each component of the arrangement using theresidual value method.  This means thatthe Company defers revenue from the total fees associated with the arrangementequivalent to the fair value of the element(s) of the arrangement that has notyet been delivered.  The fair value ofany undelivered elements is established by using historical evidence specificto the Company.

 

v.) Revenue from discontinued operations

 

The results of operations of the Company’sEMS segment have been classified as discontinued operations in the accompanyingconsolidated financial statements.  TheCompany derives revenue in its EMS segment from four primary sources.  Subscriber revenue is generally recognizedratably over the term of the customer agreement, typically one year.  Engineering services revenues on time andmaterials contracts are recognized as the services are provided.  Revenue on fixed-fee engineering servicescontracts is recognized on the percentage-of-completion method based on costsincurred in relation to total estimated costs. Software and related services revenues are recognized in accordance withSOP 97-2.  The Company recognizessoftware revenue when the license agreement is signed, the license fee is fixedand determinable, delivery of the software has occurred, and collectibility ofthe fees is considered probable.  Devicerevenue is generally recognized upon delivery.

 

(d) COST OF REVENUES

 

Cost of subscriber revenue consists primarily ofairtime costs and excludes certain costs of customer fulfillment and customercare.  When the subscribers’ monthly feeincludes the use of a wireless device, the Company depreciates the cost of thedevice over its expected useful life or the expected term of the customerrelationship.  Cost of software andrelated services revenue consists of third party royalties and personnel costsrelated to the cost of maintenance, customization, consulting and support.  Cost of device sales consists primarily ofthe cost of the device.  When theservice is considered essential to the functionality of the device, the cost ofthe device is expensed over the shorter of the expected life of the customerrelationship or the life of the equipment. Cost of device sales for the Mobile Government segment is generally on apercentage of completion basis.

 

(e) CASH AND CASH EQUIVALENTS

 

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

 

47

----

 
|                    |   | **DECEMBER 31,  2002** |   | **DECEMBER 31,  2003** |   |
|-------------------------|--------|------------------------|--------|------------------------|--------|
| Cash                    |   | $                      | 12,097 |                   | $      | 10,420 |   |
| Money market accounts   |   | 43,053                 |   | 11,098                 |   |
| Certificates of deposit |   | 1,077                  |   | 4,704                  |   |
| Total                   |   | $                      | 56,227 |                   | $      | 26,222 |   |

 

(f) RESTRICTED CASH

 

Restricted cash includes the portion of theCompany’s certificates of deposit that are secured by outstanding letters ofcredit and escrow accounts established to secure certain of the Company’sgovernment contracts.  At December 31,2003, the Company had $11.5 million of certificates of deposit, which wererestricted by letters of credit.  Inaddition, $2.0 million was in an escrow available to Lockheed Martin in theevent of non-payment of liabilities for work performed on the PennsylvaniaState Police contract.  At December****31, 2002, the Company had $8.9 million ofcertificates of deposit, which were restricted by letters of credit.

 

(g) INVESTMENTS AVAILABLE FOR SALE

 

Investments available for saleconsist of highly liquid investments in United States GovernmentAgency-sponsored securities with original maturities greater than oneyear.  As of December 31, 2002,management had classified these investments as current assets, based on itsintention to liquidate such investments within a twelve month period to funddebt repurchases or for other strategic alternatives.  As of December 31, 2003, investments available for sale totalingapproximately $220.8 million have been classified as non-current assets.  The Company carries such investments at fairvalue.  Unrealized gains (losses) areexcluded from earnings (loss) and are reported as a separate component of othercomprehensive income (loss) until realized. Realized gains and losses from the sale of these investments aredetermined on a specific identification basis.

 

As of December31, 2002, investments available for sale consists of (in thousands):

 
|                                        |   | **Amortized  Cost** |    | **Gross  Unrealized  Holding Gains** |   | **Gross  Unrealized  Holding Losses** |   | **Fair  Value** |   |
|---------------------------------------------|--------|---------------------|---------|--------------------------------------|--------|---------------------------------------|--------|-----------------|--------|
|                                        |   |                |    |                                 |   |                                  |   |            |   |
| U.S. Government Agency-sponsored securities |   | $                   | 254,449 |                                 | $      | 1,376                                 |   | $               | — |   | $ | 255,825 |   |
|                                             |        |                     |         |                                      |        |                                       |        |                 |        |  |  |  |  |

 

Maturities ofdebt securities classified as available for sale were as follows at December31, 2002 (in thousands):

 
|                                  |   | **Amortized  Cost** |    | **Fair  Value** |   |
|---------------------------------------|--------|---------------------|---------|-----------------|--------|
|                                  |   |                |    |            |   |
| Due within one year                   |   | $                   | 33,761  |            | $      | 34,039 |   |
| Due after one year through five years |   | 220,688             |    | 221,786         |   |
|                                  |   | $                   | 254,449 |            | $      | 255,825 |   |

 

As of December31, 2003, investments available for sale consists of (in thousands):

 
|                                        |   | **Amortized  Cost** |    | **Gross  Unrealized  Holding Gains** |   | **Gross  Unrealized  Holding Losses** |   | **Fair  Value** |   |
|---------------------------------------------|--------|---------------------|---------|--------------------------------------|--------|---------------------------------------|--------|-----------------|--------|
|                                        |   |                |    |                                 |   |                                  |   |            |   |
| U.S. Government Agency-sponsored securities |   | $                   | 221,093 |                                 | $      | 347                                   |   | $               | 591    |   | $ | 220,849 |   |
|                                             |        |                     |         |                                      |        |                                       |        |                 |        |  |  |  |  |

 

Maturities ofdebt securities classified as available for sale were as follows at December31, 2003 (in thousands):

 
|                                  |   | **Amortized  Cost** |    | **Fair  Value** |   |
|---------------------------------------|--------|---------------------|---------|-----------------|--------|
|                                  |   |                |    |            |   |
| Due after one year through five years |   | $                   | 221,093 |            | $      | 220,849 |   |
|                                       |        |                     |         |                 |        |  |  |

 

48

----

 

(h) FAIR VALUE OF FINANCIALINSTRUMENTS

The carrying amounts of the Company’s financialinstruments, which include cash equivalents, investments available for sale,accounts receivable, restricted cash, accounts payable, accrued expenses andnotes payable (excluding the Company’s 6% convertible subordinated notes due2005) approximate their fair value due to the relatively short duration of theinstruments.

 

The fair value of the Company’s 6%convertible subordinated notes due 2005 at December 31, 2002 and 2003 was$119.3 million and $153.5 million, respectively, based on quoted market prices,as compared to the carrying value of the Notes of $154.9 million at December31, 2002 and 2003.

 

(i) CONCENTRATION OF CREDIT RISK

Financial instruments, which potentiallysubject the Company to credit risk, consist primarily of cash, cashequivalents, investments available for sale, trade receivables, and leasereceivables.

 

The Company invests cash not immediatelyneeded for operations in money market securities and high-grade U.S. GovernmentAgency-sponsored securities.  TheCompany’s investments available for sale include commercial paper issued byfinancial institutions and other companies with high credit ratings, securitiesissued or sponsored by U.S. Government Agencies and money market securities.  The amounts invested generally exceed theF.D.I.C. limits.  These securities donot carry the full faith and credit of the U.S. Treasury.  The Company has not experienced any materiallosses in its cash and cash equivalents or investments available for sale andbelieves it is not exposed to any significant credit risk on these amounts.

 

Trade accounts receivable and short and longterm lease receivables subject the Company to the potential for creditrisk.  The Company extends credit tocustomers on an unsecured basis in the normal course of business (leasereceivables are secured by the leased hardware).  A portion of the Company’s customer base includes small companieswith limited resources and cash flow.  TheCompany’s policy is to perform an analysis of the recoverability of its tradeaccounts receivable at the end of each reporting period and to establishallowances for those accounts considered uncollectible.  The Company analyzes historical bad debts,customer concentrations, customer credit-worthiness, and current economictrends when evaluating the adequacy of the allowance for doubtfulaccounts.  As a result, the Companyrecorded bad debt expense from continuing operations of $2.8 million, $2.5million and $170,000 during the years ended December 31, 2001, 2002 and 2003,respectively.

 

(j) NET INVESTMENT INSALES-TYPE LEASES

The Company leases devices to certain of itscustomers and accounts for these transactions as sales-type leases.  The Company records its gross investment inthe sales-type leases at the present value of the minimum lease payments.  There is no unguaranteed residual valueassociated with the leased devices.  Thereceivables generally have terms of five years and are collateralized by asecurity interest in the related equipment. The Company records revenue on these leased devices as the ongoingservice is provided over the shorter of the life of the equipment or theestimated life of the customer relationship.

 

(k) INVENTORY

Inventory, net of allowance for obsolete andslow-moving inventory, consists of finished goods such as MobileMaxTM  units, network hardware and accessories andis stated at the lower of cost or market. Cost is determined using a standard costing method, which approximatesthe first-in, first-out method.  Thereare a limited number of suppliers of the Company’s inventory.

 

(l) PROPERTY AND EQUIPMENT

Property and equipment are stated at cost.Depreciation is calculated using the straight-line method over the estimateduseful lives of the assets, which range from three to seven years.  The costs of leasehold improvements arecapitalized and amortized using the straight-line method over the shorter ofthe lease term or the estimated useful life of the asset.

 

(m) INVESTMENTS

The Company accounts for those investments inwhich it exercises significant influence or has an ownership interest greaterthan twenty percent under the equity method. For equity method investments, the Company records its proportionateshare of the investee’s net income or loss. Generally, the Company accounts forits investments in which the Company has an ownership interest of less thantwenty percent under the cost method for its private investments. Investmentsin marketable equity securities, if not considered equity method investments,are considered available-for-sale securities.

 

Investments carried at cost or on the equitymethod are written down if circumstances indicate the carrying amount of theinvestment may not be recoverable. Investments in marketable equity securities are carried at fair valuebased on quoted market prices.  Netunrealized holding gains and losses are excluded from income and are reportedas a separate component of stockholders’ equity unless a decline in marketvalue is considered other than temporary. Realized gains and losses are included in income.

 

(n) DERIVATIVES

The Company adopted SFAS No. 133, “Accounting forDerivatives Instruments and Hedging Activities”, as amended, on January 1,2001.  SFAS No. 133 requires the Companyto recognize all derivatives on the balance sheet at fair value. Derivativesthat are not

 

49

----

 

hedges must be adjusted to fair value through thestatement of operations. If the derivative is a hedge, depending on the natureof the hedge, changes in fair value of derivatives will either be offsetagainst the change in fair value of the hedged assets, liabilities or firmcommitments through earnings, or recognized in other comprehensive income(loss) until the hedged item is recognized in earnings.  The ineffective portion of a derivative’schange in fair value will be immediately recognized in earnings.  The Company recognized a $6.6 million gainon the adoption of SFAS No. 133 as cumulative effect in change in accountingprinciple in 2001.

 

(o) GOODWILL

Goodwill represents the excessof costs over the fair value of assets of businesses acquired.  The Company adopted the provisions of SFASNo. 142, “Goodwill and Other Intangible Assets*”,* as of January 1, 2002.  Goodwill and intangible assets acquired in a purchase business combinationand determined to have an indefinite useful life are not amortized, but insteadtested for impairment at least annually in accordance with the provisions ofSFAS No. 142. SFAS No. 142 also requires that intangible assetswith estimable useful lives be amortized over their respective estimated usefullives to their estimated residual values, and reviewed for impairment inaccordance with SFAS No. 144, “Accounting for Impairment or Disposal ofLong-Lived Assets*”*.

 

In connection with SFASNo. 142’s transitional goodwill impairment evaluation, the Statementrequired the Company to perform an assessment of whether there was anindication that goodwill is impaired as of the date of adoption.  To accomplish this, the Company was requiredto identify its reporting units and determine the carrying value of eachreporting unit by assigning the assets and liabilities, including the existinggoodwill and intangible assets, to those reporting units as of January 1,2002.  The Company was required todetermine the fair value of each reporting unit and compare it to the carryingamount of the reporting unit within six months of January 1, 2002.  To the extent the carrying amount of areporting unit exceeded the fair value of the reporting unit, the Company wouldbe required to perform the second step of the transitional impairment test, asthis is an indication that the reporting unit goodwill may be impaired.  The second step was required for all threereporting units.  In this step, theCompany compared the implied fair value of each reporting units goodwill withthe carrying amount of the reporting units goodwill, both of which weremeasured as of the date of adoption. The implied fair value of goodwill was determined by allocating the fairvalue of the reporting unit to all of the assets (recognized and unrecognized)and liabilities of the reporting unit in a manner similar to a purchase priceallocation, in accordance with SFAS No. 141, “Business Combinations”.  The residual fair value after thisallocation was the implied fair value of the reporting unit goodwill.  As a result of this evaluation, the Companyrecorded an impairment charge of $33.9 million relating to continuingoperations, which was recorded as cumulative effect of change in accountingprinciple in the accompanying consolidated statements of operations.  Of this charge, $32.0 million and $1.9million was in the Company’s Mobile Government and Transportation segments,respectively.  An additional $95.4million was recorded as an impairment charge with respect to the Company’sdiscontinued operations.

 

SFAS No. 142 also requires thatthe Company repeat the two-step impairment analysis each year, beginning with arecurring annual measurement date chosen by the Company in 2002.  The Company chose September 30, 2002 to be2002’s measurement date, and will continue to perform annual impairment reviewson this date.  The September 30, 2002review resulted in an additional impairment charge of $20.8 million relating tocontinuing operations, which was recorded as impairment of intangibles andother assets in the accompanying consolidated statements of operations.  Of this charge, $3.1 million and $17.7million was in the Company’s Mobile Government and Transportation segments,respectively.  An additional $6.0million was recorded as an impairment charge with respect to the Company’sdiscontinued operations.

 

The Company performed thisanalysis again in September 2003 and determined that there was no furtherimpairment of goodwill.

 

Prior to the adoption of SFASNo. 142, goodwill was amortized on a straight-line basis over the expectedperiods to be benefited, which ranged from three to seven years, and assessedfor recoverability by determining whether the amortization of the goodwillbalance over its remaining life could be recovered through undiscounted futureoperating cash flows of the acquired operation. All other intangible assetswere amortized on a straight-line basis from two to seven years.  The amount of goodwill and other intangibleasset impairment, if any, was measured in accordance with SFAS No. 121,“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assetsto be Disposed of.”  The measurement wasbased on projected discounted future operating cash flows using a discount ratereflecting the Company’s average cost of funds.

 

The following table shows whatnet loss from continuing operations would have been exclusive of amortizationexpense recognized related to goodwill and assembled workforce (both of whichare no longer amortized under the provisions of SFAS No. 142):

 
| **(amounts  in thousands except per share data)**                                                                                            |   | **Year Ended December 31,  2001** |     |
|----------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|----------|
| Net loss from continuing operations before  cumulative effect of change in accounting principle                                              |   | $                                 | (375,112 | ) |
| Add back:                                                                                                                                    |   |                              |     |
| Amortization of goodwill                                                                                                                     |   | 20,401                            |     |
| Amortization of assembled work force                                                                                                         |   | 3,443                             |     |
| Adjusted net loss from continuing  operations before cumulative effect of change in accounting principle                                     |   | $                                 | (351,268 | ) |
|                                                                                                                                         |   |                              |     |
| ***Per share amounts***                                                                                                                      |   |                              |     |
| Adjusted net loss per share – basic and  diluted from continuing operations before cumulative effect of change in  accounting principle |   | $                                 | (8.62    | ) |
|                                                                                                                                         |   |                              |     |
| Weighted average shares outstanding                                                                                                          |   | 40,732                            |     |

 

50

----

 

The above tabledoes not consider the effects of recording any additional impairments ofgoodwill that may have been required as a result of the non amortization ofgoodwill approach prescribed by SFAS No. 142.

 

(p) INTANGIBLES AND RECOVERY OF LONG-LIVEDASSETS

 

Identifiable intangible assets consist ofcompleted technology, trademarks, and acquired subscribers and are amortized ona straight-line basis over five to seven years.

 

SFAS No. 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets,” provides a singleaccounting model for long-lived assets to be disposed of SFAS No. 144 alsochanges the criteria for classifying an asset as held for sale; and broadensthe scope of businesses to be disposed of that qualify for reporting asdiscontinued operations and changes the timing of recognizing losses on suchoperations.  The Company adopted SFASNo. 144 on January 1, 2002.

 

In accordance with SFASNo. 144, long-lived assets, such as property, plant, and equipment, andpurchased intangibles subject to amortization, are reviewed for impairmentwhenever events or changes in circumstances indicate that the carrying amountof an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparisonof the carrying amount of an asset to estimated undiscounted future cash flowsexpected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cashflows, an impairment charge is recognized by the amount by which the carryingamount of the asset exceeds the fair value of the asset.  Assets to be disposed of would be separatelypresented in the balance sheet and reported at the lower of the carrying amountor fair value less costs to sell, and are no longer depreciated.  The assets and liabilities of a disposedgroup classified as held for sale would be presented separately in theappropriate asset and liability sections of the balance sheet.

 

During 2002 and 2003, theCompany assessed the fair value of certain of its long-lived assets, includingsoftware, computer equipment, other tangible assets and identifiable intangibleassets obtained in connection with acquisitions.  This assessment resulted in impairment charges of $12.8 millionand $2.0 million in 2002 and 2003, respectively.  These charges are recorded in impairment of intangibles and otherassets in the accompanying consolidated statements of operations.  The Company, with the assistance of thirdparty appraisers, determined the fair value of these assets based on acombination of quoted market prices and a cost approach methodology.

 

Prior to the adoption of SFASNo. 144, the Company accounted for long-lived assets in accordance withSFAS No. 121, “Accounting for Impairment of Long-Lived Assets and forLong-Lived Assets to be Disposed Of.”

 

(q) STOCK OPTIONS AND WARRANTS

 

The Company accounts for equity-basedemployee compensation arrangements in accordance with the provisions ofAccounting Principle Board (APB) Opinion No. 25, “Accounting for Stock Issuedto Employees”, and related interpretations including FIN 44. Under APB No. 25,compensation expense is based upon the difference, if any, on the date ofgrant, 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 valuein accordance with SFAS No. 123.  SFASNo. 123 established accounting and disclosure requirements using afair-value-based method of accounting for stock-based employee compensationplans.  As allowed by SFAS No. 123, theCompany has elected to continue to apply the intrinsic-value-based method ofaccounting described above, and has adopted only the disclosure requirements ofSFAS No. 123.  The following tableillustrates the effect on net loss if the fair-value-based method had beenapplied to all outstanding and unvested awards in each period:

 

51

----

 
|                                                                                                                                                                       |   | **Year Ended December 31,** |     |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|----------|
|                                                                                                                                                                       |   | **2001**                    |     | **2002** |   | **2003** |   |
| Net loss from continuing operations before  cumulative effect of change in accounting principle, as reported                                                               |   | $                           | (375,112 | ) | $ | (65,693 | ) | $ | (35,797 | ) |
| Add stock-based employee compensation  expense included in reported net  loss  from continuing operations before cumulative effect of change in accounting  principle |   | 4,689                       |     | 3,132 |   | 1,315 |   |
| Deduct total stock-based employee compensation  expense determined  under fair-value-based method for all rewards                                                          |   | (56,786                     | )        | (42,497 | ) | (18,013 | ) |
|                                                                                                                                                                       |   |                        |     |   |   |   |   |
| Pro forma net  loss from continuing operations before cumulative effect of change in  accounting principle                                                                 |   | $                           | (427,209 | ) | $ | (105,058 | ) | $ | (52,495 | ) |
|                                                                                                                                                                       |   |                        |     |   |   |   |   |
| Pro forma net  loss per share from continuing operations before cumulative effect of change  in accounting principle                                                       |   | $                           | (10.49   | ) | (2.49 | ) | (1.23 | ) |
|                                                                                                                                                                       |   |                        |     |   |   |   |   |
| Weighted average  shares outstanding                                                                                                                                       |   | 40,732                      |     | 42,117 |   | 42,616 |   |

 

(r) RESEARCH AND DEVELOPMENT

Research and development costs are expensedas incurred.

 

(s) ADVERTISING EXPENSE

Advertising costs are expensed as incurred.Production costs for advertising are expensed the first time the relatedadvertisement takes place.  Advertisingexpense from continuing operations was approximately $2.0 million, $1.0 millionand $1.3 million for the years ended December 31, 2001, 2002 and 2003respectively.

 

(t) INCOME TAXES

The Company recognizes income taxes using theasset and liability method, in accordance with SFAS No. 109.  Under the asset and liability method,deferred tax assets and liabilities are recognized for the future taxconsequences attributable to differences between the financial statementcarrying amounts of existing assets and liabilities and their respective taxbases.  Deferred tax assets andliabilities are measured using enacted tax rates expected to apply to taxableincome in the years in which those temporary differences are expected to be recoveredor settled.  The effect of a tax ratechange on deferred tax assets and liabilities is recognized as income in theperiod that includes the enactment date.

 

(u) USE OF ESTIMATES

The preparation of consolidated financialstatements in conformity with generally accepted accounting principles requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the dates of the consolidated financial statements and the reported amountsof revenue and expenses during the reporting period.  Actual results could differ from those estimates.  Estimates are used in accounting for, amongother things, long-term contracts, allowances for uncollectible receivables,inventory obsolescence, recoverability of goodwill, long-lived assets andinvestments, depreciation and amortization, employee benefits, restructuringaccruals, taxes and contingencies. Estimates and assumptions are reviewed periodically and the effects ofrevisions are reflected in the consolidated financial statements in the periodthey are determined to be necessary.

 

(v) OTHER COMPREHENSIVE INCOME (LOSS)

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

 

For the years ended December 31, 2001, 2002and 2003, other comprehensive income (loss) consists of unrealized gains(losses) on investments available for sale and foreign currency translationadjustments.

 

(w) EARNINGS PER SHARE

The Company computes net income (loss) per share inaccordance with SFAS No. 128, “Earnings Per Share,” and SEC Staff AccountingBulletin No. 98 (SAB 98).  Under theprovisions of SFAS No. 128 and SAB 98, basic net income (loss) per share iscomputed by dividing net income (loss) available to common stockholders for theperiod by the weighted average number of common shares outstanding during theperiod.  Diluted net income (loss) pershare is computed by dividing the net income (loss) for the period by theweighted average number of common and dilutive common equivalent sharesoutstanding during the period.  As theCompany has had a net loss in each of the periods presented, basic and dilutednet loss per share are the same. Options and warrants to purchase 6.2 million, 7.1 million and 5.0million shares of the Company’s common stock during 2001, 2002 and 2003,respectively, have been excluded from the calculation of diluted net loss pershare because their inclusion would be anti-dilutive.

 

52

----

 

**(3)DISCONTINUED OPERATIONS**

 

On January 13, 2004, Aethercompleted the sale of its EMS segment to TeleCommunication Systems, Inc.(“TCS”). Pursuant to the purchase agreement, as amended, Aether received $19million for EMS, consisting of $18 million in cash and a note in the principalamount of $1 million due in August 2004. Aether also received 204,020 shares of TCS Class A common stock valuedas of closing at approximately $1 million. The total consideration is subject to adjustment following apost-closing review of the working capital of the EMS division.

 

The summary of operatingresults from discontinued operations is as follows:

 
|                                                                                                                                                 |   | **YEAR ENDED  DECEMBER 31,** |       |
|------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|------------|
|                                                                                                                                                 |   | **2001**                     |       | **2002** |   | **2003** |   |
| Net sales                                                                                                                                            |   | $                            | 72,549     |   | $ | 57,212 |   | $ | 53,403 |   |
| Restructuring charges                                                                                                                                |   | (43,236                      | )          | (36,041 | ) | (5,785 | ) |
| Impairment of intangibles and other assets                                                                                                           |   | (1,042,467                   | )          | (35,879 | ) | (629 | ) |
| Net loss from discontinued operations, net  of tax expense (benefit) of ($10.7 million), $83,000 and $75,000, for 2001,  2002 and 2003, respectively |   | $                            | (1,285,547 | ) | $ | (225,853 | ) | $ | (13,655 | ) |

 

The Company does not allocateany interest income or expense to its segments.

 

The EMS segment generated $11.4million, $1.6 million and $800,000 of revenue from related parties in 2001,2002 and 2003, respectively.  Therelated parties consisted of companies in which Aether had made an equityinvestment.

 

Assets and liabilities ofdiscontinued operations consisted of the following:

 
|                                       |   | **DECEMBER 31,** |   |
|--------------------------------------------|--------|------------------|--------|
|                                       |   | **2002**         |   | **2003** |   |
| Cash and cash equivalents                  |   | $                | 3,442  |   | $ | 1,882 |   |
| Accounts receivable, net                   |   | 8,838            |   | 7,947 |   |
| Inventory, net                             |   | 3,667            |   | 886 |   |
| Property and equipment, net                |   | 10,011           |   | 1,652 |   |
| Other assets                               |   | 522              |   | 1,852 |   |
| Net assets from discontinued operations    |   | $                | 26,480 |   | $ | 14,219 |   |
|                                       |   |             |   |   |   |
| Accounts payable and accrued expenses      |   | $                | 11,951 |   | $ | 6,756 |   |
| Deferred revenue                           |   | 3,596            |   | 2,914 |   |
| Other liabilities                          |   | 147              |   | 17 |   |
| Net liabilities of discontinued operations |   | $                | 15,694 |   | $ | 9,687 |   |

 

**(4)ACQUISITIONS**

 

(a)          ALLOCATION OF PURCHASE PRICE

 

OnMarch 15, 2002, the Company acquired certain assets and licenses from@Track.  @Track is a provider ofwireless-based vehicle fleet management and intelligent mobile-asset-trackingsolutions.  The purchase consideration(excluding approximately $800,000 of purchase related expenses) was $15.0million consisting of $3.0 million in cash and a $12.0 million notepayable.  The note was interest bearingat 5.75% and was paid in equal monthly cash installments from May 2002 throughJuly 2002.  This acquisition has beenaccounted for under the purchase method of accounting and, accordingly, theassets acquired and liabilities assumed have been recorded at their estimatedfair value as of the acquisition date. The allocation of the purchase price for this acquisition, which wasdetermined based on a third party appraisal, is summarized as follows:

 
|                     |   | **2002**                    |   |
|--------------------------|--------|-----------------------------|--------|
|                     |   | **(AMOUNTS IN  THOUSANDS)** |   |
| Current assets           |   | $                           | 1,153  |   |
| Property and equipment   |   | 636                         |   |
| Identifiable intangibles |   | 2,815                       |   |
| Goodwill                 |   | 11,196                      |   |
| Total consideration      |   | $                           | 15,800 |   |

 

53

----

 

(b) PRO-FORMA RESULTS

 

The following summary, preparedon a pro forma basis, presents the results of the Company’s operations(unaudited) as if the @Track asset purchase had been completed as of January 1,2002:

 
| **(IN THOUSANDS, EXCEPT PER SHARE DATA)**                                                                                          |   | **Year Ended December 31,  2002** |    |
|------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|---------|
|                                                                                                                               |   | **(UNAUDITED)**                   |    |
| Revenue                                                                                                                            |   | $                                 | 65,620  |   |
| Net loss from continuing operations before cumulative effect of change  in accounting principle                                    |   | $                                 | (64,811 | ) |
|                                                                                                                               |   |                              |    |
| Net loss per share — basic and diluted from continuing operations  before cumulative effect of change in accounting principle |   | $                                 | (1.54   | ) |

 

The unaudited pro forma results of operationsare not necessarily indicative of what actually would have occurred if the@Track asset purchase had taken place as of January 1, 2002, nor are they a projectionof the Company’s results of operations for any future period.

 

(c) 2000 AND PRIOR ACQUISITIONS

 

Through December 31, 2001, the Companyrecorded approximately $204.3 million in goodwill and other intangibles incontinuing operations related to its acquisitions and $1.5 billion in goodwilland other intangible assets relating to its discontinued operations.  During 2001, the Company performed on-goinganalysis of the recoverability of its goodwill and other intangibles and thevalue of its investments in accordance with SFAS No. 121, “Accounting for theImpairment of Long-Lived Assets and For Long-Lived Assets to be DisposedOf.”  Based on quantitative andqualitative measures, the Company assessed the need to record impairment losseson long-lived assets used in operations when impairment indicators werepresent.

 

Based on a variety of indicators, the Companydetermined during 2001 that the goodwill and other intangibles from itsacquisitions may have become impaired. In accordance with SFAS No. 121, theCompany performed undiscounted cash flow analyses of its acquisitions todetermine whether any impairment existed. When the undiscounted cash flows wereless than the carrying value of the related assets, the Company determined arange of fair values using a combination of valuation methodologies includingi.) discounted cash flow analysis, which is based upon converting expectedfuture cash flows to present value, ii.) changes in market value since the dateof acquisition relative to other companies and indexes.

 

As a result of this review, the Companydetermined that the carrying value of goodwill and certain other intangibleassets related to its acquisitions were not fully recoverable.  Accordingly, during 2001, the Companyrecorded impairment charges in continuing operations of approximately $76.5million, which represents the difference between the carrying value and fairvalue of the goodwill and other intangible assets.  Also during 2001, the Company recorded impairment charges indiscontinued operations of approximately $1.042 billion, which represents thedifference between the carrying value and fair value of the goodwill and otherintangible assets.

 

See Note 2 to the consolidated financialstatements above for a discussion of more recent impairments in 2002 and 2003under SFAS No. 142 and SFAS No. 144.

 

(d) ACQUIRED INTANGIBLES

 

All of the Company’s identifiable intangiblesare being amortized between five and seven years and goodwill was beingamortized between three and seven years. On January 1, 2002 the Companydiscontinued the amortization of goodwill due to its implementation of SFAS No.142.

 

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

 
|                                               |   | **ESTIMATED  USEFUL  LIVES** |   | **DECEMBER 31,  2002** |   | **DECEMBER 31,  2003** |   |
|----------------------------------------------------|--------|------------------------------|--------|------------------------|--------|------------------------|--------|
| Completed technology                               |   | 5 Years                      |   | $                      | 15,959 |                   | $      | 18,254 |   |
| Trademarks                                         |   | 5 – 7 Years             |   | 1,000                  |   | 1,000                  |   |
| Acquired subscribers                               |   | 5 Years                      |   | 2,195                  |   | 2,195                  |   |
| Total intangible assets                            |   |                         |   | 19,154                 |   | 21,449                 |   |
| Less accumulated amortization                      |   |                         |   | (3,300                 | )      | (9,278                 | )      |
|                                               |   |                         |   |                   |   |                   |   |
| Intangible assets net of accumulated  amortization |   |                         |   | $                      | 15,854 |                   | $      | 12,171 |   |
|                                               |   |                         |   |                   |   |                   |   |
| Goodwill                                           |   |                         |   | $                      | 25,369 |                   | $      | 25,369 |   |

 

54

----

 

In April 2003,the Company purchased intellectual property relating to the design and manufacturingof certain hardware used in the Company’s Transportation segment.  The purchase consideration was $2.3 million,which has been recorded as intangible assets in the accompanying consolidatedbalance sheets.

 

The Companyexpects to record approximately $6.1 million in 2004, $4.0 million in 2005,$1.2 million in 2006, $739,000 in 2007 and $134,000 in 2008 in amortizationexpense on currently held identifiable intangibles.

 

**(5) ACCOUNTS RECEIVABLE**

Accounts receivable consists of thefollowing:

 
| **(IN THOUSANDS)**              |   | **December  31, 2002** |   | **December 31,  2003** |   |
|---------------------------------|--------|------------------------|--------|-----------------------------|--------|
| Billed                          |   | $                      | 14,524 |                        | $      | 12,668 |   |
| Unbilled                        |   | 4,048                  |   | 4,998                       |   |
| Allowance for doubtful accounts |   | (4,644                 | )      | (2,652                      | )      |
| Total Accounts Receivable       |   | $                      | 13,928 |                        | $      | 15,014 |   |

 

The Company believes substantially allunbilled accounts receivable included above will be billed within the nexttwelve months.  As of December 31, 2003, the Company has unbilled accountsreceivable of approximately $1.8 million relating to a long-term contract as ofDecember 31, 2003.  This amount will not be billed in the next twelvemonths and is included in other non-current assets.

 

**(6) INVESTMENTS IN SALES-TYPE LEASES**

Future minimumlease payments to the Company under noncancelable sales-type leases follows:

 
|                                                              |   | **Sales-type leases** |   |
|-------------------------------------------------------------------|--------|-----------------------|--------|
|                                                              |   |                  |   |
| Year ending December 31:                                     |   |                  |   |
| 2004                                                              |   | $                     | 3,800  |   |
| 2005                                                              |   | 3,699                 |   |
| 2006                                                              |   | 3,491                 |   |
| 2007                                                              |   | 2,316                 |   |
| 2008                                                              |   | 822                   |   |
|                                                              |   |                  |   |
| Total minimum lease payments                                      |   | $                     | 14,128 |   |
|                                                              |   |                  |   |
| Less amount representing interest (at  11.71%)                    |   | 2,727                 |   |
|                                                              |   |                  |   |
| Present value of net minimum sales-type  lease payments           |   | $                     | 11,401 |   |
|                                                              |   |                  |   |
| Less current installments of investments in  sales-type leases    |   | 2,636                 |   |
|                                                              |   |                  |   |
| Investments in sales-type leases, excluding  current installments |   | $                     | 8,765  |   |

 

**(7) PROPERTY AND EQUIPMENT**

Property and equipment consists of the following(in thousands):

 
|                                                    |   | **ESTIMATED  USEFUL  LIVES** |   |   |   |   |   |
|---------------------------------------------------------|--------|------------------------------|--------|--------|--------|--------|--------|
| **DECEMBER 31,**                                        |
| **2002**                                                |   | **2003**                     |
| Furniture  and fixtures                                 |   | 7  Years                     |   | $      | 1,033  |   | $      | 929 |   |
| Computer  and equipment                                 |   | 3  – 5 Years            |   | 3,733  |   | 8,187  |   |
| Software                                                |   | 3  Years                     |   | 4,354  |   | 4,508  |   |
| Leasehold  improvements                                 |   | Term  of Lease               |   | 3,022  |   | 1,980  |   |
| Total  property and equipment                           |   |                         |   | $      | 12,142 |   | $      | 15,604 |   |
| Less  accumulated depreciation                          |   |                         |   | (2,852 | )      | (6,269 | )      |
| Property  and equipment net of accumulated depreciation |   |                         |   | $      | 9,290  |   | $      | 9,335 |   |

 

55

----

 

In June 2003, the Companydisposed of its corporate jet, which was classified as an asset held for saleat December 31, 2002.  In connection with this disposal, the Companyrecorded a loss on disposal of assets of approximately $838,000.  This loss was offset by gains on thedisposal of other assets of approximately $94,000.

 

InAugust 2003, the Company disposed of the Arizona Network OperationsCenter, which asset is recorded in discontinued operations in the accompanyingconsolidated financial statements as of December 31, 2002.  As a result of this sale, the Companyreceived cash proceeds of $1.4 million.  A loss on disposal of theseassets of approximately $272,000 was recorded and is included in discontinuedoperations in the accompanying consolidated financial statements.

 

**(8) INVESTMENTS**

Through December 31, 2001, the Company madeinvestments in other businesses totaling approximately $196.8 million.  The Company adjusts the carrying value ofits available-for-sale investments and equity method investments in publiccompanies to market and record the change in market value to othercomprehensive income.  The Companyassesses the decline in market value in certain of its public company investmentsas other than temporary after reviewing the following factors: length of timeand extent to which the market value of the investment has been below cost, thefinancial position and the near-term prospects of the issuer, and the Company’sintent and ability to retain its investment in the investee for a period oftime sufficient to allow for any anticipated recovery in market value.

 

With respect to investments in privatecompanies including those the Company accounts for using the equity method, theCompany performs on-going reviews based on quantitative and qualitativemeasures.  In evaluating the Company’sprivate company investments, the Company determined a range of fair valuesbased on a combination of valuation methods where applicable.  The Company determines fair value from therange of possible values, after considering the strength of the investee’sfinancial position, future prospects and risk profile of the invested company.

 

During 2001, the Company recorded a netcharge of $143.4 million, which included $136.7 million in impairment chargesrelated to its investments.  Theremainder of the net charge related to net gains (losses) from the sales ofinvestments, and changes in the fair value of warrants.  During 2002, the Company recorded a netcharge of $14.4 million, which included $14.1 million in impairment chargesrelated to its investments.  Theremainder of the charge related to net gains (losses) from the sales ofinvestments, and changes in the fair value of warrants.  During 2003, the Company recorded gains of$587,000 primarily due to the sale of investments.

 

**(9) RESTRUCTURING CHARGES**

During 2001,the Company had restructuring charges from continuing operations totaling $1.8million.  The Company implemented anexpense reduction plan as part of the Company’s integration strategy focused onimproving operational efficiencies and the implementation of other measuresintended to reduce planned expenses. These efforts resulted in the consolidation of excess facilities and areduction in the Company’s work force. The charges related mainly to workforce reductions of 109 positions andthe closing or consolidation of two facilities. Employee separation benefitsunder the restructuring plan include severance, medical, and otherbenefits.  Facility closure costsincluded expected losses on subleases, brokerage commissions, asset impairmentcharges, contract termination costs and other costs.

 

During 2002,the Company continued its expense reduction plan focused on improvingoperational efficiencies and the implementation of other measures in order toreduce planned expenses.  These effortsresulted in the elimination of positions. As a result of this restructuring plan, the Company recorded charges toearnings from continuing operations during 2002 of $1.7 million.  The charges related mainly to workforcereductions of 117 positions.

 

On January 1, 2003, theCompany adopted SFAS No. 146, which requires that a liability for a costassociated with an exit or disposal activity be recognized when incurred atfair value. The Company recorded charges to earnings from continuing operationsduring 2003 of approximately $372,000. The charges related mainly to workforce reductions of 14 positions.Employee separation benefits under the restructuring plan include severance,medical, and other benefits. As of December 31, 2003, the accruedliability related to all restructuring activities was $1.5 million, themajority of which related to outstanding lease obligations.

 

Calculation ofthe restructuring accrual related to expected losses on subleases requires theCompany to make estimates concerning: (1) the expected length of time tosublease the facility; (2) the expected rental rates on subleases; and, (3)estimated brokerage expenses associated with executing the sublease.  The Company used the assistance ofindependent real estate brokerage firms in developing these estimates and theCompany’s estimates may be impacted by future economic trends.  The expected losses on subleases have notbeen discounted.  If the actual resultsdiffer from the Company’s estimates, or as management’s best estimates changefrom quarter to quarter, based on the latest information, the Company isrequired to adjust its restructuring accrual related to facilities, includingrecording additional losses.  Thesechanges in assumptions are reflected in the table below as adjustments.

 

A rollforwardof the restructuring accrual is as follows:

 

56

----

 
|                                                            |   | **Employee  Separation  Benefits** |   | **Facility  Closure  Costs and  Other** |   | **Total** |   |
|-----------------------------------------------------------------|--------|------------------------------------|--------|-----------------------------------------|--------|-----------|--------|
| **2001 Restructuring:**                                         |   |                               |   |                                    |   |      |   |
| Charges                                                         |   | $                                  | 1,729  |                                    | $      | 41        |   | $ | 1,770 |   |
| Adjustments                                                     |   | —                             |   | —                                  |   | —    |   |
| Net charge and adjustments to discontinued  operations          |   | 8,499                              |   | 34,737                                  |   | 43,236    |   |
| Total restructuring charge for period  ending December 31, 2001 |   | $                                  | 10,228 |                                    | $      | 34,778    |   | $ | 45,006 |   |
| Reclassifications from acquisition accounts                     |   | —                             |   | 1,643                                   |   | 1,643     |   |
| Cash payments                                                   |   | (8,626                             | )      | (10,206                                 | )      | (18,832   | )      |
| Restructuring liability as of December 31,  2001                |   | $                                  | 1,602  |                                    | $      | 26,215    |   | $ | 27,817 |   |
|                                                            |   |                               |   |                                    |   |      |   |
| **2002 Restructuring:**                                         |   |                               |   |                                    |   |      |   |
| Charges                                                         |   | $                                  | 1,436  |                                    | $      | 87        |   | $ | 1,523 |   |
| Adjustments                                                     |   | —                             |   | 180                                     |   | 180       |   |
| Net charge and adjustments to discontinued  operations          |   | 4,166                              |   | 31,875                                  |   | 36,041    |   |
| Total restructuring charge for period  ending December 31, 2002 |   | $                                  | 5,602  |                                    | $      | 32,142    |   | $ | 37,744 |   |
| Reclassification from other accruals                            |   | —                             |   | 774                                     |   | 774       |   |
| Non-cash charges                                                |   | —                             |   | (4,619                                  | )      | (4,619    | )      |
| Cash payments                                                   |   | (6,781                             | )      | (22,483                                 | )      | (29,264   | )      |
| Restructuring liability as of December 31,  2002                |   | $                                  | 423    |                                    | $      | 32,029    |   | $ | 32,452 |   |
|                                                            |   |                               |   |                                    |   |      |   |
| **2003 Restructuring:**                                         |   |                               |   |                                    |   |      |   |
| Charges                                                         |   | $                                  | 468    |                                    | $      | 175       |   | $ | 643 |   |
| Adjustments                                                     |   | —                             |   | (271                                    | )      | (271      | )      |
| Net charge and adjustments to discontinued  operations          |   | 967                                |   | 4,818                                   |   | 5,785     |   |
| Total restructuring charge for period  ending December 31, 2003 |   | $                                  | 1,435  |                                    | $      | 4,722     |   | $ | 6,157 |   |
| Cash payments                                                   |   | (1,458                             | )      | (35,674                                 | )      | (37,132   | )      |
| Restructuring liability as of December 31,  2003                |   | $                                  | 400    |                                    | $      | 1,077     |   | $ | 1,477 |   |

 

**(10) RELATED PARTY TRANSACTIONS**

(a)AOL

 

The Company entered into a seriesof agreements (the “Agreements”) with America Online, Inc. (“AOL”) inNovember 2001.  The agreements includeda product development and licensing agreement, a media agreement, and a commonstock purchase agreement.  OnNovember 4, 2002, the Company, AOL and AOL Time Warner Inc. (“AOLTW”and, collectively with AOL, the “AOL Parties”) entered into a SettlementAgreement and Mutual Release (the “Settlement Agreement”) pursuant to which theCompany and the AOL Parties agreed to terminate all of the Agreements with theexception of a Stock Purchase Agreement. The Stock Purchase Agreement will remain in effect to govern the 737,790shares of the Company’s stock purchased by AOL on December 3, 2001 but wasmodified by the Settlement Agreement so as not to require future investment inthe Company by AOL. In connection with the termination of the other Agreements,the Settlement Agreement also provides for the release to the Company ofapproximately $5.3 million that the Company had previously deposited in anescrow account under the terms of the Agreements.  The parties have agreed that no other amounts are due or owing toany party.  Pursuant to this settlementthe Company took a charge of approximately $6.5 million to write off certainAOL related intangible assets.  Such amounthas been recorded in discontinued operations for the year ended December 31,2002.  In addition, the Company paid AOL$4.6 million for advertising services in 2002, which is included in net lossfrom discontinued operations.

 

(b) ADDITIONAL RELATED PARTY INFORMATION

 

The Company receives benefitcoordination services from Huber Oros, which is considered arelated party because an owner of Huber Oros is related to a member of theCompany’s senior management.  For the years ended December 31, 2001, 2002and 2003, expenses related to Huber Oros were approximately $377,000, $169,000and $107,000, respectively.  As ofDecember 31, 2002 and 2003 there were no outstanding payables due to HuberOros.

 

The Company also receives legalservices from Kirkland & Ellis LLP, which is considered a relatedparty because a partner at that firm is a member of the Company’sBoard of Directors.  For the year ended December 31, 2003, expensesrelated to Kirkland & Ellis LLP were approximately $1.4 million. The Company did not receive legal services from this firm prior to 2003.  As of December 31, 2003, the Company hadoutstanding payables of approximately $805,000 due to Kirkland & Ellis LLP.

 

57

----

 

During 2001, the Companyreceived advisory services from Deutsche Bank Alex Brown (DBAB) andFriedman, Billings, Ramsey & Co., Inc. (FBR).  These serviceproviders were considered related parties during 2001 because, at thattime, they were stockholders of the Company.  Expenses related toDBAB and FBR during 2001 were approximately $1.2 million and $77,000, respectively.

 

The EMS segmentreceived data feeds from Reuters during 2001, 2002 and2003.  Reuters was considered a related party during 2001 and 2002 becausethey were a part owner of EMS’s international operation, Sila.  During2001 and 2002, expenses related to Reuters were approximately $347,000 and$587,000, respectively.  As of December 31, 2002 and 2003, the Company hadoutstanding payables due to Reuters of $1.2 million and $67,000, respectively.

 

The related party expenses for the EMSsegment have been included in discontinued operations in the accompanyingconsolidated financial statements.

 

 **(11) DEBT**

On March 17, 2000, the Company completed anoffering for the sale of an aggregate $310.5 million of 6% convertiblesubordinated notes (the Notes) due in 2005. The net proceeds after deduction of underwriting discounts and offeringexpenses were approximately $300.6 million. The underwriting discounts and expenses of the Notes offering of $10.2million have been included in other assets as deferred financing fees.  The Notes are convertible, at the option ofthe holder, at any time prior to maturity, into shares of common stock ofAether at a conversion price of $243.95 per share, which is equal to aconversion rate of 4.0992 shares per $1,000 principal amount of notes, subjectto adjustment.

 

In April of 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB StatementNo. 13, and Technical Corrections.” SFAS No. 145 rescinds FASB No. 4 and 64 in relation to reporting gainsand losses from extinguishment of debt. The Statement amends SFAS No. 4 and 64 and requires gains and lossesfrom extinguishment of debt to be classified as extraordinary items only ifthey meet the criteria in Opinion 30. Applying the provisions of Opinion 30 will differentiate between normalrecurring operations of a company and transactions that are unusual orinfrequent in nature.    During 2001 and 2002, the Company bought back$20.0 million and $135.6 million of outstanding Notes and recognized gains of$7.7 million and $42.8 million, respectively on the early extinguishment ofdebt.  The Company did not repurchaseNotes in 2003.

 

Notespayable at December 31, 2002 and 2003 consists of $154.9 million of the Notesdue in March 2005.

 

##### **(12) INCOME TAXES**

The Company has provided no current incometaxes due to the losses incurred in all periods.    The income tax benefit for 2002  primarily relates to refunds received from the carryback offederal net operating losses to prior tax years.

 

A reconciliation of the statutory Federalincome tax rate and the effective income tax rate for continuing operations forthe year ended December 31, 2001, 2002 and 2003 follows:

 
|                                            |   | **2001** |   | **2002** |   | **2003** |   |
|-------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Statutory Federal income tax rate               |   | (35.0    | )%     | (35.0    | )%     | (35.0    | )%     |
| Effect of:                                      |   |     |   |     |   |     |   |
| Nondeductible goodwill  amortization/impairment |   | 7.6      |   | 15.9     |   | 0.00     |   |
| Other                                           |   | 0.6      |   | (1.9     | )      | (4.4     | )      |
| Valuation allowance                             |   | 26.8     |   | 20.1     |   | 39.4     |   |
| Effective income tax rate                       |   | 0.0      | %      | (0.9     | )%     | 0.0      | %      |

 

58

----

 

The tax effects of temporary differences thatgive rise to significant portions of the deferred tax assets and liabilities atDecember 31, 2002 and 2003, are presented below (amounts in thousands):

 
|                                         |   | **DECEMBER 31,  2002** |    | **DECEMBER 31,  2003** |   |
|----------------------------------------------|--------|------------------------|---------|------------------------|--------|
| Deferred  tax assets:                        |   |                   |    |                   |   |
| Net  operating loss carryforwards            |   | $                      | 268,011 |                   | $      | 303,181 |   |
| Investments                                  |   | 39,965                 |    | 35,713                 |   |
| Capital  loss carryforwards                  |   | 31,612                 |    | 35,217                 |   |
| Stock  related compensation                  |   | 6,535                  |    | 7,167                  |   |
| Allowance  for doubtful accounts             |   | 3,180                  |    | 8,544                  |   |
| Accrued  compensation                        |   | 2,037                  |    | 662                    |   |
| Reserves  and other                          |   | 22,935                 |    | 12,914                 |   |
| Depreciation  and amortization               |   | 6,574                  |    | 5,213                  |   |
| Intangibles                                  |   | 23,781                 |    | 22,896                 |   |
| Tax  credit carryforwards                    |   | 5,946                  |    | 6,832                  |   |
| Gross  deferred tax assets                   |   | $                      | 410,576 |                   | $      | 438,339 |   |
| Valuation  allowance for deferred tax assets |   | (410,576               | )       | (438,339               | )      |
| Net  deferred tax assets                     |   | $                      | —  |                   | $      | — |   |

 

The net change in the valuation allowance fordeferred tax assets was an increase of $78.9 million in 2002 and $27.8 millionin 2003.  The increase in 2002 and 2003consists of an increase related to losses from continuing and discontinuedoperations.

 

In addressing the realizability of deferredtax assets, management considers whether it is more likely than not that someportion or all of the deferred tax assets will not be realized.  The ultimate realization of deferred taxassets is dependent on the generation of future taxable income during theperiods in which those temporary differences become deductible.  Management considers the scheduled reversalof deferred tax liabilities, projected future taxable income and tax planningstrategies in making this assessment. Based upon the level of historical taxable income and projected futuretaxable income over the periods in which the deferred tax assets aredeductible, management has determined that a valuation allowance of $410.6million and $438.3 million is required as of December 31, 2002 and 2003,respectively.

 

As of December 31, 2003, the Company hadFederal and State net operating loss carryforwards of approximately $722.5million that expire between 2012 and 2023. In addition, the Company has capital loss carryforwards of approximately$100.6 million that expire between 2006 and 2008.  As a result of changes in common stock ownership, the futurerealization of net operating loss carryforwards, capital loss carryforwards andcertain other tax credits may be limited.

 

**(13) PENSION PLANS**

The Company has two defined contributionplans under Section 401(k) of the Internal Revenue Code that provide forvoluntary employee contributions of 1 to 15 percent of compensation forsubstantially all employees.  TheCompany contributed $1.3 million, $691,000 and $543,000 to the plans for theyears ended December 31, 2001, 2002 and 2003, respectively related tocontinuing operations.

 

**(14) STOCK OPTIONS AND WARRANTS**

In 1996, the Company adopted a Unit OptionPlan. In September 1999, the Company adopted the 1999 Equity Incentive Plan(the Plan) to replace the Unit Option Plan. Under the Plan, the Company has the ability to grant options to acquireup 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 vestover a period of up to four years.  Optionsare generally granted at an exercise price equal to the fair value on the grantdate. Effective December 15, 2000, the Company adopted the AcquisitionIncentive Plan (the 2000 Plan) to provide options or direct grants to employeesand other service providers of the Company and its related companies withrespect to the Company’s common stock. The Company has the ability to grant options to acquire up to anadditional 5% of the outstanding shares of common stock under the 2000Plan.  All employees (except directorsand officers of the Company and any eligible affiliates) are eligible for theawards under the 2000 Plan, without shareholder approval.  Options are generally granted at an exerciseprice equal to the fair value of the common stock on the grant date.

 

59

----

 

In January 2001, the Company’s employees wereoffered the right to exchange existing options for shares of restrictedstock.  In total, 567 employees agreedto have their options canceled in exchange for approximately 756,000 shares ofrestricted stock.

 

The per share weighted-average value ofoptions granted by the Company during 2001, 2002 and 2003 was $7.11, $2.22 and$2.11, respectively, on the date of grant using the Black-Scholes option-pricingmodel.  The 2001 calculation used anexpected option life of four years and volatility of 70 percent.  The amounts calculated for 2002 and 2003were based on an expected option life of five years and volatility of 70percent.  In addition, the calculationsassumed a risk-free interest rate of 3.70 percent to 4.71 percent in 2001, 4.95percent to 5.09 percent in 2002 and 2.46 percent to 3.25 percent in 2003.  A summary of the stock option activity is asfollows:

 
|                                            |   | **2001**              |   | **2002**                                             |   | **2003**              |   |
|-------------------------------------------------|--------|-----------------------|--------|------------------------------------------------------|--------|-----------------------|--------|
| **(In Thousands, except  per share amounts)**   |   | **NUMBER  OF SHARES** |   | **WEIGHTED  AVERAGE  EXERCISE  PRICE  (PER  SHARE)** |   | **NUMBER  OF SHARES** |   | **WEIGHTED  AVERAGE  EXERCISE  PRICE  (PER SHARE)** |   | **NUMBER  OF SHARES** |   | **WEIGHTED  AVERAGE  EXERCISE  PRICE  (PER SHARE)** |   |
|                                            |   |                  |   |                                                 |   |                  |   |   |   |   |   |   |   |
| Stock  options outstanding at beginning of year |   | 6,957                 |   | $                                                    | 64.61  |                  | 6,251  |   | $ | 19.22 |   | 7,079 |   | $ | 9.92 |   |
|                                            |   |                  |   |                                                 |   |                  |   |   |   |   |   |   |   |
| Granted                                         |   | 3,825                 |   | 12.72                                                |   | 3,848                 |   | 3.01 |   | 203 |   | 2.11 |   |
|                                            |   |                  |   |                                                 |   |                  |   |   |   |   |   |   |   |
| Exercised                                       |   | (529                  | )      | 2.47                                                 |   | (481                  | )      | 1.31 |   | (687 | ) | 1.64 |   |
|                                            |   |                  |   |                                                 |   |                  |   |   |   |   |   |   |   |
| Canceled                                        |   | (4,002                | )      | 92.83                                                |   | (2,539                | )      | 19.57 |   | (1,547 | ) | 17.82 |   |
| Outstanding  at end of year                     |   | 6,251                 |   | $                                                    | 19.22  |                  | 7,079  |   | $ | 9.92 |   | 5,048 |   | $ | 8.33 |   |
|                                            |   |                  |   |                                                 |   |                  |   |   |   |   |   |   |   |
| Stock  options exercisable at year-end          |   | 2,336                 |   | $                                                    | 9.31   |                  | 2,282  |   | $ | 11.44 |   | 2,691 |   | $ | 9.78 |   |

 

The following table summarizes informationabout stock options at December 31, 2003:

 
|                            |   | **OPTIONS  OUTSTANDING**          |   | **OPTIONS  EXERCISABLE**                             |   |
|---------------------------------|--------|-----------------------------------|--------|------------------------------------------------------|--------|
| **RANGE OF  EXERCISE  PRICES**  |   | **NUMBER AT  DECEMBER 31,  2003** |   | **WEIGHTED-  AVERAGE  REMAINING  CONTRACTUAL  LIFE** |   | **WEIGHTED-  AVERAGE  EXERCISE  PRICE  (PER SHARE)** |   | **NUMBER AT  DECEMBER 31,  2003** |   | **WEIGHTED-  AVERAGE  EXERCISE  PRICE  (PER SHARE)** |   |
|                            |   | **(IN  THOUSANDS)**               |   | **(IN YEARS)**                                       |   |   |   | **(IN  THOUSANDS)** |   |   |   |
| Restricted  Stock               |   | 367                               |   | 5.6                                                  |   | $ | — |   | — |   | $ | — |   |
| $    0.24—$1.60  |   | 984                               |   | 4.5                                                  |   | 1.50 |   | 988 |   | 1.50 |   |
| $    1.61—$4.80  |   | 2,156                             |   | 6.4                                                  |   | 3.37 |   | 784 |   | 3.41 |   |
| $    4.81—$8.53  |   | 243                               |   | 4.1                                                  |   | 6.94 |   | 123 |   | 7.47 |   |
| $    8.54—$34.75 |   | 1,016                             |   | 5.4                                                  |   | 11.47 |   | 583 |   | 11.10 |   |
| $ 34.76—$75.38        |   | 245                               |   | 6.1                                                  |   | 65.76 |   | 186 |   | 64.59 |   |
| $  75.39—$92.00            |   | 20                                |   | 3.0                                                  |   | 81.76 |   | 14 |   | 81.76 |   |
| $  92.01—$235.00           |   | 17                                |   | 3.1                                                  |   | 126.55 |   | 13 |   | 126.37 |   |
|                            |   | 5,048                             |   | 5.6                                                  |   | $ | 8.33 |   | 2,691 |   | $ | 9.78 |   |

 

As a result of the sale of the EMS segment,certain employees transferred to EMS will have 90 days to exercise 582,703options with a weighted average exercise price of $12.67 per share.

 

60

----

 

**(15) COMMITMENTS AND CONTINGENCIES**

 

(a) LEGAL PROCEEDINGS

 

Aether is among the hundreds ofdefendants named in nine class action lawsuits seeking damages on account ofalleged violations of securities law. The case is being heard in the United States District Court for theSouthern District of New York.  Thecourt has consolidated the actions by all of the named defendants that actuallyissued the securities in question.  Nowthere are approximately 310 consolidated cases before Judge Scheindlin,including the Aether Systems action, under the caption In Re Initial PublicOfferings Litigation, Master File 21 MC 92 (SAS).

 

These actions were filed onbehalf of persons and entities that acquired our common stock after our initialpublic offering in October 20, 1999. Among other things, the complaints claim that prospectuses, datedOctober 20, 1999 and September 27, 2000 and issued by Aether in connection withthe public offerings of common stock, allegedly contained untrue statements ofmaterial fact or omissions of material fact in violation of securities lawsbecause 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 certainof their customers which were designed to maintain, distort and/or inflate themarket price of the Company’s common stock in the aftermarket.  The actions seek unspecified monetarydamages and rescission.  Aether believesthe claims are without merit and is vigorously contesting these actions.

 

Initial motions to dismiss thecase were filed and the court held oral argument on the motions to dismiss onNovember 1, 2002.  On February 19, 2003, the court issued an Opinion andOrder on defendants’ motions to dismiss, which granted the motions in part anddenied the motions in part.  As to Aether Systems, the motion to dismissthe claims against it was denied in its entirety.  Discovery is nowcommencing against the underwriter defendants. The plaintiffs voluntarily dismissed without prejudice the officer anddirector defendants of Aether.  On June26, 2003, the Plaintiff’s Executive Committee in this case announced a proposedsettlement with the issuers.  Theproposed settlement provides that the cases against the more than 300 IPO’sbetween 1998 and 2000 will end.  Aetherhas agreed to support the settlement. Under terms of the proposed settlement, Aether would not incur any materialfinancial or other liability.  Theproposed settlement would not involve the cases against the 55 investment bankunderwriter defendants, which would continue. Final approval of the proposed settlement will be required by the Courtfollowing notice to class members and a fairness hearing.  There can be no assurance such approval willbe granted.

 

Aether is also a party to otherlegal proceedings in the normal course of business.  Based on evaluation of these matters and discussions withcounsel, the Company believes that liabilities arising from these matters willnot have a material adverse effect on the consolidated results of itsoperations or financial position.

 

(b) CONTRACTUAL COMMITMENTS

 

For fiscal year 2003, the Company hascontractual commitments of approximately $8.0 million primarily relating toMotient and Minor Planet airtime purchase commitments.  These are the only terrestrial airtimesuppliers of the Company’s Transportation segment.

 

(c) LEASES

 

The Company is obligated under noncancelableoperating leases for office space that expire at various dates through2010.  Future minimum lease paymentsunder noncancelable operating leases are approximately as follows: (inthousands)

 
|                         |   | **YEAR ENDING  DECEMBER 31,** |   |
|------------------------------|--------|-------------------------------|--------|
|                         |   | **Gross  Commitments**        |   |
|                         |   |                          |   |
| 2004                         |   | $                             | 4,236  |   |
| 2005                         |   | 1,722                         |   |
| 2006                         |   | 1,409                         |   |
| 2007                         |   | 1,401                         |   |
| 2008                         |   | 1,000                         |   |
| Thereafter                   |   | —                        |   |
| Total minimum lease payments |   | $                             | 9,768  |   |

 

Rent expense from continuing operations underoperating leases was approximately $5.2 million, $3.0 million, and $3.0 millionfor the years ended December 31, 2001, 2002 and 2003, respectively.  Facilities representing approximately $1.2million of the Company’s minimum lease payments have been subleased or areavailable for sublease.  There can be noassurance that the Company will successfully sublease these facilities.  Included in the lease commitments above areapproximately $824,000 related to facility leases that were transferred todiscontinued operations in January 2003.

 

61

----

 

(d) GUARANTEES AND WARRANTY RESERVE

 

In November of 2002, the FASB issued FASBInterpretation No. 45, “Guarantors Accounting and Disclosure Requirements forGuarantees, Including Indirect Guarantees of Indebtedness of Others.”  Interpretation No. 45 discusses thenecessary disclosures to be made by a guarantor in its financial statementsabout its obligations under certain guarantees that it has issued.  It also discusses that the guarantor mustrecognize a liability, at fair value, at the inception of the guarantee for theobligation incurred in issuing the guarantee. The disclosure requirements are effective for 2002.  The reporting requirements are effective ona prospective basis for guarantees issued after December 31, 2002.

 

The Company has certain guarantees requiringdisclosure under FIN 45 as follows:

 

•                  TheCompany has guaranteed the payment of sublease rentals to our Landlord onseveral properties the Company sublet. The maximum guarantee on these properties is $1.1 million.

•                  Inthe Company’s Mobile Government segment, the Company may have to pay liquidateddamages in some cases if the Company’s sub-contractors do not perform on time. In addition, the Companysometimes indemnifies certain of its customers against damages, if any, they mightincur as a result of a claim brought against them related to third partysoftware imbedded in the Company’s products. The Company is unable to estimate the maximum exposure of suchindemnifications due to the inherent uncertainty and the varying nature of thecontractual terms.

 

The following table provides the changes in theCompany’s product warranties:

 
|                                                                                          |   | **2002** |   | **2003** |   |
|-----------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|
| Warranty liability balance at beginning of  year                                              |   | $        | 1,943  |     | $      | 788 |   |
| Liabilities accrued for warranties issued  during the period                                  |   | 493      |   | 944      |   |
| Changes in liability for warranties during  the period, including claims paid and expirations |   | (1,648   | )      | (885     | )      |
| Warranty liability balance at end of year                                                     |   | $        | 788    |     | $      | 847 |   |

 

**(16) QUARTERLY FINANCIAL INFORMATION(UNAUDITED)**

 
|                                                                             |   | **QUARTER  ENDED  MARCH 31,  2003** |    | **QUARTER  ENDED  JUNE 30,  2003** |   | **QUARTER  ENDED  SEPTEMBER  30,  2003** |   | **QUARTER  ENDED  DECEMBER 31,  2003** |   |
|----------------------------------------------------------------------------------|--------|-------------------------------------|---------|------------------------------------|--------|------------------------------------------|--------|----------------------------------------|--------|
|                                                                             |   |                                |    |                               |   |                                     |   |                                   |   |
| Revenue                                                                          |   | $                                   | 14,856  |                               | $      | 14,465                                   |   | $                                      | 13,691 |   | $ | 12,538 |   |
| Gross  profit                                                                    |   | 7,490                               |    | 8,135                              |   | 6,980                                    |   | 5,905                                  |   |
| Net  loss from continuing operations                                             |   | (9,323                              | )       | (10,196                            | )      | (6,224                                   | )      | (10,054                                | )      |
| Net  loss from discontinued operations                                           |   | (3,117                              | )       | (4,520                             | )      | (3,685                                   | )      | (2,333                                 | )      |
| Net  loss                                                                        |   | $                                   | (12,440 | )                                  | $      | (14,716                                  | )      | $                                      | (9,909 | ) | $ | (12,387 | ) |
| Net  loss from continuing operations per common share — basic and diluted   |   | $                                   | (0.22   | )                                  | $      | (0.24                                    | )      | $                                      | (0.15  | ) | $ | (0.23 | ) |
| Net  loss from discontinued operations per common share — basic and diluted |   | (0.07                               | )       | (0.11                              | )      | (0.08                                    | )      | (0.06                                  | )      |
| Net  loss per common share – basic and diluted                              |   | $                                   | (0.29   | )                                  | $      | (0.35                                    | )      | $                                      | (0.23  | ) | $ | (0.29 | ) |
| Weighted  average shares outstanding – basic and diluted                    |   | 42,271                              |    | 42,538                             |   | 42,762                                   |   | 42,883                                 |   |

 

62

----

 
|                                                                                                                                                |   | **QUARTER  ENDED  MARCH 31,  2002** |    | **QUARTER  ENDED  JUNE 30,  2002** |   | **QUARTER  ENDED  SEPTEMBER  30,  2002** |   | **QUARTER  ENDED  DECEMBER 31,  2002** |     |
|-----------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------|---------|------------------------------------|--------|------------------------------------------|--------|----------------------------------------|----------|
|                                                                                                                                                |   |                                |    |                               |   |                                     |   |                                   |     |
| Revenue                                                                                                                                             |   | $                                   | 9,708   |                               | $      | 16,891                                   |   | $                                      | 16,833   |   | $ | 15,889 |   |
| Gross  profit                                                                                                                                       |   | 4,538                               |    | 8,934                              |   | 8,036                                    |   | 8,376                                  |     |
| Net  income (loss) from continuing operations before cumulative effect of change  in accounting principle                                           |   | (22,023                             | )       | 870                                |   | (45,875                                  | )      | 1,335                                  |     |
| Net  loss from discontinued operations                                                                                                              |   | (33,611                             | )       | (20,325                            | )      | (146,461                                 | )      | (25,456                                | )        |
| Cumulative  effect of change in accounting principle                                                                                                |   | —                              |    | —                             |   | (33,876                                  | )      | —                                 |     |
| Net  loss                                                                                                                                           |   | $                                   | (55,634 | )                                  | $      | (19,455                                  | )      | $                                      | (226,212 | ) | $ | (24,121 | ) |
| Net  income (loss) from continuing operations before cumulative effect of change  in accounting principle per common share — basic and diluted |   | $                                   | (0.52   | )                                  | $      | 0.02                                     |   | $                                      | (1.09    | ) | $ | 0.03 |   |
| Net  loss from discontinued operations per common share — basic and diluted                                                                    |   | (0.80                               | )       | (0.48                              | )      | (3.48                                    | )      | (0.60                                  | )        |
| Cumulative  effect of change in accounting principle per share                                                                                      |   | (0.81                               | )  | —                             |   | —                                   |   | —                                 |     |
| Net  loss per common share — basic and diluted                                                                                                 |   | $                                   | (2.23   | )                                  | $      | (0.46                                    | )      | $                                      | (4.57    | ) | $ | (0.57 | ) |
| Weighted  average shares outstanding - basic and diluted                                                                                            |   | 41,993                              |    | 42,156                             |   | 42,097                                   |   | 42,220                                 |     |
|                                                                                                                                                     |        |                                     |         |                                    |        |                                          |        |                                        |          |  |  |  |  |  |  |  |  |

 

**(17)****SEGMENT REPORTING**

 

SFAS No. 131, *Disclosures about Segments of an Enterprise andRelated Information* established standards for reporting informationabout the operating segments in interim and annual financial reports issued tostockholders. It also established standards for related disclosures aboutproducts and services and geographic areas. Operating segments are defined ascomponents of an enterprise about which separate financial information isavailable that is evaluated regularly by the chief operating decision maker, ordecision making group, in deciding how to allocate resources and assessperformance. The Company’s chief operating decision-making group is ExecutiveManagement, which comprises the Chief Executive Officer and the senior vice presidentsof the Company. The operating segments are managed separately because eachoperating segment represents a strategic business unit that offers distinctservices.

 

The Company’s businessconsists of two operating segments: Transportation and Mobile Government.

 

Transportation

 

The Transportationsegment provides mobile and wireless solutions to the transportationindustry.  The Company’s customers areprimarily the owners and operators of truck and other vehicle fleets, includingUS Xpress Enterprises, Inc., TRL Inc. and Contract Freighters, Inc.  The Company’s products offer wireless dataand asset tracking and vehicle positioning features.  The Company’s customers use these products to monitor thelocation, movement and status of their vehicles.  The products enable them to reduce trailer to tractor ratios andimprove their operational efficiency.

 

63

----

 

Mobile Government

 

In the Mobile Governmentsegment, the Company provides wireless data solutions for use by publicsafety organizations, primarily state and local police, fire and rescue andemergency medical services organizations.  The Company’s public safetysolutions are integrated into 50 different state databases, as well as localand federal databases.  The Company’sproducts deliver real-time information in seconds, without the need for humandispatchers or other resources.

 

The accounting policies of theoperating segments are the same as those described in the summary ofsignificant accounting policies.

 
| **Year ended  December 31, 2002**        |   | **Mobile  Government** |    | **Transportation** |   | **Corporate &  Other** |   | **Total** |    |
|------------------------------------------|--------|------------------------|---------|--------------------|--------|----------------------------|--------|-----------|---------|
| Revenue                                  |   | $                      | 20,490  |               | $      | 38,831                     |   | $         | —  |   | $ | 59,321 |   |
| Gross profit                             |   | 13,534                 |    | 16,350             |   | —                     |   | 29,884    |    |
| Depreciation and amortization            |   | 3,470                  |    | 3,314              |   | 6,319                      |   | 13,103    |    |
| Net loss                                 |   | $                      | (43,981 | )                  | $      | (34,845                    | )      | $         | (20,743 | ) | $ | (99,569 | ) |
|                                     |   |                   |    |               |   |                       |   |      |    |
| Total assets from  continuing operations |   | $                      | 28,373  |               | $      | 79,097                     |   | $         | 339,459 |   | $ | 446,929 |   |

 
| **Year ended  December 31, 2003**        |   | **Mobile  Government** |   | **Transportation** |   | **Corporate &  Other** |   | **Total** |    |
|------------------------------------------|--------|------------------------|--------|--------------------|--------|----------------------------|--------|-----------|---------|
| Revenue                                  |   | $                      | 20,934 |               | $      | 34,616                     |   | $         | —  |   | $ | 55,550 |   |
| Gross profit                             |   | 15,114                 |   | 13,396             |   | —                     |   | 28,510    |    |
| Depreciation and amortization            |   | 2,886                  |   | 4,428              |   | 2,672                      |   | 9,986     |    |
| Net income (loss)                        |   | $                      | 533    |               | $      | (10,634                    | )      | $         | (25,696 | ) | $ | (35,797 | ) |
|                                     |   |                   |   |               |   |                       |   |      |    |
| Total assets from  continuing operations |   | $                      | 27,939 |               | $      | 85,475                     |   | $         | 270,472 |   | $ | 383,886 |   |
|                                     |   |                   |   |               |   |                       |   |      |    |

 

64

----

 

**SCHEDULEII**

**VALUATIONAND QUALIFYING ACCOUNTS**

**YEARSENDED DECEMBER 31, 2001, 2002 AND 2003**

(AMOUNTS INTHOUSANDS)

 
| **DESCRIPTION**                  |   | **BALANCE  AT  BEGINNING  OF YEAR** |   | **CHARGED  TO COSTS  AND  EXPENSES** |   | **CHARGED  TO  OTHER  ACCOUNTS** |   | **DEDUCTIONS** |   | **BALANCE  AT  END OF  YEAR** |   |
|----------------------------------|--------|-------------------------------------|--------|--------------------------------------|--------|----------------------------------|--------|----------------|--------|-------------------------------|--------|
| 2001                             |   |                                |   |                                 |   |                             |   |           |   |                          |   |
| Allowance  for doubtful accounts |   | $                                   | 3,646  |                                 | $      | 2,829                            |   | $              | 979    |                          | $      | 3,862 |   | $ | 3,592 |   |
| 2002                             |   |                                |   |                                 |   |                             |   |           |   |                          |   |
| Allowance  for doubtful accounts |   | $                                   | 3,592  |                                 | $      | 2,497                            |   | $              | 202    |                          | $      | 1,647 |   | $ | 4,644 |   |
| 2003                             |   |                                |   |                                 |   |                             |   |           |   |                          |   |
| Allowance  for doubtful accounts |   | $                                   | 4,644  |                                 | $      | 170                              |   | $              | (73    | )                             | $      | 2,089 |   | $ | 2,652 |   |

 

65

----

 

**ITEM9****.  CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTSON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

None.

 

**ITEM 9A. CONTROLS & PROCEDURES**

 

We maintain a set of disclosure controls andprocedures and internal control over financial reporting designed to provide uswith reasonable assurance that information required to be disclosed in ourfilings under the Exchange Act is recorded, processed, summarized and disclosedin our filings within the time periods specified by the rules and regulationsof the SEC.  Our management does notexpect that our disclosure controls and procedures or internal control overfinancial reporting will prevent all errors and fraud, as any control system isinherently limited by various factors and can provide only reasonable, and notabsolute, assurance that the system’s goals will be achieved.  Limitations of a control system can includefaulty assumptions as to the likelihood of future events, errors in judgment orsimple mistakes, resource and cost constraints, and inadequacies that developover time because of changes in conditions and/or deterioration in compliancewith policies and procedures. In view of these limitations, any evaluation ofdisclosure controls and procedures or internal control over financial reportingcan provide only reasonable, and not absolute, assurance that controldeficiencies and instances of fraud – if any – within the Company have beendetected.

 

As of the end of the period covered by thisannual report (the “Evaluation Date”), we carried out an evaluation, under thesupervision and with the participation of our Chief Executive Officer and ChiefFinancial Officer, of the effectiveness of the design and operation of ourdisclosure controls and procedures, as defined in Rules 13(a) - 15(e) and 15(d)- 15(e) under the Exchange Act.  Basedupon our evaluation, our CEO and CFO concluded that as of the Evaluation Date,our disclosure controls and procedures are effective in bringing to theirattention on a timely basis, material information relating to Aether requiredto be included in the Company’s SEC report and such information is recorded,processed, summarized and reported with the time periods specified in suchforms and reports.  It should be notedthat the design of any system of controls is based in part upon certainassumptions about the likelihood of future events, and there can be noassurance that any design will succeed in achieving its stated goals under allpotential future conditions regardless of how remote.

 

66

----

 

**PARTIII**

 

**ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT**

 

The information required by this Item will beincluded in Aether’s Proxy Statement for the 2004 Annual Meeting ofStockholders under the caption Directors and Executive Officers which will befiled with the Securities and Exchange Commission no later than 120 days afterthe close of the fiscal year ended December 31, 2003, and is incorporatedherein by reference.

 

**ITEM 11. EXECUTIVE COMPENSATION**

 

The information required by this Item will beincluded in Aether’s Proxy Statement for the 2004 Annual Meeting ofStockholders under the caption Executive Compensation which will be filed withthe SEC no later than 120 days after the close of the fiscal year endedDecember 31, 2003, and is incorporated herein by reference.

 

**ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**

 

The information required by this Item will beincluded in Aether’s Proxy Statement for the 2004 Annual Meeting ofStockholders under the caption Security Ownership of Certain Beneficial Ownersand Management which will be filed with the SEC no later than 120 days afterthe close of the fiscal year ended December 31, 2003, and is incorporatedherein by reference.

 

**ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

 

The information required by this Item will beincluded in Aether’s Proxy Statement for the 2004 Annual Meeting ofStockholders under the caption Certain Relationships and Related Transactionswhich will be filed with the SEC no later than 120 days after the close of thefiscal year ended December 31, 2003, and is incorporated herein by reference.

 

**ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES**

 

The information required by this Item will beincluded in Aether’s Proxy Statement for the 2004 Annual Meeting ofStockholders under the caption Principal Accounting Fees and Services whichwill be filed with the SEC no later than 120 days after the close of the fiscalyear ended December 31, 2003, and is incorporated herein by reference.

 

67

----

 

**PARTIV**

 

**ITEM15****.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES ANDREPORTS ON FORM 8-K**

 

FINANCIAL STATEMENTS AND SCHEDULES

 

The following financial statements required by thisitem are included in the Report beginning on page 38.

 
|   | Independent Auditors’ Report                                                                                   |   |
|--------|---------------------------------------------------------------------------------------------------------------------|--------|
|   | Report of Other Independent Auditors                                                                                |   |
|   | Consolidated Balance Sheets as of December 31, 2002 and  2003                                                  |   |
|   | Consolidated Statements of Operations and  Comprehensive Loss for the years ended December 31, 2001, 2002, and 2003 |   |
|   | Consolidated Statements of Stockholders’  Equity for the years ended December 31, 2001, 2002 and 2003          |   |
|   | Consolidated Statements of Cash Flows for  the years ended December 31, 2001, 2002 and 2003                         |   |
|   | Notes to Consolidated Financial Statements                                                                          |   |

 

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

 

EXHIBITS

 

The following exhibits are filed herewith orare incorporated by reference to exhibits previously filed with the SEC.

 

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                 |   | Asset Purchase  Agreement dated December 18, 2003 by and among Aether Systems, Inc,  TeleCommunication Systems, Inc., TSYS Acquisition Corp. and TCS Limited, as  amended (8) |
|                |   |                                                                                                                                                                          |
| 3.1                 |   | Amended and Restated  Certificate of Incorporation of Aether Systems, Inc. (as amended)(3)                                                                                    |
|                |   |                                                                                                                                                                          |
| 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(2)                                                                                                                                    |
|                |   |                                                                                                                                                                          |
| 10.1                |   | Employment Agreement  between Aether Technologies International, L.L.C. and David Oros dated July  7, 1999(1)                                                                 |
|                |   |                                                                                                                                                                          |
| 10.2                |   | Employment Agreement  between Aether Systems, Inc. and David C. Reymann dated June 8, 2001(5)                                                                                 |
|                |   |                                                                                                                                                                          |
| 10.3                |   | Aether Systems, Inc.  1999 Equity Incentive Plan as amended June 22, 2001                                                                                                     |
|                |   |                                                                                                                                                                          |
| 10.4                |   | Aether Systems, Inc.  Senior Bonus Plan effective as of September 29, 1999(1)                                                                                                 |
|                |   |                                                                                                                                                                          |
| 10.5                |   | Aether Systems, Inc.  Acquisitions Incentive Plan effective as of December 15, 2000(4)                                                                                        |
|                |   |                                                                                                                                                                          |
| 10.6                |   | Common Stock Purchase  Agreement by and among Aether Systems, Inc. and America Online, Inc. dated as  of November 5, 2001(9)                                                  |
|                |   |                                                                                                                                                                          |
| 10.7                |   | Terrestrial Network  Reseller Agreement between Aether Systems, Inc. and Motient Communications  Company dated as of November 29, 2000, as amended*                           |
|                |   |                                                                                                                                                                          |
| 10.8                |   | Private Network  Satellite Service Agreement between Aether Systems, Inc. and Motient  Services, Inc. dated as of November 29, 2000*                                          |

 

68

----

 
| 10.9   |   | Land Earth Station  Services Agreement between Aether Systems, Inc. and Motient Services, Inc.  dated November 29, 2000*                                                  |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                      |
| 10.10  |   | Transition Services Agreement between  Aether Systems, Inc. and Minor Planet Systems USA, Inc. (f/k/a @Track  Communications) dated as of March 15, 2002 as amended*      |
|   |   |                                                                                                                                                                      |
| 10.11  |   | Amendment to the  Terrestrial Network Reseller Agreement and Private Network Satellite Services  Agreement dated as of October 9, 2001*                                   |
|   |   |                                                                                                                                                                      |
| 10.12  |   | Summary of agreement between Aether  Systems, Inc. and Michael Mancuso confirmed as of October 22, 2002                                                                   |
|   |   |                                                                                                                                                                      |
| 10.13  |   | Summary of agreement between Aether  Systems, Inc. and Frank Briganti confirmed as of May 15, 2002                                                                        |
|   |   |                                                                                                                                                                      |
| 21.1   |   | Subsidiaries of Aether  Systems                                                                                                                                           |
|   |   |                                                                                                                                                                      |
| 23.1   |   | Consent of KPMG LLP                                                                                                                                                       |
|   |   |                                                                                                                                                                      |
| 23.2   |   | Consent of Ernst &  Young LLP                                                                                                                                         |
|   |   |                                                                                                                                                                      |
| 31.1   |   | Certification of Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002  (“Sarbanes-Oxley”)                                         |
|   |   |                                                                                                                                                                      |
| 31.2   |   | Certification of Chief  Financial Officer pursuant to Section 302 of Sarbanes-Oxley                                                                                       |
|   |   |                                                                                                                                                                      |
| 32.1   |   | Certifications  pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the  Sarbanes– Oxley Act of 2002 for David S. Oros and David C. Reymann (6) |

 

----

* Certain portions of these documents havebeen omitted pursuant to a request for confidential treatment.  We have filed non-redacted copies of theseagreements with the Securities and Exchange Commission.

 

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

 

(2) Incorporated by reference to theRegistration Statement (File No. 333-30852) or Form S-1 filed with theCommission on February 22, 2000, as amended.

 

(3) Incorporated by reference to the Form10-Q filed with the Commission on August 14, 2000.

 

(4) Incorporated by reference to theRegistration Statement (File No. 333-52222) on Form S-8 filed with theCommission on December 20, 2000.

 

(5) Incorporated by reference to the Form10-Q filed with the Commission on June 30, 2001.

 

(6) These certifications are being furnishedsolely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and are notbeing filed as part this Annual Report on Form 10-K or as a separate disclosuredocument.

 

(7) Incorporated by reference to the Form10-K filed with the Commission on April 1, 2002.

 

(8) Incorporated by reference to the Form 8-K filedwith the Commission on January 28, 2004.

 

(9) Incorporated by reference to theForm 10-K filed with the Commission on April 2, 2001.

 

REPORTS ON FORM 8-K

 

During the 2003 fiscal year, we filed thefollowing Current Reports on Form 8-K:

 

69

----

 

•                  Acurrent report on Form 8-K was dated and filed on May 9, 2003 pursuant to Item7 (Financial Statements and Exhibits) and Item 9 (Regulation FD Disclosure)

•                  Acurrent report on Form 8-K dated August 12, 2003 was filed on August 13, 2003pursuant to Item 7 (Financial Statements and Exhibits) and Item 12 (RegulationFD Disclosure)

•                  Acurrent report on Form 8-K dated and filed on August 19, 2003 pursuant to Item7 (Financial Statements and Exhibits) and Item 12 (Regulation FD Disclosure)

•                  Acurrent report on Form 8-K was dated November 12, 2003 and filed on November13, 2003 pursuant to Item 7 (Financial Statements and Exhibits) and Item 9(Regulation FD Disclosure)

•                  Acurrent report on Form 8-K/A was dated November 12, 2003 and filed on November13, 2003  pursuant to Item 7 (FinancialStatements and Exhibits) and Item 9 (Regulation FD Disclosure)

•                  Acurrent report on Form 8-K was dated and filed on December 19, 2003 pursuant toItem 5 (Other Events) and Item 7 (Financial Statements and Exhibits)

 

70

----

 

### **SIGNATURES**

 

Pursuant to the requirements ofSection 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant hasduly caused this report on Form 10-K to be signed on its behalf by theundersigned, thereunto duly authorized on March 15, 2004.

 
|   | **AETHER  SYSTEMS, INC.** |
|--------|---------------------------|
|   |                      |
|   |                      |
|   | *By:*                     | /s/ David S.  Oros |   |
|   |                      | *DAVID  S. OROS* |   |
|   |                      | *Chairman  and Chief Executive Officer* |   |

 

 

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

 

 
| **SIGNATURE**             |   | **TITLE**                                      |   | **DATE**        |
|---------------------------|--------|------------------------------------------------|--------|-----------------|
|                      |   |                                           |   |            |
| /s/  David S. Oros        |   | Chairman  and Chief                            |   | March 15,  2004 |
| DAVID  S. OROS            |   | Executive  Officer                             |   |            |
|                      |   |                                           |   |            |
| /s/  David C. Reymann     |   | Chief  Financial Officer                       |   | March 15,  2004 |
| DAVID  C. REYMANN         |   | (Principal  Financial and  Accounting Officer) |   |            |
|                      |   |                                           |   |            |
| /s/  J. Carter Beese, Jr. |   | Director                                       |   | March 15,  2004 |
| J.  CARTER BEESE, JR.     |   |                                           |   |            |
|                      |   |                                           |   |            |
| /s/  James T. Brady       |   | Director                                       |   | March 15,  2004 |
| JAMES  T. BRADY           |   |                                           |   |            |
|                      |   |                                           |   |            |
| /s/  George P. Stamas     |   | Director                                       |   | March 15, 2004  |
| GEORGE  P. STAMAS         |   |                                           |   |            |
|                      |   |                                           |   |            |
| /s/  Jack B. Dunn, IV     |   | Director                                       |   | March 15,  2004 |
| JACK  B. DUNN, IV         |   |                                           |   |            |
|                      |   |                                           |   |            |
| /s/  Edward J. Mathias    |   | Director                                       |   | March 15,  2004 |
| EDWARD  J. MATHIAS        |   |                                           |   |            |
|                      |   |                                           |   |            |
| /s/  Truman T. Semans     |   | Director                                       |   | March 15,  2004 |
| TRUMAN  T. SEMANS         |   |                                           |   |            |

 

71

----