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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2003

For the transition period from      to      .

Commission File Number 1-16567

AT&T WIRELESS SERVICES, INC.
(Exact name of registrant as specified in its charter)

7277 — 164TH AVENUE NE, BUILDING 1
REDMOND, WASHINGTON 98052
(Address of principal executive offices)

(425) 580-6000
(Registrant’s telephone number)

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2):

As of April 30, 2003, 2,711,881,292 shares of the registrant’s Common Stock were outstanding.

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PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AT&T WIRELESS SERVICES, INC.
AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)

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

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AT&T WIRELESS SERVICES, INC.
AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)

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

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AT&T WIRELESS SERVICES, INC.
AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(IN MILLIONS)
(UNAUDITED)

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

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AT&T WIRELESS SERVICES, INC.
AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
(UNAUDITED)

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

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AT&T WIRELESS SERVICES, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS AND AS OTHERWISE NOTED)
(UNAUDITED)

(a) BASIS OF PRESENTATION

     AT&T Wireless Services, Inc. (AT&T Wireless Services) is a provider of wireless voice and data services and products primarily in the U.S., which presently operates in a single business segment. AT&T Wireless Services also holds equity interests in various U.S. and international wireless communications ventures and partnerships.

     The consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) and pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for interim financial statements and do not include all annual disclosures required by GAAP. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in Form 10-K for the fiscal year ended December 31, 2002. These consolidated condensed financial statements, in the opinion of management, include all adjustments necessary for a fair statement of the consolidated results of operations, financial position, and cash flows for each period presented. The results for the three months ended March 31, 2003 are not necessarily indicative of results to be expected for the full fiscal year 2003 or any other future periods.

     Certain reclassifications have been made to prior year amounts to conform to current year presentations. In accordance with Statement of Financial Accounting Standards (SFAS) No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections,” the extraordinary loss on early extinguishment of debt recognized during the first quarter of 2002 was reclassified to continuing operations in the second quarter of 2002.

(b) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ASSET RETIREMENT OBLIGATIONS

     In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” This statement provides accounting and reporting standards for costs associated with the retirement of long-lived assets. This statement requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the estimated useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement.

     AT&T Wireless Services is subject to asset retirement obligations associated with its cell site operating leases, which are subject to the provisions of this statement. Cell site lease agreements frequently contain clauses requiring restoration of the leased site at the end of the lease term, creating an asset retirement obligation. Landlords may choose not to exercise these rights as cell sites are considered useful improvements. AT&T Wireless Services has concluded that the fair value of these obligations cannot be reasonably estimated because neither the settlement date of the asset retirement obligation nor the probability of enforcement of the remediation clauses are currently determinable. AT&T Wireless Services has insufficient historical data to reasonably determine the probability of whether the remediation terms of the lease will be enforced and to what extent. In addition, AT&T Wireless Services is unable to estimate a potential range of settlement dates due to its intent and ability to renew site leases after the initial lease expiration. A liability for the asset retirement obligation associated with AT&T Wireless Services’ cell site leases will be recorded if, and when, a reasonable estimate of fair value can be determined. In addition to cell site operating leases, AT&T Wireless Services has leases related to switch site, retail, and administrative locations subject to the provisions of SFAS No. 143. AT&T Wireless Services’ initial adoption of this statement on January 1, 2003, did not have a material impact on AT&T Wireless Services’ results of operations, financial position, or cash flows.

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STOCK-BASED COMPENSATION EXPENSE

     As permitted by SFAS No. 123, “Accounting for Stock-Based Compensation,” AT&T Wireless Services measures compensation expense for its stock-based employee compensation plans using the intrinsic value method prescribed by the Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees.” Compensation costs charged against AT&T Wireless Services’ results of operations were not material for the three months ended March 31, 2003 and 2002. AT&T Wireless Services has adopted the disclosure-only provisions of SFAS No. 123. The following table illustrates the effect on Net income (loss) available to common shareholders and Earnings (loss) per share if AT&T Wireless Services had elected to recognize compensation costs based on the fair value at the date of grant for AT&T Wireless Services common stock awards granted subsequent to the split-off in 2001, AT&T Wireless Group tracking stock awards granted to AT&T Wireless Services employees prior to the split-off, AT&T common stock awards granted to AT&T Wireless Services employees prior to the split-off, and AT&T Wireless Services shares issued under the Employee Stock Purchase Plan (ESPP) consistent with the provisions of SFAS No. 123:

     AT&T Wireless Services granted 8.1 million stock options during the three months ended March 31, 2003. The weighted-average fair value at date of grant was $4.20 for all AT&T Wireless Services stock options granted during the three months ended March 31, 2003 and was estimated using the Black-Scholes option-pricing model. The following weighted average assumptions were applied: (i) expected dividend yield of 0 percent, (ii) expected volatility rate of 65 percent, (iii) expected life of six years, and (iv) risk-free interest rate of 3.5 percent.

     For the three months ended March 31, 2003, 0.8 million shares were purchased under the ESPP. The weighted-average fair value at date of grant was $1.41 for the option value of the shares of AT&T Wireless Services common stock issued during the three months ended March 31, 2003 under the ESPP, and was estimated using the Black-Scholes option-pricing model. The following weighted average assumptions were applied: (i) expected dividend yield of 0 percent, (ii) expected volatility rate of 80 percent, (iii) expected life of three months, and (iv) risk-free three-month interest rate of 1.1 percent.

     AT&T Wireless Services granted 37.0 million stock options during the three months ended March 31, 2002. The weighted-average fair value at date of grant was $5.66 for all AT&T Wireless Services stock options granted during the three months ended March 31, 2002 and was estimated using the Black-Scholes option-pricing model. The following weighted average assumptions were applied: (i) expected dividend yield of 0 percent, (ii) expected volatility rate of 65 percent, (iii) expected life of six years, and (iv) risk-free interest rate of 5.2 percent.

     For the three months ended March 31, 2002, 0.8 million shares were purchased under the ESPP. The weighted-average fair value at date of grant was $2.08 for the option value of the shares of AT&T Wireless Services common stock issued during the three months ended March 31, 2002 under the ESPP, and was estimated using the Black-Scholes option-pricing model. The following weighted average assumptions were applied: (i) expected dividend yield of 0 percent, (ii) expected volatility rate of 80 percent, (iii) expected life of three months, and (iv) risk-free three-month interest rate of 1.8 percent.

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GUARANTEES

     In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others — an Interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34.” This interpretation expands on the existing accounting guidance and disclosure requirements for most guarantees, including indemnifications. It requires that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value of the obligations it assumes under that guarantee if that amount is reasonably estimable, and must disclose that information in its interim and annual financial statements. The provisions for initial recognition and measurement of the liability are to be applied on a prospective basis to guarantees issued or modified on or after January 1, 2003. AT&T Wireless Services’ initial adoption of this statement on January 1, 2003, did not have a material impact on AT&T Wireless Services’ results of operations, financial position, or cash flows. Guarantees issued or modified after January 1, 2003, will be recognized at their fair value in AT&T Wireless Services’ financial statements. See Note (i) for additional disclosures related to indemnifications made by AT&T Wireless Services.

RESTRUCTURING COSTS

     In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issue Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” This statement requires that a liability for a cost associated with an exit or disposal activity be recognized at fair value when the liability is incurred. AT&T Wireless Services’ initial adoption of this statement on January 1, 2003, did not have a material impact on AT&T Wireless Services’ results of operations, financial position, or cash flows.

(c) GOODWILL AND OTHER INTANGIBLE ASSETS

     During the first quarter of 2002, AT&T Wireless Services recorded a cumulative effect of change in accounting principle of $166, net of tax, associated with its portion of transitional impairment losses recognized by its equity method investments upon adoption of SFAS No. 142, “Goodwill and Other Intangible Assets.” Of the total aftertax charge, $72 and $7 represented AT&T Wireless Services’ proportionate share of impairments recognized by TeleCorp PCS, Inc. (TeleCorp) of its licensing costs and goodwill, respectively. The remaining $87 represented AT&T Wireless Services’ proportionate share of an impairment of licensing costs recognized by American Cellular Corporation (ACC).

     Intangible assets with indefinite lives at March 31, 2003 consisted of U.S. licensing costs of $13,938. Amortizable intangible assets at March 31, 2003, consisted of customer lists of $595, net of accumulated amortization of $282. Customer lists are being amortized on a straight-line basis over five years. Pretax amortization expense associated with customer lists for the three months ended March 31, 2003 and 2002 totaled $30 and $25, respectively. The aggregate pretax amortization expense associated with customer lists for the years ended December 31, 2003, 2004, 2005, 2006, and 2007 are estimated to be $118, $112, $85, $25, and $4, respectively.

(d) DISCONTINUED OPERATIONS

     In December 2001, AT&T Wireless Services finalized plans and received approval from its board of directors to exit the fixed wireless business. AT&T Wireless Services completed the disposal of the fixed wireless business during 2002. During the first quarter of 2002, AT&T Wireless Services recorded an aftertax gain on disposal of the fixed wireless business totaling $12. The gain consisted of adjustments to the recoverability of assets and accruals associated with exit costs from the fixed wireless business and is reflected in Income from discontinued operations. Revenue from discontinued operations was $1 for the three months ended March 31, 2002.

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(e) EARNINGS PER SHARE (EPS)

     The following table presents the computation of basic and diluted earnings (loss) per share:

(1)

The effect of dilutive stock options was determined under the treasury stock method. Due to the loss recognized from continuing operations during the three months ended March 31, 2002, the effect of dilutive stock options and the 41.7 million warrants issued to NTT DoCoMo, Inc. (DoCoMo) in January 2001 were considered to be anti-dilutive, and therefore were not included in the calculation of diluted earnings per share. As of March 31, 2003 and 2002 there were 217 million AT&T Wireless Services common stock options outstanding as well as the 41.7 million warrants issued to DoCoMo that were anti-dilutive and therefore were excluded from the calculation of diluted earnings per share.

(f) ACQUISITIONS AND DISPOSITIONS

     On February 15, 2002, AT&T Wireless Services acquired the remaining 77 percent of TeleCorp that it did not previously own. As a result of the closing of the acquisition, AT&T Wireless Services no longer treats its previously owned interest in TeleCorp as an equity method unconsolidated subsidiary. The purchase of TeleCorp was consistent with AT&T Wireless Services’ strategy to expand its footprint in major markets in North America through acquisitions of wireless carriers where there are opportunities to improve operating results. TeleCorp provided wireless voice services in portions of the Midwestern and Southeastern United States, which complemented AT&T Wireless Services’ footprint of licenses and service territory in the United States.

     The following unaudited pro forma consolidated results of operations for the three months ended March 31, 2002, assume the TeleCorp acquisition had been completed on January 1, 2002:

     On March 10, 2003, AT&T Wireless Services executed definitive agreements with U.S. Cellular Corporation to transfer cash and wireless licenses in the Midwest and Northeast. In exchange, AT&T Wireless Services will receive wireless properties in Florida and Georgia. The transaction, which is subject to customary regulatory approvals, is expected to close in the second half of 2003.

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(g) INCOME TAXES

     For the tax return period July 10, 2001, through December 31, 2001, AT&T Wireless Services incurred a tax net operating loss (NOL) of $1.3 billion. Under the tax-sharing agreement with AT&T, the net operating loss was carried back for a refund of taxes paid by AT&T, as the common parent of an affiliated group that included AT&T Wireless Services. A receivable was established in Shareholders’ Equity in the amount of $461, with a corresponding increase to Additional paid-in capital as of December 31, 2002. In January 2003, AT&T Wireless Services received $436 relating to the refund claim. The remaining $25 will be held in escrow pursuant to the terms of an agreement between AT&T and AT&T Wireless Services and will be reflected as a Receivable from former parent, AT&T, until distribution from the escrow.

     For the year ended December 31, 2002, AT&T Wireless Services estimates it generated a NOL of $2.8 billion. For certain of these losses that could be up to approximately $1.5 billion, AT&T Wireless Services will pursue a carryback claim for the tax benefits related to these losses, which can be offset against taxes paid by AT&T. The balance of any 2002 NOL not paid by AT&T can be carried forward to offset taxable income of AT&T Wireless Services in future years.

     The tax-sharing agreement between AT&T and AT&T Wireless Services provides that AT&T Wireless Services may not seek a refund for taxes relating back to periods before the split-off without AT&T’s consent, and that such consent may not be unreasonably withheld. Federal tax laws generally provide that AT&T Wireless Services would only be entitled to a carryback benefit to the extent that the income of AT&T for the applicable carryback years is sufficient to absorb the carryback losses of AT&T and its affiliates in addition to the carryback losses of AT&T Wireless Services. AT&T Wireless Services and AT&T have been engaged in ongoing discussions concerning the refund, which have progressed to an advanced stage.

(h) LONG-TERM DEBT

     Long-term debt activity during the three months ended March 31, 2003, consisted of the following:

Termination of Interest Rate Swap Agreements

     During the first quarter of 2003, AT&T Wireless Services terminated all of its interest rate swap agreements, which had a total notional value of $2.8 billion. AT&T Wireless Services received cash of which $245 represented the fair value as of the termination dates of the portion of its Long-term debt that was hedged. In accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” the associated hedged portion of Long-term debt will no longer be adjusted for changes in fair value. The existing fair value adjustment recorded in Long-term debt related to the terminated interest rate swaps will continue to be amortized against Interest expense over the remaining life of the previously hedged debt.

Renewal of Accounts Receivable Securitization Program

     In March 2003, AT&T Wireless Services renewed its accounts receivable securitization program and increased the size of the program from $1.2 billion to $1.6 billion. As of March 31, 2003, availability under the program was approximately $1.2 billion based on the accounts receivable balance. The program allows AT&T Wireless Services to obtain financing collateralized by subscriber trade accounts receivable. Under the program, AT&T Wireless Services can assign subscriber trade accounts receivable on a revolving basis to a special-purpose, wholly owned subsidiary of AT&T Wireless Services. The wholly owned subsidiary of AT&T Wireless Services would then sell an undivided interest in such receivables to an unrelated third-party financing entity upon drawing on the facility. The financing is subject to a program fee of 15 to 25 basis points and a liquidity fee of 22.5 to 50 basis points, both of which are based on AT&T Wireless Services’ Senior Notes rating. This financing arrangement is to be used for general corporate purposes, is subject to customary securitization covenants, and will be recorded as an on-balance sheet transaction. Included in the covenants are provisions for the termination of the program in the event AT&T Wireless Services’ long-term unsecured Senior Notes rating is less than BB+ by Standard & Poor’s or Ba1 by Moody’s. As of March 31, 2003 and 2002, AT&T Wireless Services had no amounts outstanding under the accounts receivable securitization program and was in compliance with its covenants.

Renewal of Credit Facilities

     In March 2001, AT&T Wireless Services entered into Competitive Advance and Revolving Credit Facilities (the Facilities) in the aggregate amount of $2.5 billion consisting of a $1.25 billion 364-day Competitive Advance and Revolving Credit Facility and a $1.25 billion Five-Year Competitive Advance and Revolving Credit Facility. On March 18, 2003, AT&T Wireless Services renewed

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the 364-day Facility. The Facilities are subject to a facility fee of 10 to 25 basis points, which is based on AT&T Wireless Services’ Senior Notes rating, and is payable quarterly on the total commitment. The Facilities are also subject to a utilization fee of 25 basis points if borrowings exceed certain levels as defined in the agreement. The Facilities bear interest at variable rates based upon, in various cases, (i) LIBOR plus 65 to 200 basis points depending on AT&T Wireless Services’ Senior Notes rating, or (ii) the greater of the prime rate or the federal funds effective rate plus 50 basis points. The Facilities are to be used for general corporate purposes and are subject to customary covenants, representations, warranties, and events of default. The Facilities contain financial covenants requiring AT&T Wireless Services to maintain certain financial ratios. In addition, the existence of an obligation by AT&T Wireless Services to repurchase equity interests from DoCoMo may, under certain circumstances, constitute an event of default. As of March 31, 2003 and 2002, AT&T Wireless Services had no amounts outstanding under the facilities, and was in compliance with its covenants.

(i) COMMITMENTS AND GUARANTEES

     AT&T Wireless Services has various purchase commitments for network equipment. Those commitments totaled $867 as of March 31, 2003, with remaining payments to be made by the end of 2004.

     Subsequent to March 31, 2003, AT&T Wireless Services entered into a purchase commitment for handsets totaling $257, with payments to be made during 2003.

     Pursuant to the Investor Agreement, as amended in December 2002, between AT&T Wireless Services, AT&T, and DoCoMo, DoCoMo may require AT&T Wireless Services to repurchase its investment at DoCoMo’s original purchase price, plus interest, if under certain circumstances, and subject to the exceptions identified in the Investor Agreement:

•		AT&T Wireless Services fails to launch service based on W-CDMA technology in certain areas of Dallas, San Diego, San Francisco, and Seattle, or permitted alternate cities prior to December 31, 2004; or
•		AT&T Wireless Services’ board of directors approves changes prior to December 31, 2004 in its use of W-CDMA technology as its primary standard for delivery of services based on third-generation technology.

     AT&T Wireless Services believes that the likelihood of it being required to repurchase DoCoMo’s original investment plus interest is remote.

     In November 2000, AT&T Wireless Services joined with others in the formation of a venture, Alaska Native Wireless, LLC (ANW). On November 11, 2002, AT&T Wireless Services and the other owners of ANW amended the terms of the venture. As a result of this amendment, in March 2007, the other owners of ANW may elect to require AT&T Wireless Services to purchase their interests in ANW for $145. Under certain circumstances, this right may be exercised earlier, in which case the amount payable would be reduced by 5 percent per annum.

     In conjunction with the split-off from AT&T, AT&T Wireless Services entered into a Master Carrier Agreement with AT&T to purchase certain voice and data telecommunications services. Under the Master Carrier Agreement, as amended in December 2002, AT&T Wireless Services is required to purchase certain amounts of wholesale long-distance services from AT&T until January 31, 2007. For any shortfall in cumulative usage, AT&T Wireless Services is required to pay AT&T at the rate of $0.01 per minute at the end of the period. AT&T Wireless Services’ maximum remaining commitment as of March 31, 2003, was approximately $525. AT&T Wireless Services is also required to purchase long-distance services associated with its administrative phone usage equal to $70 for each of three years following the split-off. As of March 31, 2003, AT&T Wireless Services had fulfilled all of the first and second year’s commitments under the agreement. In addition, AT&T Wireless Services is required to purchase certain network data services from AT&T in an amount equal to $41 for each of the three years following the split-off. AT&T Wireless Services had fulfilled all of the first and second year’s data commitments under the agreement as of March 31, 2003. In October 2002, AT&T Wireless Services committed to purchase certain amounts of international long-distance services over a two-year period beginning November 1, 2002, and is required to pay AT&T any shortfall in cumulative usage based on the period’s average rate. Based on the average rate for the five months ended March 31, 2003, AT&T Wireless Services’ maximum remaining commitment as of March 31, 2003, was approximately $37.

     AT&T Wireless Services enters into purchase orders in the ordinary course of business for materials, supplies, and other items. Additionally, AT&T Wireless Services has agreements with other wireless carriers regarding subscriber activity on other carriers’

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wireless systems. These agreements establish general terms and charges for system usage, and in some cases also establish minimum usage requirements.

     AT&T Wireless Services enters into agreements in the normal course of business that provide for indemnification of counterparties. These include split-off, tax sharing, and tax refund agreements with AT&T, as well as certain asset sales, outsourcing arrangements, and financing and intellectual property agreements with other parties. The term of the indemnification varies by agreement. The events or circumstances that would require AT&T Wireless Services to perform under these indemnities are transaction specific, however these agreements may require AT&T Wireless Services to indemnify the counterparty for costs and losses incurred from changes in laws or regulations, and/or from litigation or claims arising from the underlying transaction. AT&T Wireless Services is unable to estimate the maximum potential liability for these types of indemnifications as the agreements generally do not specify a maximum amount, and the amounts are dependent on the outcome of future events, the nature and likelihood of which cannot be determined at this time. Historically, AT&T Wireless Services has not made any significant indemnification payments under such agreements and no amount has been accrued in the accompanying consolidated condensed financial statements.

(j) CONTINGENCIES

     A number of class-action lawsuits were filed across the country challenging the quality of wireless service provided by AT&T Wireless Services. These cases include allegations of breach of contract, statutory consumer fraud, and similar claims. The plaintiffs in these cases have not asserted specific damages claims, with the exception of one case filed in Texas in which the named plaintiffs have asserted claims for compensatory and punitive damages totaling $100. That case was dismissed, and then reversed by the court of appeals; AT&T Wireless Services is seeking reconsideration of the appellate court’s decision. A series of these cases pending in New York was settled and received court approval, although an appeal is pending.

     A series of class action cases have been filed against AT&T Wireless Services as well as its major competitors, alleging that defendants have violated federal antitrust laws by allegedly restricting the portability of wireless handsets between carriers. Plaintiffs assert both tying and monopolization claims, but have not asserted specific claims for damages.

     Various class action or representative lawsuits are pending against AT&T Wireless Services, that challenge a variety of billing practices and the adequacy of AT&T Wireless Services’ disclosures concerning those practices, including billing in full-minute increments, billing from send to end, out-of-cycle billing, charging early termination fees, and billing for roaming calls. Although the plaintiffs in these cases have not specified damages, the damages in two of the cases are alleged to exceed $100. One of these cases has tentatively settled; the other case has alleged that, collectively, the major wireless carriers in California are responsible for damages in excess of $1.2 billion.

     Numerous class action lawsuits were filed against AT&T and several wireless phone manufacturers and carriers asserting products liability and similar claims relating to radio-frequency transmissions to and from wireless phones. The court dismissed all but one of these cases on preemption grounds; plaintiffs have appealed.

     In 1993, shareholders of a former competitor of AT&T Wireless Services’ air-to-ground business sued AT&T Wireless Services, alleging breach of a confidentiality agreement, misappropriation of trade secrets, and tortious interference with the competitor’s business. The trial court initially dismissed all of plaintiffs’ claims, but that decision was reversed by the court of appeals and the case was remanded for trial. Plaintiffs have asserted claims for damages totaling $8.2 billion.

     Several class action lawsuits have been filed against AT&T, certain executives of AT&T and AT&T Wireless Services, and a group of investment banking firms asserting claims under federal securities laws. The complaints assert claims that AT&T made material misstatements concerning earnings and financial condition, while omitting other material information, allegedly to maximize proceeds from the offering of AT&T Wireless Group tracking stock in April 2000 and/or to avoid paying a cash guarantee in connection with the MediaOne acquisition. The complaints do not specify the amount of damages claimed, although the plaintiffs are seeking to recover for declines in stock prices of AT&T securities, including the AT&T Wireless Group tracking stock. In connection with the split-off, certain provisions of the Separation Agreement between AT&T Wireless Services and AT&T may result in AT&T Wireless Services being allocated a portion of the liabilities, if any, arising out of these actions to the extent relating to AT&T Wireless Group tracking stock.

     TeleCorp shareholders filed a class action lawsuit against AT&T Wireless Services challenging its acquisition of TeleCorp (see Note (f)). The lawsuit alleges conflicts of interest and breach of fiduciary duties by the TeleCorp directors and claims that the consideration paid to TeleCorp shareholders was inadequate. Plaintiffs claim damages in excess of $330.

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     A former executive and shareholder of Tritel, Inc. (which, as a subsidiary of TeleCorp, was acquired by AT&T Wireless Services as part of its acquisition of TeleCorp), filed a lawsuit against Tritel, Inc., Tritel Communications, Inc., and two board members seeking to rescind an earlier settlement agreement. The plaintiff alleged that the defendants withheld material information about an initial public offering that occurred after he settled his prior claims, and asserted claims for fraud, breach of fiduciary duty, and breach of the duty of good faith and fair dealing. The plaintiff sought $60 in damages and/or restitution, and $450 in punitive damages. An arbitration panel awarded the plaintiff $57 thousand. An appeal is pending that challenges the referral of the case to arbitration.

     AT&T Wireless Services has been named as a defendant, along with several other wireless carriers and wireless phone manufacturers, in three class action lawsuits alleging that existing phone equipment does not meet FCC requirements for 911 emergency call processing. Damages have not been specified, although plaintiffs are seeking injunctive and equitable relief.

     AT&T Wireless Services received a series of payments from MCI WorldCom Network Services, Inc., as part of a pre-existing reseller’s contract and a letter agreement, within the 90 days preceding WorldCom’s July 21, 2002, bankruptcy filing under Chapter 11 of the Bankruptcy Code. Neither WorldCom nor the Bankruptcy Court has asserted a preference liability claim to any of these payments. WorldCom has asserted that it is entitled to credits under its reseller contract with AT&T Wireless Services, although no lawsuit or claims in the bankruptcy have been filed.

     The ultimate outcome of these claims and actions cannot be predicted with certainty, and accordingly, the aggregate ultimate liability of AT&T Wireless Services under these claims and actions was not determinable as of the filing date. It is the opinion of AT&T Wireless Services’ management that it is not probable that the resolution of such lawsuits will have a material adverse impact on AT&T Wireless Services’ consolidated financial statements.

     AT&T Wireless Services also is a defendant in other legal actions involving claims incidental to the normal conduct of the running of its business. Such matters are subject to many uncertainties and outcomes are not predictable with assurance. Additionally, AT&T Wireless Services also makes routine filings with the FCC and state regulatory authorities, as well as federal, state, and local tax authorities. However, AT&T Wireless Services believes that the amounts that may be paid in these actions will not be material to its financial position, results of operations, or cash flows.

(k) RECENT ACCOUNTING PRONOUNCEMENTS

     In November 2002, the EITF reached consensus on EITF No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables.” This consensus requires that revenue arrangements with multiple deliverables be divided into separate units of accounting if the deliverables in the arrangement meet specific criteria. In addition, arrangement consideration must be allocated among the separate units of accounting based on their relative fair values, with certain limitations. The sale of wireless service with an accompanying handset constitutes a revenue arrangement with multiple deliverables. AT&T Wireless Services will be required to adopt the provisions of this consensus for revenue arrangements entered into after June 30, 2003, and has decided to apply it on a prospective basis. AT&T Wireless Services anticipates that this consensus will not have a material impact on its results of operations, financial position, and cash flows.

     In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51.” FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 also requires disclosure of significant variable interests in variable interest entities for which a company is not the primary beneficiary. AT&T Wireless Services is required to apply FIN 46 to new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired on or prior to January 31, 2003, AT&T Wireless Services is required to apply FIN 46 no later than July 1, 2003. AT&T Wireless Services anticipates applying FIN 46 to these entities effective April 1, 2003.

     AT&T Wireless Services has significant variable interests in several of its unconsolidated subsidiaries for which AT&T Wireless Services may be the primary beneficiary. These variable interests are in the form of non-voting equity interests, loans, and put options that provide the other owners the right to require AT&T Wireless Services to purchase their ownership interest if and when certain events occur. These subsidiaries were formed to acquire FCC licenses that AT&T Wireless Services was not eligible to acquire, and to build, hold, and operate wireless communication systems in various areas of the United States. These subsidiaries are generally considered to be in the development stage and require additional financial support, given that they have incurred losses and have not yet generated any significant revenue from their primary operations. To date, the activity of these entities has consisted primarily of

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acquiring FCC licenses through acquisitions and FCC auctions. AT&T Wireless Services currently accounts for these ventures under the equity method of accounting as AT&T Wireless Services does not have voting control and AT&T Wireless Services recognizes virtually 100 percent of the entities’ operating losses due to its significant variable interests. If AT&T Wireless Services had been required to consolidate these ventures in the first quarter, it would have resulted in an estimated increase to Licensing costs of approximately $670. Additionally, AT&T Wireless Services will no longer treat these entities as unconsolidated subsidiaries and will reduce its Investments in and advances to unconsolidated subsidiaries by the carrying value of its investment in these entities, which totaled approximately $500 as of March 31, 2003. Any resulting difference between the net amount added to AT&T Wireless Services’ balance sheet from consolidating these entities and the carrying values of the unconsolidated subsidiaries will be reflected as a Cumulative effect of change in accounting principle. AT&T Wireless Services’ maximum loss exposure related to these entities as of March 31, 2003 was approximately $145, which represented the value of the put options that provide the other owners the right to require AT&T Wireless Services to purchase their ownership interest when and if certain events occur. Additionally, AT&T Wireless Services has determined that upon adoption of FIN 46 it may have to consolidate two synthetic leases which are currently off-balance sheet. If these synthetic leases had been consolidated in the first quarter, the estimated impact would have been an increase to Property, plant, and equipment, net and a corresponding increase to Long-term debt of $65 as of March 31, 2003. AT&T Wireless Services has determined that the impact to its results of operations and cash flows of consolidating these entities will not be material.

     In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” This statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133. AT&T Wireless Services will be required to adopt this statement no later than July 1, 2003. AT&T Wireless Services is currently assessing the impact of this statement on its results of operations, financial position, and cash flows.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     You should read the following discussion and analysis in conjunction with the consolidated condensed financial statements and accompanying notes included elsewhere in this report. Except for the historical information, the following discussion contains forward-looking statements that involve risks and uncertainties, such as our objectives, expectations, and intentions. Actual results could differ materially from results that may be anticipated by such forward-looking statements and discussed elsewhere in this report. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section below, and those discussed under “Additional Factors That May Affect Our Business, Future Operating Results and Financial Condition.” Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We undertake no obligation to revise any forward-looking statements in order to reflect events or circumstances that may subsequently arise. Readers are urged to carefully review and consider the various disclosures made in this report and in our other filings made with the Securities and Exchange Commission that attempt to advise interested parties of the risks and factors that may affect our business, prospects, and results of operations. We make our periodic and current reports available, free of charge, on our website as soon as reasonably practicable after such material is electronically filed with the Commission.

INTRODUCTION

     We are the second-largest wireless communications service provider in the United States based on revenues for the four quarters ended March 31, 2003. We seek to expand our customer base and revenue stream by providing high-quality, innovative wireless voice and data services. As of March 31, 2003, we had 21.1 million consolidated subscribers. For the three months ended March 31, 2003, we had $3.9 billion of total consolidated revenues.

     We currently provide wireless voice and data services over two separate, overlapping networks. One network uses time division multiple access, or TDMA, as its signal transmission technology. As of March 31, 2003, it covered an aggregate population, which we refer to as “POPS,” of approximately 202 million, or 70 percent of the U.S. population. We also provide voice and enhanced data services over a separate network that uses the signal transmission technology known as global system for mobile communications, or GSM, and general packet radio service, or GPRS. As of March 31, 2003, this network covered approximately 193 million POPS, or 67 percent of the U.S. population. As of March 31, 2003, our two networks covered an aggregate of approximately 213 million POPS, or 74 percent of the U.S. population, and operated in 83 of the 100 largest U.S. metropolitan areas. We refer to this area as our coverage or network footprint. We also provide voice service on our analog network, as mandated by the Federal Communications Commission (FCC), and data service over a network utilizing packet switched data technology, or CDPD, which we are phasing out in connection with our launch of GSM/GPRS service.

     We supplement our own networks with roaming agreements that allow our subscribers to use other providers’ wireless services in regions where we do not have network coverage. With these roaming agreements, as of March 31, 2003, we were able to offer our TDMA customers wireless services covering virtually the entire United States population and GSM/GPRS service covering approximately 74 percent of the U.S. population. We refer to this as our service area. We plan to continue to expand our coverage and service area and increase the capacity and quality of our GSM/GPRS network through new network construction, acquisitions, affiliations, joint ventures, and roaming arrangements with other wireless providers.

DESCRIPTION OF FINANCIAL AND OPERATING METRICS

Non-GAAP Financial Measures:

EBITDA and EBITDA Margin: EBITDA is defined as Operating income excluding Depreciation and amortization. EBITDA margin is defined as EBITDA as a percentage of our Services Revenue. See “EBITDA DISCUSSION” within the Results of Operations section below for a discussion of why management believes these measures to be important and useful information in understanding the results of our operations and also for a reconciliation of these measures to their most comparable measures under generally accepted accounting principles (GAAP).

Free Cash Flow: Free Cash Flow is defined as the Net cash provided by operating activities of continuing operations less cash paid for Capital expenditures and other additions. See “Free Cash Flow Discussion” within the Liquidity section below for a discussion of why management believes this measure to be important and useful information in understanding the results of our operations and also for a reconciliation of this measure to its most comparable measure under GAAP.

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Operational Measures:

ARPU (Average Revenue per User): ARPU is used to measure average monthly services revenue on a per subscriber basis. ARPU is calculated as the Services revenue generated by subscribers, including both our subscribers and roaming revenues we collect from other carrier’s subscribers, divided by our average subscribers for the period.

CPGA (Cost per Gross Subscriber Addition): CPGA is used to measure the average cost of adding a new subscriber. CPGA is calculated as our sales and marketing expenses (included within Selling, general, and administrative expenses on our Statement of Operations) and equipment subsidies (included within Costs of equipment sales on our Statement of Operations) related to new customer acquisitions divided by the number of new gross subscribers added in the period.

CCPU (Cash Cost per User): CCPU is used to measure the average monthly cost of serving our existing subscribers. CCPU is calculated as our Total operating expenses net of Equipment revenue, excluding Depreciation and amortization and the costs of acquiring new subscribers (as described above under CPGA), divided by our average subscribers for the period.

SUMMARY OF FIRST QUARTER RESULTS

     Services revenue for the first quarter was $3,743 million, an 11.5 percent or $388 million increase from the first quarter of 2002, primarily as a result of growth in the subscriber base, including the subscribers associated with our acquisition of TeleCorp PCS, Inc. (TeleCorp) in February of 2002. Services revenue was essentially flat with the fourth quarter of 2002, increasing by 0.1 percent. ARPU of $58.70 increased by 0.2 percent from the prior year quarter but declined 2.2 percent sequentially compared to fourth quarter 2002. The slight increase in year-over-year ARPU came despite competitive pricing pressures and was aided by increasing contributions of data revenues and revenue enhancement initiatives instituted during the second half of 2002. The sequential decrease in ARPU was a result of seasonally lower roaming revenue and the impact of migrating existing customers to lower rate plans. Minutes of use (MOUs) per subscriber increased to 508 average minutes per subscriber per month for the first quarter of 2003, up from 430 and 507 MOUs per subscriber per month during the first and fourth quarters of 2002, respectively. This increase in MOUs versus the prior year quarter was generally due to subscribers’ continued shift toward calling plans with higher buckets of minutes. Going forward, we anticipate a continued competitive pricing environment to exert downward pressure on ARPU, which we expect will be at least partially offset by revenue enhancement initiatives, data revenues, incremental revenue sources, and increased MOUs per subscriber.

     CCPU declined to $30.60 for the first quarter of 2003, or 1.0 percent below the prior year quarter. The decline in our CCPU was driven by a lower provision for uncollectible receivables and decreased per-subscriber roaming expenses. Specifically, bad debt as a percentage of services revenue improved by 1.1 percentage points compared to the first quarter of the prior year while roaming expenses also declined as a percentage of services revenue to 7.4 percent in the first quarter of 2003. Partially offsetting these declines were increases in per-subscriber network expenses associated with the growth in MOUs as well as costs related to supporting our GSM/GPRS network. Our ability to maintain or reduce CCPU will be affected by our ability to reduce costs, the impact of seasonally higher roaming expenses in the second and third quarters, and our ability to control costs associated with implementing new infrastructure support systems for our GSM/GPRS network.

     EBITDA was $1,110 million for the three months ended March 31, 2003 compared to $820 million during the prior year quarter. This increase of 35.4 percent or $290 million was driven primarily by higher services revenue, cost reduction efforts, and the impact of lower acquisition costs related to fewer gross subscriber additions. Our ability to continue to grow EBITDA faster than our revenues, and therefore to continue to improve EBITDA margins, will be dependent upon a number of factors, including the success of our revenue enhancement programs, our ability to further reduce costs and establish more efficient distribution channels, and the level and cost of new subscriber additions. While we expect our revenue and cost initiatives to improve EBITDA margins over time, our ultimate focus remains on generating positive Free Cash Flow.

     We are in the process of undertaking a series of actions to continue to reduce our cost structure, which we anticipate will improve our EBITDA margins over time. We anticipate that these efforts will occur during 2003 and into 2004, of which some of the benefits will likely not be realized until 2004 and thereafter. These initiatives may require us to recognize incremental expenses prior to anticipated savings.

     Our Free Cash Flow for the first quarter of 2003 was $774 million. The positive Free Cash Flow in the quarter was driven primarily by our EBITDA of $1,110 million and the $245 million cash received for the termination of our interest rate swap

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agreements. Offsetting these items were our Capital expenditures and other capital additions during the quarter of $501 million; interest payments made during the quarter; and cash used as a result of changes in our working capital. We expect Free Cash Flow to vary from quarter to quarter, and we do not expect to remain at this quarterly level throughout 2003.

     In the first quarter of 2003 we increased subscribers by 283 thousand, a 56.4 percent decrease from our net subscriber additions during the prior year quarter. This decline reflects a continued slowdown in the industry growth rate. We ended the quarter with 21.1 million consolidated subscribers, an 8.2 percent increase over the prior year quarter. Our ongoing subscriber addition objective is to attract and retain profitable customers. We expect slower industry wide growth to continue to impact our subscriber growth rate.

     CPGA rose to $404 in the quarter ended March 31, 2003, compared with $367 for the quarter ended March 31, 2002. CPGA was unfavorably impacted in the first quarter versus the prior year quarter by a decline in the number of gross customer additions, which resulted in our fixed costs associated with acquiring customers (such as costs relating to our sales force and retail facilities) being allocated over a smaller number of acquired customers. Additionally, lower cost reseller gross subscriber additions declined significantly in the first quarter of 2003 compared to the prior year. We continue to focus efforts on reducing our CPGA through increased productivity in our sales channels, shifts in our distribution mix, and through new product offers. Despite these efforts, we cannot provide any assurance that our CPGA will decline during 2003.

     Our churn rate for the first quarter of 2003 was 2.3 percent, down from 2.6 percent in the first quarter of 2002, and down from 2.4 percent in the fourth quarter of last year. Our churn improvement reflects the company-wide customer retention efforts that we instituted during 2002. Despite our favorable churn numbers during the first quarter of 2003, we anticipate that competitive pressures as well as our continued focus on high value customers may increase our churn rate over the balance of the year to the mid-2 percent level.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

     The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities as of the date of the financial statements and revenues and expenses during the periods reported. We base our estimates on historical experience, where applicable, and other assumptions that we believe are reasonable under the circumstances. Actual results may differ from our estimates under different assumptions or conditions.

     There are certain critical estimates that we believe require significant judgment in the preparation of our consolidated financial statements. We consider an accounting estimate to be critical if:

	•		It requires us to make assumptions because information was not available at the time or it included matters that were highly uncertain at the time we were making the estimate, and
	•		Changes in the estimate or different estimates that we could have selected would have had a material impact on our financial condition or results of operations.

     Our critical accounting policies and estimates include our unbilled services revenues; allowances for doubtful accounts; the estimates used in determining the useful lives of our property, plant, and equipment; fair values and related impairments of property, plant, and equipment, goodwill, licensing costs, and investments in and advances to unconsolidated subsidiaries; legal and tax contingencies; and deferred tax valuation allowances. For a detailed discussion of our critical accounting policies and estimates please refer to our Annual Report on Form 10-K for the year ended December 31, 2002. There were no material changes in the application of our critical accounting policies and estimates subsequent to the report. We have discussed the development and selection of these critical accounting estimates with the Audit Committee of our board of directors and the Audit Committee has reviewed our disclosures relating to them.

NEW ACCOUNTING POLICIES

     In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 143, “Accounting for Asset Retirement Obligations.” This statement provides accounting and reporting standards for costs associated with the retirement of long-lived assets. This statement requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized

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cost is depreciated over the estimated useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement.

     We are subject to asset retirement obligations associated with our cell site operating leases, which are subject to the provisions of this statement. Cell site lease agreements frequently contain clauses requiring restoration of the leased site at the end of the lease term, creating an asset retirement obligation. Landlords may choose not to exercise these rights as cell sites are considered useful improvements. We have concluded that the fair value of these obligations cannot be reasonably estimated because neither the settlement date of the asset retirement obligation nor the probability of enforcement of the remediation clauses are currently determinable. We have insufficient historical data to reasonably determine the probability of whether the remediation terms of the lease will be enforced and to what extent. In addition, we are unable to estimate a potential range of settlement dates due to our intent and ability to renew site leases after the initial lease expiration. A liability for the asset retirement obligation associated with our cell site leases will be recorded if, and when, a reasonable estimate of fair value can be determined. In addition to cell site operating leases, we have leases related to switch site, retail, and administrative locations subject to the provisions of SFAS No. 143. Our initial adoption of this statement on January 1, 2003, did not have a material impact on our results of operations, financial position, or cash flows.

     In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issue Task Force (EITF) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” This statement requires that a liability for a cost associated with an exit or disposal activity be recognized at fair value when the liability is incurred. Our initial adoption of this statement on January 1, 2003, did not have a material impact on our results of operations, financial position, or cash flows.

     In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others — an Interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34.” This interpretation expands on the existing accounting guidance and disclosure requirements for most guarantees, including indemnifications. It requires that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value of the obligations it assumes under that guarantee if that amount is reasonably estimable, and must disclose that information in its interim and annual financial statements. The provisions for initial recognition and measurement of the liability are to be applied on a prospective basis to guarantees issued or modified on or after January 1, 2003. Our initial adoption of this statement on January 1, 2003, did not have a material impact on our results of operations, financial position, or cash flows. Guarantees issued or modified after January 1, 2003, will be recognized at their fair value in our financial statements. See “Off-Balance Sheet Arrangements” for additional disclosures related to indemnifications made by us.

RESULTS OF OPERATIONS

     The following discussion and analysis should be read in conjunction with the consolidated condensed financial statements and accompanying notes included elsewhere in the report and provides information that management believes is relevant to an assessment and understanding of our results of operations for the three months ended March 31, 2003 and 2002, and financial condition as of March 31, 2003 and December 31, 2002.

THE THREE MONTHS ENDED MARCH 31, 2003 COMPARED WITH THE THREE MONTHS ENDED MARCH 31, 2002

     Services revenue primarily includes monthly recurring charges, airtime and toll usage charges, and roaming charges billed to both our customers and other wireless service providers. Services revenue is recognized based upon minutes of use processed and contracted fees, and is net of credits and adjustments for service discounts. Amounts collected in advance of the service period, primarily related to our prepaid customers, are recorded as unearned revenue and are recognized when earned. Customer activation fees, along with the related costs up to but not exceeding these fees, are deferred and amortized over the estimated customer relationship period. Services revenue is derived primarily from voice services. Revenue from data services has not been material in

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any of the periods presented. We do not anticipate that revenue from data services will be material to our overall services revenue during 2003. However, in order to grow services revenue and maintain current ARPU levels, growth in data and other revenue sources will need to occur to offset the expected continued decline in revenue per minute of use for voice services. Services revenue also includes revenues not generated from subscribers which primarily includes sublease rents and revenues we collect from local exchange carriers for call termination charges. Equipment revenue is generated primarily from the sale of wireless handsets and accessories. We generally subsidize all or a portion of handset sales in connection with longer-term contracts or other promotional offers. The revenue and related expenses associated with the sale of wireless handsets and accessories are recognized when the products are delivered and accepted by the customer or distributor, as this is considered to be a separate earnings process from the sale of wireless services.

     Total revenue grew 9.3 percent to $3,948 million, an increase of $337 million, in the three months ended March 31, 2003, compared with the three months ended March 31, 2002.

     Services revenue for the three months ended March 31, 2003, grew to $3,743 million, an increase of $388 million, or 11.5 percent, compared with the three months ended March 31, 2002. Services revenue was higher in the first quarter of 2003 because it included a full three months of TeleCorp revenue as opposed to approximately six weeks in 2002. Additionally, services revenue was higher in the first quarter of 2003 due to growth in the subscriber base and a slight increase in ARPU.

     As of March 31, 2003, we had 21.1 million consolidated subscribers, an increase of 8.2 percent compared with March 31, 2002. Net consolidated wireless subscriber additions during the three months ended March 31, 2003, totaled 283 thousand, representing a decrease of 56.4 percent over the prior year quarter. The lower number of net subscriber additions in the first quarter of 2003, compared to 2002, reflected a slowdown in industry growth versus the prior year. Prepaid subscribers as of March 31, 2003, remained a mid-single-digit percentage of the total consolidated subscriber base.

     Our churn rate for the three months ended March 31, 2003, was 2.3 percent, down from 2.6 percent in the quarter ended March 31, 2002. The churn rate related to our postpaid customers of 2.1 percent for the first quarter of 2003 also improved from 2.4 percent a year ago. The improvement to both our overall and postpaid churn versus the prior year quarter was largely the result of our continued focus on credit worthy subscribers and ongoing customer retention efforts.

     Our ARPU for the three months ended March 31, 2003, was $58.70, a marginal increase over the $58.60 for the three months ended March 31, 2002. ARPU in the current year quarter was impacted by continuing price competition in the wireless sector, which was more than offset by the increasing contributions of data revenues and various revenue enhancement initiatives we instituted during the second half of 2002. Average minutes of use per subscriber per month were 508 and 430 for the three months ended March 31, 2003 and 2002, respectively. The growth in the current year quarter was attributable to subscribers continuing to shift toward calling plans with higher buckets of minutes.

     Equipment revenue for the quarter ended March 31, 2003, was $205 million, a decrease of $51 million, or 20.0 percent, compared with the three months ended March 31, 2002. The decline in equipment revenue was attributable to a lower average revenue per unit.

     Costs of services consist primarily of costs to operate and maintain our TDMA and GSM networks, incollect expenses (the roaming costs paid to other wireless providers), and access, interconnection, and toll charges paid to connect our customers’ calls on other carriers’ networks. Additionally, costs of services include the provision for uncollectible receivables and non-income related taxes. Costs of services for the three months ended March 31, 2003, were $1,114 million, an increase of $66 million, or 6.3 percent, compared with the quarter ended March 31, 2002. The majority of the increase resulted from increased network support costs and higher interconnection expenses, both resulting from an increase in the minutes used by the existing customer base, as well as new customers added since the prior year. These increases over the prior year quarter were partially offset by a decline in incollect expenses due to a lower average incollect rate per minute we pay to other carriers, counteracted to some extent by an increase in our total roaming minutes. Additionally, our provision for uncollectible receivables decreased versus the prior year quarter due to lower net write-offs and an improved aging of our accounts receivable balances.

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     Costs of equipment sales include the costs of the handsets and accessories sold to new as well as existing customers and the related distribution and shipping costs. Costs of equipment sales for the three months ended March 31, 2003, were $469 million, a decrease of $84 million, or 15.2 percent, compared with the quarter ended March 31, 2002. The decrease in costs of equipment sales in the first quarter of 2003 as compared with the prior year period, resulted from a decline in the average cost per unit sold, which was driven primarily by more favorable pricing associated with our GSM/GPRS handsets, and a lower volume of equipment handsets sold.

     Selling, general, and administrative (SG&A) expenses for the three months ended March 31, 2003, were $1,255 million, an increase of $65 million, or 5.4 percent, compared with the quarter ended March 31, 2002. The increase in SG&A costs in the first quarter of 2003 over the prior year quarter resulted from increased customer care and other general and administrative support expenses to support growth in the subscriber base. Partially offsetting these increases were lower subscriber acquisition costs, primarily related to lower sales commissions expenses. Sales commissions expenses declined primarily due to a decline in gross subscriber additions as compared to the first quarter of 2002; a higher percentage of gross additions from our direct channels (which typically have a lower sales commission rate); and a decrease in the average commission which we paid to our indirect distributors. CPGA, which includes the cost of handset subsidies related to new subscriber acquisitions, which are recorded in Costs of equipment sales, was $404 for the three months ended March 31, 2003, a 10.1 percent increase compared with the quarter ended March 31, 2002. The increase in CPGA compared with the prior year quarter was attributable to higher per-gross-add costs for advertising and retail store related costs. These increases were partially offset by lower per-gross-add commissions costs in the first quarter of 2003 compared to the prior year period. CPGA was also unfavorably impacted during the first quarter of 2003 by the decrease in gross subscriber additions during the first quarter of 2003, which resulted in the fixed cost component of our CPGA being spread over a smaller number of subscribers. Additionally, lower cost reseller gross subscriber additions declined significantly in the first quarter of 2003 compared to the prior year.

     Depreciation and amortization expenses for the three months ended March 31, 2003, were $735 million, an increase of $93 million, or 14.4 percent, compared with the quarter ended March 31, 2002. The increase in depreciation and amortization expenses resulted primarily from growth in our depreciable asset base, including a full quarter of depreciation expense on the assets acquired in conjunction with the TeleCorp acquisition. Capital expenditures, including capital additions related to internal-use software, were $428 million and $703 million for the quarters ended March 31, 2003 and 2002, respectively.

     Other expense primarily includes impairment charges associated with our equity investments accounted for under the cost method, fair value adjustments of certain derivative instruments, and losses on the early extinguishment of debt offset by interest income. Other expense was $30 million and $31 million for the three months ended March 31, 2003 and 2002, respectively. Other expense for the three months ended March 31, 2003 consisted primarily of losses recorded in conjunction with an asset sale, partially offset by interest income. Other expense for the three months ended March 31, 2002 consisted primarily of a pretax impairment charge of $57 million related to our common stock investment in Dobson Communications Corp. (Dobson) due to a decline in the quoted market price of Dobson’s common stock that management deemed to be other than temporary. Partially offsetting this impairment was interest income earned during the first quarter of 2002.

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     Interest expense, net of amounts capitalized, consists primarily of interest on our Senior Notes and interest on the TeleCorp Wireless, Inc. and Tritel PCS, Inc. Senior Subordinated Notes that we assumed in conjunction with our acquisition of TeleCorp. Interest expense for the three months ended March 31, 2003, was $184 million, an increase of $69 million, or 59.8 percent, compared with the quarter ended March 31, 2002. Interest expense for the first quarter of 2003 increased from the prior year period due primarily to interest on the $3.0 billion Senior Notes offering, which occurred in April 2002 as well as a full quarter of interest expense associated with the debt acquired in conjunction with our acquisition of TeleCorp in February 2002. Additionally, capitalized interest decreased from the first quarter of 2002 due to lower capital expenditures during the first three months of 2003.

     Provision for income taxes was $46 million for the three months ended March 31, 2003, compared to $12 million in the quarter ended March 31, 2002. We continued to require a full valuation allowance on our net deferred tax assets during the first quarter of 2003. The first quarter of 2003 provision for income taxes reflects primarily deferred tax expense resulting from temporary differences associated with goodwill and licensing costs, as well as certain state taxes. The provision for income taxes for the first quarter of 2002 represented an effective tax rate of 37.3 percent. Future income tax provisions or benefits will be impacted by our valuation allowance requirements, which in turn may be impacted by the 2002 NOL carryback claim to AT&T, which may be reflected as a contribution to Additional paid-in capital in Shareholders’ Equity.

     We incurred net equity earnings from investments in unconsolidated subsidiaries of $27 million for the three months ended March 31, 2003. In the three months ended March 31, 2002 we incurred net equity losses of $42 million, which included a tax benefit of $16 million. The improvement over the prior year’s quarter is attributed to an increase in our proportionate share of earnings in our foreign equity investments and lower accretion related to our obligation to the other owners of Alaska Native Wireless, LLC (ANW). Additionally, the net equity losses for the first quarter of 2002 included our proportionate share of TeleCorp losses prior to the acquisition in February of 2002.